Ever felt a little envious of the banker after applying for a loan yourself or after hearing about how the bank had once again made record-breaking quarterly income? Well here’s your chance to become the banker. Enter Lending Loop, peer-to-small business lending for Canadians.
What is Lending Loop?
Launched in October 2015, Lending Loop is a peer-to-small business lending platform in Canada. It’s very similar to peer-to-peer lending with the exception that you’re lending to small businesses instead of individuals. Lending Loop connects borrowers and lenders together and that takes the bank out of the equation.
How does it work?
A small business applies for a loan from Lending Loop and provides information about themselves, their business, financials, and what the loan is for. Lending Loop then reviews the loan application to determine if it meets their eligibility requirements and if it does they will then make it available to lenders on the marketplace. Once available in the marketplace you as a lender can decide if you would like to help fund that loan, and how much money you would like to lend towards it.
To become a lender you must first sign up for a Lending Loop account and link it to your bank account. You then need to provide proof of ownership of that bank account to Lending Loop. Once they have verified ownership you will then be able to deposit money into your bank account, and subsequently trigger a deposit from your bank account into your Lending Loop account. It can take up to 4 business days for your deposit to become available in your Lending Loop account. You also have the ability to set up recurring deposits if you wish.
Once you have funds in your Lending Loop account, you can start lending. Lending Loop will send you an email every time a new loan request has been listed, or you can sign in to their website and search the marketplace for loans that are still funding.
If you’re not familiar with the concept of peer-to-peer lending, here’s the key concept – You are not funding the entire loan by yourself, but rather you and many other lenders will each contribute a portion of the entire loan.
Lending Loop charges fees to both borrowers and lenders. Lenders are charged a servicing fee amounting to an annualized rate of 1.5% of the outstanding principal amount owed under a note every time a monthly payment under the note is due. Lenders are only charged this servicing fee when they receive a repayment. Borrowers are charged a 3.5% origination fee when the loan is successfully funded which comes out of the total loan amount. Loans generally have interest rates between 6-25%, netting you 4.5-23.5% interest after fees as a lender. You can open an account with as little as $200 and lend as little as $25 per loan.
What sort of risk is involved?
As with any kind of investment there is risk involved. First, the small business could fail to pay off it’s loan. Before a loan is listed on the marketplace for lenders to fund, Lending Loop evaluates the loan, ensures it meets minimum requirements, and assigns it a risk band. These risk bands range from A+ to E with A+ being the lowest risk and E being the highest risk. The interest rate assigned will also correlate to the risk band, with A’s being lower interest rates (less than 10%) , and E’s being much higher (above 20%). You can mitigate the risk to yourself as a lender by lending smaller amounts to more loans, increasing the surface area of your money and reducing the maximum amount that could be lost from any one loan. Of course you can further mitigate risk by only funding loans in the lower risk bands (A’s & B’s).
On the flip side there is the risk that Lending Loop itself could go out of business. I would encourage you to research and decide for yourself how likely you think this is, but here are a few reasons why I’m of the opinion that this is a low risk:
- The platform has seen strong growth since they started, and has originated over 19 million dollars of loans in Q1 2018
- In May of 2018 the Government of Ontario announced a 2 year partnership with Lending Loop to provide 3 million dollars to small businesses
- Lending Loop has already taken steps to ensure they are in compliance with provincial securities regulators
What consumer protections are in place for me as a lender?
The first and most obvious question is what’s to stop someone from requesting a loan and then just taking the money and running? Lending Loop has minimum requirements including that the business requesting the loan must have been in business for at least 1 year, be incorporated or a partnership, and have a guarantor with a credit score of over 600. Personal guarantees on the loan mean that those individuals credit scores will be negatively affected in the case of a loan default. In the case of a defaulted loan Lending Loop will attempt to reclaim monies and / or collateral on behalf of the lenders.
Additionally funds that have been deposited to your Lending Loop account but have not yet been lent out are held in a trust with a Canadian Chartered Bank.
How do I manage everything?
Lending Loop has a dashboard that you can login to, either via your desktop / laptop or smart phone. As of right now they don’t offer a mobile app, but that’s not a bad thing. Their dashboard is sleek and concise, offering quick and easy access to everything you need. Even better the responsive design translates perfectly to your smartphone making the need for a mobile app unnecessary. Within the dashboard you have access to the following:
A quick view of your Lifetime Earnings, Weighted Average Gross Yield, Available Funds, Maximum Exposure, Account Summary, and Recent Commitments
When you commit to lending money to a loan that has not yet been fully funded it is called a ‘Commitment’. You can see a list of current and unsuccessful commitments in this section.
When a loan is fully funded your commitment changes into a ‘Note’. In this section you can see a list of all of your ‘Notes’ broken down by Active (up to date on all scheduled payments), Repaid (paid in full), Delinquent (7 days or more late on a payment), or Charged-Off (when Lending Loop determines the debt is unlikely to be collected).
Here you can see a list of upcoming scheduled payments as well as all previous payments and their status.
In this section you can optionally setup auto-lend, where you can customize how much and which risk bands that you would like to automatically commit to if you have available funds in your account. You have the ability to set up different rules for different risk bands.
This is where you can go to add funds, either on a recurring or one time basis.
Refer & Earn
This part of the member area provides you with links and referral codes which you can share with others and earn some bonuses.
A detailed breakdown of deposits, withdrawals, and loan transactions.
You will find monthly statements, tax statements, and other statements here. Lenders who earn $50 in interest from Notes issued after October 2016 during the calendar year will also receive a T5 statement for income tax reporting purposes.
Finally this area has your investor profile, emails preferences, and email / password settings.
- A great way to support small business in Canada
- You have full control over which loans you lend towards, and the subsequent risk level
- The auto-lend function lets you automatically lend to new loans that match your criteria
- Start with as little as $200, lend as little as $25 per loan
- Slick user interface, equally on desktop and mobile web (no mobile app currently available)
- Peer-to-peer lending can be a good way to diversify your portfolio
- You don’t have to be an accredited investor to get started, making the service more accessible to more people
- Financials provided by the borrower are ‘transcribed without being verified’
- Deposits to your Lending Loop account can take 4 business days to show up in your account
- Loans could potentially be 100% funded by auto-lend as soon as they become available, in which case lenders with auto-lend enabled and matching the loan request are randomized
- Not available to residents of Quebec at this time
I’ve been using Lending Loop for over 6 months now and overall have been very happy with the service. I like that it diversifies my portfolio, and that I’m helping out Canadian small businesses. I like that the dashboard tools are simple and straightforward to use, and that there are usually multiple new loans posted every single week. I’ve seen a double-digit average weighted return so far, though that will go down when some of my delinquent loans are bound to eventually be charged off. I’m not super worried about that though because I’ve taken the approach of lending smaller amounts across more loans. I also make use of the auto-lend function which means that I can just put it on auto-pilot and not have to worry about it, my money will re-invest itself automatically. However it’s important to note that auto-lend comes at the cost of not having the opportunity to review the provided financials, and thus not doing the due diligence that you probably should be doing, before committing money to a loan. Thankfully you can set up different auto-lend settings for different risk bands, so you have the ability to choose as much or as little control as you feel comfortable with.
All in all it’s an easy way to make passive income with very little effort required other than to just deposit some money and setup auto-lend or check in on what’s available in the marketplace once in a while. Given the low-interest rates banks have offered in recent years, this is a promising way to potentially make above average returns if you’re willing to take on a little more risk. If you’re interested in checking out Lending Loop for yourself links are provided below.
Disclosure: If you click on the ‘Referral Link’ below and sign up for Lending Loop, fund your account, and lend $1500 to businesses, then both you and I will earn an additional $25 on the platform. There is no additional cost to you by using this link, and the inclusion of this link has not had any impact on the review above. It’s simply a way to earn an extra $25 for yourself and help support this blog at the same time. If you’re not OK with that for any reason, I’ve also included a ‘Direct Link’ which will not act as a referral and means that nether you nor I will receive the promotion.