A Peek Inside Yellowstone CapitalApril 1, 2015 | By: Sean Murray
When the banks say ‘no,’ alternative financing companies are saying ‘yes,’ sometimes. While costs may run high, there is still a limit on risk that a lender like OnDeck Capital and their competitors can accept.
In January of 2011, Kabbage stated their approval rate on volume-eligible applicants was only 55%. In February of this year, they said it’s about 80%. And a year ago, CAN Capital CEO Dan DeMeo told Forbes their approval rate was almost 70%. Similarly, a Biz2Credit report estimated the approval rate for alternative lenders in 2014 to be around 64% on average.
This indicates that approximately 20% – 35% of small businesses are being declined yet again. These are America’s exiles and they don’t fit into the neat little underwriting boxes that alternative lenders have crafted. Being declined by an alternative lender does not necessarily mean the business isn’t healthy or viable, but rather it could be because they exhibit some characteristic that today’s risk algorithms disqualify. Volatile sales activity, short time in business, poor credit, and atypical SIC codes are just a few of the reasons that a business could be rejected by a lender like OnDeck.
Consequently, an entire Plan C market has sprung up to service the small businesses that have been cast aside by the algorithms. And it’s huge. At the center of it all is Yellowstone Capital, a New York City-based merchant cash advance provider that has carved out its own niche. Founded in 2009, Yellowstone was one of a handful of pioneers that introduced ACH payments to an industry that relied entirely on split-processing.
Yellowstone does not publish their annual funding volume, but according to insiders not authorized to speak on the record, the numbers dwarf many industry behemoths including Square Capital, a company that funded more than $100 million in the last twelve months. And there’s some interesting changes happening there behind the scenes.
Last year, Yellowstone gave up an equity stake to a New York-based hedge fund in exchange for capital. Just recently however, Yellowstone CEO Isaac Stern led a management buyout to reportedly better position themselves for growth.
As part of the arrangement led by Stern and backed by a private family office, the hedge fund has been bought out and Stern is the only remaining company co-founder to retain an equity stake.
Additionally, private equity turnaround expert Jeff Reece has come on as President. Reece is a former Director of Cogent Partners, a boutique, private equity-focused investment bank and advisory firm.
Josh Karp is remaining the company’s Chief Operating Officer.
Jake Weiser is staying on as General Counsel.
Above all, the changes are more than just a few new faces in management. Yellowstone has already rented an additional floor at 160 Pearl Street, bringing the total floors they occupy there now to three.
Notably, the company has endured some negative press in the past of which they are well aware, but they have no shortage of supporters. I contacted two ISOs that claim to have worked with them and asked for their opinion on the Yellowstone experience.
Len Gelman of Allied Capital Corp couldn’t say enough good things about his account manager there, “He fights for every deal I submit, no matter how small or how difficult it may be to get done,” said Gelman. “He always takes my calls and responds to my emails and texts no matter how late it may be.”
And Arty Bujan of Cardinal Equity said, “Working with Yellowstone opened a door of business for me that really wouldn’t have existed without their unique approach to funding what some may call less desirable merchants.”
With a new management team and strong capital backing, Stern and Reece appear to be laying the groundwork to scale.
According to company insiders, Yellowstone is also working to expand their box beyond just high risk businesses and plan to service the middle market risk class. That would in effect also make them a Plan B option.
Their new underwriting depth could spare business owners from that second ‘no.’Last modified: April 1, 2015
Sean Murray is the founder of deBanked, a 10-year veteran of the merchant cash advance industry, a casual Lending Club and Prosper investor, the co-founder of Daily Funder, an alternative lending speaker, consultant, writer, and enthusiast. Connect with me on LinkedIn or follow me on twitter.