Profitability Helps San Diego Lender Step Out from Industry Cloud

With a cloud lingering over the peer-to-peer lending industry, privately held National Funding is disclosing new details today about its operations, in a bid to step into the light and differentiate itself as a fintech company and alternative lender.

In contrast to some alternative lenders, the San Diego firm said it is growing fast and is consistently profitable.

Problems at one industry leader, San Francisco-based LendingClub (NYSE: LC), have added to waning enthusiasm among some investors for the peer-to-peer model, which matches online users who want a loan with Wall Street investors or wealthy individuals looking for a higher rate of return than many traditional, fixed-income investments.

LendingClub helped to pioneer the model, saying in November 2012 that it had surpassed $1 billion in loans issued since 2006, when it was founded. The company became a Wall Street darling when it raised $1 billion-plus through its 2014 IPO, and now claims to have deployed roughly $19 billion in loans since inception.

LendingClub stumbled earlier this year, however, when an internal investigation found improprieties in the sale of $22 million in loans. The probe raised specific concerns about internal controls at LendingClub (Founding CEO Renaud Laplanche resigned on May 9), as well as broader concerns about the business model and transparency of LendingClub, Prosper Marketplace, and other peer-to-peer lenders.

Against that backdrop, National Funding said today that through the first half of 2016, it has provided over $1.5 billion in loans since 2012, when its business “morphed” into an alternative lender, according to founder and CEO Dave Gilbert. National Funding was founded 17 years ago, but operated for most of that time as an equipment leasing company, Gilbert said in a recent interview.

Alternative lending encompasses a broad range of loan options outside traditional bank loans. While National Funding is not a peer-to-peer lender, Gilbert said its loans are unsecured, and the company is not subject to the banking regulations that apply to other traditional lenders.

Since 2012, Gilbert said National Funding has grown annual revenue (generated from charging interest) by about 225 percent—from $18.1 million in 2012 to more than $59 million in 2015. The alternative lender is on track to generate about $75 million in revenue this year, Gilbert said.

Gilbert instead describes National Funding as “a balance sheet lender,” explaining that it retains loans on its books instead of selling its loans to another financial institution or individual investor at a discount. Some borrowers would prefer to deal with the original lender if a problem arises during the course of the loan, he said.

“There is more integrity to the process,” Gilbert said, because National Funding uses traditional loan analysts as well as software to analyze and process its loan applications. About 40 percent of the firm’s loan applications are completed online—and those loans can be processed in days. Nevertheless, Gilbert said most customers still want to talk to a loan officer and have a consultative discussion.

Another oft-mentioned concern about peer-to-peer lenders is that most members of the new class of lending companies have yet to prove their business model in the ultimate stress test—an economic downturn. Gilbert said he’s not worried, however, because National Funding already has weathered the Great Recession.

“We know what’s it’s like to be in an economic downturn,” he said. “Fortunately, our default rate has always been low, so even during the recession our customers made on-time payments. We are and always have been stringent in our lending underwriting practices and make sure that [small and medium-sized business] owners are taking out the right loan that they can actually repay.”

Gilbert maintained that National Funding also stresses transparency.

“We, along with other leading lenders in this space, are diligent at disclosing costs and terms, and take extra measures to ensure customers understand what they are getting into,” Gilbert said. “That’s why we consider our loan consultants to be such a big advantage over lenders that just lend electronically.”

National Funding also stands out because it never relied on outside investors, Gilbert said. Friends and family provided the initial funding, with additional growth financed from the business itself. “It’s been slower growth instead of hyper growth,” Gilbert said.

Through the first half of this year, National Funding said it has provided $151.8 million in loans to small and medium businesses, up about 45 percent from the first half of 2015.

The lender said it has provided capital to about 25,000 businesses nationwide. Working capital loans make up approximately 80 percent of National’s business, although its borrowers also use its loans to finance business expansion, marketing, inventory, equipment, and taxes.

The typical National Funding customer generates less than $1 million in sales, and has between 25 and 50 employees. The top-five industries it serves are special trades, general contractors, medical, business services, and trucking.

Bruce V. Bigelow was the editor of Xconomy San Diego from 2008 to 2018. Read more about his life and work here. Follow @bvbigelow

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