The following is my peer lending review of Lending Loop; the only peer lending available in Canada at this point in time.
After searching for a similar p2p opportunity like the many in U.S., I signed up for Lending Loop (LL). It has been approximately 4-6 months since I started investing with LL. In the article below, I will review my experience with LL. I will cover how I invest, and what I think of the investment opportunities. In the end I will close it off with my long term view on using LL.
Thus far I have not had any delinquent loans or companies that went bankrupt. The fact that lending loop has low default rates certainly helps (see the image on the right). Even then, lending loop recommends to diversify your portfolio by allocating small amounts of capital to many different notes. For instance, if your portfolio is $10,000, then investing in 100 different notes will allow you to reach their recommended exposure level of less than or equal to 2%.
How I invest?
So the loans listed on LL are not only rated but the business asking for loan also makes their financial statements available. In addition, the company provides the reason as to why they are in need of borrowing money and also indicate the primary business they are in. Now, after the 2008 financial crisis, I do not believe in credit rating of any sort whatsoever, especially when my money is on line. Below are the principles that govern how I conclude whether a given opportunity is right for me:
- Financial Statements: By default the company asking for loan can only post three past years of their financial data. Now, I do not invest in companies that have less than two complete years of data provided. No exceptions.
- Revenue: Has the company increased its revenues based on the Income Statement provided? This is a must. This tells me essentially if there is a demand for the product or services provided by the business. I do not care whether I can relate to this, all I care is if there is a market for it. Essentially if you are taking a $100k when your revenues are $1M, you would think the business would have the ability to pay the dues back to its creditors, assuming everything else is equal (i.e. Liabilities, debt, etc have no significant impact).
- Shareholder’s Equity: Has the shareholder’s equity been increasing? For certain businesses that I have invested in, I overlooked this aspect as they were a growing business, and as such if revenue stream had been increasing I am okay to overlook this aspect.
- Long Term Debts: I would like to see the company paying its long term debt over the years. It tells me the management is serious about its business operations and are in it for the long term. Certainly, if the business is in the growth phase (like most of the loans posted on the website are), this amount is likely to increase. Then the question I ask is how much percentage of the long term debt increased compared to the Revenues earned. If the percentage of the revenues earned is greater, than I am okay.
- Interest paid: Usually businesses post on LL, to pay off their high interest loans by leveraging the lending loop loan. Then, what must be evaluated is how much of the so-called interest were they paying before and after (subject to completion of loan funding on LL). You can ask questions on the Q&A part of the website if you want more clarity.
- Business Model: This part takes me back to the book, The Richest Man in Babylon. I really recommend this book as it is not only a quick read but you can apply the principles in various aspects of your financial life.
- I do not invest in the franchise business. What I mean, is if someone is looking to operate a KFC chain I would not invest. Why? Simply because most of the franchise operations repatriate a chunk of the profits to the parent. The store-operator is left with the paltry commissions, with a chance of the franchise contract being terminated. I simply want to keep away from this.
- I do not invest in operations that are startups.
- I invest in businesses where the owner has the expertise. For instance, I have invested in medical business wherein the doctor incorporated his practise and was seeking a loan to expand further. This fits my risk taking ability because the doctor would be able to treat his patients should the other doctors randomly disappear. In other words, the business would still be functional.
- I invest in businesses that have expanded. For instance certain restaurants, LED store, etc that I am invested in have increased their locations. Increase in locations indicate the seriousness of the business owner, appetite for expansion, and would give diversification benefits. I like that.
- Due Diligence: Usually if the business is a restaurant, I would check out the public opinion on the business and their ratings by doing a quick Google search. If it is greater than 3 stars, I am happy.
- Duration: The duration of the loan payback is very important. The longer it takes, the higher the risk probability of the investor not getting the money back. Typically, I like to invest in loans that are 1-2 years in length. With that being said, I have invested in loans that have had the pay back period of 3 years, and if the above mentioned points were okay, I do not have a problem.
- Lastly I would check the loan’s credit rating given by Lending Loop and see if it is reasonable after evaluating the factors above. This is totally optional but I like to do a quick check to make sure whether the assigned rating makes sense. This is my way to reinforce some level (2% perhaps) of faith and see whether Lending Loop credit rating is credible.
I believe there are plenty of businesses seeking loans on the LL platform. To my experience, they are evenly distributed across various sectors of the industry. I tend to wait for what I believe is a perfect opportunity for me. Sometimes, the A rating loans which are usually of a shorter duration are funded pretty fast. If you are not using the auto lend feature (more about this later), or do not check your email notifications (LL sends you a notification as per their default setting every time a loan is listed on the marketplace), you may squander an opportunity. However, I would recommend you wait for the right investment opportunities and not worry much about the lost opportunities. There is serious money to be made here, if you know what you’re doing.
How to sign up?
- Its a simple process, and you can start by going to their website and signing up as a lender.
- Minimum amount required – $200. This amount is not a fee as you can use to invest fully.
- Basically the whole process is straightforward and easy. They ask you few questions about your investor profile to gauge your risk tolerance level and your purpose of investing with Lending Loop. All of that is quick and does not take long.
- email Notification
- Auto-Lend (more on this later)
- Q&A discussion space
Recent Features Added
- Auto-Lend: Recently, they have added the Auto-Lend feature wherein you can save your preferences, for instance if you want 10 A graded, 5 B graded, and 3 C graded, and 2 D graded loans in your investment portfolio, the Auto-Lend feature would allow you to contribute in that manner without you having to do it physically. This is good for those that are away from their emails and are unable to logon and contribute after lending loop sends an email of a new loan listed on the marketplace (yes they send out an email every time a new loan is listed). This is really helpful feature and can be used effectively if you know what you want or if you like to only rely on the credit ratings.
How does Lending Loop work?
Once you have signed up, it takes about 4 business days or 1 week for the monies to reach your Lending Loop account. Then, you basically logon to your account and search for funding required on the Marketplace. See the screenshot below.
Each loan listed on the marketplace has details about their business operation and the reason for them seeking a loan. Also, they make their financial statements available – Income statement and Statement of Cash Flow. If you have some questions about the business or their financial statements, you may use the Q&A forum whereby the borrower answers questions for the potential lender(s). This Q&A space is very helpful.
Once you’ve decided to contribute to the business, all you have to do is click on the “Invest Now” button on the left of the loan listing and decide the dollar amounts (in multiple of $25, $25 being the minimum amount). See the image below.
How does Lending Loop make money?
Essentially, LL plays a role of a facilitator for both the business seeking a loan and the individuals seeking to invest their capital for that loan. As such, LL charges a servicing fee on both the lender and the borrower side – 1.5% for lender and 3.5%-6.5% for the borrower.
Is Lending Loop safe?
Yes, investing with LL is safe. All deposits are held at Canadian Chartered Bank. LL will provide you with a summary of your income interest and capital losses earned through the platform for you to include on your personal tax return. Also, all gains are subject to CRA rules and do follow the CRA rules. As such, at the end of the year you’d receive a T5 statement that you can use while filing your taxes. For more questions, check out their FAQs.
Also, if your question is not listed on the website, feel free to get in touch with them. I remember I had a query which was not listed on their FAQs, and they reached back to me within 1-2 business days.
- I heavily rely on the financial statements to evaluate the business. If the Financial statements are not complete, I do not invest.
- If the Q&A section is not looked at by the business owner, I refrain from making a contribution.
- You have to invest like a portfolio and have an investment strategy to bring down the risk level. With that being said, I do not believe in investing 2% evenly. I allocate the dollar amount based on the business fundamentals as explained above (see Financial Statements bullet).
- Long term, I would like to wrap up with my investment as it is a subject to economic swings. I am not comfortable with investing in Lending Loop during downturns. As the years go by, the probability of a downturn (as I see it) increases.
- In terms of returns from Lending Loop, I have invested $1000 about 2-3 months ago, and the net return thus far is 2.3-2.5% unannualized. This is pretty good. Overall, my LL portfolio should yield me approx 11-13%. The risk level meter is high, but I know what I am invested in.
How to do Research part of this article.
The following image reflects my performance for the year 2017. At 10.7% return, its not a bad investment at all.