Biggest Challenge of Low Cost Business Lending: The customers couldn’t distinguish the difference

In a podcast between Ballard Spahr attorney Alan S. Kaplinsky and Executive Director of the Responsible Business Lending Coalition Louis Caditz-Peck, the latter revealed one of the biggest revelations he had while previously working in the small business lending division of LendingClub. Winning on price doesn’t work if your customers don’t realize your product is actually a lower price.

“[…] part of that strategy [LendingClub] was to be the lowest cost financing that a small business could get online while properly managing risk and be as fast and easy as some of the fastest and easiest financing a business could get online,” said Caditz-Peck. “And what I found was that strategy of being lower cost really had challenges because customers could not tell that our products were lower cost and that was our biggest challenge.”

Caditz-Peck gave an example of how a quoted “rate” might have different meanings or reflect a different aspect of a deal:

“What was a challenge to our business was losing deals over and over again to competitors that were offering a much worse product, because the customer can’t tell. So this is a San Francisco open floor plan. And I can hear all the conversations happening of our folks that are talking to the small business owners, the kind of loan officer type folks, and they were having this conversation just constantly where they would say, ‘hey, Alan, congratulations, you’re pre-approved. We can lend to you at ________.’ The average APR at the time was about 22% that we were charging. ‘So we can get you financing at 22%’ and the small business borrower would often say, ‘Well, such and such company is offering me 10%’ and then our loan officer would say, ‘okay, but when they say 10%, what is that? Is that an APR? is it an interest rate?’ Usually it was bullshit. It just meant it was a percentage number that had no relationship to how we compute a real interest rate, and was probably equivalent to an interest rate of—in some cases if they’re saying 10% maybe it was like 40%, maybe it was like 300%, but this business owner didn’t know who to trust, and so that was squelching innovation, and that is what continues to be squelching innovation.”

You can listen to the full podcast here.