You can't keep a tough business down, it seems. Subprime-lending specialist Elevate Credit will hit the market in an IPO slated to take place this Friday. Here's a brief look at the company's history and operations, plus a glance at some of its biggest competitors in the alternative-lending segment.
In for a dollar...
Elevate Credit loans money to individuals with poor credit profiles, specifically those with credit scores below 700. It has three products, the main one being Rise, an installment loan program that offers between $500 and $5,000 in credit in durations lasting from four to 26 months. Rise is currently available in 15 U.S. states. The second is another installment loan arrangement, Sunny. It's similar to Rise except the amounts are lower and the maximum duration shorter, and it's offered in the U.K.
Program three is Elastic, a line of credit available in 40 states that loans up to $3,500 for as long as 10 months.
These loans, it almost goes without saying, are atrociously expensive. According to Elevate Credit, the weighted average effective annual percentage rate of Rise is a monster 176%, while that for Sunny is 255%. Elastic's is a comparatively light 88%.
Elevate Credit emphasizes a tech-driven approach. In its prospectus, the company says it "use[s] advanced technology and proprietary risk analytics to provide more convenient and more responsible financial options to our customers." Its apps have sleek designs and are be fairly intuitive.
Whizbang technology notwithstanding, subprime lending is a high-wire act. It's no surprise to see that Elevate Credit's provision for loan losses was a whopping $171 million for 2014 -- far higher than the loans outstanding figure of $146 million -- while net charge-offs were $139 million.
It's tough to make money in this business. Elevate Credit has posted notable losses in each of its past two fiscal years. In 2014, for example, its shortfall was almost $55 million on revenue of $274 million. The previous year's figures were $45 million and $72 million, respectively.
That's par for the course for the "alternative lending" segment of the financial industry. OnDeck Capital (NYSE:ONDK) -- which also offers pricey loans, but focuses on small businesses rather than individuals -- has also struggled to make a buck. It has posted annual losses in its three most recent fiscal years. Since OnDeck Capital had its IPO slightly over a year ago, its share price has declined by 72%.
LendingClub (NYSE:LC), a company that essentially acts as a marketplace for expensive peer-to-peer borrowing, has posted only one positive bottom line over the past five fiscal years -- and a very thin one ($191,000) at that. Like OnDeck Capital, LendingClub has been on the market for a bit over a year and suffered a share-price decline nearly as steep as its peer's.
There is certainly promise in the segment: Elevate Credit, OnDeck Capital, and LendingClub have all seen sharp increases in their top lines -- but the type of lending they do is volatile by nature, and as such it can easily plunge a company into a loss.
Provider or predator?
Compounding that bothersome tendency is the "sin stock" aspect of the subprime business, which might turn off certain investors. This type of lending is seen as predatory by some, who consider it reckless to saddle unreliable and often desperate borrowers with high-interest debt.
Regardless, Elevate Credit's IPO is scheduled to take place on Friday, and 3.6 million shares will be sold at a price of $20 to $22 apiece. They will trade on the New York Stock Exchange under the ticker symbol ELVT. The lead underwriting syndicate consists of UBS Investment Bank, Leucadia National's Jefferies, Stifel, and William Blair.