Can a Peer to Peer lending model work for Small Business?

Lending Club looks to add small business loans

I recently saw that the Lending Club entered the crowded field to help small business with liquidity, credit, and loans to provider peer-to-peer lending over the Internet.  The Lending Club has been successful arranging personal loans, having arranged $3.9 billion.

Now they are expanding to small-business customers looking to borrow between $15,000 and $100,000.  The Lending Club isn't a bank that lends money but rather an Internet service that connects borrowers with people who are willing to lend them money.   Interest rates for the 1- to 5-year loans start at 5.9 percent.

Personally, I would not fund a small business loan via an online P2P network. Why?  To me, relationships matter.  An investor puts funds into a website to make loans to end users.   There is no relationship business with the borrower to create loyalty to get greater insight of needs or ability to pay.  What is the difference between a quality lending business and one that is not?  Do we know the customer, do we have a relationship with the customer, does the customer care what we think, what is the profile of the customer, did customer seek us out or did we seek them out? These all matter to me.

If we learned anything from the financial crisis it’s that investors need to take full accountability for performing appropriate due diligence when making investments.

I can understand the Lending Club’s interest in filling the gaps created by the banks being more restrictive with credit and small business.  I get that.  But ultimately I make a loan, I want to be paid back.   There is nothing that would compel the customer to pay the money back other than reach of law.  Personal loans are different – people want to keep their credit score.  That is the one hold Lending Club has.  For small business, you may not have the same stick.

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Voices (2)

  1. A. Smith:

    I think the real question is if a personal connection between the borrower of a small business loan and the lender makes a difference to the ultimate default rate. Perhaps, it does but there is no evidence provided to test out that assertion. To verify the importance of personal connection between the borrower and lender, you would need to know the percentage of people who choose not pay despite having the resources to pay versus the percentage of people who because of economic circumstances simply cannot pay. Having a good relationship may affect the default rate in the first instance but probably not in the second. Overall, terrible lending decisions can be made after face-to-face interaction and great lending decisions can be made by just relying on data. I’m not saying that small business lending via Lending Club is necessarily a great investment but I think your take on it is overly simplistic.

    1. David Gustin:

      Mr. Smith,

      Thank you for your thoughtful response. I respect your point about lack of data. My points are
      1. P2P lending has started in the biggest era of Federal Reserve pumping up the credit markets that we have ever seen. Its unprecedented and downright scary.
      2. Commercial trade data is unreliable and secretive, unlike personal data which you can get tons of info from someones social security number.
      3. Lenders have collateral, and that collateral matters. Even if the collateral is I have your personal mortgage, intuitively dont you think it makes a difference. Making loans with no collateral is risky.
      Anyway, should be interesting to see how P2P business lending unfolds, lots of bank deposits need to be deployed.

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