Articles by Cheryl Winokur Munk
Minority-Owned Businesses Present Opportunities for Online Lenders
February 27, 2018
Research consistently shows that minority-owned businesses have a harder time accessing capital than other businesses. Online financing has the potential to change this.
Most of the online funding process is based on objective factors such as your business type and revenue. When you apply for funds online, it’s harder to discern things like the color of your skin or your ethnicity—factors which research shows can sometimes play into the face-to-face lending process, even though it’s illegal and immoral. What’s more, applying for funds online eliminates the stigma that keeps many minority-owned businesses from walking into a bank to apply for a loan, according to industry participants.
“Many minorities are hesitant to go into a bank,” says Louis Green, interim president of The National Minority Supplier Development Council, which provides business development opportunities for certified minority-owned businesses. He says the growth of online lending platforms will potentially open more doors for minority-owned businesses to get much-needed capital to operate and expand.
“The beauty of things on the Internet is that it has the ability to take away discriminatory issues,” says Green, who is also the chief executive of Supplier Success LLC, a Detroit-based business that offers online business financing solutions.
Certainly, minority-owned small businesses are a large and growing market. There were 8 million minority-owned firms in the U.S. as of 2012, according to U.S. Census Bureau data. Minority-owned firms represented 28.8% of all U.S. firms in 2012.
Historically, however, minority-owned businesses have had trouble getting access to credit for a host of reasons, and recent research suggests the problems persist.
A report published in November by the Federal Reserve Banks of Cleveland and Atlanta examines the results of an annual survey of small business owners. The report found that while many minority small businesses were profitable, a significant majority faced financial challenges, experienced funding gaps and relied on personal finances.
Some of the trouble obtaining financing may have discriminatory underpinnings. For instance, a recent working paper by researchers at Utah State University, Brigham Young University and Rutgers University, among others, suggests that minorities were more highly scrutinized for loans than other applicants. For instance, African American “mystery shoppers” underwent a higher level of scrutiny and received a lower level of assistance than their less-creditworthy Caucasian counterparts, according to the study.
Also, African American testers were asked significantly more often about their marital status and their spouse’s employment. This “marks another and even illegal differential experience for these minority entrepreneurial consumers compared with the Caucasian shoppers,” the study finds.
To be sure, other factors are also likely to blame. For instance, the average credit score of a minority small-business owner is 707, which is 15 points lower than the overall average for small-business owners in the U.S., according to a 2016 study by credit bureau Experian.
Even so, the bias issue remains a stark possibility in at least some cases. A 2010 report by the Minority Business Development Agency (MBDA) offers data to show that minority-owned firms are less likely to receive bank loans than non-minority-owned firms. Among all minority firms, 7.2 percent received a business loan from a bank compared with 12.0 percent of non-minority firms, according to the report. High sales minority-owned firms were more likely to receive bank loans with 23.3 percent receiving this source of startup capital. By contrast, 29.2 percent of high sales non-minority firms received bank loans, the data shows.
To be sure, it’s very difficult to prove discrimination when a bank loan is denied. A few years ago, a mortgage banker who asked not to be named, says he suspected discrimination when an Asian couple he worked with was denied a small bank loan. While he didn’t have rock solid proof, he felt the bank’s stated reasoning for turning down the loan was unjustified and he tried going to bat for the couple. His efforts were rebuffed, however, and the loan was denied.
Based on the size of the loan and the couple’s finances, the banker says the loan would have easily been approved by an online provider that was looking only at objective factors. “They see the numbers they’ve been given and calculate risk and make decisions based purely on numbers,” he says.
Indeed, this is where online lending has already shown significant potential. Alicia Robb, a research fellow at the Atlanta Federal Reserve who co-authored the November report by the Cleveland and Atlanta Federal Reserves, says when controlling for credit score and other business-related factors, the data shows that minority businesses have a better shot at getting loans approved online than they do at a large or small bank.
Industry participants say the online funding process can be a boon for minority business owners because it strips subjective reasoning out of the decision-making process. Instead of presenting themselves, applicants are presenting what their business looks like financially, and funders are making highly automated decisions based on the information provided.
“Humans make terrible decisions. The more you can eliminate human bias in the process the better,” says Kathryn Petralia, co-founder and president of Kabbage. She says 95 percent of the online lender’s customers have an entirely automated experience, which includes validating their identity using digital processes. “We never see a picture of them or know anything about their ethnicity or demography,” she says.
Even funders who do ask for photo identification say that doesn’t happen until after applicants have been approved. And even then, it’s just to “make sure that the person you are funding is actually the person you are funding and no one is trying to defraud you,” says Isaac D. Stern, chief executive of Yellowstone Capital LLC, a MCA funder in Jersey City, N.J. “Online financing is colorblind. It doesn’t matter if [you’re] white or Hispanic or black,” he says.
Dean Sioukas, chief executive of Magilla Loans, an online search engine that matches prospective borrowers and lenders, has hope that the anonymity of the online funding process could eventually make the off-line process more equitable for all applicants. After accepting a number of solid proposals from viable lending opportunities—without knowing any personal information about the applicant—his hope is that whatever biases a loan officer may previously have had will dissipate, he says. Funding decisions should only be made on objective criteria, he says. “The rest has no place in the process.”
While in theory online lending should improve access to funds for minority-owned businesses, several industry observers say barriers remain.
One major challenge is getting the news out to minority business owners, many of whom don’t know about the online funding opportunities that exist, says Lyneir Richardson, executive director of The Center for Urban Entrepreneurship and Economic Development, a research and practitioner-oriented center at Rutgers Business School in Newark, N.J.
He suggests online lenders and funders need to do a better job of connecting with minority-owned businesses and explaining what they have to offer. He works with about 300 entrepreneurs, 70 percent of whom are minority-owned businesses. He’s held this position for 10 years, but says he’s never been approached by an online lending company to market its services, speak at one of his events, provide funding advice to business owners or in any other capacity.
“There is an opportunity for online small business lenders to market and make known, particularly to minority business owners, that they have viable, market rate lending products that can help them grow,” he says.
One caveat is that rates online are often higher than traditional bank loans, so there is a trade-off for minority-owned businesses, says Brett Barkley, a senior research analyst in the community development department at the Federal Reserve Bank of Cleveland, who co-authored the November report.
Other research from the Federal Reserve shows that satisfaction levels were lowest at nonbank online lenders for both minority- and nonminority-owned firms compared with borrower satisfaction levels at small banks and large banks, he says. The satisfaction levels seem to be related to higher interest rates and “lack of transparency,” he adds. While the study doesn’t define the latter term, the findings could “point to confusion regarding the actual terms of the loan,” Barkley says.
Some online firms have taken steps to make pricing more transparent by using the SMART Box disclosure agreement, a comparison tool developed by the online lending industry to help small businesses more fully understand their financing options. There are currently three different versions of the SMART Box disclosure –for term loans, lines of credit, and merchant cash advances.
This “is a really important metric,” says Petralia of Kabbage, which offers the tool to customers.
Green, the interim president of NMSDC, says that helping its 12,000 minority-owned business members gain access to capital is a major goal for the organization. While online financing is still a largely “untapped resource” for minority businesses, it makes borrowing money easier and more appealing. “It holds great promise for minority-owned businesses, but I think the reality hasn’t met that promise yet,” he says.
Technology Drives Changes in CRE Lending Space
December 21, 2017
Online technology, which paved new paths for consumer and small business lending, is making similar inroads with the commercial real estate industry.
Over the last few years, several online marketplaces have been established to try and match commercial real estate borrowers with lenders quickly and efficiently using technology. In the past, commercial real estate lending depended heavily on having local connections, but online platforms are blurring these lines—making geographical borders less relevant and opening doors for new types of lenders to establish themselves.
While banks remain the largest source of commercial real estate mortgage financing, non–bank players—including credit unions, private capital lenders, accredited and non–accredited investors, hedge funds, insurance companies and lending arms of brokerage firms—have become more formidable opponents in recent years. Online platforms offer even more opportunity for these alternative players to gain a competitive edge.
At present, most of these commercial real estate marketplaces are purely intermediaries—they’re matching borrowers and investors, not actually doing the lending. Certainly, it’s an easier business model to develop than a direct lending one, but things could change over time, as borrowers become more comfortable with the online model and develop confidence that these platforms can perform, industry participants say.
“You have to be viewed as credible with a certainty of funding for borrowers to come to you. You can’t just put up a flag and say ‘Hey we’re making loans’ because borrowers won’t trust you and they won’t have the confidence that the loan is going to close,” says Evan Gentry, founder and chief executive of Money360, one of the few online direct lenders in this space. “However, once you develop a reputation of strong performance, the tide turns very quickly and that confidence is established,” he says.
For now, however, many of the marketplaces say they are content to remain intermediaries and offer business opportunities to lenders instead of competing with them. The sheer size of the market— commercial/multifamily debt outstanding rose to $3.01 trillion at the end of the first quarter, according to data from the Mortgage Bankers Association—and the fact that is an enormously diverse industry with no plain vanilla product makes it more likely that several platforms can co–exist without completely cannibalizing each other’s business, observers say.
Each of the online marketplaces has a different business and pricing model. Some marketplaces focus on small loans, while some have larger minimums; some focus on just debt; some focus on a mixture of equity and debt. Some sites cater to institutional lenders and accredited investors to help fund loans. Other sites invite non–accredited investors who meet certain criteria to participate in loans, opening doors to a segment of the population which previously had minimal access to commercial real estate deals. While the sites differ in their approach, the upshot is clear: banks—while still formidable competitors in commercial real estate lending—are no longer the only game in town for funding these deals.
The struggle for lenders is how to work most effectively with these marketplaces. “If you can acquire customers through only your own channels, then of course you’re going to do that,” says David Snitkof, chief analytics officer at Orchard Platform, which provides data, technology and software to the online lending industry. Otherwise, these marketplaces present a viable opportunity to expand distribution, he says.
GROWTH OPPORTUNITIES ABOUND
The surge of new companies acting as marketplaces between borrowers and lenders of all kinds comes as the commercial real estate industry is finally coming up to speed with respect to technology. The commercial real estate business has been static for decades in terms of how loans are processed and originated, according to industry participants.
“The use of technology is going to be an enormous disrupting force in that space,” says Mitch Ginsberg, co–founder and chief executive of CommLoan, one of the newer marketplaces for commercial real estate lending. Commercial real estate lending is “probably one of the last industries that hasn’t been touched by technology, and it’s ripe for massive disruption,” he says.
CommLoan of Scottsdale, Ariz., was founded in 2014, but the marketplace has only been fully operational since 2016. The platform targets borrowers seeking $1 million to $25 million of capital for all types of commercial real estate loans. It works with more than 440 lenders—including banks, credit unions, commercial mortgage companies, private money lenders and Wall Street firms. Altogether, CommLoan says it has processed more than $680 million in commercial transactions.
Online marketplaces can help make the commercial real estate industry more efficient and transparent, says Yulia Yaani, co-founder and chief executive of RealAtom of Arlington, Va., another new online commercial real estate marketplace. “People are tired of paying huge fees as a result of the market being so opaque,” she says.
RealAtom began operating in 2016 and targets borrowers who are seeking commercial real estate loans from $1 million to $70 million. The lenders on the platform include banks, alternative lenders, insurance companies, pension funds, hedge funds and hard money lenders. The company processed $468 million in commercial loans in its first 11 months of operating, according to Yaani.
Another benefit of online marketplaces is that they “create a liquid, national marketplace where lenders all across the U.S. can bid on a borrower’s business,” says Ely Razin, chief executive of commercial real estate data company CrediFi, which operates the upstart CredifX marketplace. Historically people who own commercial real estate have only been able to get financing through a local relationship with a bank or broker. “For borrowers, this means more certainty of obtaining a loan and optimized capital not limited by the relationship with the local lender,” he says.
CredifX started operating earlier this year to match commercial real estate borrowers, brokers and lenders including banks, finance companies, mortgage companies, hard money and bridge lenders. The platform is for loans of $1 million to $20 million across all major property types in the commercial space. It matches borrowers with appropriate lenders using the information that parent company CrediFi collects and analyzes. The company declined to disclose how much it has processed in commercial transactions.
To be sure, it’s hard to say how the marketplace model will evolve over time and which players will withstand the test of time. Certainly a similar model has faced challenges on the consumer and small business lending side.
“I think the pure marketplace will become more rare as time goes on,” says Peter Renton, founder of Lend Academy, an educational resource for the P2P lending industry. “There are examples of successful companies with a pure marketplace, but they are rare and difficult to scale. The only well-established company that seems completely wedded to the pure marketplace is Funding Circle; pretty much all other companies have switched to a hybrid model of some sort,” he says.
Commercial vs Residential
While much of the recent growth has been within commercial real estate, there are also some marketplaces that cater to residential borrowers or offer a mix of commercial and residential opportunities.
Magilla Loans, for instance, started out in 2016 as a solely commercial marketplace, but expanded outside this silo because customers were asking for residential and other types of loans, says Dean Sioukas, the company’s founder. The company now connects borrowers with lenders for a whole host of loan types—commercial, residential and others like franchise loans and equipment loans. Lenders on the platform include roughly 130 banks, mortgage loan originators, accredited investors, credit unions and online non-depository institutions. The average loan size is $1.4M for business loans and $500K for home loans. Nearly $4 billion in loans has been channeled through the platform since January 2016; of that 70 percent is tied to commercial real estate, according to the company.
While there are marketplaces that focus on residential mortgage lending, some industry participants say that side of the business isn’t as appealing to new online entrants in part because the cost to acquire customers is really high and there are more challenges to working on a national scale.
“It may not be that commercial is more attractive. It may just be easier. Going directly to borrowers in the residential space has proven harder than many companies expected,” says Brett Crosby, co-founder and chief operating officer of PeerStreet, a marketplace for accredited investors to invest in high-quality private real estate backed loans. Experience seems to suggest that for residential mortgage origination, “it’s much better to have a good ground game and know your local market,” he says.
To be sure, as the online market for real estate matures, it’s not so surprising that companies would shift business models to find their own sweet spot. RealtyMogul.com is one example of a company that has morphed over time. The online platform began operating in 2013 in both the residential and commercial space, but has since moved away from the residential business. Accredited investors, non-accredited investors and institutions can use the platform to find equity or debt-based commercial real estate investment opportunities, and borrowers can apply for private hard money loans, bridge loans and permanent loans.
Money360 is another example of a company that has shifted gears. It started out as a pure marketplace, but changed its business model to become a lending platform in 2014. Now the online direct lender in Ladera Ranch, Calif., provides small-to mid-balance commercial real estate loans ranging from $1 million to $20 million. It’s one of the only companies targeting the commercial real estate space in this way and has closed nearly $500 million in total loans since 2014.
Gentry, the company’s founder, says he would expect to see more industrywide changes as the online commercial real estate business continues to evolve. The key to success, he says, is executing well and “knowing when to pivot when you realize something’s not working just right.”
Ultimately, Gentry predicts more online lenders will target the commercial real estate space. He says technology-based alternative lenders have an advantage because they can operate more quickly and efficiently while still being very competitive from a pricing perspective.
“You put all those things together (speed, efficiency and competitive pricing) and that’s what borrowers are looking for,” Gentry says.
Lead Generators Facing Rougher Road
October 13, 2017
Lead generators for alternative funders are facing stronger headwinds these days. The business has gotten tougher for a whole host of reasons. A pullback in alternative lending necessitates fewer leads. On top of that, funders, ISOs and brokers have gotten pickier about the types of leads they’ll accept. What’s more, stricter application of the Telephone Consumer Protection Act (TCPA) is hampering lead generators’ ability to solicit business owners. As a result, some lead generators have faded away, while others have been developing additional business lines or are broadening their reach to other areas within financial services to buoy earnings.
“I don’t see any growth in the space for the next six months, or maybe a year,” says Michael O’Hare, chief executive of Blindbid, a lead generation company in Colorado Springs, Colorado. “It’s really unclear right now what’s going to happen, but we’ll see.”
The alternative funding industry has been in somewhat of a funk since spring 2016 when Lending Club grabbed headlines with a scandal that spooked the industry and also took out several senior managers, including the company’s then-CEO.
It was the first time in the industry’s relatively short history that people realized “it wasn’t all puppy dogs and ice cream,” says Justin Benton, a partner at Lenders Marketing in Santa Monica, Calif., a lead generator in the alternative funding space.
Since that time, there’s been a lot of movement in the market, including companies that are consolidating or exiting the business, pumping the brakes or making shifts in product lines, Benton says. These developments have all had a big impact on the sheer number of clients that are looking for leads, he says.
Late last year, for instance, CAN Capital Inc. stopped funding for several months, though it’s back in business as of early July. This summer, Bizfi, one of the stalwarts of the alternative financing space, began giving pink slips to staff and in August the company sold the servicing rights to its $250 million loan portfolio to rival Credibly.
There aren’t as many start-up ISOs or companies entering the alternative funding space—meaning more leads for existing funders—which, of course, is a boon for them.
“There are still roughly 75,000 business owners every week who meet the criteria for an [MCA]. Now instead of there being 5,000 options in the space, there are 2,000, so those 2,000 are gobbling it all up,” Benton says.
At the same time, however, TCPA regulations have gotten more stringent, making it dangerous to solicit businesses, says O’Hare of Blindbid. “Any phone call you make, you can get sued,” he says.
Large funding companies generally take TCPA very seriously—especially if they’ve gotten hit with violations, O’Hare says. Smaller funders and brokers, however, aren’t always as familiar with the restrictions; they think it’s only an issue if you’re calling consumers, as opposed to calling businesses, but that’s not the case. “A lot of businesses today are using their cell phone as a main business line and also for personal use. If you call a cell phone that’s on the DNC [Do Not Call Registry], you can potentially get sued.”
Last year, he had a situation where a plaintiff pretended to be an interested business. When he passed along the referral, the plaintiff’s attorney claimed TCPA violations and ultimately sued the funder. The funder balked, and it created numerous issues for his company.
His company now tries to educate funders about how to protect themselves from TCPA litigation. He sends out emails to funders with information about TCPA and provides contact information of attorneys who are well-versed in TCPA rules. He also provides funders with risk mitigation tactics and shares his list of known TCPA litigators so funders won’t accidentally call them. He also provides direction to clients that receive a demand letter or complaint on how to respond and offers a list of TCPA defense attorneys, if they need.
“We’ve become almost extreme in how we try to avoid problems related to TCPA,” O’Hare says.
To be sure, some of the changes lead generators are experiencing are indicative of a maturing industry.
A few years ago, lead generators could be less selective who they approached initially because the concept of alternative funding was so new to merchants, says Bob Squiers, chief executive of Meridian Leads, a lead generator in Deerfield Beach, Fla. Now, however, the cat is out of the bag, and, with business owners getting multiple calls a day, it’s harder to get their attention, he says.
“They know, they’ve heard, they’ve been pitched. There’s not too many unturned business owners. It’s about getting them at the right time.”
As a result, lead generation today requires more data to discern the good leads from the bad. Instead of going after half a million restaurants, lead generators are targeting the 20 percent that data suggests are the most viable funding candidates. “It’s more of a sniper approach than a shotgun approach,” Squiers says.
Rob Buchanan, senior sales executive at Infogroup in Papillion, Nebraska, who focuses on lead-generation for the fintech space, notes that within the past 18 months or so, clients have been going after “low-hanging fruit” when it comes to leads. They are looking for leads where business owners are actively looking for financing as opposed to relying primarily on UCC data. They are still using UCC data, but to a lesser extent than they were in the past, he says.
Not only do clients want very targeted and specific types of companies—but they are changing their minds more frequently about the types of businesses they’re looking for, says Matthew Martin, managing director and principal at Silver Bullet Marketing, a lead-generating and marketing company in Danbury, Conn. They might ask for businesses of a particular size or credit quality—they are even seeking to exclude businesses within certain zip codes. They are also more amenable to leads from industries they deemed too risky a few years ago.
“I have clients that are constantly changing the parameters of what they want,” Martin says.
The problem is that once you start narrowing the leads of possible merchants that can be funded, lead costs go up and many funders don’t want to pay for that, says O’Hare of Blindbid. “The glory days when everything was wide open and you could generate leads really cheaply are pretty much gone.”
Meanwhile, as some lead generators have faded into the sunset, others are forging ahead in search of new opportunities.
Benton of Lenders Marketing, for instance, says his company has started to focus its efforts in other areas of lending, including SBA, new business, mortgage, commercial, residential, auto and student loans.
Digital marketing is another area experiencing increased demand. Business owners that need money tend to use Google to find funding companies. Infogroup’s digital marketing leads these businesses directly to funders, ISOs and brokers, Buchanan says.
“More and more funders, brokers and ISOs are leaning toward doing digital marketing,” he says.
Tips From the Source: Small Businesses Told deBanked How They Wanted Loans to be Marketed to Them
July 31, 2017
Small business owner Jim Moseley is inundated with calls from online funders—and he hates it. They frequently use unscrupulous tactics to try and get his attention. More than one has claimed to be a close friend so his assistant transfers their call. Then they try to reel him in with stories they’ve concocted about past personal connections. The unprofessional-sounding calls also irk him—where a salesman insists he’s local, but his voice sounds muffled and distant. In these instances, Moseley usually hangs up within a few seconds.
“The layer of sleaze is as thick as lard in the calls that I get,” he says.
Like many small business owners, Moseley, the chief executive of TransGuardian Inc., a shipping solutions company based in Petersham, Massachusetts, finds these types of calls extremely off-putting. In fact, it’s what made him hesitant to do online funding to begin with—until it became absolutely necessary since he couldn’t get a bank loan.
He’s not alone. As online financing proliferates, several small business owners say they are increasingly being bombarded with stacks of snail mail, multiple cold calls a day and numerous unsolicited emails offers—many of which they don’t understand and therefore won’t accept. Rather, small business owners say they prefer to work with companies that are forthcoming, provide sound advice and have taken steps to prove their credibility. They offer several tips on how funders can win more of their business.
Tip No. 1: Can the cold-calls
Several small business owners say they don’t mind when lenders follow up with them after a legitimate interaction. But they could do without the boiler-room tactics.
“It feels like a loan shark situation,” says Sean Riley, co-founder of DUDE Wipes, a Chicago-based company that makes flushable wipes for men. Riley, who has several good experience obtaining loans through Kabbage, finds the constant phone calls from firms he doesn’t know particularly vexing. He suggests lenders drop the high-pressure routines and find more effective ways to promote their services to small businesses. “These companies could be very credible. I don’t know. But I don’t perceive them as credible—and perception is reality,” he says.
Tip No. 2: Step up legitimate marketing efforts
Donna Cravotta chief executive and founder of Social Pivot PR, a Bedford, New York social media and marketing communications firm, says online funders should seek out simple, cost-effective ways to get their name in front of small businesses. For relatively little money they can sponsor local small business events. She also suggests that online lenders volunteer to speak at small business events and teach small businesses how to leverage online lending opportunities. They could also appear as guests on financial podcasts or broadcast Webinars to the small business community, says Cravotta, who has taken a few loans to fund her business, two of which were with Lending Club.
R.T. Custer, co-founder and chief executive of Vortic Watch Company in Fort Collins, Colorado, offers some additional advice: Customers don’t believe when you self-publish your testimonials. When he sees a review on a website, he wants to know how much a company has paid for that review. Instead, he relies on third party confirmations of a company’s worth. “When it’s clearly something that is not paid for, that is the best kind of advertising,” says Custer, an OnDeck customer whose business turns antique pocket watchers into wrist watches.
Tip No. 3: Deliver personal attention
As much as they hate aggressive salespeople, small businesses love personal attention from their lenders. Dana Donofree, founder and chief executive of AnaOno Intimates, a Philadelphia-based company that designs and sells apparel for breast cancer survivors, appreciates the stellar customer service she gets with OnDeck. The sales rep follows up appropriately to make sure everything is going well, but doesn’t bombard her constantly. She gets an occasional email asking if she needs more funds—but the communications aren’t overly aggressive. “Some institutions can really be sales pushy and call you several times a day. I’ve blocked more numbers than I would like to admit,” she says.
Tip No. 4: Be a resource for small business owners
Online lenders can also gain traction by helping customers better understand the financing process; many small business owners often don’t know much about financing and would appreciate getting sound advice from lenders, according to Sandy Lieberman, who co-owns Artemis Defense Institute in Lake Forest, California.
She and her husband started the business a few years ago to offer reality-based training to law enforcement, military personnel and civilians. When the business needed cash, Lieberman began searching online for a bank loan, but wound up taking a merchant cash advance instead. After a few rounds, she started getting bombarded with solicitations. “I think the stacks of mailings from companies must have been four-inches thick,” she recalls.
After additional research, she reached out to Lendio to broker an $85,000 term loan; she later took another loan for $204,000 through Lendio. While these funds have brought her business to a better place—and she has learned a lot in the process—she feels online lenders are missing out on a prime teaching opportunity.
“Some lenders think business owners know more than they already do. Some really don’t know a lot and could use more hand-holding,” she says.
In hindsight, Lieberman—who nearly destroyed her personal credit while trying to run her business—wishes a funding company had offered her a short class on financing; she would have attended, even for a small cost. Access to a finance coach—someone at the lending company who could help business owners plan proactively without ruining their personal credit—would also be a boon, she says.
“Small business owners are wearing many hats—customer service, payroll, financing, strategic planning. In the midst of all that they don’t know necessarily know how to make wise funding decisions,” she says.
Tip No. 5: Advertise
There are plenty of small businesses that need funds, but many simply don’t know where to turn. Consider a TD Bank survey of 553 small business owners in late March that found 21 percent have or will seek a loan or line of credit in the next 12 months. While the majority of these businesses plan to try their bank first, a sizeable number—11 percent—don’t know how to seek credit when they are ready. While many small businesses have found lending partners by Googling for information, others simply feel stymied by the process.
Take the case of Scott Deuty, who is having trouble obtains funds for Coolbular Inc. in Cheyenne, Wyoming, which serves as an umbrella for his kiddie ride business and his writing and publishing services. He wants to raise funds but has bad credit and doesn’t meet the revenue requirements for certain lenders. There are so many lenders; he doesn’t know how to find the right one—or one that might be willing to take a chance on him. “It’s very difficult,” he says.
Deuty’s case is an example of the paralysis that can happen when small businesses don’t know where to turn. It’s an opportunity for alternative funders to gain a leg up by marketing more appropriately to small businesses that may not know they exist—or how to find them.
Custer, of Vortic Watch, reached out to OnDeck for a bridge loan after seeing a television ad that ran during an episode of Shark Tank. He also suggests funders use online advertising to gain broader exposure. “If a business owner is trying to find a loan, they are going to Google, ‘I need a loan,’” he says.
Tip No. 6: Ramp up business referrals
Another way small businesses hear about lending opportunities is through business referrals. Azhar Mirza, founder of SomaStream Interactive, an e-learning solutions provider in Berkeley, California, says funders should actively seek out more referral partnerships. In 2015, his company couldn’t afford its online marketing costs. Then a lifeline came its way. Mirza received an offer from Google telling him his company was eligible for a loan to help finance the online advertising it was doing through the Google AdWords program. The offer was part of a new pilot program between Google and Lending Club to extend credit to smaller companies that use Google’s business services. SomaStream got access to the funds it needed, but in lieu of cash, the company received advertising credits with Google.
The pilot program between Google and Lending Club ended in the first quarter of 2016, but Mirza believes similar partnerships would be a great tool for online lenders. Certainly for Mirza, the timing was precipitous, he says.
Push notifications from trusted business partners can also be an effective marketing tool, when used in moderation. When Yvonne Denman-Johnson, co-founder of HootBooth Photo Booth, a Lago Vista, Texas, manufacturer of photo booth kiosks, needed money, she happened to receive a notice from Shopify, the company’s e-commerce software and hosting provider, talking about its merchant cash advance services. She has one outstanding advance through Shopify, which she is working to pay off.
Tip No. 7: Be transparent
Denman-Johnson got the funds she needed, but she feels MCA providers need to be more transparent about the effective interest rate—at the advertising stage, not at the approval stage—so small businesses can make more informed decisions without having to do all the calculations themselves. Otherwise, some small businesses might decide not to pursue this form of funding because of the unknowns. Her company almost walked away, but decided to go through the full application process. At this point, Shopify provided the effective interest rate, which was in the 12 percent range. Other funders she researched were in the 30 percent range—which she describes as “outrageously” expensive.
Indeed, small business owners want to work with funders that outline the terms clearly and offer comparisons. Lisa Ayotte, founder of Soul’y Raw, a specialty pet food provider in San Marcos, California, has had good experiences with Kabbage, On Deck and Fundbox.
She wishes, however, that all online lenders offer more detailed information about the loan programs they offer on their website—so small businesses can weigh their options before they go through the actual application process. Small businesses want to know, for instance, whether a lender offers debt consolidation. They also want funds to spell out clearly on their websites the various types of loans offered and the underwriting criteria. Ayotte also suggests lenders provide links to online loan calculators so small businesses can understand what the terms mean to them.
Small business owners want to be told like it is. That’s one major appeal of online lending—if you’re going to be turned down, you typically know right away says Ricardo Picon, the co-owner of The Sandwich Shop, a restaurant and catering business in Williamsburg, New York.
He took an $88,000 loan in February issued by Excelsior Growth Fund, a U.S. Treasury-certified Community Development Financial Institution, but in the future, he says he would consider using a different type of online lender. It would depend on the rates, the economic times, monthly payments and closing fees, among other things. “I want transparency. I want to know if they are going to give me the money or not so I can move on. This way there are no false hopes,” he says.
Tip No. 8: Make the process as easy as possible
Small business owners also prefer to work with online lenders that make the process seamless. AJ Saleem, founder of Suprex Learning, a Houston-based private tutoring and test prep company, was proactive about searching for online lending options. He chose a loan with Lending Club in part because the process was so easy. Some applications he started, but never finished because the process was too onerous. With Lending Club, the process was quick, there were fewer questions asked and the funder asked for less documentation than some competitors, Saleem says.
To be sure, rates are really important to small businesses, but they also want to work with funders they feel are on the up-and-up. “We want a square deal,” says Moseley, the chief executive of TransGuardian. “Tell us what the deal is in an honest and professional way and if we like it we’ll do business.”
CAN Capital Resumes Funding
July 6, 2017
CAN Capital is back in business, thanks to a capital infusion by Varadero Capital, an alternative asset manager. Terms of the capital arrangement were not disclosed.
CAN Capital stopped funding late last year and removed several top officials after the company discovered problems in how it had reported borrower delinquencies. The discovery also resulted in CAN Capital selling off assets, letting go more than half its employees and suspending funding new deals, among other things.
Now, however, the company has a new management team and its processes have been revamped and staff retrained in anticipation of a relaunch, according to Parris Sanz, who was named chief executive in February. He was the company’s chief legal officer before taking over the helm after then-CEO Dan DeMeo was put on leave of absence.
As of today (7/6), CAN Capital has resumed funding to existing customers who are eligible for renewal. Within a month, the company plans to resume providing loans and merchant cash advance to new customers. It will have two products available in all 50 states—term loans and merchant cash advances with funding amounts from $2,500 to $150,000.
To be sure, getting back into the market after so many months will be a challenge. “I think we’re absolutely going to have to work hard, no doubt about it. In many ways, given our tenure and our experience, the restart may be easier for a company like us versus others. Based on the dynamics in the market today, I see a real opportunity and I’m excited about that,” Sanz said in an interview with DeBanked.
Since its founding in 1998, CAN Capital has issued more than $6.5 billion in loans and merchant cash advances. It’s one of the oldest alternative funding companies in existence today, and, accordingly, it shook the industry’s confidence when the company’s troubles became public late last year.
The new management team includes Sanz, along with Ritesh Gupta, the chief operating officer, who joined CAN Capital in 2015 and was previously the firm’s chief customer operations officer. The management team also includes Tim Wieher as chief compliance officer and general counsel; he initially joined the company in 2015 as CAN Capital’s senior compliance counsel. Ray De Palma has been named chief financial officer; he came to CAN Capital in 2016 and was previously the corporate controller. The management team does not include representatives from Varadero.
Varadero is a New York-based value-driven alternative asset manager founded in 2009 that manages approximately $1.3 billion in capital. In the past five years, Varadero has allocated more than $1 billion in capital toward specialty finance platforms in various sectors including consumer and small business lending, auto loans and commercial real estate. In 2015, for instance, Varadero participated in separate ventures with both Lending Club and LiftForward.
Varadero began working with CAN Capital as part of its efforts to pay down syndicates. Varadero bought certain assets from CAN Capital last year and provided enough funding to allow CAN Capital to recapitalize. “The recapitalization enabled us to pay off the remaining amounts owed to our previous lending syndicate and provided us with access to additional capital to resume funding operations,” Sanz says. He declined to be more specific.
“We were impressed with the overall value proposition of CAN’s offerings as evidenced by the strength of its long standing relationships, the company’s core team, sound underwriting practices, technology and the strong performance of their credit extension throughout the cycle,” said Fernando Guerrero, managing partner and chief investment officer of Varadero Capital, in a prepared statement. “We’re confident the company’s focused funding practices will allow it to serve small business customers for many years to come.”
Guerrero was not immediately available for additional comment.
DLA Piper served as legal counsel for, and Jefferies was the financial advisor to, CAN Capital, while Mayer Brown was legal counsel to Varadero Capital, L.P.
Since its troubles last year, CAN Capital had been working with restructuring firm Realization Services Inc. for assistance negotiating with creditors. It also worked with investment bank Jefferies Group LLC for advice on strategic alternatives.
Sanz declined to discuss other options CAN Capital considered, noting that the Varadero deal provides the firm the opportunity it needs to jump back into the market—this time with “tip top” operations in place.
He declined to say how many employees the firm still has, other than to say it is now “appropriately staffed.” In addition to getting rid of the prior management team, CAN Capital reduced staffing in numerous parts of its business. That includes nearly 200 positions at its office in Kennesaw, Ga, according to published reports.
The company will still be called CAN Capital. “We feel that that brand has a recognition in the market, in particular with our sales partners,” Sanz says.
Alternative Lenders Spread Their Wings Internationally
June 20, 2017
As alternative lending gains global traction, a growing number of U.S-based alternative lenders are exploring international growth, with large companies like OnDeck, Kabbage and SoFi leading the way.
Some alternative lenders have begun their expedition closer to home by extending their reach into Canada. Others are traveling farther beyond to parts of Europe and Australia, for example, while others are eying eventual growth in Asia.
Propelling the opportunity is the fact that a number of international banks are still unprepared to offer online lending on their own and thus are more amenable to partnerships with U.S.-based alternative lenders, according to Rashmi Singh, senior manager in the wealth management practice at EY.
It also helps that the options for local partners are somewhat limited. “There are not a lot of digital lenders [outside the U.S.] at the same level as some of the folks here,” Singh says.
To be sure, international expansion requires extensive time, money and regulatory know-how, and some U.S. alternative lenders may never reach the critical scale to be able to compete effectively. Nonetheless, as globalization proliferates, industry observers expect that additional forward-thinking companies will push beyond the limits of their current geographical borders.
“The question is not if, but when (and where) U.S. fintech companies will expand internationally,” contends Ryan Metcalf, chief of staff and director of international markets at Affirm, a San Francisco-based fintech that has partnered with Cross River Bank of Fort Lee, New Jersey, to allow shoppers pay for purchases over time with simple-interest loans.
Affirm—which works with more than 900 retailers and recently announced that it had processed its 1 millionth consumer installment loan—has focused on domestic growth so far, but the company is now considering a number of options for international expansion, Metcalf says.
SIZING UP THE MARKET
Certainly, there are numerous opportunities for homegrown lenders to expand internationally given the healthy growth alternative lending is experiencing in other parts of the world. Each market, of course, has its nuances and individual growth patterns.
Europe, for instance, has seen substantial growth over the past few years, with the U.K. leading the way in alternative finance. It has four times higher volumes in aggregate than the rest of Continental Europe, according to a 2016 report from KPMG and TWINO, one of the largest marketplace lending platforms in Europe. (P2P consumer lending is the largest component of alternative online lending in Europe, capturing 72 percent of the total in the first through third quarters of 2016, according to the report.)
After the U.K., France, Germany and the Netherlands are the top three countries for online alternative finance by market volume in Europe, according to a September 2016 report by the Cambridge Centre for Alternative Finance.
Asian markets, meanwhile, show significant promise for alternative finance players to make their mark due to the sizeable population of digitally savvy consumers who are still largely underbanked. China is by far the largest market for alternative lending in Asia. It’s also the world’s largest online alternative finance market by transaction volume, registering $101.7 billion in 2015, according to the March 2016 Cambridge Centre for Alternative Finance report. This constitutes almost 99 percent of the total volume in the Asia-Pacific region, the research shows. To date, most of the growth in China specifically has been from local firms, but that could change as the market there continues to develop.
Although there are many possible international markets to explore, U.S. lenders have to tread carefully before planting roots elsewhere, observers say. Some smaller U.S. lenders may find domestic expansion easier and more cost-effective because of the time, regulatory and financial commitment that goes along with exploring international markets. It’s a lot easier, for instance, to expand from New York to California, than it is to build out internationally.
“Why take on all the added costs and regulatory pressures, when you haven’t fully explored your home market, unless the business that you’re in deems it necessary,” says Mark Abrams, partner with Trade Finance Global, a London-based international corporate finance house, specializing in crossborder trade.
“It doesn’t make sense to start as a U.S. lender, do a few loans and then jump over to the U.K,” he contends.
What’s more, foreign banks looking for alternative lending partners typically prefer to work with larger, more established players. Even though new players’ technology may be ahead of the curve, the banks still want a longer track record. “It’s reputational for these banks,” says Singh of EY.
MANY CHALLENGES TO INTERNATIONAL EXPANSION
Several alternative lenders say they see significant growth opportunities by expanding internationally. At the same time, however, they are mindful of the substantial headwinds they face.
Regulation is among the biggest, if not the biggest, challenge. A lot of firms in the U.S. have invested a lot of time and money to get up to speed on U.S. regulations. When they look to Europe or to Canada or Mexico or elsewhere, there are different regulations. “If you’re speaking to folks in three continents, now you are looking at regulations times three,” says Singh of EY.
Certainly there’s a time commitment involved; it can take six to eight months for a U.S. lender to get their U.S.–based platforms compliant with regulations in another country, she says.
What’s more, regulatory barriers can vary greatly country to country, notes Metcalf of Affirm. Take Canada for example where very low barriers to entry exist with some provincial exceptions. In the U.K., on the other hand, it can take eight months or more to receive a lending license, he says.
That’s why it’s so important for online lenders to make strategic decisions about where they want to invest their time and resources—even if they have sound technology that’s easily adaptable outside the U.S. “The minute you throw in cross-border regulations, it gets very complicated,” Singh says.
Understanding the local culture of the market you’re trying to tap is also crucial, according to Rob Young, senior vice president of international at OnDeck, where he oversees all aspects of the company’s non-U.S. expansion efforts.
Within the past several years, OnDeck has begun offering small business loans to customers in Canada and Australia. Frequently Canada is a first step for U.S. companies that want to expand internationally because of the shared language and similarities between the economies, Young explains.
After the Canadian operation was successfully underway, the opportunity arose for the online lender to expand to Australia—which shares several similarities with the Canadian market. OnDeck doesn’t break out how much of its overall loan portfolio comes from these two markets, but it has announced publicly that it’s delivered more than CAD$50 million in financing to Canadian small businesses since 2014.
“So far we’re very satisfied with the performance,” Young says, referring to its expansion into both Canada and Australia.
Young notes that while a U.S.-based alternative lender can leverage certain things like technology from a central location within its home country, having dedicated teams on the ground in local markets is also critical. Marketing and pricing all have to be competitive with the needs of the local market, he says.
In Canada and Australia, for example, OnDeck has found that the “personal element” is really important. Young says customers there expect to interact with sales representatives who have ties to the community, understand the local market and can relate to the issues small businesses there are facing.
“I don’t think you can establish that rapport if you are trying to serve them with a sales team overseas,” he says.
U.S.-based alternative lenders also need to be careful to create products that fit the culture and needs of a particular market. For instance, alternative players that focus on luxury asset-based lending would want to look at countries with high concentrations of wealth. “It doesn’t make sense to grow to a country where there’s very little wealth because you’re not going to have much success,” says Abrams, of Trade Finance Global.
Even knowing the market well doesn’t guarantee results, which Lending Technologies, a white label technology provider for the MCA space, has discovered first hand.
Markus Schneider, the company’s chief executive, is originally from Switzerland and he knows the market there well, so he set out to fill a void he saw for an MCA-like product. However, Lending Technologies, which has offices in New York and Zurich, has hit some roadblocks along the way.
“It’s a very different mind-set there. People are more risk-adverse,” Schneider says.
The company already has a Swiss distribution partner in place, but has had trouble finding a lender willing to underwrite the funds. Schneider would also be willing to work with a U.S. lender that wants to partner with Lending Technologies to provide MCA services to merchants in his home country.
“We’re going to do this. It’s just a matter of time,” he says. “There’s a tremendously underserved segment of the market there.”
FINDING THE RIGHT FIT
To be successful internationally, U.S. companies also have to be willing to shift gears as needed when things aren’t working out as expected.
Take Kabbage, for example. The small business lender expanded into the U.K. in 2013, two years after its U.S. debut. But the company found that having its own small business lending business in the U.K. was too challenging for regulatory and capital reasons. It no longer offers new loans from this platform.
Instead, the funding company decided that a better global strategy was to license its technology to financial institutions in international markets a less capital-intensive, yet economically sound way of doing business.
Kabbage—which recently announced the establishment of its European headquarters in Ireland—has licensing arrangements with Santander in the U.K., Kikka Capital in Australia, Scotiabank in Canada and Mexico and ING in Spain. The company plans to launch operations in several additional countries this year where banks use Kabbage’s technology to offer online loans to their clients, says Pete Steger, head of business development at Kabbage.
“We are partnering with local experts. That’s our strategy,” Steger says.
Funding Circle has also made changes to its international strategy. Earlier this year, the company—which got its start in the U.K.—announced that it would stop issuing new loans in Spain. The Spanish version of the company’s website says that it continues to monitor ongoing loans so investors receive monthly payments for the projects they have invested in.
A spokeswoman for Funding Circle said the company continues “to look at new geographies, but we have no immediate plans for expansion and are focused on building a successful business here in the U.S., U.K., Germany and the Netherlands.” She declined to comment further.
Without divulging too many details, a handful of U.S.-based alternative financiers say they continue to look at additional markets outside their home turf.
For its part, SoFi has announced plans to expand to Australia and Canada this year. The company’s chief executive has also talked about European and Asian expansion in the future.
On the international front, Affirm is currently evaluating markets that make the most sense for its business model, Metcalf says. Affirm is also looking at possible acquisitions in developed markets such as the U.K. and Sweden as well as considering “serious investment” in new distribution models in southeast Asia, Mexico and Brazil, he says.
LendingClub, meanwhile, last November announced a significant partnership with National Bank of Canada and its U.S. subsidiary Credigy. The agreement provides for Credigy to invest up to $1.3 billion over the subsequent twelve months. A spokeswoman for LendingClub said the company has nothing to share about plans for international expansion.
As for OnDeck, Young says the company is exploring a number of options; it’s a matter of finding markets where gaps exist in small business lending and where potential customers have a willingness to borrow online.
“We want to be the preferred choice for small businesses. It’s not necessarily defined geographically,” Young says. “We review markets all the time. There are a number of markets that are interesting to us.”
Re-Banked
April 23, 2017
Just a few years ago, the financial services community was fixing for a battle of David and Goliath proportions—with scrappy, upstart online lenders threatening to rise up and vanquish the fearful and mighty brick and mortar banks. Instead, the unexpected happened: a number of well-respected online lenders and banks set aside their battle arms and began looking for ways to collaborate with their rivals—offloading loans, making referral agreements and establishing more formal partnerships, for example.
“In the real world, sometimes David wins. Sometimes Goliath wins. Just as plausibly, sometimes both sides carve up a market and they often have different offerings that target unique customers,” says Brayden McCarthy, vice president of strategy at Fundera, a New York-based marketplace for small business lending that works with a variety of lenders, including traditional banks.
Certainly, the change didn’t happen overnight. But over time, both online lenders and banks have been forced to tailor their expectations more closely to market realities. Despite their fast growth trajectory, several online lenders have come to realize that they lack several things many banks have, namely a strong, time-tested brand, a solid customer base and ample capital. Banks, meanwhile, have realized that their slow start out of the gate with respect to technology is a severe competitive disadvantage, and that they need more nimble, savvy partners to stay in the game.
Given these shifts, more and more online lenders and banks are taking the approach that if you can’t beat ‘em, join ‘em. Although some industry leaders are actively pursuing strategies that put them in direct competition with banks, partnerships of varying degrees between traditional banks and alternative players are increasingly common. As a result, the lines separating the two are getting increasingly blurry.
“Market forces are acting as a shotgun at the wedding. Whether the two sides are entirely comfortable with the marriage is irrelevant, they need one another,” says Patricia Hewitt, chief executive of PG Research & Advisory Services LLC in Savannah, Georgia. “They’re stronger together than they are alone.”
The evolution of Square is a prime example. The San Francisco-based company really packed a punch in the merchant services world with its mobile card reader designed for small businesses. From there, the payments company sought additional ways to diversify, eventually turning to merchant cash advance as a way to help small business customers obtain funds quickly. Then, in March of last year, Square moved into online lending, teaming up with Celtic Bank of Utah to offer small business loans online. The partnership got off to a running start. In its most recent earnings report, Square said it facilitated 40,000 business loans totaling $248 million in the fourth quarter of 2016—up 68 percent year over year—while maintaining loan default rates at roughly 4 percent.
Even SoFi, the San Francisco-based online lender that has been pointedly outspoken in its anti-bank rhetoric, now has bank-like aspirations. In February, the lender acquired mobile banking startup Zenbanx, giving it the ability to offer checking accounts and credit cards in 2017. Also in February, SoFi teamed up with Promontory Interfinancial Network to enable community banks to purchase super-prime student loans originated by the online lender. Large banks have been buying SoFi loans for several years.
COLLABORATION IS THE WAVE OF THE FUTURE
Many see collaboration between banks and online lenders as a logical step in the industry’s evolution. Online disrupters have forever changed the face of lending—in the same way that online brokerage shaped the financial advisor industry, according to Bill Ullman, chief commercial officer of Orchard Platform.
“There’s a tendency to want to view things as either black or white, online lenders vs. banks. The reality is that the entire financial services industry is undergoing a transformation with technology as the core driver,” he says. “I am of the view that both traditional financial services companies and fintech players can survive and thrive,” Ullman says.
For its part, Orchard recently inked a deal with Sandler O’Neill that provides access to the Orchard platform for the investment bank and brokerage firm’s bank and specialty finance clients. The deal is expected to help small banks better evaluate their options with respect to online lending opportunities.
Partnerships between online lenders and banks take many forms. Some of them are behind the scenes, where marketplaces sell loans to banks or banks informally refer customers. Others are more public. For example, in September 2015, Prosper and Radius Bank of Boston teamed up to offer personal loans to certain customers through the bank’s website using the Prosper platform. Customers can borrow from $2,000 to $35,000 in this manner.
Then in December 2015, JPMorgan Chase and OnDeck joined forces in order to dramatically speed up the process of providing loans to some of the banking giant’s small business customers. In April 2016, Regions Bank and Avant announced a partnership to better serve customers who don’t meet Regions’ credit criteria.
Avant’s customers typically have a credit score between 600 and 700, while Regions sets the bar higher. “The benefit for banks is that they do not need to worry about a platform taking away customers that meet their own credit criteria,” according to Carolyn Blackman Gasbarra, head of public relation at Avant.
She notes that Avant expects to replicate this model with more banks in 2017. “Lately many platforms and banks have come to realize their counterparts are more friend than foe,” she says.
Given the changing tides, industry watchers expect to see more relationships develop between online lenders and banks over time. These could include referral agreements, technology licensing arrangements, formalized revenue-sharing partnerships and perhaps even outright acquisitions.
PARTNERSHIP ADVANTAGES
Certainly, working together can be mutually beneficial for both online lenders and banks. For new online lenders and other fintech players, partnering with an established bank allows them to bypass significant regulatory and compliance hurdles because the necessary requirements are already in place.
“Why jump through all the hoops when you can just have a buddy system with an existing lender?” says Kerri Moriarty, head of company development at Cinch Financial, a Boston-based company dedicated to helping people make smarter investment decisions.
Fintechs that license their technology to banks still have to meet the high standards of third-party vendors determined by bank regulators, notes Stan Orszula, co-head of the fintech team at the Chicago law firm Barack Ferrazzano Kirschbaum & Nagelberg LLP.
“But it’s still less onerous than being a direct lender,” says Orszula, who works closely with banks and fintech providers on legal, regulatory and corporate issues. “They are learning that they need banks. They really do.”
Even seasoned online lenders that have a regulatory framework in place can benefit from bank relationships by using banks’ established brands as leverage. “Everyone knows Chase, Bank of America and American Express,” says McCarthy of Fundera. “They have a solid name and a solid in-built customer base to be able to offer product to them,” he says.
Teaming up with a bank gives added credibility to an online lender, at a time when the public’s confidence has faltered due to highly publicized troubles at certain firms. “Partnering has a very important signaling effect that these online players are here to stay,” McCarthy says.
Banks, meanwhile, need the nimbleness and innovation that online lenders provide. “Banks realize they have to catch up with the fintech disrupters,” says Mark E. Curry, president and chief executive of SOL Partners, which provides strategic management and information technology consulting services to financial services companies.
DIFFERENT TYPES OF PARTNERSHIP OPPORTUNITIES ABOUND
When it comes to partnerships between banks and online players, there are numerous options. In the small business lending space, for example, McCarthy of Fundera says he expects banks to continue buying loans from online lenders, as they have been for many years. He also expects more banks will route declined applicants to online lenders or online loan brokers. “This is a partnership that will allow them to make up some incremental revenue by referring business,” he says.
In addition, McCarthy says he expects banks to make products available through online marketplaces and use an online lender’s technology for online loan applications. He also expects banks will use online lenders’ technology for underwriting and servicing loans.
Years ago, before John Donovan joined Bizfi, he recalls talking to a salesman for a large national bank. The bank didn’t offer a lending product that he could give to small businesses and the salesman was losing customers as a result. “That’s where we see a lot of those opportunities,” says Donovan, chief executive of the online marketplace for small business loans.
For instance in March 2016, Bizfi partnered with Western Independent Bankers, a trade association, for over about 600 community and regional banks, to link small business clients to financing options through Bizfi. Many banks don’t offer small business loans below $150,000, whereas the average loan Bizfi does is $40,000, Donovan says, adding that the company would like to develop additional relationships similar to its agreement with Western Independent Bankers.
In the future, he predicts fintechs will continue to be more receptive to the idea of working with banks and vice versa, as the industry digests the impact of deals that are still in their early days.
FINDING STRATEGIC GROWTH OPPORTUNITIES
As banks and online lenders become increasingly accustomed to working together, there may be more opportunities for strategic acquisitions. For instance, Sandeep Kumar, managing director of Synechron, a global consulting and technology firm, expects to see banks—especially mid-tier players that don’t have the resources to innovate like big banks buying lending-related start-ups. He says banks will likely be most interested in companies that can help them with AI and other techniques to pinpoint where they should spend more efforts on cross-selling and customer profiling, for example. “There are many start-ups in this area that have very compelling technology,” he says.
On the other hand, Chris Skinner, an independent commentator at The Finanser Ltd., a research and consulting firm in London, points out that the two cultures don’t always mesh. “Quite a few startups have young, entrepreneurial founders that would loath the idea being acquired by a bank. So it really depends on the circumstances,” he says.
Valuation differences between large banks and leading online lenders may also be a sticking point for some deals, Ullman of Orchard points out. Banks’ concern over their valuation “will place a certain amount of restraint and discipline on the tech M&A activities they pursue,” he says.
ANTICIPATING TROUBLE IN PARADISE
While increased collaboration between online lenders and banks sounds good on the surface, John Zepecki, group head of product management for lending at D+H in San Francisco, urges both sides to proceed with caution. “You have to find an arrangement where you don’t have conflict,” he says. “If your innovation partner also is a competitor, it’s a challenge. If you have an inherent conflict, it doesn’t get better over time.”
That’s one reason why companies like Chicago-based Akouba have come on the scene. In Akouba’s case, its goal is to provide banks with the technology such that they don’t have to partner with an online lender that has the potential to compete for business. “We don’t compete with the bank in any way whatsoever,” says Chris Rentner, the company’s founder and chief executive.
Akouba’s business lending platform—which the American Bankers Association endorsed in February—provides banks with leading edge technology that integrates the bank’s own unique credit policies into a convenient, online process—from application to documentation— all the way to closing and funding. The bank uses its own credit policies, originates its own loans and owns the entire brand and customer relationship.
Rentner says he started the business with the idea in mind that the online lending model wouldn’t be sustainable long-term and that working alongside banks—as opposed to competing head to head— was the direction to go. “The idea that they could somehow get all of the consumers out of the banking world and onto their platforms was never going to happen. That’s why we exist today,” he says.
Equity Crowdfunding to Masses Slow Out of the Gate, But Pickup Expected
February 25, 2017
After a lackluster start, spectators are betting on more promising times ahead for equity crowdfunding to the masses.
Although it’s been talked about for years, it wasn’t until last May that the general public could buy shares of their favorite companies through equity crowdfunding. Before then, only accredited investors could be part of the crowd.
The new crowdfunding regulation, known as Reg CF, has been talked about for several years as a potential game-changer for small businesses seeking growth capital. But so far, it hasn’t gotten the fast-track reception that some industry watchers had hoped for. Between inception and January 16 of this year, 75 companies have run successful equity crowdfunding campaigns, raising $19.2 million, according to statistics compiled by Wefunder, an online funding portal for equity crowdfunding.
Even so, industry watchers aren’t discouraged, saying it takes time for any new product to catch on and to gain traction.
“Equity crowdfunding is in its infancy. It’s got to be a toddler before it can be a teenager, and it’s got to be a teenager before it can be grown up. I think in three to five years, equity crowdfunding will be all grown up,” says Kendall Almerico, a partner with the law firm DiMuroGinsberg in Washington, who represents numerous clients in Jobs Act-related offerings.
A YEAR OF TRIAL AND ERROR
Some industry watchers had hoped equity crowdfunding to the general public would take off immediately, on the heels of successful rewards-based crowdfunding sites like Kickstarter and Indiegogo. Consider that since Kickstarter launched on April 28, 2009, 12 million people have backed a project, $2.8 billion has been pledged, and 118,362 projects have been successfully funded, according to company statistics from Jan. 16.
People looked at Kickstarter’s accomplishments and projected that from day one, equity crowdfunding to the public would be an immediate success, Almerico explains.
Instead, Almerico says 2016 was a year of trial and error, in which companies seeking equity funding tested out the market and learned the process. Initially, there were several funding failures, where companies set fundraising goals that were too lofty and came away with nothing. Other companies have been hesitant to dip their toes into a market that’s still very new and unchartered.
“I’m not surprised that it has taken a little bit of time for companies to raise money this way,” Almerico says.
However, industry participants say that every success story encourages others and the market will continue to build on itself.
“We are very optimistic that 2017 will be the year it goes more mainstream in the U.S,” says Nick Tommarello, founder and chief executive of Wefunder, who expects crowdfunding levels in 2017 to reach three to four times what they were at the end of 2016.
WADING THROUGH UNCHARTERED TERRITORY
Certainly, Reg CF is still very new in practice. On October 30, 2015, the Securities and Exchange Commission adopted final rules to permit companies to offer and sell securities through equity crowdfunding for non-accredited investors. But it wasn’t until May 16, 2016 that this new type of investing actually became permissible.
Companies that want to raise money from the general public have to do it through a funding portal that is registered with the SEC. As of mid-January, there were 21 funding portals, according to a listing on Finra’s website. The bulk of the funding thus far has come through the portals Wefunder, StartEngine and NextSeed, according to statistics compiled by Wefunder. Indiegogo, best known as a leader in perks-based crowdfunding, has also gotten a fair amount of business. Indiegogo launched an equity crowdfunding portal late last year through a joint venture with MicroVentures, an online investment bank.
There are significant rules when it comes to members of the general public investing in equity deals; how much you can invest per year depends on your net worth or income. Everyone can invest at least $2,000, and no one may invest more than $100,000 per year, according to SEC rules.
Meanwhile, companies are limited to raising $1 million in a 12-month period using Reg CF. Also, they must raise enough to hit their funding target or the fundraising round is a bust. They can, however, use other avenues to raise money simultaneously, such as through accredited investors or venture capitalists. This can be an advantage for companies because it allows them to tap their customer base—a great marketing and customer-retention tool—and yet still seek growth financing from investors with deeper pockets.
Over time, as equity crowdfunding gains traction, Almerico predicts the SEC and Congress will revisit some of the regulations and tinker with the laws to make them even more user friendly. And that too, will help crowdfunding gain ground with investors and companies, he says.
For instance, under current rules, a company can’t market its offering until it goes live, at which point additional marketing restrictions set in. Congress and the SEC will likely change some of these restrictions to make the rules more similar to Regulation A, which covers offerings of larger sizes, Almerico says.
A CONSUMER-FACING PROPOSITION
For the most part, companies that are consumer-facing as opposed to B2B will have the most luck with equity crowdfunding. For one thing, consumer-facing companies often have an easier time explaining their story to the public. Also, there’s real benefit for consumer based businesses to get their customers to sink money not only into a company’s product, but behind the scenes as well. Thus far companies that have sought funding under Reg CF run the gamut from breweries to tech startups, Wefunder data shows.
When it comes to equity crowding, investment levels tend to be small. Wefunder stats shows that 31 percent of investments made through its own platform are $100 and 76 percent of investments are under $500. “The whole point is to have lots of investors investing small amounts of money and together they add up,” Tommarello explains.
One of Wefunder’s largest offerings was Hops and Grain Brewing, a microbrewery based in Austin, Texas. The company is one of three businesses to raise $1 million on Wefunder, and more than 70 percent of the money came from its own customers, according to Tommarello. “Equity crowdfunding allows customers an opportunity to back things they really care about and it’s great marketing for the company too,” he says.
Another company, Snapwire Media Inc., a start-up in Santa Barbara, California, also believes in the power of the crowd to raise funds and gain marketing traction. Chad Newell, the company’s chief executive, says Snapwire wasn’t at a point where it felt ready to solicit venture capital money, but felt confident that its users, who were already passionate about its services, would become their biggest advocates.
The company, which connects a new generation of photographers with businesses and brands that need on-demand creative imagery, was launched in 2014. It previously raised $2 million from accredited investors before raising $179,065 from the general public on the funding portal StartEngine. In December 2016, the company launched a campaign to raise additional funds on Wefunder.
“Because we had a strong community and such a large one, we felt it was a good way to raise funds. Why not raise it from the people that care about the product the most?” Newell says.
OVERCOMING THE HURDLES OF NEWNESS
Because equity crowdfunding to the general public is so new, there’s still a lot of uncertainty about how the process works—both among companies looking to raise money and potential investors.
“The biggest hurdle today is that equity crowdfunding is still underground versus rewards-based crowdfunding,” says Howard Marks, co-founder and chief executive of the online portal StartEngine. “It’s tiny. It’s small. It’s nothing. It’s not even a dot in the grand scheme of things,” he says.
At this point, many people still don’t realize they can invest, or how to invest. He likens equity crowdfunding to index funds or junk bonds that were once completely unknown products. Over the years, however, they gained broad acceptance and are now widely used investment vehicles. “Every time there’s a new financial product that comes out, it takes time,” he says.
In December, five new companies used StartEngine for equity crowdfunding. In January, he expects there to be more than 10. By the middle of next year, he predicts there could be 20 a month, and in two years from now he’s hopeful to be doing about 500 equity deals a month.
“Within five years, our plan is to have 5,000 companies on the platform,” he says. “The demand for capital is pretty large.”
At this point, Wefunder is the largest platform for Reg CF offerings in terms of dollars funded, successful offerings and number of investors.
According to data through January 16, forty-six of the seventy-one companies that listed on its platform, or 65 percent, had successful offerings, meaning they reached their investment goals.
Some funding portals have felt the pangs of being new to the industry and are trying to get their bearings to compete more effectively.
Vincent Petrescu, chief executive of truCrowd Inc, a funding portal based in Chicago, says his company got registered in May 2016 and spent the rest of the year learning the lay of the land. Ultimately, truCrowd decided it would be better off specializing in a few verticals than going after all types of companies. Its plan now is to focus on the cannabis industry and the HR space.
“I think that the potential is huge. There are lots of good companies out there that need capital,” he says.
THE SNOWBALL EFFECT
Wefunder data shows that investors who buy into one deal tend to do another deal shortly after, so it’s a compounding effect, Tommarello says. “It’s a snowball rolling down a hill. We’re developing a whole new class of mini angel investors,” he says.
In terms of future growth, Petrescu of truCrowd says the biggest hurdle for the industry is exposure. Lots of people still don’t know about it, and they are still in the mindset that it’s illegal because it was for so long.
He says he’s not too concerned, though, because the UK had a similar experience when equity crowdfunding to the general public first started there a few years back. As soon as the success stories start to become more publicized and people see the returns that are possible, he predicts interest will grow. “The potential is there. No doubt about it,” he says.
For companies that are giving more thought to equity crowdfunding, it may help to seek out advice from others that have already traveled this road. Newell of Snapwire says he gets calls every week from company founders to ask about his experience with equity crowdfunding and to discuss in further detail whether it might be the right option for them.
Newell tells companies that ask him about equity crowdfunding that it’s an effective way to raise funds, with certain caveats. For instance, you really have to understand the rules of what you’re allowed to do and what you can’t do because there are many more restrictions when marketing to the general public versus accredited investors. You also have to be good at marketing—or hire a company to do it on your behalf—and have a sizable group of users that you think will want to invest in your future.
“It’s been a great source of capital for Snapwire because of our passionate community. I caution any company that doesn’t have a large community to be careful about spending time and resources and have realistic expectations,” he says.
He also says companies should have realistic fundraising goals since it is unusual—at least at this juncture—to raise a million dollars from small investors through equity crowdfunding. It’s more realistic to expect to raise $200,000 to $500,000, he says.
“I think everyone gets attracted to the top number. But that’s not necessarily what happens. Equity crowdfunding should be complementary to any funding strategy. By itself, it’s not some magic bullet,” he says.
