Online consumer lender Upstart Holdings is struggling with funding, with investors lamenting the company’s personal loan purchases as fears of a recession grow and its credit quality deteriorates.

Upstart acknowledged in a Thursday press release that its loans marketplace ⁠ — where it sells loans it makes to consumers seeking to refinance credit card debt ⁠ — is “funding constrained.”

The San Mateo, Calif.-based firm attributed investors’ hesitation largely to “concerns about the macro economy among lenders and capital market participants,” which has “put banks and capital markets on edge. prudent basis”.

But Upstart’s funding issues may also reflect concerns about its loan underwriting model, analysts said, pointing to deteriorating credit metrics for the company. Losses and late payments on some of Upstart’s loans, which the company aggregates into securities and sells to investors, have increased faster than expected.

“Credit investors’ concerns are that underwriting is still out of control and consumer credit will get worse,” Stephens analyst Vincent Caintic said.

Investor demand for Upstart’s loans has “declined significantly” and buyers appear to be demanding a higher rate of return for the loans than before, he added.

Upstart, which went public in 2020 and is due to report quarterly results in August, released preliminary quarterly results after the close of trading on Thursday.

The company said it now expects revenue totaling $228 million in the second quarter, down from its earlier forecast of around $300 million. It also said it expected to post a net loss of $27 million to $31 million, down significantly from previous forecasts which called for a range between flat profits and a loss of $4 million.

The company’s stock price fell at the opening of trading on Friday and fell 20.4% to $26.88 in the afternoon. Its stock price has fallen 81.2% this year.

Upstart’s revenue forecast for the second quarter appeared to fall in part due to lower loan volumes, which reduced the fees the company collects when it sells loans to investors. The volatility has prompted Upstart to hold more loans on its balance sheet in recent months rather than selling them to investors. But the company also said it “took steps to convert loans from our balance sheet to cash,” which led to a further drop in revenue.

The results were “not surprising,” given that Upstart’s “business model appears to be under strain” and some of its borrowers appear to be defaulting on their loans faster than expected, Jefferies analyst John Hecht wrote. in a note to customers.

Upstart touts its artificial intelligence models as a way to better predict customers’ ability to repay their loans ⁠—and, in doing so, lend to people who would otherwise only qualify for more expensive loans.

But that narrative is “in contrast” to the fact that at least one of Upstart’s securities to investors breached a cumulative loan loss covenant, and that other Upstart securities are at risk of doing so, wrote Hecht.

In May, bond rating agency KBRA said two of the company’s securities from 2021 “may violate” certain triggers related to customer default rates. These securities “underperform” previous asset-backed securities, KBRA analysts wrote in a report.

In Upstart’s press release, Chief Financial Officer Sanjay Datta said the company’s loans “performed exceptionally well” despite a “tumultuous economy”. The company said the personal loans it has helped establish banks and credit unions have consistently exceeded expectations.

For other loans purchased by non-bank investors, securities from 2018 to 2020 “provided significant excess returns.” Upstart said. Losses on 2021 stocks are “within 100 basis points of our loss expectations,” Datta said in the press release.

Upstart CEO Dave Girouard said the consumer lender continues to develop its underwriting models.

“Despite limiting hiring to critical areas, we continue to invest in our models and products and are confident that Upstart will emerge from this cycle a stronger business,” Girouard said in the press release.

Upstart’s funding issues point to the risks of relying on outside investors rather than more stable deposit funding, said Caintic, the Stephens analyst.

“When things are going well, then things are going well,” Caintic said, but those funding sources can “crash” when credit starts to deteriorate. For Upstart, the concern is that loan volumes will decline and its revenue “could dry up very quickly,” he said.

The situation isn’t something Upstart “can’t overcome,” Caintic said, noting that the online lender could try to become a bank and get more stable funding. But it’s a “lower multiple activity” that would force the company to take on more credit risk and spend more money on regulatory issues, he said.