The Banker’s Guide to New Small Business Finance—Business Fuel Podcast #80
Does your banker know what he or she doesn't know?
Listen to our interview with Charles Green
The world of small business lending is changing and keeping up has been a challenge for the banker down the street according to Charles Green. Innovative, non-bank lenders are taking a bigger role in small business financing than ever before.
Small business lending expert Charles Green talks to us about what’s happening in the market and what bankers and borrowers, his upcoming book, and what we need to know.
Information you need, the podcasts you trust, this is the PatrickWiscombe.com podcast network. Bringing you interviews with top business professionals and business financing tips to fuel your American dream. This is The Business Fuel Podcast heard exclusively on Lendio.com. And now, here are your hosts, Ty Kiisel and Patrick Wiscombe.
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Patrick Wiscombe: This is the Business Fuel Podcast. Coming up today our guest is Charles Green. He is a business finance professional with over 30 years experience as a commercial banker, mostly funding the small business sector. But before we talk to him, let’s go over your Forbes article Ty.
Ty Kiisel: This article is about 3 things I learned about customer service on an 18 foot fishing boat in the Sea of Cortez. And earlier this morning, I published an article listing 3 reasons why veterans make great entrepreneurs. I met with a group called Vet to CEO out of Atlanta, Georgia. They help active military personnel transition into entrepreneurship. There are specific skills they learn in the armed forces that can make them successful entrepreneurs. They offer those services free to veterans. Anything that helps those people come home from overseas and transfer into civilian life is a great thing.
Patrick Wiscombe: You can read the article on Forbes.com. Just do a search in the upper, right hand side of the screen for Ty Kiisel. You can also see the past articles he has written. Alright, let’s transition to our guest, Charles Green. He is the author of the yet to be published book, The Bankers Guide to New Small Business Finance. It’s good to have you here Charles.
Ty Kiisel: Yes. You were kind enough to send an advanced copy of your book and I think it’s an important book and I’m glad you wrote it. I get the impression reading your book that you think most bankers are not aware of the changes that have occurred in the market since 2008. I just have to ask, how can that be.
Charles Green: We all know what we know. I teach banking through several schools around the country. For the last three years I’ve been asking people if they are aware of some of the lenders that have been around longer than others. Until last week in Philadelphia, no one ever answered that they knew anyone. What happens is we get trapped in our own world and we’re not looking outward much. If I were thinking about banking the way you think about Facebook, I would recognize there are a lot of things there that can tell me about your character which is one of the important tenants in underwriting credit. Trying to associate those two different worlds together was the purpose of the book.
Ty: When you talk to bankers about this, what’s their reaction? Or are they reacting to these changes in the market?
Charles: I advised an innovative lender in 2013 on how to connect with a lot of community banks who are losing market share rapidly. This lender wanted to throw a lifeline out. They were willing to fund and underwrite the loans the banks don’t care about. I talked to 50 different banks and not one was interested.
Ty: You just said something I took out of your book and really love. Most people call this space alternative or online lending. You don’t like those terms. You call them innovative lenders and I really like that. Except it kind of implies the traditional banks are not innovating. Is that safe to say?
Charles: I think it is. In the introduction to the book, I talk about how banks handle cash and account for cash. They have made some startling technologies to enable money to move around the world with transparency for the government with security concerns. But in lending, the only innovation that has changed is the Excel spreadsheet. You can get credit reports online today, but there hasn’t been a lot of innovation.
Ty: The traditional lenders would say that the innovative lenders are making loans that are too risky. And yet, those lenders are able to create profitable businesses out of serving small business owners that wouldn’t be served by traditional lenders. What does that say about the marketplace today and maybe the banks role in the marketplace?
Charles: It’s no different than if you go back 120 years to guys who manufactured buggies, buggy whips, and harnesses. When the Model A when roaring up the street, there was the same skepticism that these things were dangerous and they were going to kill people. But they weren’t, it was innovation. How many people today do you see manufacturing buggy whips? With bank lenders, it’s very regulated. Their inventory is your checking account, your IRA account, your savings account. They have a much lower tolerance of risk. The innovative lenders are honing in on a much more specific metric on what they want to lend to. They are looking at risk as a line item. They collect payment every day so their risk gets lower every day. By the time the first bank payment is due in 30 days, an innovative lender might have collected 20 payments. They are reeling it back in a lot quicker. You don’t have to have a loan officer and different layers of approval. And yet some of these online lenders are making loans of up to $1.5 million dollars.
Ty: I think the biggest dig innovative lenders get in the marketplace is that it’s really expensive capital. Do you think the cost is going to come down to the small business borrower?
Charles: If you have a willing lender and a willing borrower and they come to grips with a fair price, it can work. As a traditional banker, we’ve always had the obligation, under disclosure rules, of disclosing what our cost was called an APR – average percentage rate. The way a lot of these online lenders operate is they’ll have a multi-tiered pricing arrangement. Their interest rate may be a simple fixed rate of 15%. So from the day the money goes out until it’s all collected, that borrower is charged 15% on what’s actually outstanding. But on top of that, many of them charge an origination charge. Those are different than an interest rate, they’re a fixed fee.
Ty: Part of the advantage is instead of waiting weeks or months to get a loan approval, borrowers can have cash in their account in a couple of days. They have quicker access to capital.
Ty: We were talking earlier about how things have changed since 2008. For the smallest business owners, the main street businesses, access to borrowed capital basically just shut off for a few years. You point out a number, a cost to main street since 2008. Would you share that number with us?
Charles: The costs are huge. Without capital, you can not go out and create jobs. Main street got hit pretty hard and they were blamed for the problems. I did an article about how Sears can still borrow money and they’ve been failing for years.
Ty: That blows my mind. I read that piece and did some research into it. Because they own so much real estate, this downward spiraling retailer is able to get millions and millions of dollars. But a profitable and healthy business on main street can’t access $20,000 to buy a new pizza oven or something.
Charles: Last week I made this point to some of the brightest bankers coming up. My message to them is the banking industry has been lending on real estate and become drunk on it. We created this bubble that burst in 2008. There’s an old adage in banking that if you have the dirt, you can’t get hurt. We learned that didn’t always hold up. We’ve been dealing with real estate inflation dollars. You compare that to an alternative lender who advances sums after a sale has been made. These folks have a locked in deal.
Ty: It would seem the factor has the safer bet.
Charles: Absolutely. And yet the banking industry has gravitated into a place where they feel very safe and comfortable. In 2005, a brand new office building opened up at Main and Main in Atlanta. One of the largest legacy law firms moved in there. By 2011, they were already subleasing some of their area out. Real estate is not as important as it used to be.
Ty: This leads into my next question. What’s wrong with the traditional way borrowers are evaluated? And why do innovative lenders look at borrowers with a different paradigm and still remain profitable? Maybe this is also a good time to talk about the FICO score.
Charles: I’m very skeptical about FICO. It was an innovation in and of itself. It was an attempt to create a numerical value from a persons financial performance. It was an attempt to reward stability. The problem is that FICO was really designed for mortgage lending. But it didn’t take long for business lenders to take it up. Too often it was a dumbed down number we could cling to. Most people don’t know that only 35% of the score is whether you are paying your bills on time or not. It values credit card payments because that’s a revolving door that’s got to be paid back every month or over time. That’s more important to FICO that the fact that you’ve got a mortgage you got in 2000 and you’ve been paying steadily for 14 years without missing a beat. You can increase your FICO score by getting another credit card. There are so many irrational pieces to it.
Ty: I think I read somewhere that you said, “The computer geeks of the world are doing it as good, and in many cases better, than 100 years of experience. That’s a bitter pill to swallow for bankers.” What are the computer geeks doing better and do you think banks will ever come around to that methodology?
Charles: Computer geeks are making credit decisions just as well as traditional banks. Their advantage is they have gone to the credit bureau and rented the meta data without anybody’s name attached to it of course. They have all these different metrics and they form a box to say that, “We think these people will pay back their loan.” By using that methodology, they are able to hone in their model to know the acceptable loss rate. It’s working very well.
Ty: Do you think banks will ever adopt that methodology?
Charles: Invariably. It’s got to happen. The SBA just announced this week that for loans under $300,000, they will accept a credit scoring model drive on their platform as a credit decision matrix. If they approve it, they won’t criticize you for your decision. That is huge. Here, the SBA is dragging bankers into the 21st century.
Ty: I really like what Maria Contreras Sweet is doing. She’s making some really good decisions. Let’s wrap up with this. What are the biggest challenges faced by small business lenders and small business borrowers in the next 5-10 years?
Charles: For lenders, it’s going from an Excel economy to a digital economy. We’re also moving from people who had assets of land and buildings and inherited wealth. That’s not going to be as important in the future. The entrepreneurs challenge is getting a grip on the marketplace. Financial literacy is a big thing. They can make burgers and repair your car, but they can’t tell you how much money they made last year. That’s a problem for a small business person. We hope to look forward to start up companies tapping into money.
Ty: I speak to a lot of lenders who say, “It’s not my job to fix your credit.” I tend to believe that maybe it is. Maybe it’s our job to help a less than perfect borrower become a better borrower. Do you think we’re going to see financial institutions get more involved in educating their customers?
Charles: I’m hopeful. I wrote my first book in 1996 which was, The Comprehensive Handbook for SBA Loans. I couldn’t afford to give away all the free advice I was because it was hours and hours of talking to someone who didn’t qualify. But I wanted to teach them how to become qualified. The article you wrote about bankers saying it’s not their job, how would they feel going to a doctor saying, “Your health is not my problem. If you’re not sick, get out of my office.” That line of reasoning is self defeating.
Ty: I agree with that 100%. Your book is not published yet, when will it be available?
Charles: It’s supposed to be released August 25th by John Willey and Sons. There’s already a page about it on Amazon.com.
Ty: If you are a banker or lender and work in this space, this is a book you want. Charles goes into some of the history of why the market is the way it is. It’s easy to read; very digestible. I would go on Amazon today and pre-order the book so when it comes out, you have it. This is a book that is really worth reading. Thanks for being on the podcast today, I really appreciate it.
Charles: Thanks for your invitation gentlemen.
Patrick: We’ll go ahead and wrap up this edition of The Business Fuel Podcast. Remember you can pick up the podcast every Tuesday morning around 9:00 am Mountain time on Lendio.com/blog. You can also subscribe to the podcast in iTunes. Just do a search in the podcast section for Lendio. So for Charles Green, Ty Kiisel, I’m Patrick Wiscombe. Thank you for listening. We will talk to you next Tuesday.
Bringing you interviews with top business professionals and business financing tips to help fuel your American dream. This has been the Business Fuel podcast, with your hosts, Ty Kiisel and Patrick Wiscombe, heard exclusively on Lendio.com