With any business, there are two types of financing requirements. The capital cycle requires spending a lot of money up front and generates little cash flows over time. The operating cycle needs working capital. If the business is widget-making, there will be a 30-60 day wait to get paid by the customer, but the business still […]
With any business, there are two types of financing requirements. The capital cycle requires spending a lot of money up front and generates little cash flows over time. The operating cycle needs working capital. If the business is widget-making, there will be a 30-60 day wait to get paid by the customer, but the business still has to make the widgets, pay suppliers and staff, and take care of all the overhead costs. Cash is needed to float the business until the money comes in.
The lending marketplace has originated tons of loans in response to the need for financing. Early adopters used technology to make origination more efficient, ignoring underwriting or taking it for granted. But when those loans are incentivized by volume where the lender takes 100% of the risk and sells to investors, “in the history of finance, it’s never worked because people act irresponsibly,” George Souri said. “If you are lending $800K or $3M, you can’t just gloss over points and make good credit decisions.”
The Future of Non-Bank Lending
Souri is the CEO and founder of LQD Business Finance. He sees the future of non-bank lending in companies that have a focus on underwriting quality and credit risk management in their DNA. In the tech space, they are defining a new market from the supply side by servicing deals banks can’t service.
“Our message is about quality of loan, not quantity,” Souri said. “We understand the entire needs of business and create customized facilities to meet those needs while mitigating risk.”
The LQD Matrix is a quantitative risk module simulating probability over time. It looks at the volatility of cash flows and extracts distribution so the EKG dynamic is understood when they price the loan. Credit risk is not just about numbers and financials because financially successful companies can go bankrupt. LQD looks past a straight financial analysis to the organizational behavior of the borrower.
“It’s not true that quality of management is wrapped up in financial performance,” Souri said. One example is the quality of bookkeeping. “A borrower that uses an outside CPA and closes the books monthly is generally less likely to default than a borrower who uses a sister-in-law with no formal training. When we see how they run operations, we get a statistical model that says if, behaviorally, this is a high or low risk company.”
The LQD Decision-Making Process
Instead of onsite visits, the company goes through a series of five dozen questions and documentation checks. They look for objective, verifiable data revealing best practices employed in the business. In about 10 business days, LQD can process the loan.
“Banks take too long,” Souri said. “The borrower pays more for our money, but they can then make more because we are more flexible and faster. The structure and sophistication allows them to deploy in a better way with fewer restrictions on the money. If they want liquidity, they need to take on some of the risk.”
By taking robust underwriting and using technology to make it more efficient, LQD hopes to define a sustainable model for non-bank lending and capture the market.
News Comments Today’s main news: Funding Circle raises another $100M, praised by chancellor. Today’s main analysis: Brussels, London form FinTech bridge. Today’s thought-provoking articles: What every entrepreneur needs to know before starting a business. United States What every entrepreneur needs to know before starting a business. AT: “Sharestates CEO Allen Shayanfekr shares from his own […]
P2P to explode in 2017 while platforms close. AT: “The interesting thing here are he closures even as the industry on the whole does well, a reminder that markets often come with a mixed bag of success for some and failure for others. A rising tide is not a tidal wave.”
Global loan servicing software market to grow over 14% through 2021. AT: “This is a come-on to sell a report, but the interesting thing is that the software we’re talking about is software that can be used by MPLs and other financial services in the alt lending space. If the software market goes up, it’s a good sign that the industry is moving in the same direction.”
As the founder of a real estate crowdfunding startup, I have learned a lot over the last two years and am eager to share that information with other entrepreneurs.
The first tip I would give any entrepreneur is to forget the concept of a 9-5 work day. If you start your company thinking that all of your responsibilities will be handled in an 8-hour day, you are setting yourself up for failure.
Without a solid operations team, the inefficiencies from department to department will end up costing much more in the long term.
The capital raising environment is volatile and the key to survive a raise is to find the quickest path to profitability even if it means growing slower. Because raising capital is a long and tough process, you should make every single penny count. Sharestates started out with a $25,000 family loan and now has originated over $200 million in real estate loans since its inception in 2014. Until your company is ready to raise capital, be sure to be in touch with each department’s spend to ensure you are maximizing each dollar.
Make sure you consult an attorney to ascertain all regulatory and compliance risks – not everyone is aware that sometimes their line of business is subject to some form of scrutiny. This is especially important in an industry as new as marketplace lending.
In the old days, banks were imposing granite buildings housing massive vaults and offering 3% on savings and 6% mortgages. Later they morphed into unassuming suburban branches distinguished from fast-food outlets primarily by having multiple drive-through lanes. 21st Century banks increasingly live online, and the chief exemplar of that is SoFi.
Another difference is that SoFi relies less on credit scores when deciding to grant a loan compared to mainstream lenders. “We’re looking primarily at free cash flow — do you have enough money at the end of the month to pay us back for this loan?” Macklin says.
Perhaps the most marked divergence between SoFi and mainstream banks is its interest in customers’ personal lives. The company hosts meet-and-greet singles events and community dinners and provides career planning and job search assistance. It even offers coaching to help would-be entrepreneurs launch businesses.
Roseman says SoFi appears to seek refinancing business with borrowers whose student loan balances are $80,000 and up. “With that type of loan balance, they’re looking at the Ivy Leagues and the Stanford grads, more of the private college folks,” he says.
On life insurance, he suggests looking at other options before signing up for SoFi’s. SoFi doesn’t require medical exams from applicants. which means the insurer shoulders more risk, which generally means higher premiums.
He also cautions against refinancing government student loans as part of a mortgage refinance without accounting for the fact that government loans may allow for modifying payments or forgiving part of the loan.
Most lenders spread their loans across a variety of rankings—with the bulk in the highest-quality ratings (lowest default risk) and some in the lower quality, where yields can top 20% to offset the higher risk.
One of the big advantages of P2P lending is the very low correlation these loans have to traditional stock and bond markets.
Due to the nature and number of the loans you’ll make, the correlation to the stock market for a P2P portfolio is just 0.19. For US bonds, the correlation is even less, -0.13.
There are also add-on services you can use to improve your overall returns while better managing your risk. One tool we analyzed in our report consistently provided a net annual return of over 14%.
Financial technology (fintech) is a young but $78.6 billion–strong industry, and legal precedents can only help it thrive. Unethical business practices by one company can ruin opportunities for all, and that would be a tragedy given that alternative finance holds the power to transform the industry, bringing services to millions who have long been excluded from the system.
Traditional firms like Goldman Sachs will capitalize on Lending Club’s missteps by arguing that point of sale is where it’s at — and they’ll be right.
Mobile apps aren’t merely add-ons for banks trying to appeal to younger generations; they’re now baseline requirements.
2017 will be the year of alternative payments. Heavy hitters like PayPal, Apple Pay and Google Pay will continue to flourish as merchants increasingly encourage customers to pay via their phones or digital wallets. But smaller companies will emphasize mobile payments as well, using new apps and streamlined systems to drive more widespread adoption among consumers.
The natural next step from alternative payments is for smartphones to become people’s go-to personal finance management systems. Individuals will pay their bills, monitor their budgets and make purchases almost exclusively through mobile apps and notifications.
Approximately 24 million U.S. households rely on services like pawnshops and payday loans to access cash and credit. Fintech companies will target these millions through new products and underwriting models that look beyond traditional credit indicators.
Improved efficiencies will empower consumers and hold banks and fintech companies to higher standards of transparency and ethics.
Enhancements in financing will also enable individual verticals or marketplaces build cooperative microeconomies, thanks to improved access to capital.
Last spring, following a loan-doctoring scandal at Lending Club—at the time, the industry leader—capital for online lending startups became harder to come by and many suffered layoffs. Avant, Prosper, and Lending Club cut staff by the hundreds.
Funding Circle weathered the storm, closing 2016 on a high note with $485 million in Q4 loans to small businesses. In total last year, the company lent $1.4 billion. According to Hodges, Funding Circle is cash-flow positive in its home market, the United Kingdom (where it benefits from the support of the government-owned British Business Bank), and expects to make its U.S. business profitable in 2017.
Online lenders also face increased competition from banks, many of which have shiny new platforms thanks to partnerships with startups. Kabbage, for example, has made bank partnerships central to its strategy; CEO Rob Frohwein says that licensing Kabbage technology to banks has grown to become an “eight-figure business” for his organization.
LQD Business Finance, an alternative lender that uses a proprietary credit-scoring algorithm to underwrite business loans, announced standout business results in 2016, its first full year of operations. Last year, LQD grew its flow of loan applications to over $140 million and loans closed to $33 million. In addition, the company closed a significant Series A funding round, complementing the $30 million credit facility secured in 2015.
Looking ahead, Souri said LQD anticipates growing its origination run rate to $80 million by the end of 2017 and to more than $200 million over the next 24 months, largely by expanding its data-driven lead generation and targeting the $200 billion market of prime and near-prime loans between $250,000 and $2 million. That market is underserved by both banks and existing alternative lenders. Additionally, LQD is in partnership talks with several banks interested in the company’s underwriting platform.
Professional Bank Services and Austin Associates Announce Strategic Merger (ProBank Email), Rated: B
Professional Bank Services, Inc. (PBS) and Austin Associates, LLC (Austin) announced today they have completed a strategic merger to create the nation’s premier bank consulting and investment banking firm. The resulting firm will operate under the name ProBank Austin, with offices in Louisville, KY, Nashville, TN and Toledo, OH.
Transaction terms are not being disclosed. ProBank Austin will continue to be privately-owned by the management and employees of PBS and Austin.
PricewaterhouseCoopers (PwC), one of the Big Four auditors and a multi-bln dollar professional services firm, launched a program called “Startup Collider” in early September of last year. The program, which begins today, will support young entrepreneurs and startups working within the Blockchain and fintech industries.
By the end of the program, PwC hopes to see its startups cooperate with industry leaders and introduce their technologies to mlns of users and consumers. Dissimilar to many venture capital firms or accelerators, PwC also allows startups to test their technologies with its multi-bln dollar clients and partner corporations. If startups wish to pivot away from their focal point to another market within fintech or Blockchain, PwC will support the decision.
Chancellor Philip Hammond has praised Funding Circle as “a real success story” after the British peer-to-peer lender raised a further $100 million (£82 million).
The company announced its sixth funding round on Thursday, which takes its total equity funding to over $370 million (£300 million).
The latest funding round was led by existing investor Accel Partners, with participation from other existing backers including Baillie Gifford, DST Global, Index Ventures, Rocket Internet, Temasek, and Union Square Ventures.
UK MD and co-founder James Meekings told Business Insider that the money will go towards building out Funding Circle’s technology platform and hiring more staff.
“B-Hive,” the part-government-owned platform set up to facilitate innovation between Belgium’s fintech sector and the traditional financial and technology sectors, has signed a memorandum of understanding (MoU) with Innovate Finance, the trade body for Britain’s fintech sector, it said on Wednesday.
In 2015 Britain’s fintech sector, whose ranges from app-based payment services to crowdfunding and peer-to-peer lending firms, employed over 60,000 people and generated 6.6 billion pounds ($8 billion) in revenue, according to the Treasury.
Yesterday we published an article about BrewDog raising £10 million on Crowdcube. The funding round via Mini-bonds was described as the largest ever on a UK crowdfunding platform. Later in the day, Crowdfund Insider was contacted by Crowdstacker saying not so fast – they believe they have the largest crowdfund record for a UK platform.
Their new record-breaking claim to a single raise has been undertaken via its peer to peer lending platform for leading specialist lender, Amicus Finance plc. To date, £12 million has been invested.
With less than a week until its Seedrs campaign comes to an end, P2P lending platform Flender has secured 98% of its £500,000 funding target (more than £485,000) from 225 investors.
Funds from the equity crowdfunding campaign will be used for key hires, including a direct sales team and in-house software developers; marketing, including online targeting and above-the-line advertising; product development, specifically native iOS and Android versions plus roadmap features for all channels. Flender’s Seedrs initiative is currently scheduled to close next Tuesday (January 17th).
The lender stated that the app would connect lenders and borrowers directly, helping them to control their finances and transfer money while on the go. Through the app, iBAN users will have a modern money management tool, integrated with gamification, and risk management.
4thWay, a P2P ranking site, has published a report on the UK peer to peer lending market. According to their numbers, delivered another “record year”, with a total of £3.02 billion facilitated via 35 various platforms in the UK.
The totals are as follows:
Consumer loans £1.27bn
SME loans including invoices £1.01bn
Development and short-term property loans £690m
Asset-backed (HNW pawnbroking) £40m
Rental property £10m
4thWay said investors typically received returns of 3%-7% net of costs and bad debts. Lower returns went to investors who desired greater liquidity and the higher returns to those lending for up to five years.
Bad debts at the majority of P2P lending platforms remained consistently very low at less than 1%.
LANDLORDINVEST has been approved by HMRC as an ISA manager, paving the way for the launch of its Innovative Finance ISA (IFISA), Peer-to-Peer Finance News has learnt.
At present, just 18 companies are authorised to offer IFISAs, most of which are very small firms. Out of the eight members of the Peer-to-Peer Finance Association, only Lending Works has HMRC approval. Just before Christmas, Landbaygained full authorisation from the FCA, meaning that HMRC permission is the next step.
LandlordInvest has said that its IFISA will offer investors annual returns ranging between five and 10 per cent.
PEER-TO-PEER lending will grow by 50 per cent this year driven by the Innovative Finance ISA (IFISA), but some platforms will fall by the wayside, predicts new research.
Just five IFISAs have been launched so far, but independent P2P analysis firm 4th Way is forecasting a total of 16 by the end of the year, which will boost lending.
“Interest rates in peer-to-peer lending will continue to fall in 2017, benefiting borrowers at the expense of lenders,” he said. “However, we believe P2P has been kind to lenders, as they have been rewarded generously for low risk.
“Over the long term, the amount of interest lenders can earn will be aligned to risk. The high-quality of the loans that most lenders are lending in means more lenders will pile in to push rates closer to a fairer level.”
Crowdfunding, the world over, has been about peer-to-peer funding. However, there are many challenges in the Indian real estate market, such as the absence of an organised trust/agency, which make crowdfunding a non-starter. So, what makes crowdfunding different from a Real Estate Investment Trust (REIT)?
With REITs, investors only know the portfolio and not the properties. However, in crowdfunding, individuals can single out a particular building or builder to invest in, he explains.
David Walker, MD of SARE Homes, points out that REIT has already gained official sanction, while crowdfunding is still not officially recognised in India, unlike in the developed nations.
The market study covers the present scenario and growth prospects of the global loan servicing market for 2017-2021. The report also presents a detailed analysis of the key vendors in the market, along with a comprehensive analysis of the emerging trends and challenges faced by the vendors.
The increasing demand for the lending market has given rise to efficient loan servicing software that helps the lenders in managing loan databases and debt collection activities.
Loan servicing software enables lending organizations to minimize financial risk exposure in addition to increasing their operational efficiency. Loan servicing software also supports a wide variety of loan industries and lending products that include SME lending, peer-to-peer lending, mortgage lending, payday loans, credit unions, microfinance, retail lending, POS financing, auto lending, and medical financing. Loan servicing software handles the mortgage, home equity, and other consumer loans on one platform. All these factors are collectively increasing the adoption of loan servicing software.