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Alt-Lending’s Disappointing 2015 – So Far

The first half of 2015 has come to a close, and market analysts will be examining all aspects of the state of the U.S. economy to see where the markets have been, and where they are headed for the rest of the year.

One of the most intriguing trends of the year thus far is the fluctuation of the small business lending market. The general consensus in recent years has been that in the wake of the 2008 financial crisis, mainstream banks have shied away from lending to SMEs, giving rise to the alternative lending boom, and saving small businesses.

Lending Club’s $1 billion IPO and OnDeck Capital’s own high-profile debut, both about six months ago, kicked up the alternative lending excitement and signaled that 2015 would be the year the industry changes everything.

But over the last six months, the U.S. economy has painted a vastly different picture.

Traditional Lending Up, Demand Down

Biz2Credit’s latest Small Business Lending Index, published last month, found that large banks have increased their SME lending application approval rates for seven months in a row.

"In fact,” said Biz2Credit CEO Rohit Arora at the time of the report’s release, “big banks are granting a higher percentage of small business loan requests than at any time since the recession."

The May 2015 data represented a major milestone: for the first time in 2015 – indeed, for the first time since Biz2Credit first began tracking these statistics – institutional SME lending approval rates surpassed those of alternative lenders.

Continual low interest rates are a major contributor to SMEs’ attraction toward big bank lending these days, the report found.

The Thomson Reuters/PayNet Small Business Lending Index for May 2015, released Tuesday (June 30), found that small businesses are borrowing less than they had been after boosting their loan application figures over the last few months. “Small businesses took a breather last month after the high levels of investment over the prior quarter,” said PayNet president William Phelan in a statement. “This release isn’t surprising given the challenges building new property, plant and equipment."

The slowdown doesn’t signal a long-term trend, the researchers found, and instead suggests that boosted hiring, stronger inventories and easier access to credit have all led to small businesses not needing loans in recent weeks. Even with the slowdown, PayNet found, SME lending was still up by 9 percent compared to the year prior. Still, the figures signal a lull by 2015’s standards.

Alt-Lending Slump

The rise in traditional bank lending to small businesses, coupled with a pause in SME demand for financing, has generated a climate that is not too kind to the alternative lending market.

Bloomberg reports released Monday (June 29) found that two of the nation’s most prominent and trailblazing alternative lenders, Lending Club and OnDeck Capital, are in a bit of a rut.

Lending Club’s shares as recorded Monday were a 50 percent drop from its peak in December, marking the first time the company fell below the levels seen at its December 2015 IPO, during which shares were priced at $15. While its IPO valued the company at more than $10 billion, today it is worth about $5.4 billion.

The same goes for OnDeck Capital. Bloomberg reported that its shares, after spiking for its December IPO, plummeted below the $20 initial stock pricing for the first time in January. This week, those stocks saw a 8.6 percent decline, today being priced 42 percent lower than December 2014 levels.

"I don’t think people had really dug into some of the underlying risks,” said Compass Point Research & Trading LLC analyst Michael Tarkan in an interview with Bloomberg. Reports said he is among four analysts that have placed a sell rating on Lending Club.

Bloomberg also pointed out Lending Club’s lackluster revenue forecast provided last February, then with its $6.4 million net loss reported for the first quarter of 2015.

For both Lending Club and OnDeck, Tarkan has lowered his outlook and predicts their stocks will continue to fall. “The stocks are too expensive relative to underlying risks,” he said according to reports in Forbes, published Tuesday.

The analyst is among a growing community of skeptics that are beginning to sound the alarm on alternative lending: the industry may not be the small business savior it was cracked up to be when 2015 began.

An explosion of alt-lending competitors, an increase in traditional bank lending, and the preparation of existing major players like Goldman Sachs to enter the small business lending scape, suggests that alternative finance may not take off as was once predicted. High interest rates and fees and the uncertainty of impending federal regulation on the market may lead to even weaker performance by these players, analysts agree.

The market is still in its infancy, and it’s too early to predict how regulation will impact alternative lenders, say analysts. But with the first half of 2015’s figures coming into picture, industry experts and players will be keeping a close watch on how the rest of the year pans out, and whether the reputation for alternative finance can redeem itself.

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