p2p lending
Making Cents of Short Term Business Lending
June 22, 2014Where do you see yourself in 5 years? Perhaps you’ve seriously planned what you’ll be doing in mid-2019 or maybe you at least have an idea of how things will play out. It’s only a half a decade after all so how hard could it be to foresee the future?
Surely all of us saw the DOW surging 5 years ago and got rich right?
Did New Yorkers factor Hurricane Sandy into their 5 year plan back in 2009?
It’s only 5 years, what could possibly happen to a small business in that time?
As I recently logged onto LendingClub to invest in consumers loans, I began to wonder just how safe the 60 month terms were. Not that I have a lot of options since LendingClub only offers 3 or 5 year terms, but the latter is unquestionably risky. The borrower might look good now, but where in the heck will they be in 5 years? I can’t even begin to guess.
Mortgages, student loans, and car leases aside, I can think of very few reasons to use a 5 year loan from a personal perspective, mainly because that’s an extremely long commitment. For a small business, such a term far exceeds the rationale behind “working capital”, the reason oft-cited by businesses seeking less than $200,000.
The Small Business Administration’s website speaks of this:
Businesses that are seasonal or cyclical often require more working capital to stay afloat during the off season. Although your company may make more than enough to pay all its obligations yearly, you must ensure you have enough working capital at any one time to meet your short term obligations. For example, a company may do significantly more business over the holidays, resulting in large payoffs at the end of the year. However, the company must have enough working capital to buy inventory and cover payroll during the off season as well, when revenues are lower.
Working capital may come in handy for something like inventory for which the business probably expects to sell it all off in less than a year. Can you imagine still making monthly payments in 2019 for inventory you bought with a loan in 2014?
I bet this guy can’t:
And if the financial picture looks great and they have a long term need, why not go out 5 years?
Verizon replaced Washington Mutual. But a Verizon store, that will last forever…
Only 41.1% of retail businesses live to experience their 5th birthday.
And even then when business types are aggregated, making it past year 5 doesn’t ensure lifelong success. Don’t confuse established with safe:
In fact, even borrowers are opting for shorter term loans with higher interest rates than long term loans with lower interest rates. Part of that is due to the lower net dollar cost paid for the loan said OnDeck Capital CEO Noah Breslow in an interview with Peter Renton:
5 years ago I used to spend way too much time on Instagram. Oh wait, no I didn’t… there was no such thing as Instagram.
What do you think is the best bet for this CD store? A 3-6 month working capital loan or a 5 year term loan?
Giving a borrower a lengthy repayment term ensures they will be able to pay you back right?
Above is the result of my $25 contribution towards a 5-year LendingClub loan issued on May 16th. They missed the very first payment. I’m really looking forward to the next 59 months…
In 2019, everything will be business as usual, won’t it Madam President…
As short term business lending critics herald the emergence of 3-5 year term business loans, I think it’s important to remember that they are catering to a market that likely has different goals. Long terms are often not appropriate for borrowers with working capital needs. The CEO of RapidAdvance, Jeremy Brown discussed this in an article he wrote for DailyFunder more than a year ago.
Our industry is based on providing working capital to merchants. By its very definition, working capital is less than 12 months. Longer term deals are permanent capital, even when they are repaid over 15-24 months.
As a borrower, the very idea of committing yourself to monthly payments 5 years from now should be considered very seriously. The average length of a marriage prior to a divorce is 8 years. For past or future divorcees, a 5 year loan is more than half as long as a marriage!
Alternative lenders should be asking themselves if they really have the data and underwriting skills necessary to make accurate predictions that far out in the future. Working capital underwriting models are not applicable as long term assessments.
If you’re going to make 5 year business loans, make sure to take advantage of Google maps. Take a look back at the business location and the ones surrounding it over the last few years. You may not feel so safe about your investment…
Exponential Finance
June 15, 2014
Last week, DailyFunder was a media sponsor of Exponential Finance presented by Singularity University & CNBC. It was a totally different atmosphere from some of the other events I’ve been to this year already (Transact 14, LendIt, etc.). In the upcoming July/August issue of DailyFunder magazine, I’ve got a column that summarizes the event that I think you’ll like.
Exponential Finance brought together leading experts to inform financial services leaders how technologies such as artificial intelligence, quantum computing, crowdfunding, digital currencies, and robotics are impacting business. And my mind = blown.
Some tweets to hold you over:
Robots may be coming to a bank near you: http://t.co/r0PlWUrYqU #xfinance pic.twitter.com/WYWUhZIUaD
— CNBC Social Team (@CNBCSocial) June 10, 2014
"The more data you produce, the more organized crime will consume." Goodman’s Law. #xfinance Be prepared!
— Exponential Finance (@xfinance) June 11, 2014
"Banks charge 32B in overdraft every year…that's almost as much as the gov. spends on food stamps." – Customers Bancorp CEO at #xfinance
— CNBC Social Team (@CNBCSocial) June 11, 2014
"It is no coincidence that Satoshi Nakamoto published this paper [on Bitcoin] during the financial crisis." #xfinance pic.twitter.com/a9eCWO7OXi
— CNBC Social Team (@CNBCSocial) June 11, 2014
Robots are going to steal your finance job:
I also had the chance to do a Q&A with a longtime prominent U.S. Congressman. The next issue should be available in about 3 weeks.
Do Opportunities Abound?
June 8, 2014
Just recently I found myself in an office surrounded by some folks who had each worked in the merchant cash advance business for more than 10 years. The first generation of MCA pioneers are still out there of course but it’s rare to be in the presence of so many at one time. It was weird. Weirder still was the realization that no matter how much things have changed, some things continue to be exactly the same.
Me: You guys looking to recruit ISOs?
Them: Damn right
As far as the industry is concerned, these guys might as well have fought in ‘Nam. They’re from another generation where life was hard and men were still men. When businesses couldn’t get bank loans, these guys were splitting payments with their bare hands and reprogramming credit card machines with nothing more than a paper clip and a ball of twine. Funding a deal wasn’t a product of technology, it was one of sweat, tears, and blood. Have you ever bled for your deals?
This August I celebrate my 8th year in the industry. Next month marks the 4 year anniversary of this blog. I enjoy reading some of my posts from back then, particularly since most of them discuss the ordeals of credit card processing. A lot of what I’ve written no longer applies and some of what I’m writing these days will be outdated years from now. As I approach 600 articles and blog posts on this subject matter, I’ve had to stop and ask myself if everything has already been written. What more can possibly be said about this business? Perhaps the tale of the industry has already been told and I am on my way to retelling exaggerated stories to anyone who will listen. I don’t want to be that wrinkled up old man swaying back and forth in a rocking chair talking about how ISOs got it so easy these days.
Sadly, even the name of the website is reflective of a previous era. This is the Merchant Processing Resource, not exactly what you’d expect a top destination to be called on the subject of alternative business lending.
But the story’s not finished. Every passing month is filled with events that inspire a dozen new chapters, which is more than one man can keep up with. Last month at the LendIt conference, I got a glimpse of just how many opportunities still lie ahead.
Some alternative business financing companies such as Funding Circle and DealStruck are diverging away from merchant cash advance and going back to the traditional roots of term lending. Funding Circle is doing it with a 21st century twist, by making their system peer-to-peer based.
Still other firms have sprung up around LendingClub’s and Prosper’s APIs and offer their users ways to make better loan investment decisions.
And even among the players we’re all familiar with, there is innovation, growth, and new ideas. Just recently CAN Capital launched CAN Connect, a software application that can be integrated with any other company’s software. According to CAN’s release,
Through CAN Connect™, merchants will be able to receive a CAN Instant Quote™ based solely on data provided by the partner. Once the merchant elects to proceed, they are taken through a simple online application process and can obtain access to working capital without ever leaving the partner’s platform.
Indeed technology has even allowed me to become a lender myself,
My LendingClub portfolio, which is still very young and made up by hundreds of $25 consumer loan contributions has a current Net Annualized Return of more than 10%. Contrast that against the average U.S. savings account that pays out less than 1%.
While it’s certainly not the 54% yield that OnDeck Capital enjoys, there are levels of risk and markets set up for just about anyone interested in alternative lending.
And what might come next may not all be broker/funder related. As the industry flies in a thousand different directions, entire new industries and services are going to grow up around them. That brings me back full circle. Has everything already been written? 4 years of blogging here and this might as well be my first day.
Some things haven’t changed a bit, but the rest of it, well… we must soldier on in this strange new world.
Do you see opportunities ahead? Discuss with industry insiders on DailyFunder.
Alternative Lending: Big Government and Big Data
May 7, 2014– Professor Michael Barr at LendIt 2014
One of the clear themes of the LendIt 2014 conference was that borrowers are willing to pay extra for speed and convenience. Regulators have taken note of this trend but they’re still supportive of the alternative lending phenomenon anyway. Truth be told, the government is acting like a weight has been lifted off its shoulders. Ever since the 2008 financial crisis, the feds have prodded banks to lend more, but they’ve barely budged, especially with small businesses. Non-bank lenders have relieved them of the stress and all they need do now is make sure everybody plays nice.
Professor Michael Barr, a former US Treasury official, key architect of the Dodd-Frank Act, and Rhodes Scholar, believes the best way forward is to empower consumers. That’s something lenders can accomplish through education and transparency. On transparency, he cited many of the commendable practices that credit card companies and mortgage companies have implemented, but did not fail to note that these were forcibly instituted through regulation (Hint hint…).
When a LendIt attendee asked Barr to name someone in the alternative lending industry that is a great role model for transparency, Barr answered by saying, “I haven’t seen anyone in the industry doing things the way I would do them in regards to education and disclosure.” On the path towards transparency, “the potential is not yet realized,” he added.
While it sounded as if he favored eventual regulation of alternative lending, he offered all in attendance advice to prevent it. “Take the high road to prevent regulatory interest,” he said.
Barr’s sobering presentation also covered the Consumer Financial Protection Bureau (CFPB) and the role they might play in alternative lending, if any. Payday lenders and debt collectors were their primary supervisory targets he said, but added the “the CFPB has the flexibility in the marketplace to address problems before they occur.” That flexibility essentially gives them jurisdiction over whatever they decide they want to be in their jurisdiction.
Sophie Raseman, the Director of Smart Disclosure in the U.S. Treasury Department’s Office of Consumer Policy appealed to the industry in a different manner. “Small businesses are at the heart of the economy. We want to serve you [alternative lenders] better so that we can better serve them,” Raseman pleaded. As part of that, she came bearing gifts, a reminder that the federal government had loads of data available via APIs at http://finance.data.gov. The government wants to make sure we have access to as many tools as possible, most likely to help drive borrowing costs down. If you need to verify someone’s income, Raseman recommended the IRS’s Income Verification Express Service.
The Income Verification Express Service program is used by mortgage lenders and others within the financial community to confirm the income of a borrower during the processing of a loan application. The IRS provides return transcript, W-2 transcript and 1099 transcript information generally within 2 business days (business day equals 6 a.m. to 2 p.m. local IVES site time) to a third party with the consent of the taxpayer.
The irony with this service is the two business day timeline, though I haven’t confirmed if that’s still the case. Delays and archaic data aggregation methods are the exact things alternative lenders are trying to overcome. Kabbage comes to mind as the length of time it takes for them to go from application to funding can be as quick as 7 minutes, a time frame I found to be reality after watching the demonstration by Kabbage’s COO, Kathryn Petralia.
Kababge’s blazing speed is made possible by access to big data, which made Petralia an excellent choice to have on the Big Data Credit Decisioning Panel. She was joined by Noah Breslow of OnDeck Capital, Jeff Stewart of Lenddo, and Paul Gu of Upstart.
Stewart, whose company lends internationally presented the idea of mining not just data on social networks, but the photographs on them. One possibility was measuring whether or not borrowers appeared in photographs with other borrowers known to be bad, or whether or not they hung out with undesirables such as ex-convicts. He was a big believer in association risk, speculating that friends of bad borrowers also made them more likely to be bad borrowers themselves.
Breslow of course said you have to be careful with the noise of social media as there can be a lot of false signals. Does that mean there are big data problems then? Upstart’s Paul Gu said, “we have small data problems” in reference to why there seems to be so much trouble evaluating applicants that have little to no credit history. Gu believes that basic information such as where a borrower went to college, their major, and their grades can be used as an accurate predictor of payment performance and his company has acquired the data to back that up.
Somewhere along in the discussion though the meaning of automation got twisted. OnDeck for instance has an automated process, yet humans play a role in 30% of the loan decision making. Does that mean they are not actually automated? Breslow clarified that aggregating data from many different sources using APIs and computers was automation and that there was still a role for humans. The goal is to make sure that humans aren’t doing the same things that the computers are doing.
“The world’s greatest chess human can beat the world’s greatest chess algorithm,” said Lenddo’s Stewart. “Humans should be pulling what the algorithms can’t think of,” added Breslow. He presented an example of an applicant satisfying all of an algorithm’s criteria but sending up a red flag at the human level. “Why would the owner of a New York restaurant live in California?” Breslow asked. That’s something an algorithm might get confused about. It might mean nothing or it might mean something.
“Algorithms are probabilistic,” Stewart reminded the audience. They spell out the likelihood of repayment, they don’t guarantee it.
For Kabbage, algorithms and automation have been instrumental in allowing them to scale. “I don’t need to hire a lot more people to serve a lot more customers,” Petralia explained.
“Let the data speak for itself,” Breslow proclaimed. And there is a lot of statistically interesting data. “People with middle names perform better than people without them,” added Breslow.
For Gu, borrowers with degrees in Science, Technology, Engineering, and Mathematics fare better than their academic peers, though he wouldn’t reveal which major is #1. That information, while probably available to OnDeck, likely plays little or no role. “There is a lot more data to analyze on the business side than the consumer side which is why [things like] the social graph is a little less relevant,” Breslow said.
In the end, lenders don’t need to go on a wild data goose chase to learn all about their prospective clients. Kabbage applicants for instance are asked to provide their online banking credentials in the very first step of the applications. “A lot of people would be surprised as to the amount of data borrowers are willing to share,” Petralia proclaimed. Indeed, many alternative business lenders and merchant cash advance companies are analyzing historical cash flow activity using third party aggregating services like Yodlee, something that requires the client’s credentials.
During Kabbage’s earlier demonstration, some members in the audience worried that factors such as deposit activity could be gamed. Petralia assured them that their algorithm was sophisticated enough to detect manipulation and at the same time explained that they analyzed far more than just deposit and balance history.
Perhaps all this technology though has gone overboard. Is it possible to predict performance just based on what the applicant says? Believe it or not, “the language someone uses is an indicator of default probability,” Stewart said. But even that kind of detection has become automated. “Lenddo uses semantic analysis. People tend to use different words when they’re desperate.”
Who knows, a year from now getting a loan might be as easy as picking up your phone and saying, “Siri, send money.” Just make sure to delete all the photos of you hanging out with criminals off your phone first. A lender might use them against you.
LendIt Conference: The State of Alternative Business Lending
May 6, 2014
Have you heard? Banks aren’t lending. Nobody at LendIt seems to mind though. Ron Suber, the President of Prosper Marketplace, said earlier today that banks are not the competition. That’s an interesting theory to digest when contemplating the future of alternative lending. If banks are not the competition, then who is everyone at LendIt competing against? I think the obvious answer is each other, but much deeper than that, the competition is the traditional mindset of borrowers.
The biggest challenge the wider alternative lending industry faces is awareness and understanding. Those happen to also be two of Suber’s three edicts for growth. The third is education. Just because alternatives are available today doesn’t mean that potential borrowers know about them or feel comfortable enough to use them. Today we are competing against the old way of thinking.
Revolution?
Other products in the new “share economy” have encountered a similar struggle. Several presenters today cited Uber as having revolutionized the way people use taxis. “A long time ago, people used to stand on corners and hold out their hand to get a cab, but that’s all changed,” was the oft-paraphrased proof that age-old industries were falling like dominoes. But as a New York City resident, I hadn’t quite noticed a change at all. Hailing cabs off the street is still very much the norm. It is only by sheer coincidence that I used Uber for the very first time to travel to JFK airport on my way to this conference.
I first encountered Uber a year ago when an acquaintance dazzled me with his ability to summon a car using an app on his phone. It was then that I became aware, but I did not understand how it worked. It took me 12 months to get comfortable enough to try it myself, and the experience was okay I guess if you discount the fact that my driver went through the E-ZPass lane without actually having an E-ZPass. Needless to say, that led to a major holdup that caused me to almost miss my flight.
If it took me a year to get past the confusion of hailing a cab from my phone, I can only imagine what potential borrowers must think when told they can raise money from their peers, the crowd, or a lender that requires payments to be made every single day.
Perhaps most telling about the awareness challenge, is that many people I’ve spoken to at LendIt had never heard of a 16 year old product known as merchant cash advance. That speaks volumes about how much more work merchant cash companies still have to do in order to gain mainstream awareness.
Even those fully aware were not entirely certain about how to define the product. In the Online Lending Institutional Investors Panel, merchant cash advance was briefly discussed as a topic but it was almost entirely spoken in the context of being something that OnDeck Capital does. That would come as disheartening news to OnDeck since they have spent considerable resources in positioning themselves as anything but a merchant cash advance company. Confusion over what somebody is or isn’t will probably increase especially as alternative lenders from different industries start to compete for the same clients.
Funding businesses instead of people
Brendan Ross, the President of Direct Lending Investments, and the moderator of the Short Term Business Lending panel pointed out that a dentist could pursue two different loan options and get completely different results. With excellent credit a dentist could expect to land a 3-5 year personal loan at 7-8% APR on a P2P platform. If he were to apply for the loan using his dental practice though, he could expect to incur costs over 25% and get nothing longer than 2 years.
Ross, who was a very active moderator, subscribes to the belief that businesses are overpaying for credit. Unlike the consumer loan space, there hasn’t been price compression. The cost of business capital remains high, perhaps higher than what is necessary to turn a reasonable profit. Ross argued that the padded cost serves as a hedge against defaults and economic downturns. “The asset class works even when the collection process doesn’t,” Ross said. “The model works with no legal recovery.”
Building on that premise, Ross asked the panelists if an increase in defaults were simply the cost of doing business towards automating the underwriting process.
Stephen Sheinbaum, the CEO of Merchant Cash and Capital argued that just the opposite had occurred, that automation had led to a decrease in defaults. Others on the panel confirmed a similar outcome, though Rob Frohwein of Kabbage admitted they could potentially weather higher defaults through automation by offsetting it against decreased infrastructure costs.
Noah Breslow of OnDeck echoed something similar to Frohwein in the Small Business Term Lending Panel. He asked this question, “Do underwriters add value or not?” and followed up by saying that 30% of their deals were still manually underwritten, usually the deals that are larger.
Is full automation right around the corner?
The debate between humans and computers in risk analysis is a featured segment in the third issue of DailyFunder that is being mailed out this week, but there is another angle that is seldom discussed, whether or not customers want automation. Breslow said today that, “if customers want full automation, we are prepared to deliver it.” They’ve learned over time that “many customers want someone to talk to at some point in the transaction.” Rohit Arora, the CEO of biz2credit expressed much of the same in a recent interview with DailyFunder’s Managing Editor Michael Giusti.
The only dissenting voice was Gary Chodes, the CEO of Raiseworks who seemed to be of the belief that human involvement in underwriting was nothing short of ridiculous. He stated that, “if you look back over the last 20 years, the loss rates on business loans under 24 months has been really low.” To him, that data seemed to be proof enough that complete automation could and should be achieved, though he admitted to performing back-end checks such as landlord verifications. They currently have no physical underwriters however.
Is there a transparency problem?
Tom Green, a VP of LendingClub shared an interesting tale. While trying to convince potential borrowers to ditch a merchant cash advance in favor of a LendingClub business loan, they get pushback on the cost of their money. The reason being? Some borrowers think they’ve already got a great deal or at least a better deal than what LendingClub is offering. The problem stems from the borrower’s belief that the holdback percentage set up in their future revenue sale (the most common way a merchant cash advance is set up) is the APR.
Merchant Cash Advance Companies pay cash upfront in return for a specified amount of a businesses’s future sales. They collect these sales by withholding a percentage of each credit card transaction or bank account deposit until the agreement is satisfied in full. On a dollar for dollar basis, the cost of these programs typically range from 20%-49%, but on an APR basis, substantially higher. The holdback % is not even a factor in the APR. Green said they’ve learned that some small business owners are not sophisticated when it comes to finance.
Ethan Senturia, the co-founder of Dealstruck would probably agree. Earlier today he said, “you need to speak the borrower’s language.” Some understand APR, some don’t. “Dealstruck offers more than just APR comparisons to borrowers,” Senturia said. “Whatever helps them understand.”
When the OnDeck Capital model and merchant cash advance model were questioned as possibly being bad for borrowers, Tom Green was quick to clarify. “There are different capital needs that small businesses have,” he said. And “there is a trade-off between the length of the term and the risk.”
OnDeck Capital’s clients are not entrepreneurs born yesterday. “The typical customer has been in business for 10 years,” Breslow said. Their deals are “structured to protect through daily and weekly payments in addition to the interest rates we charge,” something he reminded everyone was “not single digits.”
Still, transparency issues remain in business lending. Sam Hodges, the Managing Director of Funding Circle explained that when he was previously a small business owner, there were hardly any lenders willing to provide him with an amortization schedule. Ashees Jain, a managing partner of Blue Elephant Capital Management admitted he would find it hard to justify the high rates of merchant cash advance if asked by a regulator, so he’d rather not invest in that market. When it comes to those types of transactions, they “don’t want to have to explain themselves” at some point in the future.
Scott Ryles, the managing member of Echelon Capital Strategies, LLC commented on OnDeck capital’s model as unbelievable. “The arbitrage is huge,” Ryles said. And Eric Thurber the managing director of Three Bridge Wealth Advisors believes that alternative business lenders are at odds with themselves. “They always talk about their risk management,” Thurber said, but he feels that players in that industry are concerned with how much market share they have. That conflicts with risk management in his opinion.
They pay or they don’t
At the end of the day Ashees Jain said as far as unsecured loans go, “borrowers pay or they don’t.” The recovery process on secured loans can be 12-18 months Jain said, a statistic cited by Brendan Ross earlier in the day.
It’s clear at LendIt that there are a lot of products available, but Ryles summed it up nicely. In the consumer space, all the volume is in the 36 month installment loans, he reckoned. For businesses it’s merchant cash advance. “It’s an awareness thing,” Ethan Senturia said in regards to getting businesses to use alternative lending sources.
It is indeed. Awareness, education, and understanding…
Securitization Begins in Alternative Business Lending
May 1, 2014
It’s official, alternative business loans can now be pooled up and sold off to investors. On Wednesday, OnDeck Capital announced a $175 million transaction made possible by issuing fixed rate notes backed by their loans.
Their Class A notes were rated BBB by DBRS while the Class B notes received a BB.
According to DBRS, BBB grade are of “Adequate credit quality. The capacity for the payment of financial obligations is considered acceptable. May be vulnerable to future events.”
BB grade are “Speculative, non-investment grade quality. The capacity for the payment of financial obligations is uncertain. Vulnerable to future events.”
While it’s popular to refer to alternative business lending as highly speculative and fraught with risk, it’s notable that a highly respected ratings agency would not officially bestow OnDeck’s loans with a label to match that. A single B would’ve signified a highly speculative investment and CCC, CC, and C would signal danger. But OnDeck’s Class A notes are up to snuff as investment-grade level material.
OnDeck has been dogged by critics over the last few years, most of whom are their competitors. The argument goes that their practice of undercutting the rest of the industry on rates is doomed to fail. Those theories are bolstered by the very public knowledge that they have yet to turn a profit. Back in March, CEO Noah Breslow was quoted in the Wall Street Journal as saying they were “imminently profitable“, an optimistic yet openly ambiguous indicator of where they stand. Since they are not a publicly traded company, they are not required to disclose their financial statements.
While DBRS serves to validate OnDeck’s policies and approach, word that they had achieved “investment-grade” status did little to pacify their critics. Yet, for a company that places a remarkably heavier focus on credit modeling and technology infrastructure than the majority of their peers, there is always the possibility that OnDeck is actually as smart as they want everyone to believe. Four months ago it was reported that “fifty-six of their 225 employees have backgrounds in math, statistics, computer science, or engineering.” Contrast that with some of the small and mid-sized players that are largely focused on ISO recruitment and sales.
While I haven’t seen a prospectus in its entirely, I’ve learned there are quite a few ground rules in place for these notes. For one, these loan pools have to be diversified. That means no secretly packaging up all the loans in a risky zip code in Nevada and selling them off as a BBB rated note. There are concentration limits in place to reduce risk. Below are the maximum thresholds allowed in a pool based on their location:
Obligor Located in California 20.0%
Obligor Located in Florida 15.0%
Obligor Located in New York 15.0%
Obligor Located in Texas 15.0%
Obligor Located in Any Other State 10.0%
If a concentration limit is exceeded, the issuer is required to maintain additional credit enhancement. I’m not surprised at all that California, Florida, New York, and Texas are singled out. In addition to being among the most populous in the country, they are the heaviest users of alternative business loans and merchant cash advances. There’s also the theory that Floridians are statistically the least likely to repay a loan, as openly discussed in The Joy of Redlining, a controversial assessment borne out of the peer-to-peer lending crowd.
There are other concentration limits to adhere to such as the OnDeck Score range (not FICO score range), size of the outstanding principal, industry type, and repayment time frame.
Notably, recognition and acceptance of the proprietary OnDeck Score in concentration limits is a major achievement for them. Breslow previously referred to the OnDeck Score as “the Main Street equivalent of FICO” in American Banker.
Additionally, OnDeck’s reliance on ISOs/brokers for originations is shrinking. In 2013, their direct marketing channel accounted for 43% of their deal flow, compared to only 12% back in 2010. This is a step in the right direction for them financially as broker commissions are on the rise. Increasing the direct marketing percentage will serve as a hedge against increasing third party origination costs.
So what’s next?
For now, OnDeck Capital can enjoy the liquidity gained through securitization and focus on more important things like growth and profitability. Profits are a must in the current IPO environment. Payment company Square had their IPO hopes dashed when word of their losses were leaked to the Wall Street Journal. That came as a shock to the general public. Meanwhile everybody already has an idea of where OnDeck stands, sort of. They’re either brilliant or doomed to fail. I’d say an independent assessment that they’re capable of issuing investment grade notes, increases their odds of brilliance.
Whatever your feelings, they have set a powerful precedent for secuitization. As these notes were reportedly oversubscribed, investors will be looking to their competitors for a taste. OnDeck just whet the appetite. Additional securitization in this industry could be right around the corner. One might say it’s… imminent.
CAN Capital Still King – $4 Billion Funded
April 29, 2014While college kids across the country are creating alternative lending platforms in their dorm rooms, industry king CAN Capital announced today that they have provided small businesses with more than $4 billion. That puts them on pace to be funding approximately $1 billion a year. ($3 billion milestone back in March 2013).
Word apparently leaked out on DailyFunder ahead of time, drawing several members to tip their hats on the achievement.
As of March 31, Lending Club had also surpassed the $4 billion mark, but with a major distinction, it was almost entirely consumer loans. In the business space, CAN Capital remains on top after 16 years, which sadly makes them older than some of the kids writing code in this industry.
In a lot of ways, code has become the new focal point of alternative lending. There’s sex appeal in having a NASA-worthy underwriting algorithm right now and everybody’s getting caught up in it, some at their own peril.Why stop at a hundred data points when you can have a thousand? Screw it, why not TEN THOUSAND?!
While strong on technology, CAN originates like a boss, having funded over 55,000 small businesses. The tech side is challenging enough for some companies, but it’s the difficulty in marketing that catches many entrepreneurs off guard. In Alex Binkley’s requiem of a defunct startup, Funding Community, he detailed the challenge in generating interest. Who you attract is not always who you’re looking to fund in business lending.
In 2014, there’s no shortage of sexy buzzwords dazzling investors, yet it’s a 1990’s era funding company that continues to dominate. Three out of four eligible customers return to them for additional funds according to their report. Having survived Y2K, the dot com bust, and the financial crisis, they are proof that it takes a lot more than fancy code and a catchy name to master the risky world of business lending. With 16 years worth of data, it may take until 2030 for this year’s new entrants to truly know what they know. $4 billion says a lot but it’s standing tall through both the good times and bad that makes all the difference.
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Photos borrowed from HBO’s Silicon Valley series.
