Helping Businesses and Banks Hook Up
Shalinder Kular and his partners own around two dozen gas stations and 15 Subway franchises in Indiana employing more than 100 people. During the financial crisis their Indianapolis company, Hoosier Pete, couldn’t get credit from its regular bank. So Kular, a former accountant at Ernst & Young, turned to Biz2Credit, an online marketplace that matches small businesses with lenders. Since 2009 the New York City-based startup has helped Kular’s outfit land more than $4 million in commercial loans at what he calls “very nominal” interest rates from Borrego Springs Bank, headquartered near San Diego, more than 2,000 miles away.
Biz2Credit is one of a new crop of matchmaker sites that also includes BoeFly, CNF Exchange, and Lendio. The middlemen aren’t lenders and don’t act like traditional loan brokers, who tend to specialize in a single industry. Instead, the sites analyze would-be borrowers’ financial data to assess risk, then funnel their assessments to banks, credit unions, and alternative lenders. The amounts requested generally range from a few thousand dollars to a few million. While the firms make no guarantees a deal will close, they trumpet approval rates of 70 percent to 80 percent, along with the ability to slash the time it takes to process a bank loan from months to weeks. Executives at the four sites say they expect to complete a total of more than $1.5 billion in lending this year, double the amount they handled in 2011.
The middlemen are “playing into a real weakness” among banks, says Sharon Chinn, a practice manager at advisory firm Corporate Executive Board. Prior to the housing bust, many small business owners used their homes as piggy banks to fund operations. So “a lot of banks haven’t, for a very long time, needed to invest in support and advice infrastructure for small businesses,” says Chinn. That may explain why lending to small businesses has been contracting for four years straight, while lending to large companies began showing signs of recovery in 2011, according to data from the Federal Deposit Insurance Corp.
Biz2Credit co-founder and CEO Rohit Arora says his company’s software streamlines the origination and underwriting process for borrowers and lenders. When a company requests a loan through Biz2Credit, the site pulls and crunches data from sources like credit bureaus, payroll and accounting service providers, and the Internal Revenue Service. Then it suggests a handful of matches from its 1,100-plus databank of lenders. The borrower and lender conduct the negotiations, from initial request through closing, via Biz2Credit.
For banks, the attraction of going through a site is that it lowers the cost of acquiring new customers. “It’s hours and hours of time and interruptions in trying to develop a borrower yourself, as opposed to one just being presented to you,” says Jim Mueller, a vice president at Borrego Springs Bank, which started using Biz2Credit in 2009 and has funded about 15 deals through it.
While business models vary slightly from outfit to outfit, most middlemen make their money by charging borrowers and lenders fees for using their site, as well as for extras, such as polishing a loan application. Biz2Credit typically takes a fee equal to 1 percent to 4 percent of the loan from the lender. New York-based BoeFly’s co-founder, David Nayor, says “the problem with taking commissions on deals is that it drives up [the lender’s] cost of origination.” Instead, his company charges borrowers a fee starting at $149 per loan request. Lenders can access full documentation to three deals for free; after that, they pay $55 a month. At CNF Exchange, based near Tampa, borrowers must pay $99 before they can contact interested lenders. Salt Lake City-based Lendio sells leads from $40 to $300 per referral to its nearly 200 lending institutions, according to co-founder and CEO Brock Blake.
Paul Merski, chief economist at Independent Community Bankers of America, a lobbying group that represents 5,000 banks, doesn’t think the matchmakers will increase lending significantly: “Banks have pretty robust liquidity to do small business lending. Their No. 1 complaint is new regulation, and their No. 2 complaint is there’s just not enough quality loan demand right now.” National Small Business Association Chairman Chris Holman disagrees, arguing there’s still “a capital void” that makes the go-betweens “essential” now.
BoeFly’s Nayor witnessed the contraction firsthand when he worked at United Western Bank, which is now defunct. He launched BoeFly in 2010 and says its more than 2,400 lenders are financing deals “that we may have otherwise thought couldn’t get funded,” including new restaurants, hotels, and medical offices. Former bank underwriter Michael Mack started CNF Exchange near Tampa in 2010 because he saw “a significant need to help companies that the banks just weren’t treating right.” He says 590 lenders use the site today, and he expects to help them make around $60 million in loans this year, up from $27 million in 2011.
Biz2Credit is now expanding abroad. Delhi native Arora launched a sister site in India in February and plans to launch in Brazil by summer 2013. The rise of the matchmakers intrigues Matthew Gamser, who heads the SME Finance Forum at the International Finance Corp., the World Bank’s development arm. “For emerging markets, this model has enormous potential” to improve credit access for small businesses, he says. “Smart guys like Rohit [are] very important players.”
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