The job listing has since been taken down but the astute forum member copied the contents of the job ad and posted it on the forum here. You can plainly see that Lending Club is looking to launch a small business lending operation some time in the future with this new hire helping to craft the strategy and credit policy.
Of course I had to confirm this so I contacted senior management at Lending Club and they did indeed confirm the plans for a new division dedicated to small business loans. Scott Sanborn, the new Chief Operating Officer at Lending Club (he was recently promoted from Chief Marketing Officer), was kind enough to answer some questions for me via email.
Peter Renton: What is behind Lending Club’s decision to expand into small business lending?
Scott Sanborn: While we plan to continue to aggressively grow our consumer loan originations, our ambitions are to apply our efficient model elsewhere and to be more useful to more people.
PR: Why now?
SS: We have record investor demand including specific interest in small business as an asset due to its short duration and attractive yield. We want to begin the development process but be deliberate in our execution.
PR: What time frame are you looking at?
SS: We plan to begin making the loans in less than a year. The job posting is a reflection of our commitment to get started with the crucial building block of credit.
PR: Do you expect to make these loans available to all investors in $25 increments like you do with consumer loans?
SS: Retail investor availability is the tentative eventual plan. We may choose to start with a private offering until we confirm that we have the right product structure and full confidence in our credit model.
So there you have it. Small business lending is coming to Lending Club but first for large investors only it seems. But I would be very surprised if they did not eventually make it available to everyone.
But Small Business Loans Underperform Consumer Loans
You may be thinking that this is a really bad idea. Experienced p2p investors know that the small business category on Lending Club is one of the worst performing categories of all – significantly underperforming debt consolidation loans. So doesn’t that mean it is a bad idea?
I would answer no to that question. The people taking out “small business” loans on Lending Club today are really taking out personal loans and using it for small business purposes. What Lending Club is talking about here is creating a completely new underwriting model where the loan is made to the business not the individual.
Lending Club Will Be Competing With On Deck Capital and Others
On Deck Capital (who incidentally received an investment from Google Ventures this week) has shown that online small business lending has tremendous potential. They have issued over $450 million in short duration (one year or less) loans to small businesses. Their proprietary underwriting model is based on the creditworthiness of the business not the owner something that Lending Club will be trying to emulate.
One of the main differences between On Deck and Lending Club at least from the investor perspective is who invests in these loans. On Deck raises money from the likes of Goldman Sachs and other large Wall Street institutions – not even accredited investors are allowed to invest in the business loans they issue.
There are plenty of other companies making moves in the small business lending space such as Kabbage, Lendio, SoMoLend, Endurance Lending and many others. So Lending Club will have plenty of competition when it comes to finding borrowers.
Small Businesses Offer Higher Yield With Shorter Duration Loans
I am becoming more and more interested in the small business lending space as time goes on. I will be profiling several new investment opportunities here on the blog in coming weeks. There are many advantages to small business lending not least of which is the potential returns for investors. The underwriting in this area has gone through massive changes in just the last five years and is now far more sophisticated than ever before.
Is small business lending risky? Yes, of course. Is it more risky than consumer lending? I don’t think so. Now, we are only just beginning with online small business lending and it will be interesting to see how it develops. But with Lending Club’s brand recognition and expertise in developing an online platform I think investors will find the new offering to be quite compelling.
Is this a good move by Lending Club? As always I am interested to hear what you think.
Hat tip to Edward for discovering this and posting the job ad on the forum.
Peter Renton is the chairman and co-founder of Fintech Nexus, the world’s largest digital media company focused on fintech. Peter has been writing about fintech since 2010 and he is the author and creator of the Fintech One-on-One Podcast, the first and longest-running fintech interview series.