Loans
Applicant Didn’t Complete their Business Loan Application? They Might’ve Gotten Stuck
September 26, 2024
“Early discovery showed us in the market that over 85% of [small business] loan application packets were straight up abandoned,” said Jay Long, COO and co-founder of Parlay.
In an era where fintechs have sought to increase the speed and accuracy of the underwriting process, Parlay, an AI-native SaaS company, noticed that one major lingering challenge for small business lenders starts well before today’s tech stacks even come into play. For example, an applicant might not be sure what they’re supposed to be submitting to the lender in the first place and thus the process may never even make it to the fintech underwriting stage. This bottleneck comes at a cost for both a lender who fails to move a loan application forward and for a borrower who gets stuck and isn’t able to get what they wanted.
“A lot of small businesses when you request a bunch of stuff in an email or you just say ‘give me these things,’ they may not have the financial background, that financial education to know how to answer those questions,” said Alexandra McLeod, CEO and co-founder of Parlay. “And so what we’ve done is we’ve built a series of really intuitive, user-friendly, plain-English workflows that are easy and rapid to get through but also systematic.”
Parlay’s Loan Intelligence System (LIS) was drawn from interviews with hundreds of small businesses and also by observing how they did with existing workflows.
“We’re asking them yes-no questions, and based on how they answer, then the questions arrange themselves in a specific way,” said McLeod. “But also, we have tool tips in the platform, so if somebody doesn’t know what a term is or if they need help building something—like a debt schedule is something they have to provide, and people don’t know how to generate those, then we have these builders in the workflows to help them with that.”
At present, Parlay is focused on SBA 7(a) loans with their most common customer being a community bank or credit union. The company’s focus on the intake process has also enabled their technology to do even more, and that is to nurture applicants that are not eligible for approval to eventually become eligible through personalized actionable recommendations.
According to Parlay, their LIS easily integrates with existing Loan Origination Systems and it improves profitability without increasing overall business risk.
For McLeod, who has a prior background with financial inclusion initiatives and startups, she’s seen firsthand that there are financial institutions eager to provide capital to the underserved but that the economics to do it with legacy systems at scale have just made it too cost prohibitive.
“…the other side of the problem is the small business needs more hand holding,” said McLeod, “and the lender can’t provide it. And so this is a perfect application of technology where you can offer a scalable alternative where you can handhold the small business, you can provide a lot more insight to the lender as to the needs of those small businesses and you can generate that outcome of more booked loans because more people can actually get through the process.”
Notably, Parlay is a recent graduate of the Center for Accelerating Financial Equity (CAFE) Fintech Accelerator Program, which supports fintechs advancing health & wellness of underserved populations. CAFE is headquartered in the Fintech Innovation Hub building on University of Delaware’s STAR Campus, a building deBanked covered in 2022.
Prosper Continues to Chug Along
August 18, 2024Prosper originated $512.2M in consumer loans in Q2 of 2024, which was down 14% from the same period last year. This was “primarily due to the reduced usage of our Warehouse Lines to purchase loans, as well as decreased third-party investor demand,” the company said in its quarterly report.
Prosper rates its borrowers from AA (best) to HR (worst). They are AA, A, B, C, D, E, HR. Twenty two percent of their borrowers in the first half of 2024 were given a B rating. 15% had an E rating and only 10% had a AA rating.
Overall, Prosper has been chugging along, generating an insignificant net loss of only $500,000 for the quarter. The fact that it supplies public quarterly reports is unique in that the company is not public but continues to sell notes to retail investors, making it more-or-less the only remaining peer-to-peer lender to remain from what is now a bygone era.
SoFi Focused on Diversification
August 4, 2024SoFi signaled that diversification is a main goal in its business right now.
“Less capital, less risky businesses get valued much higher,” said SoFi CEO Anthony Noto in the company’s recent quarterly earnings call. “And we don’t want to have an over-dependence on a high capital, high-risk business. This year, the macroeconomic environment accelerated our diversification and it’s worked out quite well.”
Within the lending category of its business SoFi wants to scale up home equity loans and student loan refinancing and become more conservative on personal loan growth. That strategy is not only being driven by its diversification initiative but also the economy. For example, Noto said that the company wanted to see how the years trends with unemployment.
“We’re at 4.1% [unemployment], a move to 4.2% could signal a recession,” Noto said in the days before the actual unemployment numbers revealed an increase to 4.3%. SoFi’s stock dropped by more than 6% on the news.
SoFi’s business loan marketplace was hardly mentioned, generating only a single line in the company’s earning’s announcement. “Small and medium businesses can now apply and get approved offers from lending partners all on SoFi,” it said.
SoFi says its business loan partners can lend up to $2 million and can fund as fast as the same day.
Trading MCA for Mortgages
June 5, 2024
“I like multiple ways of getting business,” said Julio Sencion, Principal at Alta Financial. “If I did one thing and one thing only and that slows down, it affects my bottom line, so I like to keep my doors open for more opportunity and I think the ISOs should as well.”
Sencion’s not funding MCAs today, he’s doing mortgages, a business he had been in for years prior to the Great Recession. In the early 2000s, he said that everyone wanted to be a mortgage broker, himself included when he got into it. Like many in that business at the time, the fallout of it all pushed him to seek out a new revenue stream and a product that was still in demand. By 2011 he and a partner were running a large MCA brokerage shop in New York with nearly 70 sales reps on the floor. Sencion liked the business but not necessarily the conversion rates on the leads he was buying. By his count only 2-3% of the leads would become a funded deal, a metric deemed too low in the industry era of yesteryear. Old habits die hard, however, because he couldn’t help but continue to think like a mortgage guy.
“We realized that we had a couple of different questions on our application, one of them was ‘Do you own real estate? Commercial, residential?’ 40 to 50% of our clients owned real estate, so because of that we spun off a division for commercial lending.”
By 2016 Sencion exited MCA and went back into traditional finance. He’s now a principal at Alta Financial, which not only does mortgages but has also found a unique niche to source borrowers from, MCA brokers.
“So let’s say for example you’re an ISO and the client says ‘yes, I own real estate’ I’ll be interested in looking at that product,” Sencion said. “Then you will click a link that we will give you, that link will open up the questionnaire and you will fill out that questionnaire and then my agent will receive that lead from that questionnaire with all the data in it.”
Referrals of this nature in the biz are not new, but perhaps the circumstances are. One of Sencion’s account managers, Jamie Schiff, is also a former MCA rep himself, and he’s found this business to be better.
“I think over the past a year and a half, from my perspective, I think the MCA space is just a bit saturated,” said Schiff. “There’s a million and one funders out there.”
The challenge with this different product, according to Schiff, is getting an MCA broker to wrap their mind around a deal that could take a month to close when they might be used to 2-3 days. But on the upside Alta Financial does all the work and they really just want a broker to qualify a lead and submit the details. If a loan closes the broker gets paid. Quite a number of MCA broker shops are already doing this with them, the company said. Once these files are in hand, they underwrite various factors including credit score of the borrower. While just about any kind of property could qualify except for gas stations, they said that multifamily properties are the most common they get.
“People will be surprised how many clients have real estate, not just a [primary home], but they own just a small multifamily down the road that they never touched or tapped into,” said Sencion. “So I think it’s important nowadays to have the ISOs ask the question because if they didn’t do the cash advance they could always flip this into a mortgage.”
While all of Alta’s loans are secured by real estate, they can look beyond the value of the asset by evaluating an applicant on the rental income they generate or look at the average revenue from their business bank statements and base a loan amount off of that. Naturally, the rates and terms are much more attractive than what’s available in the unsecured market. There’s also the added benefit of these products being able to work alongside an MCA or to buy out existing ones. It’s a commission a broker might not have gotten otherwise.
“I’m actually excited, it’s something different but it’s kind of the same,” said Schiff. “And it’s such a smaller space that I don’t have to worry about every other month 10 other new funders popping up…”
As for Sencion, he said that the barriers to entry are higher than the MCA business, between the education, state licensing, how to process the files, etc.
“It takes years to get to the level of where we’re at, to be able to underwrite, fund deals, sell to a secondary market,” said Sencion. “And I think that’s where the edge comes in, you can’t get a cash advance guy, no matter how big they are, to get into my space unless they team up with a mortgage company. No one’s out there trying to become a mortgage company anymore like it was back then.”
AMEX: ‘We’re not seeing small businesses spend more’
January 28, 2024
“We’re not seeing existing small businesses spend more than they spent the year before,” said Stephen Squeri, CEO of American Express, “And that’s not an American Express phenomenon, that is an industry phenomenon.”
Squeri, who was speaking on the company’s Q4 earnings call, was answering questions about what they’re seeing with small business customers. Although spending in particular is not increasing, they still want loans and cards. “As far as card acquisition within small businesses, that still remains strong,” he said. “As far as small businesses, looking at our platform, and looking at our loans, and so forth, that remains strong. And the credit quality remains strong.”
The trend is not concerning to American Express, who explained that write-off and delinquency levels were actually lower now than they were before the pandemic, despite ticking up just a little bit higher.
First Ever Domain Name Loan by Smart Contract Was Executed on Ethereum
January 27, 2024
History was made on Saturday when the first ever loan against a domain name was executed with a smart contract on the Ethereum blockchain. The significance is that the success marks the birth of a new asset class that can be leveraged to unlock capital for business owners or domain name investors in an expeditious and secure manner.
deBanked founder Sean Murray was the executor of the transaction. The process involved tokenizing a domain name (domainfi.net) into an NFT and then offering that NFT as collateral on an NFT loan marketplace. When a loan was executed on the platform with a smart contract, the domain name was automatically placed into an ethereum address to be held as escrow. If the borrower were to default on the loan, the smart contract would automatically release the domain name to the lender, who would now have full control of it.
The process involved two parties, the tokenizing registrar and the NFT loan marketplace. The loan, which was consummated for proof of concept, carried a 10% APY and a 7-day term. It took less than 20 minutes combined to complete the tokenization and loan execution process.
“I was guessing that this capability might still be another year away and I had not even dreamed that I would be the very first one to execute this type of loan,” said Murray. “Following this space closely probably contributed to that stroke of luck. There is still time until this is ready to be a consumer-facing product in the marketplace, but the tech already exists and transactions of this nature are already viable. It will be fascinating to watch.”
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deBanked was launched in 2010. For questions or inquiries email info@debanked.com and call 212-220-9084.
Small Businesses More Understanding, Looking for LOCs
December 4, 2023
“The ISO channel is an important part of our business and we remain committed to it,” said Jay Shaw, Head of Sales at Enova SMB. Enova, which operates OnDeck and Headway Capital, is one of the largest small business lenders in the United States. The company has originated more than $2.2B in loans in the first three quarters of this year, a lot of which comes through “highly compliant ISOs.” The relationship works, especially in times like these when banks are reducing their exposure to small business lending.
But officially we’re not in a recession. The S&P 500 is up 20% YTD, for example, unemployment is low, and inflation has backed off from its previous peak. Shaw says that a positive sentiment among small businesses is something they’re seeing along with this, that when they actually talk to small business owners one-on-one, many of them are feeling pretty good right now.
While most observers would point out that elevated interest rates have shaken up the game, there’s actually been a silver lining to how it’s played out.
“There’s a lot more education and understanding of cost of capital,” said Shaw.
Business owners, for example, who were used to a perpetual low interest rate environment, have watched banks dramatically increase interest rates over the last year or so and it’s actually brought attention and awareness to the fact that lenders have a cost of a capital to contend with as well, that rates come from somewhere. It’s made them more understanding, according to Shaw, when they’re presented with terms now from online lenders. That understanding is compounded by a greater openness to doing it all online in the first place, which businesses are now more accustomed with after having to do so much online during the covid years. In essence it’s a strong environment to be working in right now. Still, many businesses are coming in with a certain expectation of how online lending should work especially if they worked with a bank previously.
“More and more businesses are looking for a line of credit product,” Shaw said, which Enova offers in addition to term loans. Businesses tend to appreciate this product not only because of the control it gives them but also because “they have continuous access to capital after every payment they’ve made,” Shaw said.
According to the Intuit Small Business Index Annual Report, 22% of small businesses applied for a loan or line of credit last year. Although this didn’t distinguish term loans from lines of credit, the demand for a revolving product is evident by an even more sought after type of financing, credit cards, which 30% of small business owners applied for. MCAs, by comparison, were a distant fifth, with only 6% of businesses applying for one.
Perhaps an all important measure is not only what businesses want but how they’re using it in the end.
“A lot of [our customer’s] borrowing is growth borrowing with a significant ROI,” Shaw said.
Nice Yacht, Someone Financed It
October 26, 2023
Every sentence sounds better ending with the word “yacht.” Enjoying crackers and cheese on a yacht. Sipping champagne aboard a luxurious yacht. Even making money financing high-end yachts, the charm remains intact. Over the past six years, East Harbor Financial has been offering a range of financing solutions under their Luxury Assets category, which includes exotic cars, aircraft, and vessels. While the company has been in business for 11 years, President Bruno Raschio’s foray into the yacht industry provides a unique perspective from an outsider turned insider.
According to Yatco.com, there are currently 592,000 yachts in the United States and the global market size was valued at $8.91 billion in 2022, with expectations to expand 5.8% from 2023 to 2030. The most Raschio has ever financed on one unit was $2 million and he admits there is a lot of money to be made in this sector, but people must be willing to welcome the risk that comes with it.
“Lenders who embrace risk and identify a specialized market can consistently generate profits in a business,” said Raschio. “Nonetheless, market corrections often possess the capability to level out the gains amassed during prosperous years.”
Raschio emphasized that the industry has many brokers that do not necessarily need an in-depth knowledge on yachts. Nevertheless, the significance of understanding yachts itself is always advantageous. In the case of private lenders, like his own company, Raschio advised focusing on financing high-quality yachts that possess strong market appeal and retain their value.
With the increase in manufacturing costs, Raschio states that prices may not revert to pre-Covid rates, like when they initially joined the yacht industry. For instance, A-credit rates, which used to range from 4½ to 5% before the pandemic, have now risen to 8 to 9%. Similarly, rates for B, C, and D credit ratings, previously between 10 to 13%, have surged to 14 to 19%.”
“Consider this scenario, if you were buying a million-dollar yacht before, you’d typically put down 30%, leaving you with a financing amount of $700,000,” he said. “However, in a post-Covid market, if the same yacht is selling for $1.5 million and you still put down 30%, you’d be looking at financing $1,050,000. That means you’re financing nearly $50,000 more than its pre-Covid value.”
East Harbor specializes in financing high-end yachts, brands like Sunseeker, Azimut, Ferretti, Pershing, and Princess. Transactions typically range from $600,000 to $1 million, covering yachts that fall within the 40 to 75-foot size range. Working with clients nationwide, the primary regions where the company provides financing are South Florida, which is the largest market, California’s Newport Beach, the second largest, and various areas along the east coast, the third-largest market. The company exclusively offers short-term loan options, typically lasting between 5 to 8 years, as opposed to the more common 15 to 20-year loan terms for yachts.
“We prefer to expedite our financing process since we rely on private funding,” Raschio explained. “Furthermore, this type of financing is generally costlier than traditional bank loans. Therefore, many individuals find it more sensible to present it as a short-term solution, where you secure your financing, achieve your objectives, and exit, or sell the boat.”
Upon entering the boat financing business, Raschio first’s client came to him with a million-dollar yacht with a $500,000 down payment. It seemed like a solid deal, but there was also a high likelihood that the yacht was going to need very expensive repairs. Its details like this that can change the entire dynamics of the deal and it was a teaching moment for him.
“As an example, a major repair on a used yacht that’s heavily depreciated could cost more than the entire used yacht price,” said Raschio.
