Earlier this year, online lender Avant Inc. moved into an 80,000 square-foot headquarters in downtown Chicago that had all the amenities of a fast-growing startup. Employees needing a midday break could step away from their standing desks and into a "Nintendo" room full of vintage videogames.

Now, many of those desks sit empty. Around 220 of Avant's workers, or roughly 30% of its full-time staff, accepted a buyout offer that was extended to all employees this summer, the company says.

It's "not the highlight of my professional career to have to shrink the size of the company," said Chief Executive Al Goldstein in an interview. Mr. Goldstein's wife, Chief Compliance Officer Anna Fridman, was among those who decided to leave the firm.

Avant and other lenders have tried to maneuver in recent months around a more challenging funding environment for online loans. Mr. Goldstein has been working to reassure investors that shrinking is the right move in this market. Avant would save $30 million in operating costs annually thanks to the cuts, which forestalled any need to tap investors for new equity "for the foreseeable future," Mr. Goldstein wrote in a letter to investors that was reviewed by The Wall Street Journal.

Online lenders rely on outside money managers to fund their loans, but this year many have stepped back after returns slipped and concerns about loan quality grew after LendingClub Corp. fired its chief executive due in part to loan-disclosure problems. Avant's rivals—including LendingClub and Prosper Marketplace Inc.—also cut hundreds of jobs and went to great lengths to entice investors, including offering discounted loans or incentives such as equity stakes.

Avant has long touted a crucial difference with its rivals: It didn't profit by charging fees to borrowers, and instead sought to sell loans at a big premium to investors. The model worked when loan buyers were plentiful, but with investors now hunting for bargains, Avant has decided to change course. It plans to introduce an "administration fee" to new loans later this month, which will allow it to sell the loans more cheaply to investors.

"We are still competing for mindshare with investors," Mr. Goldstein said. "It's progressively difficult to deliver the no-fee product."

The race between Avant and its peers to capture investors' attention illustrates how the brunt of the slowdown in the industry is being borne by workers and borrowers. Many online lenders have already increased interest rates multiple times and cut off parts of the population that were previously eligible for their loans.

Part of that tightening was to correct for loans previously offered on terms that were too easy and that have since started to default at faster-than-expected rates.

Cumulatively, the steps taken in recent months put online lenders on more solid footing, but they also weaken what has been a rationale behind the nascent industry: that the firms will lend to people that banks have left behind. Avant this year began requiring borrowers to have more income relative to the size of their loans. It also has been shrinking the size and payback period of its loans.

Avant's fees will range from 1.75% to 3.75% of the loan amount, which is less than its competitors charge because Avant also receives income from the loans its holds on its books. To boost the attractiveness of the product to borrowers, Avant will also roll out a rewards program offering free credit scores and money-management tools.

There are signs that Avant's outlook has improved in recent weeks. The lender had originally said it could let go about 40% of staff, but was able to stop at 30%. The firm recently renewed its credit facility with J.P. Morgan Chase & Co. and Credit Suisse Group AG. Bonds backed by Avant loans were sold in August at the lowest yields of any deal brought by the lender to date.

"Our mission is to be able to provide access to credit for middle-income consumers around the world," said Mr. Goldstein. There's "no question Avant is going to survive and be a winner."

Write to Peter Rudegeair at Peter.Rudegeair@wsj.com and Telis Demos at telis.demos@wsj.com

 

(END) Dow Jones Newswires

August 17, 2016 12:45 ET (16:45 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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