The Retail Investor: Will the Little Guy Decide Alternative Lending’s Fate?

When an industry booms, imaginations run wild. In alternative business lending, the unabated evolution of non-bank financing has felt more like a revolution. Lending is not evolving, it’s being overthrown, gutted, and replaced with an entirely new system. This is an age of empire building, an era filled with modern day Carnegies, Rockefellers, and Vanderbilts. The concept of sitting inside a bank to apply for a loan and waiting several months for a response is poised to become part of ancient American folklore, an absurdity that may or may not have existed in a bygone simpler time.

When I was your age, I used to walk 5 miles barefoot uphill in blinding snow storms to get to a bank and apply for a loan. We didn’t hear a word back until it was halfway through summer…and we counted ourselves lucky back then!

But the rising new world order of lending is susceptible to even greater disruption. What seems like a period of methodical and unstoppable growth could be thrown for a loop all over again. Industry insiders speak of many dangers, the threat of regulations, future economic downturns, and rogue actors that skirt generally accepted best practices. They’re all worth keeping an eye on, but it’s the blind spots that should keep you up at night. Does another outside force have the power to change everything?

The Retail Investor
Until now, the alternative business lending industry hasn’t really encountered retail investors. Syndicates (wealthy investors that participate in merchant cash advances) have been the closest thing thus far and they paved the way for change in fashions many folks didn’t notice.

In the immediate aftermath of the financial crisis, trust waned between the companies that funded small businesses and the brokers that originated the applications. To bridge the gap, brokers offered to “participate” in the deals they sold as a token of good faith. By sharing in the risk of the deals themselves, both parties were aligned in the goal of doing nothing less than good business.

As syndication grew, so did the appetite. There was a period when funders called all the shots and the rest of the industry fell in line. That oligarchy crumbled as brokers and account reps essentially became funders of their own. A power shift took place almost overnight and with that, a million different ideas that made sense or made none at all, were unleashed into the market. Factor rates shot up and plummeted. Repayment periods doubled and halved. Commissions were all over the place. Some pegged stacking as the next frontier of opportunity while others saw it as a step towards swift federal regulation. Nobody was in control but the industry grew. And it grew and it grew some more.

The debate over stacking, though bitter, has been relatively tame. It’s a debate amongst peers. As different as some beliefs may be, everybody’s playing for the same team.

Enter the retail investor. Syndicates typically wield less capital than funders, but on the low end, that could be hundreds of thousands or tens of thousands of dollars, and look at how much change they wrought. With peer-to-peer lenders such as Lending Club or Prosper, everyday retail investors can contribute as little as $25 into a loan. With such low financial barriers to entry, peer-to-peer lending allows virtually everyone to become a funder. In 2014, the average joe is a funder.

What once used to be discussed in board meetings is now being discussed at the dining room table; Interest rates, debt-to-income ratios, default rates, all of it. The masses have gained an entirely new perspective on consumer lending. There’s a growing appetite for knowledge on the subject and questions and ideas are popping up that may never have otherwise.

In Peter Renton’s online Lend Academy forum, peer-to-peer loan investors are devising tax strategies and arguing about whether levels of literacy can predict defaults. Once upon a time there were bankers and there were consumers. Now the consumers are also bankers. The very same folks that decried high interest rates as predatory have had their eyes opened to the risks associated with them. The average joe is developing an appetite for F and G rated loans, the riskiest loans on the platform, but also the ones that charge the highest rates. Some wish it were possible to charge even more to applicants that don’t even qualify to be on the platform. They smell opportunity where they never imagined they would. It’s like the universe has been flipped on its head.

Such a catastrophic shift has not yet come to alternative business lending but it will. Peer-to-peer lenders are just now starting to test the waters there, Funding Circle to name one. It is the merchant cash advance companies that will likely be left vulnerable. Some have convinced themselves that the greatest threat to the status quo is government. While the feds breathe fire when stirred, the retail investor is a flood that can’t be stopped.

They come in many forms, but it is the IPO that will bring them forth to business lending. Folks speculate that Kabbage, OnDeck Capital, and CAN Capital are on the short list to become public. When and if that does happen (and it doesn’t necessarily have to be one of those three), the power to spur change or set best practices will be redistributed from funders, brokers, and syndicates, to millions of average joes nationwide. Commissions will rise and fall at the behest of shareholders. Conversations about stacking will be had at bars, family barbecues, and on stock forums.

Online communities like Investors Hub will breed new ideas about merchant cash advances and business lending in ways no one has even thought up yet. Stock analysts will want to know it all and rate companies based on every perceived opportunity and threat.

To an extent, alternative business lenders are much like the banks that preceded them. Nobody on the outside really understands how they work. That will change when everybody and anybody has an opportunity to share in their financial success. What a world it will be to talk about payment splits, stacks, and ACH processing with retail investors.

Embrace the Zeitgeist brothers and sisters. This is the age of empires and through lending a chapter in human history will come to a close, one where credit was controlled by a few, and misunderstood by all. Though some lenders will rise like Carnegie, Rockefeller, and Vanderbilt, they will be shaped and influenced by the one guy no one saw coming, the retail investor.

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