Google-Lending Club Alliance Takes Captive Finance into Digital Age

Google's partnership with Lending Club puts a contemporary, high-tech twist on the age-old model of large commercial companies providing financing to the small businesses in their supply chain.

Like General Motors extending credit to car dealers, Google will use Lending Club to finance resellers, service providers, and consultants tied to its business while putting to work a portion of the tech giant's cash war chest. Google already knows the borrowers; Lending Club will handle the underwriting — including crunching data to evaluate small businesses' creditworthiness — and servicing of the loans.

Lending Club had high expectations heaped upon it along with the piles of capital it gained from its high-profile initial public offering last month. One of the largest questions has been how online marketplace lending platforms would be able to scale up, with pools of securitized loans receiving the lion's share of attention.

If the Google pilot, which began quietly in December and was announced this month, is successful, it may point to an alternative route for online lenders: corporate partnership for low-cost, small-business lending–captive finance for the age of the Internet.

"There's a lot of interest from large companies to provide credit to customers, partners, and suppliers," said Renaud Laplanche, the founder and chief executive of Lending Club.

Matt Burton, co-founder and CEO of Orchard Platform, a provider of technology and services to online lenders, characterized the Lending Club partnership as a "canary in the coal mine," signaling that other corporate giants could become active, at least for their partners, in lending through online marketplace platforms.

"It's the first time we're seeing Lending Club just as a platform, where they're essentially renting their pipes out to Google," said Burton, a former Google employee. (Laplanche bristled at this analogy, saying it downplayed Lending Club's role in the pilot too much. "It's more than the pipes. Compliance, oversight: that's really important," he said.)

Orchard has heard of other lending platforms interested in pursuing the partnership avenue, Burton said. "It's much easier to scale up with a partner."

Google did not return several requests for comment. Laplanche said the pilot has been in the works since Google bought a substantial stake in Lending Club 18 months ago. Between that and Google's reputation for strong data analysis, the two make natural partners, he said.

Google will fund loans of up to $600,000 over two years, with businesses expected to pay an interest rate of 5% the first year and a low variable rate capped at 9.9% the second year. The loans will be pay interest-only for the first year.

Charles Moldow, general partner at Foundation Capital, a California-based venture capital firm, said Google likely views investment in loans through Lending Club as a way to grow its capital faster than, say, money market funds, while reinvesting in product partners.

"If I can invest my cash and advance my core business at the same time, why not?" said Moldow, whose firm is also an investor in Lending Club. Google held $125 billion in assets at the end of last year's third quarter, including $15.6 billion in cash and cash equivalents.

"I don't know if that means Google's going to be a quote-unquote finance company," Moldow said, though the universe of businesses announced that Google will choose from includes about 10,000 businesses, most of them small.

Google's past history in finance gives it good reason to experiment through Lending Club rather than trying this on its own. Google Checkout, the company's competitor to PayPal, completed its last payments in 2013. Google Wallet, another stab at payments, has failed to catch on widely after four years and has only seen a bump in usage from riding the coattails of Apple Pay.

Checkout struggled to knock PayPal off its perch in part due to problems with infrastructure — so Google could be trying to avoid repeating history with the Lending Club team-up.

Not all of the businesses in Google's "for Work" network will need help from the tech giant, and it may not want to lend to all of them; this is a pilot program, after all. But Google has sought for years to create more revenue streams — advertising generated 88.9% of Google's revenues in the third quarter of last year — and lending to resellers will also help those who advance Google's software keep doing so.

Penrod Software, a small Milwaukee-based provider of third-party support for businesses that use Google apps and cloud computing, said that even though it's never borrowed from banks, relying instead on venture capital funding, it would be prospectively interested in borrowing through Google's lending pilot.

"We've never really had to go down that route" of conventional borrowing, said Joseph Taylor, managing partner of the reseller. But, "Yes, [Google's pilot] would be of interest. It would be worth the time to take a look at it."

Nigel Glenday, vice president of capital markets for the boutique investment bank StormHarbour, called such partnerships "vital" to Lending Club's model for sustained growth.

"It's a strategic priority for Lending Club to strike these partnerships that provide access to pools of proprietary borrowers," Glenday said.