Business Lending Ain’t Easy
I was fortunate enough to stumble upon a marvelous post by Alex Binkley, one of the co-founders of the now defunct Funding Community. In his Blog, Binkley shares the details of a wild 18 month ride in the world of business lending. P2P lending was going great for consumers, so why not businesses? What followed is a lesson that anyone interested in alternative business lending needs to read.
I’ve copied some of the quotes I think are most relevant below:
On ACH processing:
we were trying to find a way to make our payment processing both inexpensive and simple. Many ACH (bank transfer) companies wanted to charge us high fees because our type of transaction was considered “high-risk” for chargebacks, so instead we started working with a relatively new payment processor called Dwolla. Now, Dwolla does ACH transactions cheaper than just about anyone else, but that cheapness comes with a price. For us, it was ease of use.
On the quality of businesses:
So after our first couple weeks we had just about funded all of out first set of loans and we were furiously trying to get new ones signed up. Here was the rub though. We started to get a little bit of inbound interest, but frankly most of those businesses were in rough shape. When we looked at a small business making gross revenue of $1,000 a month looking for a $10,000 loan we just could not see how our lenders were going to be repaid. Of course this was not every business we were looking at, but it was a huge percentage.
On selling the product:
A total of 83% of Lending Club’s loans are for refinancing existing debt. How amazing is that? You don’t have to convince someone to take on new debt, you just have to be able to convince them you can offer a better deal than their current debt. On top of that, you can piggy back on other lending companies’ credit analysis. Our company was built on the idea that the credit markets were too lean for small business, which means that we were built on the idea of originating new debt as opposed to financing old, a much more challenging (and expensive) proposition.
On origination fees as a revenue driver:
Because all of our loans were 9-month loans and we were trying to keep total cost down to borrowers we felt we could not charge origination fees nearly that high.
On ancillary opportunities in business lending:
One aspect of our model we were pitching to investors was that small business lending is very different than consumer lending. When you make a loan to a consumer you really don’t have a lot more to offer that consumer (except maybe more loans). When you make a loan to a business or theory was that you then had the ability to sell a lot of ancillary products to that business.
On not having state of the art technology to track loan repayment and performance:
We started to get questions and concerns about what was happening with peoples’ money. It was all safe and was all being put into the loans intended, but because the transparency was not there some lenders became very concerned.
Business lending ain’t easy…April 16, 2014