August 21, 2023
The recent interest rate hike has brought about challenges for all lenders, including LENDonate. What if a lender had the power to do something “counter-intuitive” to dampen the effect of the rate hikes by offering to lend at lower rates than conventional credit pricing would otherwise indicate?
The recent interest rate hike has brought about challenges for all lenders, including LENDonate. This rapid shift has led to elevated investor interest rate expectations and as a result, higher lending rates. For the first time since we gave the first loan, we have had to price a loan above 10% interest rate when that same loan would have been 6-7% a couple of years ago. I wonder if you can help us trim our effective lending rate by a percent. Let me explain…
When you look at the economic data below, rates started to spike last summer at a higher velocity than any other time in recent history. When that happens, typical lending rate calculations get stretched and squeezed in the “new normal”, or as many still wonder, “is it normal?” Uncertainty leads to perceived risk which leads to higher lending rates to compensate for the added risk. But what happens after that?
What happens when borrowers have few choices and bite the bullet by accepting the elevated borrowing rate and budget for larger interest payments? Even if they can “afford it”, this cuts into their future net income and free cash flow which in turn weakens the borrowers’ financial resilience, a measure that is important to their lenders. This perpetuates a cycle that could ultimately cause lasting damage to some borrowers.
Our Appeal to Lenders
What if a lender had the power to do something “counter-intuitive” to dampen the effect of the rate hikes by offering to lend at lower rates than conventional credit pricing would otherwise indicate? That is obviously good for the borrower, but could it also be good for the lender because the borrower’s default risk is lowered, all things being equal? That depends on the lender’s objectives. Some lenders seek higher return targets that suit their larger risk appetites while others are more altruistic and less return sensitive as long as their money is invested in something with social good.
LENDonate aims to be a partner to a range of lenders by offering them the choice to receive “market rate” return (our Ceiling Rate), or below Ceiling Rate. As our 2023 Progress Report stated, 95% of our loans received below Ceiling Rate interest since inception. We are so grateful for every lender on our platform to allow us to continue to vet and finance worthy nonprofit organizations.
My humble request: if you would like to invest in a LENDonate loan project, please consider reducing your offer by 1% from the Ceiling Rate. We understand for various reasons it is not always possible, and that is perfectly fine. For those who have some flexibility to extend this generosity, we are most grateful.
We are open to additional suggestions, solutions and strategies that can help nonprofit borrowers emerge this environment stronger. Over the years I have learned and been inspired by many of you who share our mission and vision. My virtual door is always open. Let’s innovate together!
Best,
Vivienne Hsu, CFA
Founder & CEO, LENDonate
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