A Look at Alternative Lenders

July 23, 2013 at 12:57 PM

There are a number of online lending platforms that offer small business financing and facilitate peer-to-peer consumer lending.  CPG researched a selection of the most popular online lenders to understand their operating models and their growth since launch.  In general, each of these non-depository platforms aims to profitably and efficiently serve small borrowers via technology and by employing sophisticated predictive analytics and electronic monitoring. 

Small Business Lending

On the small business lending side, CPG researched three companies – Kabbage, Capital Access Network, and On Deck Capital.  Although these firms vary in the size of the businesses they serve and the funding options they provide, they all emphasize:

  • Easy online application and low documentation.  For instance, Capital Access Network’s process requires three steps, and On Deck’s application contains fifteen fields for the applicant to fill. 
  • Speed with which businesses can receive funds.  Kabbage can advance merchants capital within seven minutes.
  • Underwriting and monitoring adapted to the online world and the risk profile of their small business borrowers.  With Kabbage, micro-retailers can download their financial information directly from QuickBooks.  Social media statistics (e.g. number of followers on Twitter) are also considered in the underwriting process. On Deck and Capital Access Network reduce risk through daily loan repayments. 

These companies are closely-held so detailed financial data is not available; however available statistics do illustrate the tremendous growth of these relatively small operations:

  • In a two year period, Kabbage has made 60,000 advances and expects to reach 100,000 by the end of 2013.
  • Capital Access Network has provided 80,000 loans and advances to more than 40,000 businesses since 1998.
  • Since its inception in 2007, On Deck has generated $500M in loans and expects to match that amount in 2013.

Refer to Table 1 for additional information about target segments and growth.

Peer-to-Peer Lenders

The peer-to-peer lenders, Prosper and Lending Club, have several differences from the online small business lenders, specifically:

  • Focus on prime borrowers.  Prosper requires FICO scores greater than 640, and Lending Club 660.
  • Value proposition of these companies is to offer funds at lower interest rates compared to credit cards.  Over half of the individuals using these platforms are using them to pay off some other form of debt.
  • Limited liability.  Credit risk is the sole responsibility of the lender.  Neither Prosper nor Lending Club is liable for any late payments or loan charge-offs.

These peer-to-peer lenders, though relatively small, also have experienced rapid growth:

  • During first 4 months of 2013, Prosper made $50M in new loans.
  • During first 4 months of 2013, Lending Club made $480M in new loans.

Titan Bank (Mineral Wells, TX) and Congressional Bank (Bethesda, MD) are traditional banks that have decided to expand their customer bases through online lending.   These banks have partnered with Lending Club, buying and servicing loans Lending Club originates.  Titan Bank also uses Lending Club to extend personal loans to its customers.  On Deck also has partnered with traditional banks that can elect whether to portfolio the loans or simply refer them to On Deck. 

These online lending platforms appear to have developed profitable and effective models for serving segments of businesses and consumers that banks have not been able or willing to serve.  The key question to ponder becomes: How long will it take before these online competitors fix their sights on the borrowers that traditional banks currently serve?

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Eileen Sullivan

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