Consumer (P2P) Online Marketplace Lending vs. Middle Market Online Marketplace Lending

The marketplace lending industry has come under scrutiny following recent headline events including the stepping down of LendingClub CEO, Renaud Laplanche as well as the New York Department of Financial Services (NYDFS) probe into the underwriting and borrower verification process of LendingClub. While these events have diminished a number of investors’ short-term confidence in the space, this article seeks to highlight the advantages of investing in middle market secured loans as opposed to peer-to-peer (P2P)/consumer loans via these platforms.

 

Firstly, it is important to distinguish between the different kinds of online marketplace lending platforms. LendingClub and Prosper are consumer or peer-to-peer (P2P), meaning they give individuals the ability to provide financing to borrowers for personal loans.  In contrast, CrowdOut Capital focuses on loans to middle market companies. The latter is subject to a significantly lower level of risk, due to both a higher number of associated regulations, as well as the nature of the loans themselves.

 

In the table below, note that for a relatively similar level of default there is a much lower recovery rate in consumer/personal lending. This data is taken as a weighted average for loans across multiple term lengths.

 

P2P vs. Middle Market

Figure 1: Consumer and Middle Market Lending Default and Recovery Statistics
(Source: TIAA-CREF Middle Market Lending Primer, Hewitt Ennis Knupp presentation to San Diego County Employee Retirement System, Public Filings)

For example, from Prosper’s recently filed S-1, they only verified employment and income on 59% of the loans on their marketplace. Of the 59% verified, one in six loan applications were found to be fraudulent or fabricated. It is gaps in diligence and loan underwriting that have come to fruition in the recent scandals associated with some of these online marketplace lenders. On LendingClub’s website, the company states that it only verified income for 27% of loans this year, and, on its form S-1, it states that it does not check to see if credit report information is fraudulent. The recent 80%+ decline in LendingClub’s stock price illustrates the rapid dissension in investor confidence, for both stockholders and loan investors.

 

On the other hand, middle market lending is accompanied by significant due diligence. There is significant interaction between the lender and the borrowing company to reach an understanding of the needs and risk profiles of both parties. This then entails an analysis of the company’s business model, management, financials, and industry. When this work is completed by the lending platform, the borrower is able to feel comfortable that their needs and ability to fulfill obligations are being accurately communicated to lenders. Lenders are also at ease since this analysis gives them greater confidence that they understand the borrower.

 

Despite the shadow of LendingClub’s troubles causing some investors hesitancy in the P2P space, as a whole, marketplace lending continues to flourish.  Savvy investors continue to seek viable ways to diversify their portfolios, and mid-market companies seek capital that is challenging to acquire elsewhere through avenues that streamline the process.  CrowdOut is the only online marketplace lender that connects accredited investors with strong middle market companies seeking capital. Through our easy to use platform, investors obtain access to loans that are typically exclusively available through mezzanine or credit funds.  Companies seeking capital are able to receive funds more rapidly and less expensively than they would through alternative funds or the traditional banking system.