Lending Club has gone quiet and is no longer allowing lenders to lend, but borrowers can still borrow money according to their email notice. Those loans will be funded by Lending Club. From the email notice:
The borrowing side of our site will remain generally unaffected by this registration process; borrowers can continue to apply for loans and new loans posted after April 7, 2008, will be funded and held only by Lending Club.
This made me start to consider the change in the Lending Club cash burn rate (definition of burn rate). Since I have no idea what Lending Club’s burn rate was, I can only estimate the delta in the burn rate.
Debt Kid mentions in his take on the quiet period that he thinks that a high estimate of Lending Club’s burn rate was $400,000 per month considering 22 employees. The pre-quiet period burn rate is not nearly as important as the change the burn rate since Lending Club agreed to fund all borrowers until the SEC issues are sorted out.
Lazy Man asked what loans would be funded, but to make my delta calculation, I will assume that similar loans will be funded as were being funded before the quiet period since Lending Club said “borrowing… will remain generally unaffected.” I will also assume that the loan volume will stay the same since borrowers are not nearly as concerned about the stability of the company as lenders.
Lending Club Stats lists the March originations as just over $4 million. So the burn rate will be rate at which cash is loaned out plus the interest received in the mean time. I assume also that lending club will receive the average interest rate of approximately 12% and that Lending Club will still capture the same origination fees.
$4 million per month for four months is $16 million dollars in loans. Since Lending Club charges an origination fee, of approximately 1.75% on average, the cash out the door is only $3,930,000 per month. To offset that, Lending Club will receive interest and principal payments each month starting in the second month — approximately $132,857 per month for each month that they have purchased the loans. If the quiet period will last four months, here is a rough estimate of Lending Club’s change in cash burn rate:
Month One: $3,930,000
Month Two: $3,930,000 – $132,857 = $3,797,143
Month Three: $3,930,000 – $265,714 = $3,664,286
Month Four: $3,930,000 – $398,571 = $3,531,429
Total four month cash out the door: $14,922,858
Lending Club had $10 million in funding about 9 months ago. That money will not last through a quiet period if Lending Club funds borrowers’ loans as they have promised. I hope that they have been able to convince a bank or secure another round of funding to cover this quiet period lending spree. If not, Lending Club will likely be out of business before the quiet period is over. Unfortunately, since Lending Club is in a “quiet period” does not allow them to answer any questions about these issues.
I am heading to Lending Club right now to withdraw all the funds that I can and I will continue to do so until they come out of the quiet period.
Summary of blog postings on the Lending Club quiet period and more postings.
Technorati Tags: Lending club, P2P Lending, Venture Capital, Cash, financing
I don’t think the worst case scenario is Lending Club will run out of money. If things did get bad they would stop funding loans before they ran out of money.
Prosper backers have put up $40 million. With how well LC is doing so far I don’t think it would be hard for LC to secure some more capital.
Yeah, I’m sure they have arranged financing or have the cash to fund during the quiet period, otherwise they would have suspended borrowing as well.
I am guessing that they have also take care of this cash flow problem – or at least they can if necessary. It would be easy to structure a deal with a bank to loan Lending Club the money for 6-8% using the loans as collateral. If the Lending Club were to go under, the bank would be able to take over the loans (as long as the borrowers contract is written correctly). If Lending Club works out (and I hope it does), Lending Club will earn a nice sum on the difference between interest rates and the bank would earn their ~7% on the loan to Lending Club. The bank would have the opportunity to loan out the money without any advertising or servicing overhead at a rate much higher than a current three year treasury note. Plus, it might help cement a relationship that could be mutually beneficial between the bank and Lending Club in the future because I am assuming if Lending Club and other P2P lenders continue to grow banks will somehow want to play in the same game.
They must have thought of this, but as I mention, this is a large change in cash burn rate that must be accounted for.
It’s also good for another reason. With LC money on the line they will likely be more aggressive with collections in the future.