If you’re looking for business finance, it can be very helpful to remember that banks are not the only option. There are also credit unions, online lenders and peer-to-peer lending platforms. With that in mind, here is a review of the peer-to-peer lending platform, Lending Loop.
What is Lending Loop?
Lending Loop is a regulated peer-to-peer lending platform. At present, it focuses specifically on lending to small businesses.
How Does Peer-to-Peer Lending Work?
At a basic level, the mechanics of peer-to-peer lending work very similarly to the mechanics of regular bank lending. Here is a quick overview of the process as it works at Lending Loop.
- The applicant completes an application form in the usual way.
- Lending Loop screens the applications and, if they are accepted, assigns them a grade of A+ to E.
- Investors then decide if they want to lend to a particular applicant and, if so, what percentage of the requested amount they are prepared to offer.
- Assuming the applicant receives their loan, they make repayments to Lending Loop. These are then distributed to the relevant investors.
NB: If the borrower subsequently defaults, then the default will be pursued in the same way as a default on a standard bank loan. Peer-to-peer lending is not an “easy option” for businesses that are unsure of their ability to repay a loan.
The big difference between using Lending Loop and using a regular lender is that you deal directly with the people who are actually putting up the money. The obvious benefit of this is that it can offer much more flexibility. Individual lenders can take their own decisions about what they do with their own money. They do not have to follow standardized lending policies.
Another potential benefit is that investors can opt to lend a percentage of a loan rather than the whole amount. The reason can be a benefit is that persuading several investors to put up a small amount of money can be easier than persuading one lender to put up a large amount of money, especially with higher-risk loans.
Is Lending Loop Safe?
How Does Lending Loop Work?
Lending Loop operates what is effectively a three-stage application process. The initial stage is the online application process. This is essentially a basic screener and Lending Loop aims to have an initial decision within two business days.
Assuming the initial decision is favourable, Lending Loop will request further documentation. It will then use this to decide what terms it is prepared to offer the borrower. If terms are agreed, the loan will be listed on Lending Loop’s Marketplace for up to 30 days (or until it is fulfilled).
What Products Does Lending Loop Offer?
At present, Lending Loop only offers small business loans. The minimum loan amount is $1,000 and the maximum is $500,000. Lending terms range from three months to five years.
Lending Loop currently divides its loan book into Express Loans and Standard Loans. Express loans have a maximum limit of $40,000 and are available to sole proprietorships as well as incorporated companies. The loan-grading system is exactly the same for both types of loans.
Who are Lending Loop’s Investors?
As of October 2020, Lending Loop advertised 11,100+ active investors. The minimum investment is just $25 so it is open to private individuals. It is, however, also possible for corporations to open an account.
Lending Loop highlights three main attractions for investors:
Access to small businesses (so investors can diversify their portfolio)
Lending Loop allows investors to access the vibrant Canadian small business market. Small businesses are much less likely to be listed on a stock market. This means that platforms such as Lending Loop are one of the few ways investors can benefit from their performance, especially if they only have limited capital to invest.
Lending Loop works with regulated financial institutions, but it’s not a financial institution itself. It is effectively an online-only fintech. As such, its overheads are relatively low (as compared to banks).
These savings are passed on to investors in the form of lower fees. Investors can therefore afford to pass some of them on to borrowers, in the form of lower interest rates, while still making solid returns for themselves.
Helping their local community
For some investors, at least part of their motivation for using Lending Loop is simply to help local businesses in Canada.
What are Lending Loop’s fees?
Lending Loop charges borrowers an origination fee. This amount of this fee depends on the loan’s level of risk and hence is determined when terms are agreed. If the loan proceeds, the origination fee is deducted from the funds before they are transferred to the borrower.
Other than that, the only time a borrower pays fees is if a payment is declined due to insufficient funds or if they make a late payment. At present, these fees are set at up to $25 and 15% of the outstanding loan payment(s) respectively.
How to Sign up for Lending Loop (Step-by-Step)
The process for signing up for Lending Loop essentially the same for Express Loans and Standard Loans. There is an initial eligibility check. If successful, the applicant can proceed to the first-stage application.
If this is successful, Lending Loop will make a final offer to the applicant. If the applicant accepts this, they can list their request on the Lending Loop marketplace. Here is a step-by-step guide to the whole application process.
Initial eligibility check
Lending Loop has an online application process. It starts with an initial check to see if you meet their basic eligibility criteria. This will not impact your credit score. Lending Loop’s basic eligibility criteria are as follows:
- 1 year in business
- $100k in annual revenue
- 640+ credit score (can be a personal credit score e.g the business owner’s)
The first-stage application is fairly basic. Applicants essentially need to set out, in brief, who they are, what they want and why they should get it.
The only documentation required at this stage is as follows:
- Income statement and balance sheet for the current fiscal year
- Year-end statements for the previous two fiscal years (if available)
Lending Loop prefers to receive documents prepared by an accountant but may accept documents prepared by management.
If you use Quickbooks, you can connect it to Lending Loop to save yourself having to upload your financial documents manually.
Lending Loop can usually make a preliminary decision within two business days. During this time, they will assess your application and assign you a provisional loan grade. The algorithm used to calculate this is proprietary, however, Lending Loop has indicated that it makes use of the following details:
- Your credit score
- Key financial metrics (from the documentation provided)
- The specifics of the loan (amount and term)
If provisionally approved Lending Loop will request further details
Lending Loop will undertake further due diligence before making a final offer. As a part of this, it will need further documentation. This will include:
- Articles of Incorporation
- Last 6 months of bank statements
- Latest Notice of Assessment from the CRA
It may also request further documentation on a case-by-case basis.
You will have the option to connect your bank account to Lending Loop. This can be easier than uploading all of your bank statements manually.
Please note, if you have mislaid your NoA, you should be able to retrieve a copy from their website. If, however, you can’t, you’ll need to send away for it and this can take 10 business days (or even more). It’s therefore advisable to look into this as early as possible.
Assuming all goes well, Lending Loop will make you a final offer. Please note, however, that you can turn this down without any repercussions. You will not have to pay any fees to Lending Loop and you can still apply to them at a later date if your circumstances change.
Listing the loan
At this point, your application itself is complete and you are approved as a loan candidate. Lending Loop will proceed to list your request in their Marketplace. It will stay there for a maximum of 30 days. If it is not fulfilled by that point, it will be removed. If it is fulfilled earlier, it will be removed earlier.
There is a difference in how Express Loans and Standard Loans are presented to investors. Express Loans do not show the details of financial statements or have the function for investors to ask questions, whereas Standard Loans have both.
Lending Loop has explained that the absence of financial statements is because, in their opinion, companies that request Express Loans do not have in-depth financial statements. The absence of a Q&A section is because Express Loans tend to be funded so quickly there is insufficient time to provide meaningful responses to questions.
Importance of the Q&A section
If you are applying for a standard loan and you have a Q&A section on your listing, then it is strongly recommended to pay attention to it. Remember that any question is your opportunity to impress all potential investors, not just the one who asked the question.
Think about the situation from an investor’s point of view. They have either asked a question themselves or seem someone who has. If you answer it appropriately, then you are demonstrating professionalism, courtesy and transparency. If you do not answer it, then you’re showing that you’re unable or unwilling to respond to people whom you are asking for money.
That being so, it’s advisable to check your Q&A section at least once a day and to answer any questions raised, even if your fundraising is going well. If you need time to answer a question, then respond accordingly, set an expectation regarding when you will have an answer and make sure you keep to it.
Getting the money
Assuming all goes well and your loan is fulfilled, Lending Loop will arrange for the money to be sent to you by bank transfer. You can usually get access to your cash one business day after your loan is fulfilled.
Remember that Lending Loop will take an origination fee. This will be deducted from the amount you receive. This is the only fee borrowers pay.
Repayments are made in the usual way i.e. via bank transfer. The payments are made directly to Lending Loop, which then redistributes them to the relevant investors. One of the nice features of Lending Loop is that you can make overpayments if you like and exit the loan early without any penalties.
If you’re rejected
If at first, you don’t succeed, you can try again at any time. The issue is whether or not it is worth your time to do so. The good news is that Lending Loop does provide feedback on why you were rejected. This can be very helpful when making later decisions.
Pros & Cons of Lending Loop
There’s a lot to be said for Lending Loop, but there are some potential pitfalls as well.
Pros of Lending Loop
The major pro of Lending Loop is that you can get access to funding at very attractive interest rates. As a bonus, you have the option to make overpayments and can even exit the loan early without penalty. This could potentially save you a lot of money.
Cons of Lending Loop
The major con of Lending Loop is that being approved by Lending Loop itself does not guarantee that you will receive funding from their investors. What’s more, even if you do receive funding, it could take you a lot longer to get your cash than it would if you just dealt directly with a lender.
In fact, in a worst-case scenario, you could be looking at spending over a month on the application process and still not getting the cash you need. Admittedly this is unlikely, but it is possible.
The reality is that Lending Loop has over 11K investors and those investors are on the platform because they are looking to invest. This means that if you are approved by the platform, you have a very high chance of getting the funding you need. You may, however, have to wait for it, especially if you are looking for a larger sum.
On the other hand, if you can qualify for Lending Loop then you can probably also qualify for a loan from a bank or credit union. This could potentially be much quicker, especially if you went for an online lender, but the rates would probably be higher, especially if you went for an online lender or a regular bank.
It’s therefore important to think carefully about your timescale and priorities. The more you’re looking to borrow, then the more you could potentially save by getting the lowest possible rates. That’s likely to be an argument in favour of Lending Loop. What’s more, if you’re borrowing to fuel growth, then you could use that growth to pay back the loan early without any penalty.
On the other hand, if you just want to get your funding quickly and move on, then you might be better just to go to a regular lender, especially if you only want a small amount. The overall cost would probably be higher, but sometimes it’s worth paying a premium for convenience.
Who Should Use Lending Loop?
The fact that Lending Loop requires businesses to have been trading for a year means that it’s not a suitable funding option for brand new businesses and the very youngest startups. Even businesses that have been operating for at least a year may struggle to meet the credit scoring requirements in their own right. That said, they could use a personal guarantee instead.
Lending Loop is probably of most value to established smaller businesses, looking for better rates than they would get from a bank (or even a credit union). It’s also preferable if you’re not in too much of a hurry for your cash. Remember that approval from Lending Loop itself does not guarantee that you will receive funds. It just gives you the opportunity to put your request to Lending Loop’s network of lenders.
Realistically, it’s in nobody’s interest for Lending Loop to approve an application that has little chance of success. It’s also a simple fact that Lending Loop investors are there to lend, so the cash is there. It is, however, still down to you to persuade investors to fund your loan and you only have 30 days in which to do it.
Lending Loop’s Main Competitors
Lending Loop operates in a very specific niche, so it’s debatable whether it has any direct competitors. There are, however, several other sources of business finance that could be viewed as indirect competitors.
Lending Loop’s eligibility criteria mean that businesses that could qualify for one of their loans would probably have a decent chance of qualifying for a bank loan. On the one hand, going with Lending Loop could offer better interest rates and the option to repay the loan early without penalty. On the other hand, going with a bank means if you’re approved, you’re approved and that’s it.
Similarly, if you’re able to qualify for Lending Loop, then you may well be able to qualify for a loan from a credit union. Credit unions work on a non-profit basis, so their interest rates can be very competitive. Some of them are part of the Canada Small Business Financing program.
There are, however, two potential downsides to going with a credit union. The first is that you may struggle to qualify for a loan, even with the CSBF. The second is that you may not be able to exit the loan early without a penalty.
goPeer is a consumer-focussed peer-to-peer lending platform. You would, therefore, not be able to get a business loan from it. If you qualified, however, you could get a personal loan, which you could then use to fund your business.
The advantage of this would be that you might find it easier to access funds when applying on the basis of your personal credit history. The disadvantage of this is that doing so would not help your business to build its own credit history. You could, however, potentially address this by other means, such as getting a business credit card.
Crowdfunding platforms are different from peer-to-peer lending programs in that companies do not necessarily have to repay the funds with cash. Instead, they may offer non-financial rewards such as access to limited services or limited-edition merchandise.
The crowdfunding approach has produced notable success stories. Its success does, however, largely depend on a company’s ability to create sufficient “buzz” around its request. This means that it may not be the right approach for companies that want funds for “unglamorous” expenses.
Other lenders e.g. fintechs
There are various other niche lenders operating in Canada, such as Mogo. Mogo is, technically, in the personal loans market, but it does offer loans for small business expenses. These would have to be examined on their own merits. That said, any regular for-profit lender is unlikely to offer the same competitive interest rates as Lending Loop