Cracks are spreading in the online industry out to disrupt the banks

Cracks are spreading in the online lending industry.

Startups like LendingClub, Prosper, and Sofi — which have set out to disrupt traditional banks — are scrambling for new ways to boost revenues and funding as investors lose interest and regulators raise questions about their business models.

Lending Club last week had to raise interest rates for certain customers for a third time in recent months, citing a tough economic environment and poor performance on loans.

Now that startup, which is the largest online lender by volume, is taking things a step further: It plans to sell bonds backed by its unsecured loans, The Wall Street Journal’s Peter Rudegeair and Telis Demos report.

Its loans have previously been indirectly securitized without the company’s own involvement, according to the report. Goldman Sachs and Jefferies are reportedly working on the bond offering.

LendingClub’s search for new sources of funding highlights the broader issues facing the industry.

Regulators are concerned about the online lending model and its ability to survive credit crunches or other systemic risks.

The ratings agency Fitch highlighted another major concern in a recent report, according to Fortune: Essentially, online lenders are making riskier loans than everyone had initially anticipated, and they’re seeing higher-than-expected levels of loan deliquencies as a result.

The worry is that investors like hedge funds, which back the majority of the loans, will eventually lose interest.

Prosper earlier this month lost its partnership with Citigroup, which had been buying debt from its customers and packaging it into bonds. That’s because investors wanted higher yields from the securities Citi was selling, according to Bloomberg.

Charging customers higher interest rates is one way to appease those investors.

Another way to keep money flowing is for lenders to create some investor demand themselves. Sofi recently launched an in-house fund to invest in its own loans.

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