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Entrepreneur Addiction Episode #4
Patrick Wiscombe hosts the show each week, covering a wide variety of entrepreneur topics that can help small businesses secure more financing, hire more employees and grow their business. Patrick has had many years in the media, and owns the Patrick Wiscombe Podcast Network.
This episode is all about alternative financing options, which reveals how and when business owners should pursue other sources of financing instead of conventional business loans. Highlights from today’s podcast:
- Rock ‘N Roll Hall of Fame
- Debut of Levi King
- Ghost towns in the Midwest
- Non-bank financing
- Feds say 91% of businesses can’t get financing they need
- Peer-to-Peer Financing the solution?
- Banks facing competition
- Cash Flow Loan, Merchant Cash Advance, AR and PO Financing
- Alternative loans aren’t for everyone
- Hot and steamy relationships between business owners and banks
- How to decide?
Click below to Play.
Go here to download on iTunes. Click to download the mp3
If you can’t listen to the Entrepreneur Addiction Podcast, here’s the text:
Cool Voice Guy: Fueling your business success, this is the entrepreneur addiction podcast, breaking the small business loan news you need if you obsess about your company. Heard exclusively on Lendio.com. And now here are our your hosts: Brock Blake, Dan Bischoff and Patrick Wiscombe.
Patrick: It’s the entrepreneur addiction podcast, Episode number four. My name is Patrick Wiscombe. Joining me for the podcast this morning is the president of Lendio.com. Levi King, it’s good to have you here this morning.
Levi: Thank you. I appreciate it.
Patrick: And Dan Bischoff back from his glorious, I won’t say, vacation from Cleveland, but you are back from Cleveland.
Dan: Yeah, it’s good to see your face again, Patrick.
Patrick: Oh, thank you. Did you like Cleveland?
Dan: Actually it was better than I thought. Levi told me it was dump, but I liked it.
Patrick: I went to the Rock & Roll Hall of Fame when I was back there. Man, I love that place. Did you go?
Dan: Yeah, I did. I ended up sitting at the bottom of the Rock & Roll Hall of Fame watching some U2 Concert for the whole time.
Patrick: The U2 Concert?
Dan: Yeah, they have a theater, and they showed U2 when they were inducted into the Hall of Fame, and I was just captivated by it. Then I went out to the pier, was it lake Erie?
Patrick: Yeah, right there?
Dan: I just watched the sunset. It’s actually a pretty nice place. I liked it.
Patrick: I know, downtown Cleveland is actually pretty nice. I stayed at the Marriott.
Dan: Yeah, in the Renaissance.
Patrick: Yeah, nice place. How many times of you been there, Levi?
Levi: Oh, two or three times. Downtown can be a ghost town at night. I went to dinner one time, actually on Valentines Day, and we waited for thirty minutes just to find one taxi to get back to the hotel. So…
Patrick: Yeah, that’s right. It is kind of a ghost time at night.
Levi: It’s slow, yep.
Patrick: You know, I stayed in a similar place. St. Louis. Busy during the day. At night, nobody’s there. Everyone took off to go to the suburbs.
Levi: And then there’s downtown Detroit, which is a ghost town day or night. There’s no economic activity.
Patrick: (Laughter) You know, that’s actually a pretty good segue into what we’re going to be talking about on today edition of the entrepreneur addiction podcast. Let’s go there. Right now. Alternative financing. When that particular phrase is uttered, what is alternative financing. What does it entail?
Levi: Categorically it was just be any non-bank financing. So, anything that’s not a conventional way for a business owner to get access to capital, like a SBA loan or a term loan or just a traditional business loan, it’s everything else.
Dan: 41% of small business owners cannot obtain adequate financing.
Patrick: They cannot?
Dan: They cannot obtain. 41%. So, almost half, right? That’s the highest percentage in seventeen years, they say.
Patrick: Is that because they’ve tightened the credit market, meaning banks?
Dan: Yeah, well, I mean, that’s partly.
Patrick: Traditional.
Levi: Primarily, yep.
Dan: We can, you know, generalize it that way. And in a separate July study by the National Federation of Independent Business, said, 91% of small business owners said they couldn’t get the credit they needed. 91% is almost everyone.
Patrick: So, if you cannot get a traditional loan, this alternative stuff, the alternative finance options, which would be what?
Levi: There’s a variety of options. There’s peer-to-peer financing, there’s…
Patrick: Okay, now, stop there. What is peer-to-peer?
Levi: Peer-to-peer… There’s two large companies that kind of dominate the space: Lending Club and Prosper, and…
Dan: Which are a partner of ours.
Levi: Yeah, we’re partners with them. We send them a lot of customers to get financing. But it’s just the concept of people giving loans to people. So, investors, and it could just be Joe Investor that has five thousand bucks he wants to lend, can put that money to one loan or multiple loans and spread that risk across a lot of different people. And it’s through a platform online, where it’s a little bit more personal. There is some underwriting credits…, thinks like that. Where the investor can choose the level of risk they can tolerate. They can look of the story of what the person is trying to do. So then people obviously can get loans from other people. They pool their money together.
Patrick: Okay, so rich dude, for a lack of a better phrase, goes to, what’s the name of this?
Levi: Prosper or Lending Club.
Patrick: Okay, Prosper or Lending Club, they say, “Hey, I’ve got ten thousand dollars, you decide where to put my money.” Obviously, Prosper is going to get something out of it.
Levi: Prosper gets something out of it. They take a transaction fee. But the investor makes their own decisions. Prosper doesn’t manage it for them. They create an account with a profile. They choose the… the set the ‘risk appetite’, as far as credit and type of loan and other things, or purpose of funds, and the other factors that are there. And they choose that, and then they choose which loans to fund, to participate in, whether it’s to fully participate and put a bunch of money in or fund the whole lone, or, must investors, though, divide their money up. So if they have that ten thousand, maybe they’ll spread that out across twenty loans. Put five hundred bucks towards each one. And then there’s twenty other people doing the same thing. And then that adds up to funding the loan with maybe ten to twenty investors on every single loan.
Patrick: Do people know about peer-to-peer lending?
Levi: It’s a newer type of financing. It’s only been around for a few years, and they’ve gained a lot of traction, but the vast majority of the public has no idea what peer-to-peer financing is.
Dan: It is growing quite a bit right now at the same time, though. But estimates by 2013 is it’s going to be 5 billion dollars of outstanding loans in the peer-to-peer industry.
Patrick: Are Prosper and Lending Club the only ones involved at this point? Or are we just talking they’re involved with Lendio.
Dan: They’re involved with us, but they’re two of the biggest ones.
Levi: Yeah, there’s a few other smaller peer-to-peer lenders that are trying to create their own niche and space. But really these are the two that dominate the vast majority of all the lending in that’s actually taking place in the peer-to-peer space.
Patrick: What risks are involved in peer-to-peer lending.
Levi: They’re unsecured. And so, if the person defaults there’s no collateral to go repossess.
Patrick: So, unsecured?
Levi: Yep.
Dan: But back to the growth, too. The banks, they know it’s growing, too. In the same study that I referenced before, the banks are starting to loosen their credit, their terms right now, in the first time in the last four years. They’re starting to loosen their terms for credit. And part of this is because they’re facing more competition for that credit. Those banks that said that they’re loosening their terms it’s because their facing competition for that.
Patrick: I will always advocate competition because I think it makes everyone better. So, I’m actually kind of glad that there is competition entering into the traditional space. Any other companies other than Lending Club or Prosper, is there another one?
Levi: Not in the peer-to-peer space that’s worth mentioning. But there’s other types of alternative financing that there’s some prominent players.
Patrick: Are there higher interest rates in peer-to-peer?
Levi: There are. In any type of alternative financing, there’s typically a higher interest rate. And that is the case in peer-to-peer.
Patrick: In addition to peer-to-peer what other types of lending options or alternative lending options are there?
Levi: The more common and probably most viable options are, one is, for example, there’s a lender, On Deck Capital, it’s just a business to business lender. And they look at risk just a little bit differently than a bank. They’ll pull credit, but they’ll give a loan for a hundred thousand dollars to someone with a 550 credit score that a bank would never touch. But they gauge the risk based on the past six months of deposits into the checking account and credit card swipes, and things like that. So, they look at cash flow, and they have a very robust risk algorithm, where they can look and see: Are they’re gaining customers or losing customers? Are the deposits going up or down? So, first they look at that and they just say, “Does the business have enough money to pay us back? Do they have enough cash flow?” Then they take a daily payment out. So, if it’s a one year term, every single day a small payment comes out. Which also mitigates the risk because if the business goes through the whole month and they’re short on money at the end of the month, and they have a big payment they have to pay, that’s maybe the payment that’s going to go late. But if it’s just a small amount that comes out every day, and they’ve looked at all the bank statements and can see: no matter what they’ve always got five grand in their account, and we’re only taking out a hundred bucks a day, again, it’s just a different way of doing a loan that mitigates risk for someone that has a lower credit score.
Patrick: Is it considered a credit card… well, I guess it is just cash flow.
Levi: It is cash flow. With On Deck it’s cash flow. There are… Cash Advance is another type that just purely goes off the credit card swipes that your business has. On Deck took it a step further and said, “Well, let’s look at all deposits, not just credit card swipes.”
Patrick: That sounds pretty reasonable.
Levi: In a business it’s not like a person. A person, if they go out and they make a consumer buy, and they buy a TV at a real high interest rate, it’s just dumb for everybody. There’s no smart scenario to do that as a consumer, but as a business, you may choose to take on some financing at a high interest rate because you have an opportunity in front of you where you can easily pay for that, plus have an additional return. And so, the business that says yes to an alternative loan that is higher cost, let’s say a retail shop that needs to stock up for the holidays, if they’re buying goods from China or somewhere for thirteen cents and marking them up for two dollars, and they now have to factor in an extra few cents per product in high interest rate, they can cover it.
Patrick: That makes sense. So, it really just boils down to profitability, how profitable you are on a particular item?
Levi: That’s correct.
Patrick: Do they analyze the profitability on a particular company?
Levi: The lender does not. No.
Patrick: So, they don’t care. That’s a business issue?
Levi: That’s correct. There’s lots of financing, like purchase order financing, for example, where, let’s say you land a purchase order from the government for a 250 thousand dollar job, and you’re profits going to be seventy thousand. If you don’t get the job, you can’t fulfill, or you lose half your profit in financing, but then you now have that job, and it increases the likelihood of you getting another job with the government or whatever big company that is putting in this purchase order. There’s other reasons beyond maybe taking lower profitability on the job, this one job, maybe you have other jobs behind it. Now you’ve got enough capital.
Patrick: Or, you’re trying to make a name for yourself.
Levi: Yeah, there’s a lot of different motives that go into accepting the cost of financing to seize the opportunities that are there for you business.
Patrick: This is exactly why we do this podcast. I think that there are plenty of people that simply don’t know that these avenues are even available to them. So, we’ve got peer-to-peer, we’ve got the…
Levi: Cash flow loan, On Deck Capital.
Patrick: What else do we have?
Levi: Then there’s the credit card advance, which I lightly covered. But it’s just purely based off credit card swipes. So, if you’re swiping twenty thousand dollars a month in credit card swipes, maybe you can get a thirty thousand dollar loan. It’ll be payed back over the next six months. It patterns after how we live as consumers. If every single month you looked at all the money you spent in the month, you detailed it. You spend one to ten dollars on all kinds of things that are just total garbage, but if instead you have that whole pile of crap that you buy, and you sat down at the end of the month, and you said, “Okay, am I going to spend four hundred dollars on this crap?” You wouldn’t do it. But when it’s split up into these small increment, then you don’t even think about it.
Patrick: What is purchase order financing?
Levi: Purchase order financing is, large companies, small companies, the government, they’ll issue a purchase order, which is typically binding. And then because it’s binding, and if it’s a reliable source of payment, then a certain lender and even sometimes banks will use that as collateral. So, you’ll assign ownership of the purchase order to that lender for collateral. Then they’ll advance a certain percentage of the face value of the purchase order. And that depends based on what your needs are. And in that case a lot of times they will look at your margins. You asked that earlier on a different kind of loan.
Patrick: Right.
Levi: They will look, and let’s say you’re selling a thousand office chairs to GE the company. You’ve got a purchase order for a thousand chairs. They’re going to look at, “Okay, what do you need to acquire the chairs for? What’s your shipping costs going to be?” So they can get a gross margin. And let’s say your gross margin is 40%, so maybe they’ll give you an advance of 50%. So, you’ve got to figure out where you’re going to come up with 10% on your own to cover all your costs. And then when you get paid by GE, then that’s obviously your gross profit.
Patrick: This is fascinating stuff. You guys are obviously in the business of lending money.
Levi: We are a matching technology. So, we take thousands of loan options and we match. Just like eHarmony gets scientific about matching people for a marriage, we get scientific about taking the business owner’s data, the bank’s data, and then matching appropriately. So, there’s a high probability that the business owner gets approved for the loan that we match them to.
Patrick: I hear a commercial there: Lendio, we’re the eHarmony for money. (Laughter)
Levi: I have T-shirt that says, “We create hot steamy sexy lasting relationships between business owners and banks.”
Patrick: That’s disturbing.
Levi: Do you think that will sell?
Patrick: I think we have a title. (Laughter)
Dan: I think Patrick wants one already. (More laughter)
Patrick: Say that one more time.
Levi: It’s kind of a play on that whole eHarmony space, but it’s, “We create hot steamy sexy lasting relationships between business owners and banks.” (Laughter)
Patrick: That a long podcast title. Maybe we won’t go there. What other types of financing are there?
Levi: Another type of financing is AR financing, accounts receiving financing, also known, sometimes it’s factoring. And any business, especially if it’s a business to business, B to B business, for example I used to own a manufacturing business, it was an electric sign company. So, we manufactured electric signs, awnings, and neon for other companies, and they would usually pay us 50% to start the project. We would manufacture and install, invoice them, net thirty. And so we would always have a pile of AR, of money that other businesses owed us. And that’s pretty solid collateral, and so lenders will look at that. They’ll look at the aging to determine whether it’s garbage AR or good AR, and then they’ll lend on a certain percentage of that AR. And then they become the owner of the accounts receivable.
Patrick: Is that common?
Levi: That’s one of the most common types of alternative financing.
Patrick: Oh, it is?
Levi: You sell your asset at a discount. It’s not technically a loan. It accomplishes the same things a loan because you sell your asset at a discount, which gets you money today.
Patrick: How do you decide which financing option is the best for a particular business?
Levi: So, at first it starts with their viability as a business owner, their credit worthiness. So, if a business owner needs a hundred thousand dollars, and they had perfect credit and they were full doc, meaning they could show their tax returns and they had profits, they were just the ideal scenario, then they should just get something that’s just a traditional bank loan, SBA insured or not, so they can get a 5 or 6% interest rate. So, it kind of goes in that order of the best terms on the financing, and then it works back to the worst terms. For example, with our reasoning, our risk reasoning, and Lendio’s technology platform, it goes in that order: Is there something that’s a premier type of financing that you’re worthy of, per say? No. What’s the next best thing? What’s the third best thing? And it spans from a SBA loan perhaps having the best interest rate all the way back to a merchant cash advance based on credit card swipes having the worst interest rate. And so, it should be terms driven. So, based on the profile of the customer, or the borrower I should say, what is the best financing that they could qualify for, meaning the lowest cost, and/or the fastest. Because the priority for the business owner might be, “I need the money in three days. Yes, I would qualify for a business loan, but I have this opportunity in front of me that has a three day time stamp on it, and so I’ll take a higher expense.” So, either the cost of the financing or how quick it can happen.
Patrick: When a customer goes to Lendio.com, do you have options as the customer is going through the sign up process, “Hey, I need financing now, like today. Or, we’re looking at something six months out, a year out.” How quick can you match a person’s needs to loan options.
Levi: The matching happens instantly, within seconds. They fill out their profile, and we’re integrated with the credit bureaus for a soft pull on their credit. It can all happen with a few minutes as they fill out the profile, but then once they see their matches, we have an estimate attached to each loan product in each lender of what would the cost be of the financing and how long would it take.
Patrick: Okay, so it’s instant, meaning Lendio’s end is instant?
Levi: The matches are instant. That’s correct. Someone could log on at two A.M. on Sunday morning and get matches within minutes.
Patrick: This podcast is about getting Lendio out there in front of more people. And I just think that this message is lost, that people think of slow. They don’t think of this speedy technology that can help their business out instantly. Do you find that marketing Lendio can be difficult? Does a person call their match to get things rolling? How does that work?
Levi: That’s one way. It depends on the lender on how they accept customers. So, sometimes they have to call. Other times they can go right from our site straight to an application online with the lender. Our longer term goal is to bring a lot of, with our more preferred lender partners, to bring some of their credit decisioning into our platform so that we can issue a pre-approval right within our system, so that it can happen faster. We’re now live with one lender, with one of these peer-to-peer lenders, with Lending Club, where that credit decisioning has been brought into our technology to make that more seamless and fast for the customer. It just depends on the lender and how they accept customers, where they proceed from their matches.
Patrick: So, Lendio the company is in the business of matching the person with a select set of lending companies, and the pace of which that can happen is up to the lender. They can actually click, “Yeah I accept that loan, or they’re pre-approved.”?
Levi: That’s correct.
Patrick: Dude, that’s awesome.
Levi: It is.
Patrick: Why has no one else done this? Or is there anyone else in the space? I’ve never heard of anyone.
Levi: There’s a few others in the space competing for eyeballs. They don’t have the exactly same concept and platform as us. It’s a race. There’s a lot of reasons why this has been a difficult space to crack because it’s so fragmented. Lending Tree, for example, cracked the mortgage space with a similar concept. But they’re just FHA, and Fanny Mae, Freddy Mack loans every lender writes for the same guidelines. With business loans there’s tons of different options, and on every option a bank can have its own unique underwriting procedures. And so there’s thousands of variables that had to be programed into our matching algorithms.
Patrick: So, your job at Lendio.com, other than just making the technology work and sing, I’m assuming there’s a lot of behind the scenes stuff to find multiple lending institutions, whether it’s alternative financing or just traditional people who will take a look at someone’s finances.
Levi: That’s correct. It’s a living and breathing precess that will never end. That data input side of the business is something that will last forever.
Patrick: Man, that’s a lot of work.
Levi: Yeah.
Patrick: Wow. Lendio, “the small business loan specialists”. Is that a good way to phrase what Lendio does.
Levi: Sure.
(Laughter)
Levi: It’s probably better than “hot steamy relationships.”
Dan: I don’t know …
Patrick: Alright guys, what do you say we wrap it up there.
Dan: Alright, let’s wrap it up. But I did want to say one thing, though. Next week we have a cool guest. His name is Joe Abraham. He’s the author of “Entrepreneurial DNA”, and he’s started a thirty or so companies. He’s in Chicago. He does a lot of entrepreneur things there. He has online network that matches entrepreneurs with other entrepreneurs. It’ll be a big entrepreneur podcast next week with Joe Abraham.
Patrick: Joe Abraham, look forward to that next week. Be sure to check out the podcast. Subscribe to it on Lendio.com. And if your company is looking for small business financing, whether it’s traditional or the alternative methods that we’ve discussed her on the podcast. Absolutely be sure to stop by Lendio.com, and you can also subscribe to the podcast on my website, which is PatrickWiscombe.com. So, for Levi King the President of Lendio.com, it’s good to meet you, too.
Levi: My pleasure. Thanks for having me today.
Patrick: Dan Bischoff Director of Communications at Lendio.com, good to see you as always.
Dan: Always great to see you, Patrick.
Patrick: Thank you. My name is Patrick Wiscombe. Thanks for listening to the entrepreneur addiction podcast. We’ll talk to you next week. See ya.
Cool Voice Guy: Making business loans simple, this has been the entrepreneur addiction podcast, helping you secure the capital you need, with your host Brock Blake, Dan Bischoff, and Patrick Wiscombe. Heard exclusively at Lendio.com.
Today more than ever small business loans are most needed to get the country up and running again!