Lending Loop works something like this. Businesses need money, but banks are notoriously stingy when lending to small business. They want things like personal guarantees and collateral and whatnot. You can’t blame them. Why lend to small business when there are large businesses and potential homeowners who want the cash instead?
It’s tough for small businesses to get funding. They’re often forced to do creative things like hitting up their local private mortgage lender. I’ve done quite a few deals over the years where someone will borrow against their house and put the money into the business.
Lending Loop saw this problem and created a solution. It’s Canada’s first true peer-to-peer lender, connecting small businesses with investors who are looking for yield. Loans yield anywhere from 8% all the way to over 20%, with most businesses paying double-digit gross yields. The company grades each loan from A+ (the keeners) to D (the class clowns), with interest rates going up as the rating goes down.
I first wrote this Lending Loop review in late 2016, right after the service opened back up (it ran into some regulatory problems, mostly because it was so new and the powers to be didn’t really know what to do). Let’s take a closer look at how the service works and how things have changed in last couple years.
The first step is signing up for an account. It wasn’t a cumbersome experience. It took maybe five minutes of my time, although I just skimmed some of the small print. GASP DON’T TELL THE CHILDREN.
You also have to fill out an investor profile. My risk tolerance is VERY AGGRESSIVE because I’m a badass who lit four buildings on fire before breakfast. THE RUSH, BABY.
The next step is funding your account. All you need to do is give it your account info (found on any cheque), and you’re in business. The money took nearly a week to get from my account to the point where I could lend it out, which I thought was a little much. This is a very minor quibble, though.
When I first started lending to small businesses via Lending Loop, the pickings were pretty slim. Borrowers were more popular than an actual woman in a chat room. That joke wasn’t even funny 20 years ago!
Things are much different now. There are currently more than a dozen different loans available to fund in the marketplace, with more showing up most every day.
Lending Loop posts certain information about the business including a little story, the financials, any collateral pledged to cover the loan, and a Q&A section where investors can ask management questions. They’re not obligated to answer questions, but most make at least a token effort to alleviate any potential concerns. Note that companies with collateral pledged against their loans tend to pay much lower rates.
You have to put a minimum of $25 into a loan and invest $200 into the service to get started. These are extremely reasonable numbers. You can also send up an auto-lend feature, which puts a set amount into each loan that shows up on the marketplace. It’s kind of like index investing, in a way.
Lending Loop does take some fees, but they’re not excessive. They take 3.5% off the value of the loan as their cut. So if a business is looking for $50,000, they’re getting $48,250. They also take 1.5% of the interest as a charge for processing the loan. So an 18% interest rate nets out to 16.5% for the borrower.
Note that you have to pay taxes on your gains. Lending Loop makes this easy, automatically sending you the tax slips each February.
How is my investment doing?
I recently took a few minutes to scrutinize my Lending Loop portfolio, as well as putting some cash back to work, and I was pleasantly surprised at the results.
First, the bad news. One of the original five loans I made back in 2016 has defaulted. The borrower still owes approximately 2/3rds of the amount financed. Lending Loop has made efforts to collect, but as the old expression goes you can’t draw blood out of a vampire, even one of those sexy True Blood ones. Fortunately, the business is only a few hour drive away, so in theory I could go and break the guy’s kneecaps.
Wait. I’m being told by my lawyer to tell y’all that breaking kneecaps is a very bad idea and should not be attempted. AW COME ON MAN IT FEELS SO GOOD.
The rest of my portfolio is performing fine. In fact, I even had a couple of loans that have paid me out completely. My five note portfolio has now expanded to eight different names.
All these details are fine and good, but you ANIMALS care only about one thing — just how much money I’ve made. Okay, jeez. I’ll tell you.
In just under two years, my investment is up 18%. That works out to a little more than 9% a year, which includes one of my original loans going straight to hell. Also I haven’t been meticulous in checking my account, meaning I had cash to reinvest that didn’t happen immediately. If I would have done that, I’m confident my Lending Loop portfolio would have returned at least 10% a year, which meets my long-term compounding expectations. Not bad.
In fact, I’ve just transferred more money to Lending Loop. It’s still a very small part of my portfolio, but I’m satisfied enough to give it more importance.
The bottom line
When I first did this Lending Loop review, I thought the service had potential. I was just a little nervous about how things would work out. There would be risks to each individual loan; that much is obvious. I was more concerned about the nature of the business. Would it last? Would businesses sign up?
Lending Loop has exceeded my expectations. It’s a great way to invest without putting your cash in the stock market, and my personal returns have been solid. I hope it sticks around for decades.