Interview: Cato Pastoll, CEO of Lending Loop
Cato Pastoll is the CEO of Lending Loop, a Canadian marketplace lender specializing in small business loans.
Lending Loop allows investors to invest in small business loans through a peer-to-peer marketplace. Since opening, Lending Loop has originated over $20 million in loans and has over 6,000 participating investors.
I had the opportunity to sit down with Cato and discuss the future of Lending Loop and the future of the marketplace lending industry in Canada.
When did you recognize there was a need for a company like Lending Loop in Canada?
The genesis of it growing up in the UK and seeing successful peer-to-peer lenders fundamentally changing the financing landscape and changing how small businesses access capital. When I came to Canada and went to university I was always thinking about that in the back of my mind being a viable and interesting solution for businesses to access capital. That’s where I met my co-founder who came from a small business family background and he shared the struggles that businesses in Canada face getting access to capital. At that point it became evident that there was a need in the market for this type of solution and that marketplace lending or peer-to-peer lending would be a real and viable solution to overcoming those challenges, by reinventing how businesses or borrowers get access to capital.
Why do you think marketplace and peer-to-peer lending has been more successful in the U.K?
The number one reason is that government has been supporting the industry in the U.K. and creating new ways for business to access capital. The second reason I would say is around the general size of available capital. If you look at London or San Francisco, or other major financial hubs around the world, there is generally more capital put into platforms like this. Those two things combined have really created the perfect mix for the industry to thrive in the U.K. To a point now that I think there are platforms that are doing about 20 percent or more than 20 percent of all business loans in the U.K. It’s obviously taken off quite quickly and gained a lot of traction.
Lending Loop shut down briefly while engaging in discussion with regulators. Could you walk me through this process and the reasons you had to shut down?
We wanted to make sure we were fully compliant with the regulatory landscape that existed here, which is quite complex and not simple to navigate. As well, there is a lack of a clear business framework for business like us to operate in. I think because of the Canadian landscape it generally takes a longer period of time and you have to go through many pages of regulations to understand how you might operate a model like this in Canada. Whereas the regulators approach in the UK for example, is very standoffish and the mindset is typically, “we’ll let the business grow and thrive, and then when it’s big enough that it makes sense, we’ll then look to regulate it.”
Would you be able to walk me through the Lending Loop customer journey, for both the borrower and investor?
For businesses it’s an incredibly attractive way to get affordable access to capital. Small businesses aren’t really served by anyone in Canada. Banks and credit unions rarely lend to them, and other types of lenders typically charge very high interest rates, so there’s no real affordable way for a business that is doing well to get access to money. For them, they come to our website and fill out a very brief application. The purpose of that is to understand; do they have a viable business? Do they meet our minimum criteria? From that point they have to provide their financial statements, so we can get some understanding of how well the business is doing. We perform our full underwriting and due diligence process on the business, which typically takes one to two business days, and if they’re approved we then post them on the marketplace.
The marketplace is essentially an online platform where investors can go and look at the different businesses that have applied for financing. Once the loan is posted then the business can get access to capital from the 6,000 investors that are currently on the platform. All of those investors can go on the marketplace, look at the business, look at what they do, and if they like that loan, they can lend to it. The other way that investors can invest capital is something called auto lend. An investor using Lending Loop might decide they want to invest $10,000 and they might want to lend to a hundred different businesses. They can simply just set our auto lend tool to lend $100 to a hundred different businesses, and the tool will allocate their money for them. That’s typically a popular way to invest because it’s a little bit more hands off in terms of the investment experience, and also it gives people rapid diversification that lets you spread your risk across lots of different businesses very quickly.
I would expect the auto lend feature also allows business to access capital faster, as investors now have to spend less time on research.
Exactly. It’s definitely driven down the average funding time, where it’s now around 12 days for a business on average.
Lending Loop recently introduced corporate lending, allowing corporations to invest in small business loans. Have you guys seen a lot of interest in this product?
What we’re trying to do is create access to the asset class for anyone that would like to participate. At the end of the day we believe that the product is suitable for anyone, and we believe that everyone has the right to access this type of asset class and shouldn’t be something that only large institutions can get access to. That was one of the main reasons we wanted to continue to open up access and allow more people to invest. So far there has been a lot of popularity on that front from businesses wanting to invest in other businesses.
How does Lending Loop mitigate the risk of borrowers defaulting on loans?
The fact is that businesses go out of business every year. We try to create a great risk adjudication and underwriting process, in order to weed out any of the businesses that are particularly high risk. The most important thing an investor can do is diversify their investment. We and the investor can do as much due diligence as we like and hopefully we’re doing a great job of due diligence, it’s certainly a large part of our process, but there’s nothing more important than making sure you spread your risk. If you happen to lend to four or five businesses that go bankrupt, if you have diversified your portfolio, you should still be making positive returns. That’s really what we’ve tried to drive home from an investor experience standpoint and from an education standpoint. Letting people know diversification is the most important thing when involved with lending.
What is your vision for the future of Lending Loop?
We want to be the biggest lender to small businesses in the country and provide businesses with an excellent product that they are truly happy with. One that is affordable for their business, helps them grow, hire new employees, and expand their operations. The reason we started the business was to create a product like this, and that’s one of the reasons we decided to go down the regulatory path and create a peer-to-peer lending platform, so we could create a product where any Canadian business can get access to capital from any Canadian investor. We’re a financial technology company and our mission is to better the lives of investors and businesses. In the short term, our goal is to help improve the business ecosystem and increase the number of businesses that can get access to capital through Lending Loop.
Does Lending Loop have plans to expand from small business loans to personal loans?
We’ve definitely looked at it. There’s definitely pros to doing that type of lending as well. I think at the end of the day, right now at least, we’re focused on building and scaling the core product. However, that’s definitely not going to rule out adding other types of loans in the future. Undoubtedly investors want to get access to different types of asset classes and diversify not just within small businesses but beyond that. So I think that’s definitely something that’s on the table for us as we continue to grow.
What are you excited about within the alternative lending industry in Canada?
A lot of what’s been done before has been on a pretty small scale. I’m excited for other people to get involved in growing the industry, whether it would be financial institutions or international organizations. There is a need for faster adoption of this type of asset class. I’m excited for alternative lending to be more mainstream across the board. Most Canadians still don’t know this is a viable way for them to invest their money. I’m excited for it to become more mainstream, as it in in the U.K. As an example of that, not that many people know this here, but when you go to the supermarket in the UK and you go to check out, they typically have a place to invest your money through peer-to-peer lending platforms right there. It’s so mainstream that even your everyday people are doing it when they’re at the grocery store. I think it’s going to take a while for us to get even close to that, but I’m excited for the prospect of our financial landscape changing, because I think it’s helpful for Canada and the economy, and that’s something we’re trying to be a part of.
Are you worried that larger financial institutions may attempt to take a bigger stake in the alternative lending industry?
No. I think there may be more opportunities for them to leverage what we’re building rather than compete. I wouldn’t see it as a negative if they did try to compete, and I don’t see that as an imminent threat to our business, because it’s not their core business. Many people think it is their core business, but retail and commercial banking is. They’re good at lending large amounts of money to big business or lending you money against your house. Unsecured loans for amounts under a million dollars are not what they specialize in.
What does your typical day look like at Lending Loop?
I wish I could tell you I have a typical day. I don’t think I’ve had a typical day at Lending Loop. I started off writing software and code, then went to raising capital, then developing partnerships, then finding businesses. I’m very much overseeing the growth in the organization and trying to enable people here to be successful and create something special. I really wish I could give you a relative normal day, but I don’t think I’ve had two days the same in a long time.
