San Diego Business Journal

Peer-to-peer lenders are becoming more acceptable, both as a source of capital for consumers and as a legitimate place for investors to get a better return on their money.

San Diego-based Dealstruck, a platform that matches small business borrowers with investors, recently surpassed arranging 100 loans last month, well ahead of its projected goal, co-founder Ethan Senturia said.

As more people become familiar with peer-to-peer lending, investor vehicles such as

family offices and hedge funds are investing in the platforms, Senturia said.

“Our experience has been that we’re feeling a tailwind for our service,” he said.

Dealstruck lets entrepreneurs solicit for their financing from investors via its website. When enough investors deem the business a good risk and pledge the requested funding, Dealstruck arranges the loan, charging interest rates ranging from the high single digits to the high teens, and passes on the payments less its fees to the investors.

Senturia declined to provide the total dollars in loans Dealstruck has made since it began operating last year; the average loan size is about $100,000.

Lending Club, a San Francisco online lending platform aimed more at personal loans, recently passed $1 billion in loans in the second quarter, bringing the total since inception in 2007 to more than $5 billion.

Banks Getting Involved

That kind of volume has attracted interest from some strange bedfellows — commercial banks, the industry that peer-to-peer lenders is clearly disrupting and that rejects most of the borrowers who peer lenders count as customers.

Recently, Lending Club partnered with Union Bank, with more than $105 billion in assets, for the bank to buy some of Lending Club’s loans.

“This relationship will allow Union Bank to invest in high-quality assets while bringing new products to our customers,” said Jim Francis, Union executive vice president and head of the bank’s consumer lending division in San Diego in a news statement. The bank, owned by Japan’s Mitsubishi UFJ Financial Group Inc., did not make Francis or anyone else available for an interview.

Neither Lending Club nor Union revealed how many loans the bank is buying. Most of those loans are made to customers who are paying off or refinancing expensive credit card debt. Lending Club spokeswoman Beth

Haiken said the average personal loan is for $13,000 and a term of 36 months. The average interest rate as of last quarter was 12.23 percent.

‘More Exciting But Stable’ Investment

Typical investors funding most of Lending Club credits are people who can invest as little as $25 per loan and do not need to be accredited or have a net worth of at least $1 million — as do investors in Dealstruck and other platforms. Lending Club said it has more than 80,000 investors.

Thomas Yungen, a manager at a San Diego high-tech company, said he’s been investing through Lending Club since 2009 after looking at the paltry returns he was getting in some of his other investment choices.

“I wanted to diversify and wanted to find something more exciting but stable,” said Yungen, 50, who also invests in his 401(k) retirement fund and has other stock and bond funds.

Yungen now regularly invests using Lending Club’s automated process that picks out the loans based on criteria that he’s set.

While some borrowers have defaulted, Yungen said the vast majority pay off the credits over three- and five-year terms. He said he’s received an average return of about 7 percent on the “tens of thousands of dollars” invested in the platform over five years.

Seeing the success in the personal lending space, Lending Club expanded this year to offer small businesses loans and loans to patients who are undergoing elective surgery.

Haiken said through the second quarter, the average business loan is $50,000, with an average interest rate in the mid-teens.

Most banks say those loan amounts are far too small for them to consider.

Rick Sanborn, CEO of Seacoast

Commerce Bank in Rancho Bernardo, said the average real estate loan his bank does ranges from $800,000 to $1 million.

Practically all of Seacoast Commerce’s portfolio are loans guaranteed by the U.S. Small Business Administration, and 25-year, fully amortized credits. Sanborn’s bank and other community banks do little or no consumer lending, and concentrate on commercial real estate backed credits.

“It would be hard to buy a piece of real estate here for $100,000, so no, we’re not offering that kind of loan,” he said.

Bridging a Lending Gap

Yet clearly, some borrowers “graduate” from peer-to-peer to full bank customers. Take Jake Hansen, president of Z-Ray Technologies Corp., a San Diego Internet services provider, who borrowed $100,000 using Dealstruck last year.

Hansen used Dealstruck after his request for a $10,000 loan for a truck was rejected by his bank. The $100,000 loan he got cost more, 11 percent, but was worth it, Hansen said.

Z-Ray was paying the debt down, with $45,000 outstanding when it recently obtained a $450,000 financing package that included a refinancing of the old loan, a $250,000 line of credit and a $125,000 equipment loan, all from Chase Bank, Hansen said.

“That [Dealstruck] loan was like bridge for us,” Hansen said. “It was a great stepping stone for us to get into the club with the banks.”

Lola Cimmino, owner of Chick Sticks, an Oceanside maker of surfboards for women and other sports equipment, said her startup was 2 years old when she tried to obtain a small business loan but gave up as the process dragged on too long.

She decided to apply via Accion San Diego, a nonprofit micro lender that has partnered with peer-to-peer lender Kiva.

“They told me that my loan was the fastest funded ever,” Cimmino said of the $14,000 she got through the Kiva platform. While the interest rate on the two-year loan is about 18 percent, it was well worth it, she said.

Cimmino said she didn’t know what she would have done otherwise because she had already maxed out her own capital resources.

“There was no other option,” she said.