The majority of my net worth is locked into real estate and that gets me worried from time to time. On one hand, I love the control I have over my real estate investments. On the other hand, I don’t want to keep all my eggs in one basket. The current volatility in the global markets is making it hard for me to figure out how to diversify my investments and make them more passive. With the European and Chinese markets falling 20% from their highs (a signal for selling, i.e. bear market), there is a lot of anxiety and fear in the markets, which is also impacting bonds, commodities and currencies.
Attractive options for diversifying outside of real estate have been limited, until now. I’m very excited to say that an answer to my problem came late last year – Lending Loop.
What is Lending Loop
Lending Loop is a Canadian market place that makes it simple for you to invest in small business loans for as little as $50. Lending loop allows investors to pool their money into bigger loans for small businesses and to get a nice return. This is very similar to hard money lending, where you become the bank, but with smaller chunks of money. What I really like about it (other than the healthy return) is that the loan supports the growth of local Canadian businesses!
I had been patiently waiting for this type of lending model since it was launched in the US in 2006. When it finally arrived in Canada last October, I immediately signed up, opened an account, and started lending money. I was one of the first 450 people who signed up and I was very excited to try it out.
How is this Different?
Less than a handful of niche firms offer these services, and what is really unique here is that:
1) it is available to all investors across Canada (excluding Quebec);
2) it is completely online (no bankers); and,
3) you can lend as little as $50.
Competitors like Grouplend and Borrowell are only open to institutions and accredited investors, which makes Lending Loop the first peer-to-peer lending marketplace in Canada.
What types of investments are available?
Here is a sample of small businesses on Lending Loop’s marketplace. Loans to these businesses help them with increasing their working capital, expanding their operations, or consolidating their debt. Since October, Lending Loop has only loaned to 12 small businesses, but a new one comes up after the last one is fully funded.
Before handing over any cash, investors get to check out the credit worthiness of the business, their financial statements, the reasons on the loan, and the return for the loan. Returns range from 6% to 15.5%. The loan is backed by a personal guarantee (which means you can affect their credit score). Lending Loop takes a small cut of the returns (1.5%) and that still nets you anywhere from 4% to 14%.
Lending Loop completes the groundwork, such as checking credit ratings and determining debt-to-income ratio of the business, before approving them as a borrower. Another minimum requirement for borrowers is that they must have been operating for at least two years, with an annual revenue greater than $200,000 per year, before an application is considered at Lending Loop. Once a borrower is approved, Lending Loop issues them a rating from A to C+. Lending Loop is very transparent about this information and provides this and more to the investors so that they can evaluate the risks and returns of a loan.
Lending Loop Loans:
Here is a snapshot of my dashboard. I made a couple of small loans (called Pledges), but I haven’t received any payments, yet, because my loans are fairly new and it took some time before the balance of the loan was funded by other investors. In terms of re-payment, amortizations range from six months to five years and I’m expecting monthly payments (principal and interest), similar to a mortgage.
There has also been a ton of data collected on peer-to-peer lending since 2005. NSR Invest has a great resource which highlights the performances of US peer-to-peer lending firms. And, if you want a case study, TechCrunch has a great article, titled ‘peer-to-peer lending is profitable, even in a recession‘, about a man who has invested in peer-to-peer lending for the last ten years. Based on my research, this is a very viable investment vehicle.
My current strategy is to make loans to businesses with B and above ratings. Half of the borrowers are rated B and above. What I’ve experienced so far is that the borrowers with A ratings get funded fast, so you have to act fast to loan money out. Lending Loop makes this an easy process, the firm notifies you of new borrowers and with a touch of a button on your mobile device, you can make a loan to the company instantly.
What are my thoughts to Help You
To date, I found the process of signing up, linking to bank accounts and making loans to be very seamless. Also, the customer services has been impeccable. With time, there will be more and more small businesses signing up.
Given that I can loan as little as $50, and get decent returns, I think this is a great option for testing the waters of peer-to-peer lending. My experiment is to spread $1000 over 10 different loans such that even if there is an occasional default, it is very unlikely that I will get a negative return overall. If the results are promising, I plan to invest larger chunks.
As a worst case, there is always a risk that the businesses might default on payments and I would lose my money. But sticking to a plan on diversifying my loans to many businesses will level out the risks. And in the event of a rare default, Lending Loop manages the collection process, including negotiating payments so I wouldn’t need to worry about how to get my money back.
Thanks to Lending Loop for supporting this blog. I’ve been waiting patiently for years for this type of lending platform to come to Canada. I think this is a great way to invest. If you want to get started with an account of your own, be sure to hit up my affiliate link to get $50! It is a win-win situation. You get $50 for opening an account with a minimum investment of $500 and you also help me out by supporting this blog.
Have you ever tried peer to peer lending? How was your performance, please share your experiences below.