The credit profiles that these funding options target also differ quite drastically. Because MCAs can carry significantly higher costs, they attract riskier applicants (and as such protect their yields through these costs.) Crowdlenders, conversely, charge lower rates to their borrowers – between 6 and 21% at Lending Club or 6 and 32% at Prosper. This allows crowdlenders to target borrowers with higher FICO scores and stronger credit profiles. At Funding Circle, where our rates range from around 10% to 17%, our loans are also secured, which further distinguishes the differences between what we do and MCAs. The stark difference in risk that MCAs and crowdlenders take on implies that they market themselves to significantly different clients, without much chance of overlap absent some significant changes to how they structure their deals.
The differences in credit that these funders target works hand-in-hand with the turnaround time on their underwriting processes. MCAs can normally originate deals in a matter of hours or a single day due to laxer underwriting standards and the protection afforded them by higher rates. The more stringent credit requirements of crowdlenders means that verification and funding often take between a few days and a week. These procedural differences cause businesses to approach these funding providers with very different needs. MCA applicants will normally have immediate capital needs that don’t fit the underwriting schedule of crowdlenders.
All these differences create de-facto market segmentation between crowdlenders and MCAs. The way these distinct types of products work compels each to target radically different customers, without much opportunity for head-to-head competition absent some significant changes to their models. It’s those differences, combined with the outsize addressable market for small business lending, which will likely keep these two options from overlapping for the foreseeable future.
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By: Nik Milanovic, Funding Circle
nik.milanovic@fundingcircle.com
San Francisco, CA
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