Online small business lender Square Capital plans to sell consumer loans originated under a new program that is currently in the pilot stage, and has already received interest in the loans from investors including hedge funds, according to Jacqueline Reses, the company’s capital lead.
Offloading consumer loans from its balance sheet will allow the company to decrease its cost of capital, she said.
Square began piloting its consumer loan product, Square Installments, in some states in 2Q17, and has so far held those loans on balance sheet. However, investors will soon have the opportunity to buy the 9.99% APR loans from the fintech firm, Reses said, without specifying when exactly the loans will be up for sale.
The loans are offered via Square partner merchants in California, Colorado, Florida, New Jersey, New York and Virginia, according to a company website. Reses declined to disclose any further metrics on Square Installments, citing the early stages of the program.
SQ’s personal lending products have “attractive potential long-term returns” for investors, but are inherently riskier than the lender’s core small-to-medium sized enterprise (SME) business loan product, according to a Compass Point report published in August.
Currently, Square Capital sells the bulk of its SME loans to a pool of investors. “We have a wide range of investors today, from hedge funds to ’40 Act funds to pension funds … [and] are always open to talking to different kinds of investors,” Reses said.
Recently, the company has seen increased interest from larger institutional players, such as Canada Pension Plan Investment Board, which joined the platform in 2Q17. “We now offer more of an established institutional product, while before we had a little more of a startup product, and had a lot to prove,” Reses said.
In the future, the company may look into tapping the ABS market to diversify its funding sources. “We haven’t pursued securitizations thus far, as we haven’t seen the benefit of it for us right now, particularly since securitization is less efficient for smaller portfolios, and we keep a relatively small portfolio, selling the majority to third-party investors,” Reses said.
SQ, which started off by providing point-of-sale solutions to small businesses, extended about USD 318m in small business loans to approximately 50,000 sellers in 2Q17, as reported (see story, 3 August). The data gathered from its network of more than 225,000 merchants allowed the company to build unique profiles of more than 90m consumers.
“We identified early on that data was the secret sauce,” Square’s CFO Sarah Friar said at an industry conference recently. From its early days, the company used machine learning and deep learning technology to underwrite small business loans, and will now use the data it has amassed to help underwrite loans to consumers of those businesses, according to Friar.