Articles by deBanked Staff

Ready Capital Grows as Leading Non-Bank Small Business Lender

“Ready Capital has become a leading national non-bank lender to small businesses providing a full suite of loan options from $10,000 unsecured working capital loans to $25 million plus real estate-backed USDA loans,” said Ready Capital CEO Thomas Capasse during the company’s Q3 earnings call.

Ready, in some ways, has flown under the radar in recognition. On the one hand the company is the top non-bank SBA lender in the country and fourth overall SBA lender in the country. On the other hand, the company has previously acquired Knight Capital, iBusiness Funding, Madison One Capital, select non-SBA assets of Fountainhead, and Funding Circle USA. The result is that the overall organization is a powerhouse with a current public market cap of $1.25B.

iBusiness Funding, once the technology arm of Knight Capital, has played an integral role for the company. For example, when Ready acquired Funding Circle USA, it did it through the iBusiness Funding brand.

“[In 2019, iBusiness Funding was] a leader in unsecured small business lending,” Capasse said on the call. “And then they adopted their tech to the PPP which was very accretive. And since then there’s been the initiative within the SBA to emphasize small loans below $350,000, which many times are minority women-owned businesses, and so that’s been a significant initiative by the SBA–so what we’ve done is iBusiness has developed a tech stack, which is now being marketed as a third-party underwriting model for banks. Banks just do not focus on that at all. Even if they do SBA loans, it’s mostly for larger loans again above the $350,000 to the $5 million. So the idea with iBusiness is to grow the revenue stream from this software-based business.”

On Funding Circle, Capasse said that the newly acquired subsidiary would be “accretive to earnings once fully ramped.” The numbers offered so far was that $6.6 million growth in Q3 origination income came from small business working capital loans through the Funding Circle platform.

Square: Our Customers Actually Grow Faster With a Square Loan Than Without One

On average, Square customers that used the Square Loan product grew 6% faster than those that did not use it, the company revealed. Jack Dorsey, the CEO of Square’s parent company, Block, used the 3rd quarter earning’s period as an opportunity to discuss its lending operations. The relevant parts are excerpted in non-sequential order below:

“In 2013, we began offering capital to sellers because we saw a meaningful gap in the market: small businesses were often denied access to credit, in the same way they were once denied access to accepting credit cards. We utilized our deep understanding of the seller and their business to build a technology that invited them to accept a loan with transparent rates, and pay back simply by making sales to their customers. We called it Square Capital (which is now known as Square Loans).

Since then, we’ve underwritten more than $22 billion in loans globally, with aggregate loss rates below 3%. And we’ve proven we can expand access: 58% of Square Loans are to women-owned businesses, and 36% are to minority-owned businesses, both of which are higher than the benchmark we track If our sellers grow, we grow – and we believe Square Loans has a direct impact on our sellers’ growth. Sellers who take out a Square Loan grew on average 6% faster than sellers who did not take out a loan.

Many financial products trap borrowers in cycles of revolving debt. We don’t allow customers to take on new loans if they have an overdue balance. And repayment is built into how our products work: Square sellers repay loans through a fixed percentage of their revenue, creating a manageable-real-time payment flow.

On credit risk management, we have a long history of maintaining stable loss rates and these products act as working capital, which means they are usually short in duration. What that means for us is that a dollar used on our balance sheet can turn multiple times, driving capital efficiency while providing us with high-quality data to continually refine our technology-driven underwriting.”

– Jack Dorsey

Square shared some stats as well, showing that the average loan term was 150 days and average loan size is only $10,208.

Loss rates on Square Loans have historically been less than 4%. Square is a company to watch considering it is likely the largest online business lender in the United States.

Nerdwallet: Continued “Pressure in SMB Loan Originations”, Search Engine Traffic Flux

“We continue to see pressure in SMB loan originations, with rates remaining elevated and underwriting remaining tight,” said Lauren StClair, CFO of NerdWallet on the Q3 earnings call, “However, this was more than offset by growth in our renewals portfolio, which showcases the benefit of our vertical integration strategy and the reoccurring nature of the vertical when we pursue a higher touch experience.”

NerdWallet CEO Tim Chen further said that it was a “tough macro environment in SMB loans.”

Their SMB business overall, which includes several products, not just loan referrals, did well however in Q3, generating double digit YoY growth for a total of $27.8M in revenue.

Of additional note is NerdWallet’s commentary on search engine traffic and its impact to its business.

“After a stronger start of the quarter, we saw some additional deterioration in our search visibility in mid-Q3,” said Chen. “While traffic to our monetizing shopping-oriented content started to rebound as we exited the quarter, traffic to our non-monetizing learning-oriented content did not. As a result, Monthly Unique Users were down 7% year-over-year in Q3.”

deBanked drew attention to their search engine observations this past August after hearing Chen muse that the current state of organic search result rankings were not actually helping business owners get business loans. Chen dived into this subject yet again on the Q3 call, the full quote of which is worth including:

“So, during our Q2 call, our search visibility was broadly stabilizing and actually starting to rebound a little bit. And then soon after our Q2 call, things took a turn for the worse. So with our shopping traffic, things got worse in August and September. But then going into October, rebounded back to a level that was a bit better even than where we were when we did the Q2 call. We think we did some things on our end to clean up the user experience that were net positive. Now, there were some exceptions, so for example, parts of credit cards and personal loans are still lagging. But, overall, we got a pretty good place – we got to a pretty good place on shopping pages and feel like we’ve figured out what to improve.

Conversely, for that far bigger bucket of education-oriented traffic that is less commercial in nature, things got progressively worse throughout the quarter and recently stabilized at a lower level. So, what’s happening there is a renewed push by search engines to incorporate their own answers directly into the search results, like you mentioned AI overviews as an example. So, for those of you who have been following search over the years, this isn’t really anything new. So, for example, at one point when you search for the weather, it didn’t show up directly in the results, and eventually a module was inserted there. That trend towards the simpler stuff being pulled into search results is inevitable, and we’ve always been more insulated from that, but historically it happens in waves, and sometimes haircuts are MUUs.

So, we’ve generally seen a re-baselining after any major changes, and then eventual growth from there as you lap the impact. Oftentimes, those changes are rolled back. And so, over the last 10 years, I’d say these changes come in waves, and we’re in the middle of a big wave, and as long as we focus on delivering consumer value, we’re steering in the right direction, and things tend to sort themselves out. So, this headwind is driving our outlook for further MUU deceleration in Q4, because of the full quarter impact of some of the stuff that happened with those headwinds.

Now, in the long run, I do think an improving search experience is a win for the overall ecosystem and keeps it healthy and growing. And, really, I’d say the silver lining here is that Q3 was pretty brutal as far as some of the headwinds we faced in organic search, especially in highly commercial areas, and being able to hit like a 12% NGOI margin in Q3 in spite of that headwind is really a testament to some of the progress we’ve made in building a brand and a direct relationship with our users and our increasing competitiveness in other channels.”