Is Alternative Lending Suffering From an Identity Crisis?
It’s been a long, windy road for the FinTech industry. Sam Graziano of Fundation explains the industry is on the cusp of yet more distinct pivots.
BY SAM GRAZIANO
The growth and evolution of "alternative lending" has been a windy road. Like any so-called "disruptive" industry, the eventual successful business model (or business models) evolves through a series of "pivots" (in entrepreneur-speak). It would appear that we are on the cusp of another major pivot for the industry, or, more likely, a few distinct pivots that will be taken by a few distinct groups of businesses, furthering their evolution toward business models that are scalable, profitable and part of the long-term financial services ecosystem. Perhaps, in so doing, clarifying for the outside world whether these companies are technology-enabled financial services companies or technology companies addressing the financial services industry (true "FinTech" companies).
What’s clear is that the industry continues to suffer from an identity crisis, evidenced by the terms used to describe it. It was initially labeled as "Peer to Peer Lending," at times uses the term "Online Lending," morphed into "Marketplace Lending," and now, at least some are using a term I am proud to have coined, "Digitally Enabled Lending" (or its abbreviated version "Digital Lending"), a term more suitable to the broad array of businesses within the industry. The industry terminology never seems to quite catch up to changes in business models or draw enough clear distinctions between the various business models.
For purposes of this article, let’s use my preferred term, "Digitally Enabled Lenders", (or DELs for short). A DEL is distinctly different than the Alternative Lenders of years ago — the factors, asset-based lenders and equipment financing companies that were the original fabric of the non-bank lending ecosystem. DELs leverage the "Triple As" (aggregation, automation and analytics) to run their lending models. Aggregation, enabled by technology, is the process of a DEL capturing data from third parties in real-time. Automation, enabled by technology, in this context is the process of applying software to running business logic (credit algorithms) or redundant business processes. Analytics, enabled by technology, in this context is the process by which DELs turn that aggregated data into statistical probabilities – probability being the key word. The "Triple As" are the common denominator of the industry, an industry built to underwrite, originate and service small-balance credit to consumers and small businesses more efficiently than the traditional bank models ever have. Perhaps after another credit cycle DELs will prove to have developed better risk models as well.
Undoubtedly this tech-enabled method of lending is and will be a driving force in the evolution of small-balance lending. Yet, the "Triple As" don’t equal triple the profits. As it turns out, customers don’t just show up at your doorstep asking for the "tech-enabled loan." And, more recently, the capital markets are suggesting it might not flood every prospective industry participant with cash forever. Meanwhile, the banks still have two major competitive advantages: 1) their low cost and stable funding, and 2) a structural advantage to the customer through the deposit relationship.
Small-balance lending, technology or not, is a tough business. Few, if any, DELs have delivered the level of profits that the private and public markets will require to justify the valuations they still command. As high profits still elude the DELs, they are starting to pivot, or, at least signal a pivot is in the making. The bank dis-intermediators are talking about bank partnerships, the brand builders are talking about providing platform solutions and the "marketplaces" are moving toward leveraging permanent capital vehicles. None of which is a criticism of any kind (I run a DEL after all!). If only Blockbuster had pivoted faster when Netflix launched their disruptive concept of mailing people their DVDs.
The nature of the pivots differs based on product line. To date, DELs largely exist in four markets, student lending, unsecured consumer lending, nonconforming mortgage lending and small business lending. Some DELs are pursuing new product lines to sustain their growth rates and capture more of the customer’s wallet. Others are pursuing bank partnerships. A select few are intent on becoming software companies (not lending at all), enabling digital lending for the banks and other non tech-enabled lenders. And, lastly, others who have already proven their ability to drive strong unit economics by marketing directly to a consumer (or a business) are intent on becoming a lasting brand within the U.S. financial services ecosystem.
What is rather clear is that the players in the DEL market are choosing to pivot and pursue pathways that will result in profitable and sustainable business models. My wager is that the result will bring clarity to the DEL identity crisis through the creation of multiple new business models and multiple new identities.
DIGITALLY ENABLED LENDERS
Sam Graziano is the chief executive officer of Fundation, a New York City-based small business direct lender and solutions provider that utilizes a sophisticated software platform to streamline the lending process. Graziano is a highly experienced financial services professional and entrepreneur. Graziano graduated from Bucknell University with honors with a degree in Computer Science & Engineering.
Online Lenders Breed Competition, New Loans for Banks
Birmingham’s banking community is finding that the growing financial technology sector is providing both challenges and opportunities.
Nowhere is that more evident than the growing marketplace lending arena.
Marketplace lenders, which provide an online, tech-driven way to connect borrowers and lenders, are creating new business and new competition for Birmingham’s traditional banks.
And some Birmingham financial veterans are carving out their own niche in the industry, which an American Banker study showed has increased by 700 percent in the past four years.
Simply put, marketplace lenders are companies that create an online option for consumers to find loans for everything from home purchases and small business loans to loans for purchases at specific companies.
Some are direct lenders that actually hold the loans, while others are simply platforms that partner with financial institutions to originate loans.
With major players like Avant, Kabbage and Lending Tree, it’s already a huge industry. And Birmingham banks and financial pros are trying to carve out their own place in the business.
One new player is based in Birmingham.
Stairway Lending, started by Birmingham financial industry veterans Cary Cooper, Josh Dennis and John Romero, was launched six months ago. The company plans to initially focus on student, health care and small business loans.
Company leaders say they are carving out a niche with loans that are too small for many banks.
“It takes more money for a bank to process smaller loans than they would make on the interest of that loan,” Cooper said. “So using us, the companies not only are not losing money, but actually come out on top.”
Stairway uses its own in-house technology and cobrands its websites with businesses that use its services.
The ease of finding a loan - a decision comes instantly, and often the money is available that day - is one of marketplace lending’s strong selling points. And big banks are getting on board.
Regions Bank announced last October a partnership with Fundation, an online lending platform Regions executives say can help small businesses find loans.
“We asked our customers early in 2015 what were some of the products they wanted to see from Regions, and a large percentage of our business customers expressed an interest in working with us to use an online lending experience,” said Joe DiNicolantonio, head of Regions Business Banking. “So, we started looking at ways to fill that need.”
They partnered with Fundation after researching several other platforms.
DiNicolantonio said the use of Fundation can combine the face-to-face personal banking experience that small business owners want, with the ease and convenience of the online lending process.
“The customer is walked through the whole process, so it is not just some dark space they are entering when applying for and receiving the loans. There is still a customer experience. Someone talks to them and sees them through the process.”
Using an MPL, Regions can still retain customers while offering them the opportunity to access funds through a fast and convenient outlet.
Regions also announced earlier this year that it would team up with Avant, another marketplace lender, but Regions officials say that partnership will not begin until later in the year.
Stephen Yoder, assistant professor at the UAB Collat School of Business and of counsel at Balch & Bingham, said banks teaming up with marketplace lenders and other non-bank financial service providers is a logical reaction to what is called “disintermediation” in banking.
“Disintermediation is a fancy term for the lessening of the role of banks in our financial system, and its pace has been quickening dramatically in recent years,” Yoder said.
“Crowdfunding sites like Kickstarter and nonbank lenders like the Lending Club are other examples of non-regulated lenders moving into what used to be the territory of banks.”
Yoder said there are many causes of disintermediation. One being technology - which makes it much easier for non-banks to reach consumers and other traditional banking customers directly. Another is the Dodd-Frank banking legislation passed in 2010 that has put pressure on banks to raise more capital and to spend more on compliance, probably at the expense of making as many loans as they would like to make.
“Avant is not itself a lender, however,” Yoder said. “Its bank partners are still making the loans that are started on the Avant website.”
Whatever the future holds for these lenders, the industry is taking notice. Foundation Capital predicted last week that marketplace lending is expected to grow to $1 trillion by 2025.
Best Alternative Small Business Loans 2016
By Chad Brooks, Business News Daily Senior Writer May 17, 2016
To help you find the right business loan, we researched and analyzed dozens of alternative lenders. Here is a roundup of the lenders we think are best and an explanation of how we chose them.
Best Working-Capital Loans: Fundation
Fundation offers conventional fixed-rate loans of between $20,000 and $500,000, with annual rates ranging from 7.99 to 29.99 percent. Online applications can be filled out in 10 minutes, with final approval taking place within 24 hours. To qualify, you must have been in business for at least two years and have at least three employees, annual revenue of at least $100,000 and good personal credit. Fundation provides excellent customer service over the phone and via live chat. Go here for our full review of Fundation.
Best Lines of Credit: Kabbage
Kabbage offers small businesses lines of credit of between $2,000 and $100,000. Each time you draw against your line of credit, you have six or 12 months to pay that money off. Instead of paying interest, however, you pay fees of between 1 and 12 percent each month. To apply, fill out an online application and link the system to either your business bank account or an online service you are already using, such as QuickBooks. Kabbage's platform automatically reviews the data on those sites to determine if you meet the company's standards for a loan. The process typically takes just minutes to complete. Once approved, you have instant access to your loan. Go here for our full review of Kabbage.
Best Startup Loans: Accion
Accion is a nonprofit microlender that specializes in small business loans. It offers loans specifically for startups that have been open for less than six months. Accion's loan amounts and minimum requirements vary by state. Among the more common requirements are a minimum credit score of 575, sufficient cash flow and proof of income. Maximum loan amounts range from $10,000 to $100,000. Applications can be filled out online, with approval usually taking place within one month. Accion's loans, most of which have annual percentage rates starting at 10.99 percent, are repaid on a monthly basis over the length of the loan. Go here for our full review of Accion.
Best Merchant Cash Advances: RapidAdvance
RapidAdvance offers merchant cash advances of between 50 and 250 percent of your monthly credit card volume. Loans are repaid by giving RapidAdvance a fixed percentage of future card receipts until the loan is paid off. To qualify, you need to have been in business for at least three months, have at least $2,500 in monthly credit card receivables and have a physical location for your business. You can apply for the advance online or over the phone. The approval process can be completed in 24 hours, with funds available within three days. Go here for our full review of RapidAdvance.
Best Bad Credit Loans: OnDeck
OnDeck offers fixed-rate loans of between $5,000 and $250,000. To qualify, you need a minimum credit score of 500 and an annual revenue of at least $100,000, and must have been in business for at least one year. Loans have lengths ranging from three to 24 months and are paid back on a daily or weekly basis. You can apply for a loan online or over the phone. Approval can be completed in just a few minutes, with funds deposited into your account within 24 hours. Go here for our full review of OnDeck.
Best Equipment Loans: Crest Capital
Crest Capital offers equipment financing of up to $1,000,000. Financial documents aren't needed for financing of less than $250,000. The lender has a wide range of loan and lease terms, including fixed-rate loans, $1 purchase agreements, 10 percent purchase options, fair-market-value leases, guaranteed purchase agreements and operating leases. To qualify, you must have been in business at least two years and have a minimum credit score of 650. The approval process can be completed in as fast as 4 hours. Go here for our full review of Crest Capital.
Our Methodology
To determine the best alternative lenders, we started with a pool that included all of the lenders on the comprehensive list below. After some preliminary investigation, including a look at other best-pick lists and initial research into each lender, we interviewed small business owners to discover new lenders to add to our list. We also eliminated peer-to-peer lenders and online sites that match businesses with lenders, because these lenders didn't fit into this year's best-pick categories.
Ultimately, we settled on 28 alternative lenders to research as best picks: Accion, American Business Credit Services, American Capital Group, American Express, Amerifund, Ascentium Capital, Balboa Capital, BFS Capital, CAN Capital, Crest Capital, Dealstruck, Direct Capital, Fora Financial, ForwardLine, Fundation, Kabbage, Kalamata Capital, Keystone Leasing, Merchant Advisors, OCM Financial, OnDeck, PayPal, RapidAdvance, Rapid Capital Funding, Shield Funding, SnapCap and Square. (See below for the full list of alternative lenders.)
Next, we researched each lender by investigating the types of loans it offered, the amount of money that could be borrowed and for how long, the application and approval process, and repayment procedures. We also considered any general term-rates that were listed on these lenders' websites. After narrowing the list to 18 final contenders, we contacted each lender's customer-service department by phone, and live chat if possible, and posed as business owners in order to gauge the type of support each company offered.
In all, we analyzed each lender based on the following factors:
- Application and approval process
- What it takes to qualify
- How long it takes to get a loan
- Loan amounts
- Loan terms
- Repayment process
- Customer service
- Better Business Bureau ratings and complaints
- Online user reviews
It's important to note that our best picks were not selected based on the lender most likely to approve your business for a loan. Each lender evaluates businesses differently, and each business has a different financial makeup. Considering these factors, it would be impossible for us to try to determine any business's likelihood of securing a loan with any of these lenders. In addition, our review process did not fully examine specific loan interest rates. These are determined individually for each business based on the amount of money being borrowed, the loan terms and the business's financial makeup. We did, however, consider any average rates that were provided.