Do Small Business Loans Generate Significant Returns?

Originally @ Newfination

Editor’s note: Nik Milanovic is the head of business development & marketing analytics at Endurance Lending Network. He is also a Newfination Expert in crowdlending.

A recent blog post by Lend Academy founder Peter Renton on Lending Club’s entrance into the small business lending market brought up a too-familiar question: do small business loans underperform consumer loans? The concept of small business loans generating abysmal returns is a common misconception among peer-to-peer investors. But where does this myth come from? And what evidence is there to the contrary?

If you look only at peer-to-peer lenders focused on consumer loans, it’s easy to walk away thinking business loans are too risky to generate positive, reliable returns. Nickel Steamroller, which provides analytics and insights on the ROI of peer-to-peer lenders Lending Club and Prosper, highlights this issue. Over Lending Club’s historical performance, for instance, small business loans generated an ROI of 0.82% – the second-lowest of 14 loan purpose categories. The default rate of these loans was 10.99%, the second-highest.

Yet maybe this perspective is too narrow. Focusing on firms that exclusively provide small business loans tells a different story. Take Funding Circle, a UK-based peer-to-peer commercial lender. Their business loans yield on average a 6.2% return, with a median return of 6.8% (meaning 50% of investors make more than 6.8%.) Rebirth Financial, an American peer-to-peer business lender, has provided returns to investors of 8% – 10%. OnDeck Capital, a tech-enabled small business lender, has successfully lent over $450M to small businesses since 2007 and continues to generate positive returns. These companies all point to the viability of generating outsize returns for investors through small business loans.

But what about defaults and losses? Are small business loans too volatile to expect reliable returns? Recent  loan data shows that there is no reason to expect high charge-off rates from small businesses. The loss rates of SBA 7a loans, which are exclusively made to small businesses, have declined over the past 3 years from 2.5% to 1%. The Equipment Leasing and Finance Association has shown similar declines over the same period from 3% to 0.5%. The Federal Reserve reports similar loss rates for total leases and C&I loans.

With such low loss rates and proven performance, Endurance feels strongly that small business loans can generate consistently outsized returns to investors. That’s why we make it our mission to provide not one, but two great products: access to capital for main street businesses and access to a high-yield asset class for accredited investors.


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