Steven Mandis was working on a book two years ago about whether Goldman Sachs put profit above principles when he decided to get into small-business lending’s version of subprime: a corner of Wall Street where brokers push loans with interest rates that can climb higher than 100 percent to dentists with bad credit and pizzeria owners behind on their bills.
As Mandis, a former Goldman Sachs banker, scouted for lenders to invest in, he saw offices that looked like boiler rooms, with salespeople furiously working the phones. The co-founder of one firm he visited had been sentenced to probation for insider trading.
Mandis was not deterred. Although some competitors may take advantage of borrowers in distress, he says, he’s driven by something loftier than profit. “There’s this obligation to try to do something to solve a problem in America,” he says. “Providing capital to people to grow their businesses and to give jobs to people is, I think, a good thing.” Mandis began by investing in two lenders, then started his own firm, Kalamata Capital, late last year.
Borrowers who turn to the costly loans often have bad credit, little collateral, or maxed-out credit cards. Taking out high-rate loans they may not be able to repay can lead them to bankruptcy instead of growth. “This is like a payday loan for a business,” says Pat Fossett, a lawyer in Corpus Christi, Texas, making a comparison to costly cash advances for workers. “Unless they’re making a large profit to pay that high interest, they’re shooting themselves in the foot.”
Small-business lending has yet to recover from the financial crisis. Loans of less than $1 million are down 22 percent from 2007 because of tighter lending standards, Federal Reserve research shows. Even as banks have pulled back from funding businesses directly, Wall Street investors have funneled at least $1.7 billion in financing over the past two years to the high-rate lenders rushing in to fill the gap, according to data compiled by Bloomberg.
Mandis says he’s funding Kalamata with his own money and chose the name because of his family’s Greek heritage to evoke an olive branch extended to customers. He wants to make his company the first choice for small-business owners when they need financing. Mandy Calara, who runs the Forever Yogurt frozen-yogurt chain in Chicago, says his Kalamata loan worked out. He borrowed to cover payroll and rent in November when harsh weather kept customers home. Calara says he found Kalamata through an online service called Biz2Credit and doesn’t remember the terms of his deal. He didn’t have time to apply for a bank loan. “It’s sort of the best of the bad loans,” Calara says. “It was still pretty aggressive.”
For all Mandis’s good intentions, it’s hard to come off as a nice guy in the business. Sheila Stiles was one of Kalamata’s first clients. Her family firm, Goins Waste Oil, has been collecting used motor oil from auto shops in Tennessee and turning it into fuel for more than 60 years. With sales dropping, Goins took a Kalamata loan in November to avoid layoffs before Christmas.
Goins borrowed $122,000, agreeing to pay back $165,920 in about 11 months, according to a copy of the contract with Kalamata. Although Stiles says she was aware of the terms, they turned out to be more onerous than she had thought. Goins furloughed employees so it could afford the payments that Kalamata automatically withdrew daily and then weekly from the company’s bank account, she says. “The way they present it, it’s so tempting, especially when you know you’re in such a bind,” says Stiles, the company’s treasurer. “He’s taking advantage of the small-business owners because of the interest rate he charges.”
The Goins contract shows a rate of 36 percent. When calculated as an effective annual percentage rate—which takes the timing of payments into account—that doubles to 72 percent, says Marco Lucioni, a vice president at nonprofit lender Opportunity Fund. The Truth in Lending Act requires that the effective rate be stated on loans to consumers, but not to businesses. “Every time you make a payment, you’re reducing the amount of money you had available to work with,” Lucioni says, so you are making the same payment on what is in effect a smaller loan.
After Stiles and Mandis were interviewed for this story, Stiles complained to Kalamata, which said she could repay the loan more slowly, lowering her payments by about $1,000 a week. Kalamata did that voluntarily and “without imposing any penalty,” Mandis says.
Kalamata sued the owner of a New Jersey liquor store for defaulting after borrowing $100,000 in February. The annual interest rate on the eight-month loan, 17 percent in the contract, is effectively 53 percent, Lucioni says.
Mandis says the higher rates are justified because the businesses are risky, post little collateral, and can’t get the money elsewhere. What he does isn’t subprime lending because the term refers only to loans made to people, he says, and Kalamata’s customers are businesses. Sometimes the money he advances isn’t really a loan at all, he adds—it’s financing. “When you put it in a percentage, it sounds big and eye-popping, but you need to have a relative sense of it all,” Mandis says. “Should we let that company just go bankrupt … or should we have these alternatives?”
Kalamata’s rates are relatively low for the industry, according to Rohit Arora, co-founder of Biz2Credit, who says rates have topped 200 percent. Jared Hecht, a co-founder of Fundera, an online loan middleman that’s planning to work with Kalamata, says that as the industry matures, “business owners should theoretically be able to run a competitive process and get the lowest rates.”
After 12 years at Goldman Sachs, Mandis left in 2004 for a hedge fund. In 2009 he enrolled at Columbia University, where his work for a Ph.D. in sociology formed the basis for his 2013 book, What Happened to Goldman Sachs. In it he describes how the firm adopted a legalistic approach that enabled it to make more money. “The sense that one is doing God’s work or serving a higher purpose can easily transmute into a holier-than-thou attitude and an excuse for any behavior,” he wrote.
He also teaches at Columbia Business School and has tutored Harlem teenagers. “If I’m choosing something to do, there has to be some intellectual curiosity related to it, because that’s how I’m driven,” Mandis says.
Kalamata is still a small business itself, with two employees in Bethesda, Md. Mandis says it has made $6 million in financing. Kalamata’s website features a family history and a photo of him in a sweater and tie. “What I thought I would do with Kalamata is say, ‘Here’s who I am. I’m a real person,’ ” he says. “You have to have the values and the brand that people will come back to.”