FICO SBSS Webinar Synopsis:
A recent Wall Street Journal article covered how top franchise brands, SBA lenders, and business owners are using new strategies to assess “fundability” before the on-set of the lending process. The FICO SBSS is the tool to accomplish this assessment and saves time and frustration.
This complimentary webinar occurred on Wednesday, April 16th at 2:00 pm ET and covered everything you need to know about the FICO SBSS. BoeFly, the online marketplace connecting business borrowers and lenders, assembled a panel of experts to help educate and address questions you may have about the SBSS.
Recorded Webinar on FICO SBSS
Topics discussed include:
-Why SBSS is relevant
-How smart Franchise brands are using SBSS to support growth
-How lenders leverage SBSS for SBA lending
-What the SBA lender new SBSS requirements are
Jennifer Durham, VP of Franchise Development, Checkers Drive-In Restaurants
In 2001 Jennifer Durham joined Checker’s and Rally’s. For more than a decade, Jennifer has worked her way up within Checkers & Rally’s to lead the Finance and IT departments, and today, she heads up the Development team. With a solid background in what it takes to grow profitable restaurants, Checkers & Rally’s has jumpstarted unit growth, delivering flexible building options, improving site selection strategies and ROI’s that attract both existing and new franchisees to growth. “It’s a privilege to help entrepreneurs realize their restaurant dreams by opening successful restaurants. I love the big flavors and great value that make our food so unique. Try it once and you’ll know what it means to load it big. No diets allowed!” Jennifer got her masters and undergraduate education at the University of Florida. She is a Certified Public Accountant.
Morgan Johns, SVP SBA Lending Group, Conestoga Bank
Morgan has been Senior Vice President at Conestoga Bank since November 2009. Conestoga Bank is a privately owned community bank with 14 branches located in the Philadelphia area. Morgan is responsible for developing the SBA Lending production primarily in the Mid-Atlantic region of Pennsylvania and its contiguous states but is also providing franchise financing outside of the Bank’s footprint. He brings over 20 years of commercial lending experience along with over 15 years of SBA lending experience utilizing the SBA’s 7a and 504 programs. Prior to joining Conestoga Bank he served as a consultant to the largest CDC in Pennsylvania. Morgan also previously managed SBA Lending for Sovereign Bank’s Mid-Atlantic region where he took SBA lending production from less than 10 loans annually to one of SBA’s top 25 lenders nationwide.
Kris Roglieri, Founder, Commercial Capital Training Group
Founder of Commercial Capital Training Group which is a nationwide Commercial Lending Broker School . Kris has over 21 years of experience in commercial lending with having founded two commercial lending companies, and also The Finance Marketing Group, a digital marketing firm concentrated in the industry of finance.
David Smith, Lead Consultant, FICO
David has years of origination consulting experience with FICO. He engages in strategy discussions with financial institutions as small as a $100MM in assets up to top 25 US Banks. The Small Business Administration has relied on his expertise to assist in the training of banks centered around FICO’s SBSS scores and the LiquidCredit decision engine technology platform. David is a regular speaker for FICO for various educational webinars available at www.fico.com. When not working for FICO, David enjoys producing and directing videos and short form documentaries.
FICO SBSS Webinar Transcript
Mike Rozman: My name is Mike Rozman of BoeFly, and I’d like to welcome you to the webinar today. The purpose of today’s session is to introduce you to the FICO SBSS score as well as BoeFly’s bQual solution, not to focus on sales pitch but rather so you’re better informed about the score itself and why it matters and how smart lenders, franchisors, brokers and small business owners are and will be using the score to better achieve their goals. This is a wise group of folks, right? Lenders, franchisors, brokers and business owners like franchisees. It’s a wide audience and each of you have your own goals. And we’ve brought together an expert panel to help us all gain perspective.
Just a few quick items before we introduce our panelists. First, I’d like to thank our friends at the International Franchise Association and Franchise Times for helping spread the word about today’s session. Both organizations serve an important role in the market, and we’re so pleased to have their support. Also, a special welcome to those BoeFly members on the call today, those brands, lenders and brokers. You’re all the heart of BoeFly and we hope this session serves you well. I certainly want to welcome those new to BoeFly. If you’re unfamiliar, BoeFly’s an online marketplace connecting small business borrowers with more than 3,600 lenders, and we’re happy to schedule a time for you to learn more about how we work. Go ahead and just chat us your contact information and we’ll go ahead and get in touch separately. We are recording the session and will email you out a link as soon as it’s available for online viewing. You are on mute, but we very much encourage you to chat in your questions throughout the session.
So we want to get started and we’ll go ahead and mention each panelist by name, but first we want to go ahead and talk about this SBSS score, this FICO SBSS score. It’s been around as decades as a tool to help lenders make more accurate credit decisions. But thanks to a new rule by the SBA and the work we’re doing here at BoeFly in alliance with FICO, we believe that the score is gonna explode in relevance and not just for lenders.
To help us understand this issue, I’m pleased to be joined by David Smith, a client consultant at FICO; Morgan Johns, SVP of SBA Lending at Conestoga Bank; Jennifer Durham, VP of Franchise Development at Checkers; and Kris Roglieri of Commercial Capital Training Group. And as we start this discussion, I want to first ask a quick poll question of you, the attendees. Tell us what hat you’re wearing today? Are you a lender, a franchise or a business owner franchisee or broker or something else? And the idea here is we really want our panelists to understand who they’re speaking to today to make sure they’re directing their comments accurately.
And, David Smith from FICO, thanks for being here and we’re thrilled you could be a part of this and we’re so happy to be working with your – with you and your company and the great team of people you have there. As the folks answer that question – and we’ll leave that open for another minute – get us started. Tell us about SBSS from a very high level.
David Smith: Sure.
Mike Rozman: And maybe start with a simple question. Tell us about FICO and your company.
David Smith: Well, FICO – everybody knows the FICO credit score, right, but we’re much more than that. We not only build credit scores for the three consumer bureaus, but we build the tools that we build the scores with. We build – we have one of the world class-leading decision engines. We do optimization. Anything analytic in its space we do. And odds are if you get a call from your bank about potential fraud on your credit card, the odds of it coming to that decision to call you coming out of a FICO solution called Stopping Fraud, it’s in the 90 percentile.
Mike Rozman: So your company builds these scores and so – thank you for that, David, to get us started and actually let’s take a quick departure just to share the results of that question of who we’re talking to today. So nice diversification. Not many business owners so we know that as far as the audience today but good diversification between lenders, the largest concentration, brokers that we’ll talk to and franchisors we’ll talk to. So, David, FICO is the leader in these credit scores. What’s the goal of SBSS? Why was it built and how is it primarily being used?
David Smith: Sure. The goal of SBSS was to give customers, small- to medium-size customers an application risk score for the small business owner. And when I say application risk score, this is – the score compares small business owners seeking new credit to other small business owners that have sought new credit in the past because we’re FICO. We have a FICO score. That’s a generic score. Anybody with credit has some sort of score, be it a bureau score like a DNB Paydex or an Intelliscore or whatever. But we saw a niche that said hey, once you get credit, your credit profile changes. So to keep it simple on the consumer side, if you’re a 720 FICO and you go out and buy a car, your credit profile changes. Your credit habits are going to change. So what we did on the small business side was say okay, if a small business owner has a credit profile of X, how did other credit profiles of X perform once they received new credit? And so we segmented out some models and now in our 7.0 iteration we have 79 different scorecards that look at different lines of business and different data sources that can compare on a subpopulation level different credit profiles to say this is how other credit profiles of this type have performed in the past. And we assign what we call a bad rate or a 90-day delinquency to that score so you run the –
Mike Rozman: So fundamentally I think what I heard from your comments is your score – and this is particular application of risk score – this score, SBSS score is helping in this case credit grantors, lenders or someone else making a credit decision to say how does this score inform or predict how this person will perform on the obligation I’m thinking of extending them? So it’s a decision tool to help you make a decision.
Mike Rozman: And how do we know it works?
David Smith: Well, we know it works because A) our development sample says it works strongly. Secondly, we’ve gone out, every time we develop a new set of scorecards – we’re on our seventh iteration of this so SBS of seven – we pick a few sample customers of our sixth score and we ran the models on their portfolio and compared the previous version to the new version. And every sample that we’ve pulled – these are large 100,000 samples – says that it’s rank ordering more effectively. In other words it’s separating the good accounts from the bad accounts better than the previous model and better than just using the Business Bureau score or just using a consumer score for the principals in the small business.
Mike Rozman: Got it so we’re – you can statistically show that it works, right, so if a decision-maker, let’s say a chief credit officer, says “My bank’s thinking about bringing the score in. Convince me,” and the answer is you’ve got plenty of presentations to convince them because the data supports that, that in fact it helps a lender make a better yes-no decision.
David Smith: Right.
Mike Rozman: How high does the dollar amount go up? Can you use this on a $600,000.00 credit?
David Smith: Yeah, you can use it up to a $1,000,000.00 credit and, of course, the lower dollar values you’re gonna rely on it more heavily than the $1,000,000.00 values, but it is validated up to $1,000,000.00 on the term loan side and up to a quarter million dollars on the leasing side because we have term loan line of credits, leasing and business card.
Mike Rozman: Okay, perfect so I want – and this is really interesting stuff and I want to transition to Morgan in a second here, but I don’t want the franchisors to meaningfully glaze over says, “Well, it sounds like a banker discussion.” It’s not and we’re gonna get to that or I should say it’s important to understand how the bankers’ view of it is. But what we believe is really interesting and why we have Jennifer from Checkers on the line is to think about how we brand this thinking through leveraging this same score in light of the fact that banks are using it, so we’ll get to that in a second. David, just to wrap up on this topic, we know that SBA has made a new rule as of January 1st that every loan under $350,000.00 – and they’ve been using this score prior to that point as well – but every loan under $350,000.00 is required to clear a hurdle point, meaning at some support threshold.
David Smith: Right.
Mike Rozman: And we know it currently as 140 but that can change. Does your score only work for SBA loans?
David Smith: No, no, not at all. It’s – no, it works for – we’ve got banks. We’ve got credit unions. We have independent financiers. We have captive markets, lenders and leasors using the solution. We have banks as large as KeyBank, USBank, Fifth Third Bank, Bankco Santandar.
David Smith: And we have banks as small as a six-branch bank in Texas using the score so …
Mike Rozman: Great, great. No, that’s perfect. Soon I want to loop back and think about what would – how would a bank start leveraging these scores in their decision process. Before we do that I want to – we introduced this concept that the SBA is now requiring this score for every loan that gets an SBA loan with in the 7(a) Program to clear a 140 if it’s below $350,000.00. Morgan, tell us has your bank historically used this SBSS product and also what is the implication on the SBA side for you?
Morgan Johns: Well, in the past we have not. We have not used any kind of a scoring system or a model for SBA loans. But as we, obviously, saw this coming as of January 1 and now that it’s here, we’re definitely looking for ways to leverage it into better efficiencies, turnaround time, responsiveness to actually all of the members of your audience, whether it’s franchisors, franchisees, brokers. It’s applicable to all three.
Mike Rozman: Okay, good and so one of the things you said in that comment is we’re thinking about it as it relates to efficiency, right? So many, particularly on the franchisor side, these smaller investment brands have heard for a long time well, the bankers I meet, they say they’re interested but they really want to do larger dollar deals. As a lender, tell me the difference in underwriting a $250,000.00 deal and a $700,000.00. Is it a meaningfully different exercise? It’s similar? What do you experience there?
Morgan Johns: Our experience is that we’re spending pretty much the same amount of time regardless of the loan amount. We can all discuss anecdotally and historically that we have done an easy $2 million deal and a very difficult $200,000.00 deal in terms of processing time and trying to get through the SBA process as we know it. So I think the scoring model allows us to really shorten up the process on the low end under 350 because I can only speak for our bank because, obviously, all the banks that are involved in the program doing SBA can use this as they see fit. But from our standpoint, we do SBA loans outside of our geographic market. We do particularly franchise lending. We can go nationally and we’re actually looking to diversify our risk by doing some smaller loan amounts, meaning it’s gonna bring us into the market of the under 350s, so we need to learn how to use this model and this scoring system to generate volume and do it efficiently.
Mike Rozman: Good and so one of the things when the SBA creates a new rule change, they don’t often – nor do I believe are required – to state why they set up a new rule. That being said, one of the elements that they have publically spoken about – I was at a Small Business Lending Summit in Washington a few months ago that was led by NADCO. And one of the things that a senior SBA official said was that they are frustrated that more deals are happening under SBA at a larger dollar point, right, and they specifically own up to this fact that part of it this new higher loan amount. You can do a 7A up to $5,000,000.00 which makes bankers happy. But it also has created this unintended consequence of fewer small dollar deals happening, and they specifically called out this cost of origination is this cost of underwriting the small dollar deal. So I think, Morgan, I heard the official say that this is why they did it. Does that resonate with you that they want to get smaller deals into the SBA from your perspective?
Morgan Johns: Yes, yes and from the banker’s perspective I’ve been at large banks, small banks in my career. And I can tell you in light of the pressure for volume, for profitability, for bottom line income to the banks, a lot of them tend to gear towards larger deals because more bang for your buck. And I think by incorporating the SBSS score, now they’ve given banks, and especially smaller banks which I’m a part of right now, smaller banks the opportunity to in some ways level the playing field and at the same time allow us to do smaller deals without that hanging over our head, the idea that they take too long. The processing takes too long and that’s why we don’t do them. I think they’ve done a good job of kind of removing those roadblocks as much as possible. And then it’s up to the bank to decide how they want to apply it in their particular model.
Mike Rozman: Good so I agree with what you said from my perspective for my two cents, so we think the SBA in part wants to remove these roadblocks. So now you hear in very simple terms that every loan under $350,000.00 that your bank wants to approve and get SBA financing that it needs to clear this 140 hurdle. And if you were to think of this at the race in a perfect environment, you’re finding out from SBA whether it cleared the hurdle in essence after the race has been run and you’ve invested lots of time. What would it mean for your business to be able to get that score at the front end? Is that something that would be compelling for you?
Morgan Johns: Yes, absolutely. That’s – quite honestly, that’s the reason of my particular interest in my organization of what we’re trying to accomplish is that by allowing us to get whether it’s a soft score or we end up going to BoeFly giving us hard scores and incorporate that into our process, it allows us to get through our pipeline volume much more quickly and find the deals that we really want to do and then spending our time on those instead of doing ten deals and being halfway, you know, ten deals that are halfway done. I’d rather do six deals that I know can be done.
Mike Rozman: That’s great and Morgan introduced this concept that BoeFly will be making available to its lenders and other constituencies the ability to access that score, and the only way we’ll do it – we’re able to do it is through our close partnership with FICO. So the ability for Morgan, for you and your bank who historically is a small lender who had not adopted scoring for you to leverage this score when you need it to assess the deals that you bring in your funnel we think is important and it’s good to hear. Obviously, we’re pleased to hear that it’s important for you as you think about better processing.
I wanted – I’m anxious to bring Jennifer and Kris into this conversation but I want to jump back to David from FICO real quick. We got an audience question that came in, and really when you start talking about numbers and digits, it really begs the question “Hey, you guys have thrown around 140 a couple times. What’s that mean?” Can you give us some perspective on what a 140 means?
David Smith: Yeah, the score ranges from theoretically you’re see you’re a 350. You rarely see a score over 300. A 140 represents about a 30 percent delinquency rate. A rate 140 is a very low hurdle to jump in the greater scheme of lending. Most of our customers have set their low cutoff at 180, maybe 170 if they’re very tolerant of risk, if their tolerance is low. But at 140 is … the SBA used the phrase “it’s a fog-to-mirror test” just to see if the underwriter was alive when passing the loan onto them.
Mike Rozman: Right and I think if you were to go ahead and say I’m gonna have a hard decision rule that knocks out a class of my applicants, we might agree that setting a low bar as they start the program might be totally appropriate.
David Smith: Yeah.
Mike Rozman: It might not be the bar that Morgan and his bank would want to set to auto-decision.
David Smith: And that’s the point. SBA wants to put that on us back to the lenders, so they don’t want to inhibit. If the lender wants to lend at a 140, then the SBA says, “Okay, we’ll take it.” But a 140 represents a recent bankruptcy. That’s the type of accounts that will come through a 140, so it’s a very lenient generous cutoff.
Mike Rozman: Good so thank you for that and so, audience members, as you have questions like what’s a 140, send it over. The screen we’re showing now is actually an extract of the BoeFly bQual solution. And fundamentally bQual is intended to allow a current or prospective small business owner get education about how of what their score is. So we really borrowed a play out of the FICO handbook that said – or playbook that said hey, our consumers want to find out how banks are judging them. And so they built a really compelling product that I’ve used myself, Myfico.com, and I can go there to buy my consumer credit score. Our goal in building bQual was in part, not exclusively but in part, to educate that small business owner about what their score is. And the slide we have up shows, very consistent to David’s comment, hey, here’s a 206. Well, 206 indicates a lesser risk for a lender and, sure enough, we do point out that the score of 140 is the hurdle. Frankly, 50 percent of all loans at 140 will perform for a lender. Inversely, only 50 percent won’t perform, right.
So we with this bQual solution really want to educate the end small business owner, which now I think should take us over to Jennifer. Jennifer from Checkers, thanks so much joining.
Jennifer Durham: Thanks, Mike.
Mike Rozman: We just spent the last 20 minutes with FICO and bankers talking about credit scores. Now I know you pull scores or historically will pull scores as a hard credit pull to decide whether you want to work with a new franchisee. Tell us about that.
Jennifer Durham: Yep, yeah so as part of our review of any franchise applicant, we do a two-step review. We look at the operation experience of that franchisee, their experience specifically within the food category. And then we also look at their financial capacity. We have exclusive rights and development agreements within our system. So before we set that amount of restaurants in that exclusive territory, we look to confirm and basically serve to support the banks in terms of their underwriting decision as to what amount of territory we’re willing to tie up for that perspective franchisee. And we do do a hard credit pull and background check as part of our evaluation financial consideration in that process.
Mike Rozman: Good and so is that hard credit pull is very squarely intended to answer questions that you have. What we were just speaking on with Dave from FICO this idea of in our case with bQual allowing the candidate or franchisee to become educated. Tell us – we’re gonna bring up a slide of your – what we’re calling your bQual portal in essence where a candidate can go to find out if they qualify for financing for Checkers. What do you think of this? Why have you incorporated this in your process?
Jennifer Durham: Well, for two reasons really. We have franchise prospects that are looking at developing and growing with our brand that are new to the brand. In some cases they may be hesitant or reticent to make that application, not understanding whether or not they would in fact qualify for financing. With respect to the other population and the other reason, I have existing franchisees in my system today that are strong operators, strong performers. We talk to them about growing additional restaurants and very often the response I get back is, “Well, I’m not so sure that I’m gonna be able to secure financing.” They believe that it’s more challenging to obtain it. And certainly if we were talking to them in 2009, that would very much be the case. But we now have tools such as bQual that you have shown on the screen here as well as your BoeFly tool to match the right franchisees with the right lenders. And I think that this takes some of the questions out for both prospects and for existing franchisees. And that’s why we see it as a real nice value-add for both groups.
Mike Rozman: Great. That’s real helpful. I want to show at least one more slide of in this case I want to show the input slide. And I think maybe this is just to get your perspectives on, Jennifer. When we designed this bQual solution, we really wanted it to be user friendly and give visibility where someone is, and it’s intended as a five- to seven-minute input process. Use it – and we’ve chatted about this before, Jennifer, as hey, you guys invest your brand, invest a lot of money and a lot of resources in finding a candidate. For instance, at an expo you guys will historically – we’ll see you now and again at expos. If someone were to come by your booth and ask, “Well, gees, can you help me understand if I can get financing?” how does that help you differentiate yourself? And I know this is new, right, so you haven’t been at the next expo with this, but what do you expect it’s gonna do for you in your discussions and why does a simple user interface, why is it important?
Jennifer Durham: Well, as a franchise, there are a variety of different kinds and there’s thousands of different franchises to choose from. When you’re at an expo, it’s all about how you do differentiate yourself and you represent the brand that you’re there to present. Our particular brand is very high-touch, very much in support of the franchisees. That’s part of the reason why we’ve been named one of the top franchisees from a satisfaction perspective, and it’s because of the level of service that we provide to our franchisees and the support that they expect from us.
And this tool and this, you know, the resources that we provide around financing are just one example of that. I think as you’re having a conversation with a prospect, it allows you to demonstrate the type of support that you’re willing to do and how you walk through what could be a very foreign concept to them in terms of how they go about getting money. Some folks it’s very easy and they’re very comfortable and familiar with it, but there’s plenty of candidates that need that additional assistance and support, and I think that this tool and making it user-friendly, making the interface easy to use is one of the ways in which we can provide that service to them much the way that we would a site selection service and the real estate resources that we have here or the construction support that we provide with the construction manager through their development process. It’s just, again, another example of the way in which we support them.
Mike Rozman: That’s great. Thank you, Jennifer. And, Kris, you run an organization that in part trains loan brokers to be successful in their pursuits, and you’ve been active with BoeFly. We’ve always enjoyed working with you. This solution we’ve just heard of – we just heard from Jennifer saying it’s the ability to give a candidate, in this case candidate or even existing franchisee who wants to expand, clarity that they’re in play, that the markets aren’t still frozen, that in fact they could be prequalified. How are you thinking about this and how are you thinking about positioning it with your folks that are investing to get trained by you?
Kris Roglieri: I’m glad you asked. I think this is really gonna change the game as far as both from the lender perspective and the broker perspective. I, myself, own two private lending companies in the small business space as well. I think this is gonna spread into the private lending space, and really if you analyze a loan broker and a lender relationship, it’s all about time and efficiency kind of back to what Morgan said. From a broker’s perspective, when they get an applicant in and let’s say they purchase this score, it’s gonna tell them a lot of information up front without spending a lot of time. More so some of the brokers out there that are diversified in different products so not just SBA but let’s say some of the merchant cash advance products or future revenue-based type financing products. It’s gonna let them know if they have a low score or below a 140, well, maybe we’re gonna have to go to a different product to kind of try to get this applicant financed or if it is a 140 or above a 140, well, great. This is a great SBA candidate. So I think it’s gonna allow them to prequel applicants much, much better.
And then from the lenders’ side I think and I know from myself being a lender, it’s gonna be great to know kind of – it’s gonna be good to assess the quality of the applicant the broker is bringing me without a lot of paperwork. So in other words, if we require brokers to have this score, we can asses and I think an SBA lender can assess, too, I’m gonna spend a lot of time on this transaction or I’m not gonna spend a lot of time on this transaction. So I think it’s gonna cut down on, again, it’s gonna cut down on time and it’s gonna improve efficiency both from a lender perspective and a broker perspective because a lot of times there’s a lot of disconnect, I think, between brokers and lenders and lenders and brokers. And that’s largely in part because the broker doesn’t understand the lender’s underwriting parameters, and a lot of times the lender doesn’t understand the conditions surrounding the applicant. So I think this is really gonna streamline the process from both ends.
Mike Rozman: That’s great, Kris, and like any good loan broker, Kris is quick to pat his banker friend on the back of making a good point so, Morgan, hopefully you picked up on that and you’re gonna be quick to return Kris’s calls. What we heard from Kris on this idea of – and actually I want to steal Kris for one more moment. The idea of Morgan pulling the score and accessing the score is something that we’re excited to bring to the market, and we’re gonna be rolling this out to allow brokers to access the score as well.
This brings up an interesting point and it’s this idea of a hard credit pull and soft credit pull. There’s a lot of perception around this. I suspect many of your brokers and their end clients go “I don’t want to get my credit hurt by getting pulled lots of times.” And I’m not gonna guess on exactly how the fight goes forward, gets generated. We can obviously ask David in a second on part to get at this. We do hear in the market that multiple pulls or multiple inquiries does impact it. Is that something you hear from clients? And we’re gonna clarify exactly what’s a hard pull and what’s a soft pull in a second, but do you hear that from clients and from brokers?
Kris Roglieri: We do. We do and it’s kind of a rock and a hard place from our perspective because we teach and educate the brokers that come to our training on, No. 1, proper broker etiquette and interacting with a lender but also kind of prequalifying deals upfront to basically have higher closing ratios and to submit better deals to the lender relationship. So a lot of times we do. People will provide feedback or graduates will provide feedback on the applicant was kind of hesitant of their credit being pulled more than once. But like I said, a lot of times a broker has to pull credit because they have to decide which lender to send an applicant to, especially a lot of loan brokers that have a diversification of products. So to answer your question, yes, we do hear that.
Jennifer Durham: And I would echo that, too, from the franchisor perspective, Mike, that applicants because they know – either they’re evaluating several different brands and/or they know they’re gonna be looking for financing. Adding, in our case, the application process and adding that is something that we hear a lot from prospective franchisees.
Mike Rozman: That’s great, Jennifer, and thank you for adding that. And we hear it when we’re at expos or when people first turn to BoeFly to start their financing request. Just I hate to not ask, David, what are your comments when you hear a professional broker training executive or VP of Development from a franchisor and online marketplace all saying that we understand the perception that people are anxious about these multiple inquiries. Do you want to calm us down? Are we right on target? What should we be thinking?
David Smith: Yeah, the caveat out there. I do not work on that side of the fence of FICO. I don’t build FICO scores but I’m knowledgeable because that’s what we do. But, yeah, there’s a fifth reason code that the Dodd-Frank regulations sort of mandated, and the fifth reason code is if multiple inquiries have affected the FICO score, you’re gonna see that reason code as part of the consumer bureau file. So you know if a ton of pulls have been made on that person’s credit because that’s one indication just out upfront you know, hey, people have been pinging this person for awhile. But, yeah, it takes – there are different rules around that. It’s something to be aware of but not something to panic about because it’s really not gonna plummet your FICO score. It’s just gonna ding it so …
Mike Rozman: And part of this is also, I think, from Jennifer’s perspective or Kris’s client’s perspective is managing that perception of their client base. And, frankly, if they are concerned about it, what we want to do is avoid accentuating it. And one of the things that we were really thoughtful and you were great and your team was great in helping us make sure that as we allowed Jennifer’s candidates or franchisees and Kris’s clients secure their own score for their own education, not for approval process …
David Smith: Right.
Mike Rozman: … but for their own education. That’s a soft credit pull and it doesn’t impact it at all. Now, if Morgan is gonna move ahead or as Morgan moves ahead and starts pulling scores to help him make a better assessment decision, that would be a hard credit pull. Morgan, is that something you hear? I want to ask is that something you hear from your clients? Are they thinking about it and, frankly, do you just have to work through it and remind them that it’s important for you to make a decision?
Morgan Johns: Yeah, for us I think it’s a matter of educating the borrower and we try and get that upfront as soon as possible. So understanding their trepidation with what they’re gonna go through, we’re trying to – again, it goes toward the efficiencies and paring our pipeline down to the deals that we really can get done. We’re trying to tell them we’re gonna pull credit score, but at the time we do that, we hopefully have enough information that we’ve given them an indication, a term sheet, a pre-qual letter that says basically as long as we don’t find any really red flags, we’ve seen enough information that here’s the deal. This is what we want to do for you and in return to finish it we need to pull your credit and do a couple last-minute, you know, tie up loose ends. And barring any red flags on the credit report, we should be able to continue processing the deal.
Mike Rozman: And I think that’s something great, Morgan. Thank you. I think that’s something that we think and hear about in our team at BoeFly as we engage with candidates. We let them know or franchisees or business borrowers, whomever the case is, that bankers on BoeFly are not authorized to pull credit until the borrower has specifically granted them authorization to do so and nor would we recommend a borrower do that until they’ve received a term sheet that’s relevant based on self-reported information.
Morgan, I think I want to kind of go back to we talked about you accessing scores to help you more efficiently assess someone at the beginning of the race or at the post at the end of race and we like that. Now I want to talk about a growth opportunity that you referred to in your earlier comments about the idea of growth. You want to grow beyond your geographic footprint. You’re willing to go around the country, for instance, when you find a good franchise brand. You want to support that growth. The slide we have us says – and this would be what a Checkers candidate or existing franchisee would see. You’ve been prequalified for financing by a lender on BoeFly for Checkers. The ability for you to connect with maybe it’s an existing franchisee adding a new unit, you have loan officers out there kind of beating the bush to find borrowers. What will it mean for your business to be able to find qualified people? And when I say qualified, that they’ve cleared the key hurdle that you care about whether it be SBSS or FICO or brand or equity injection. What does it mean for your business?
Morgan Johns: Well, it’s huge for us because we’re, again, speaking from point of view of a smaller bank but with really big goals, this allows us to reach out and be more proactive in terms of getting to the perspective borrowers that we want to target based on an SBSS score or FICO score, a little bit more objective benchmarks that early in the process really allow us to proactively contact borrowers, prospective borrowers. So we, again, and it’s my mantra I guess for today is that we’re trying to pre-qual people as quickly as possible so that we’re dealing with people we know we can get a deal done. And for us it’s all about responsiveness, timeliness and this allows us to do a lot more deals without blowing up our overhead.
Mike Rozman: That’s great and so, Kris, as you hear that and put your broker hat on for a moment. Someone’s just left your training and they’re excited to start engaging with business owners and helping that business owner find the right lender. This pre-qual concept that is based upon objectively independently secured data, what does it mean for a new loan brokers?
Kris Roglieri: It means I’m saving them time and cutting out the guesswork on kind of where to send a lender, and I think it’s gonna allow the broker to shine a spotlight on them when they can go to a lender, particularly an SBA lender, and say “Hey, I already have this report.” And the SBA lender is going to spend more attention and I think react a lot quicker than without the score just because they know they have a serious, you know, the broker is bringing a serious deal in hand. And then, like I said, for a lot of those newer loan brokers that are kind of learning different products out there in the industry, whether that be factoring or MCAs or any type of product, it’s gonna allow them to really streamline their business. And so when they pull that score, again, if it’s not an SBA deal that they’re gonna have possibly five to six other options to take that applicant, it’s gonna build that. I think it’s gonna build the trust and credibility between that loan broker and the client because, again, it’s gonna cut down on time, which as we know in this business, time is everything and for that loan broker to secure the capital for that, for his or her client so …
Mike Rozman: And that’s great and, Jennifer, what’s your view on time and working with a new lead?
Jennifer Durham: Yeah, time kills deals and so does the process of finding prospective franchisees that aren’t ultimately gonna be opening restaurants. I think that for us it’s about working with the right candidates that would be well-suited for our brand, and this just allows you to get to a decision that much quicker, and for that reason, we’re really excited about it.
Mike Rozman: And Jennifer, her own mantra of time kills deals is something I’ve heard her articulate time and time again because it’s critical to her business to grow. And how many leads do you guys have a year? On what order of magnitude are you guys working on, Jennifer?
Jennifer Durham: Yeah so we see about 8,000 inquiries a year on franchise opportunities, and last year we approved 37 new franchisees. So we have to cull through a lot in order to get the diamonds in the rough as part of that 8,000 ________ [shuffing against mic].
Mike Rozman: We’re gonna – we just moved to quarter of. I think we’re gonna be able to wrap up on the hour. If you’re an attendee and you have a question, please, please chat it over and we’ll get those asked of our panelists. If it’s something too granular we’re not able to get to, we’ll get back to you afterwards. Morgan, we just heard from Jennifer 8,000 leads to get to 37 new franchisees. Now, some of those may stay in your pipeline. They may fall in the next year, but when you think of this concept that Kris introduced, Jennifer supported time kills deals, is that critical in your business, too?
Morgan Johns: It’s everything to us because my one thing I tell my lenders is we’re always looking through the pipeline and we need to be working on the deals that we feel can get done. And interestingly enough, as I’m listening to the other panelists, this SBSS score in a sense now we’re all speaking the same language. What Kris said about relationships with brokers, with bankers and sometimes what they think is a good deal is not what I think is a good deal or vice versa. And you spend a certain amount of time just kind of feeling each other out on the deal to find out where your comfort level is. And I think this score – and the same thing with the franchisors when we’re dealing with people in development or the finance side of franchisors, they need to know what’s your appetite? What are you looking for? And there’s so many different definitions of that from bank to bank to bank and sometimes legitimately so based on their credit box that they want to – that they’re trying to build. This kind of all brings some uniformity to the industry across different levels from the franchisor to the lender to the broker and, again, as it relates, time kills all deals. This shortens up the process of what we’re all looking for.
Mike Rozman: Perfect so we’ve been talking a lot around, of course, the SBSS score. We’ve made mention of the personal credit score. Let’s paint the picture. One of – and I want to ask kind of David with this question. An new candidate shows up on Jennifer’s 8,000 list and this person’s never owned a business. They’ve spent the last 15 years working in restaurants, but they don’t have any what we would call business credit. Are we able to get an SBSS score on them?
David Smith: Yes, we are due to the data permutations that we allow. We can score them on application data and their consumer credit file and treat them and look at them as a small business owner, not just a consumer. They’re not out getting a car loan. They’re looking for a small business loan, so we compare their profile to other small business profiles like them and we can return a score.
Mike Rozman: Got it and so this idea – we got a question from one of the audience members. Will the lender use the SBSS report or we pull another one and double hit the client? So I’m gonna ask that and thank you for that question. It’s a slightly different approach and let’s paint it out in the case of the Checkers franchisee. So the Checkers franchisee comes to bQual, goes to the Checkers landing page and goes ahead and says, “I’d like to get financially pre-qualified for a loan.” They get educated along the way, and we’re gonna deliver them their bQual report, which features their SBSS score. We’ve introduced this idea that that’s a soft credit pull because they’ve pulled it on themselves to get educated. As part of it says, “Congratulations! You’ve been prequalified for financing by a lender on BoeFly for your Checkers.” We know behind the scenes that that belongs to Morgan at Conestoga because Morgan said, “Hey, BoeFly, if it scores above a 200 SBSS, above an 800 FICO and above – and Checkers brand, I’d like to prequalify them because that’s a level of detail I need to issue a prequalification.”
Now it goes in essence continues down the pipeline. Now, once Morgan’s engaged that person, likely they would’ve posted the deal on BoeFly and Morgan in underwriting. Morgan has already expressed – Morgan, you’ve expressed that you’re gonna go ahead and likely work towards pulling the score to help you make a better decision. Will you – and I have a view on this and it’s something we’ve been thinking a lot. Will you rely if the borrower were to print it out and give you their SBSS, would you rely on that or at some point would you also need to pull your own? And is there any implication to the borrower in that sense?
Morgan Johns: Well, I think – and this is where I think time will tell as we use this more and more is if they’re bringing us the soft score, that gives us obviously the ballpark that we know we want to play in. But obviously, what first thing we would do is let them know that we need to do a hard pull to really – to firm things up. I relate it to – and it’s only part of the overall SBSS score, but I relate it to we can give you a lot of information, but we can’t give you the final approval until we, let’s say, pull that final personal credit history, your personal credit report.
Mike Rozman: And I think that makes it a lot – I think that makes perfect sense, Morgan. You’re doing it on the credit side, on the consumer credit side as well. But I want to make it clear in Keith’s question from the inquiry on the individual’s credit bureau report, the soft credit pull to educate themselves will not show up as an inquiry. When Morgan pulls credit to make a final diligence decision or in his protocol that will. Did some of the other panelists want to comment on that?
David Smith: Yeah, this is David.
Kris Roglieri: This is Kris here, if I may. I think it’s gonna be lender-specific and how their guidelines are. And particularly, I’m coming from if a loan broker pulls a score and it’s a hard pull, will the lender – will the bank or the lender accept that hard pull? Because I know in just dealing with hundreds of lenders and different types of lenders, they all have different policies. Some lenders even though you give them let’s just say a regular FICO trimerge and it’s a hard pull, even though it is a sure report and it’s a trimerge FICO report, the lender is required just by their own rules and regulations to pull their own. And there are a lot of lenders, especially in the private sector, that will go along with what the broker gives them on their pull. And so I really think it comes down to bank/lender policy in some cases from a broker’s perspective.
David Smith: When a broker’s involved, some banks may take the broker data. Some banks may go out and get their own independent. But regardless, when that bank or financial institution pulls that SBSS score, what’s coming with it is the consumer credit and possibly business credit profiles as well so you get more than a score. There’s a lot of data that has to be analyzed behind that as well.
Mike Rozman: Okay, that’s a great point, David.
David Smith: And by the way, when the SBA scores it, it’s a soft pull as well.
Mike Rozman: So for you SBA lenders on when it hits eTran, it shows up as a soft pull. As you lenders start thinking about how do you go ahead and front end that information if you’re pulling it to decision or as part of your decision process, it makes sense it’s a hard pull. The screen we’re gonna bring up now I want to accentuate a point that may be out there but maybe hasn’t been clearly articulated. In an example of a prequalification being issued from, for instance, Morgan, Morgan in our world with bQual can be almost as creative as he wants to be. So, for instance, he can say, “I’m gonna look at the SBSS. I’m gonna look at the FICO score. I’m gonna look at the equity injection. I’m gonna look at the state and I’m gonna look at retirement assets, right, because we’re capturing that variable. Now I suspect he’s not gonna look at that variable, but illustratively he can. Years in business we look at, industry, loan purpose, obviously what brand it is, the loan size that the person’s seeking. So this idea of a pre-qual, it’s not solely linked to an SBSS, but likely lenders will leverage that because it is this nice objectively pulled data that a borrower can’t self-report incorrectly in some capacity. Morgan, do you want to add anything to that or does that make sense?
Morgan Johns: No, that’s exactly right. We – our intention is to use this and drill down as much as possible for exactly what we’re looking for whether, as you said, whether it’s something in a particular state or it’s a particular industry. We want to maximize what we can – how we can leverage, how we can use this as much as possible.
Mike Rozman: There’s a question I’d like to read out from Gary. Thank you, Gary. “As a broker, if I send a client to BoeFly to pull a score, will they be directed to be contacted by BoeFly as indicated on the screen for the Checkers screen?” So we’re gonna go ahead and pull up that screen to show what Gary was referring to. We envision this tool as it relates to either Morgan using it or a broker using it to fulfill your own objectives. And as part of that process, it becomes apparent that if you’re playing this brokerage role as Kris and his team and his trainees will do, that that touch point should come back to you and not BoeFly. So certainly, as we go live with a broker iteration, we’ll be making available for those clients to engage directly with a broker because that makes perfect sense. We view our role in many ways as a utility to allow whether you’re a brand and you want to do a soft pull, whether you’re a brand and you want to do a hard pull. You can use both lines. If you’re a banker and want to do a hard pull, you can come on or if you want to pre-qualify leads that secure their own soft pull, right? So we don’t want to overthink this, but we do understand that there’s a world of complexity in this area and we’re excited to work with partners like Kris and Jennifer and Morgan to be abel to understand their specific needs and incorporate our design in light of ut.
We just have a couple minutes left. Please keep those questions coming. We have a question “How does a business owner find out what their SBSS score is?” and we’ll take an opportunity. If they go to bQual, B-Q-U-A-L.com, they can buy it themselves much in the spirit of what someone would do at myFICO when getting the consumer credit, they can go to Bqual.com and purchase their own score. We charge a whopping $79.00 for the privilege of someone to get this education. Fundamentally it’s an education report. I, as a prospective small business owner or current small business owner, I want to be educated. And we’re gonna obviously view it as very important to work with partners like brand and brokers to get this out there on the market. We do have a different price for franchisors, so the idea of a brand we expect to send a steady diet of prospective or current franchisees who need the score. We won’t charge that retail price of $79.00, and we can talk more about it offline. We don’t want to turn this in – I want to turn this into a sales pitch, but no one else wants me to.
Cost of bQual hopefully we addressed. What determines an SBSS score? So a question from Barry “What determines an SBSS score?” It’s previous credit history, business and personal, financial condition, collateral, et cetera. David, you talked about what main elements are brought in: the personal or the consumer bureau report, the Business Bureau report as available or applications on data. Can you give us a little bit more detail on kind of what your magic scoring tool uses?
David Smith: Sure. There are five areas of data. You mentioned two. The third one is a couple data consortiums called Small Business Financial Exchange and Small Business Risk Insight and the SBRI is a D&B consortium. SBFE is independent but currently held at Equifax, so we can look at that data. But then we also have application data, which is timely data such as number of months in business, owner experience, owner’s net worth, that sort of thing. And then the financial information, which is basic asset liability ratios such as quick ratio, current ratio, interest, that sort of thing.
Mike Rozman: Good. Thanks, David. I want to – we’re kind of approaching the hour here and I want to open it up for if any of the panelists have last comments that have come to mind that they haven’t articulated yet. Sound off now, guys, because soon our time is over. So I invite you guys to speak up now if there’s anything you want to add. I will close with if comments aren’t coming from the panelists this idea that this is an ongoing learning curve for everyone in the market although the score’s been out in the market for a meaningful amount of time. David, late ‘80s, early ‘90s? Is that when this rolled out?
David Smith: Yes.
Mike Rozman: So it’s been out there on the market. There’s hundreds of banks that use it, but in thinking about it in a different paradigm now that SBA’s set this new standard, there’s gonna be a whole lot more need in the market on the brand side, on the broker side, on the bank side even for those community banks that historically weren’t scoring shops. We will be continuously updating you with information. As you want information from BoeFly or these great panelists, we will let you know. We’ll be happy to hear from you. Following this webinar as you exit, you will be receiving very brief survey questions, real helpful to us to hear your comments to our very brief questions. And separately we will email everyone with a copy of this recording so you can go back and really pore over all the good, juicy comments we got from our panelists. So with that, I do want to bring up the upcoming dates real quick, Brian?
So we did get a question. “So SBSS is not available for a new franchisee?” No, SBSS – I’ve never owned a or if someone never owned a small business, they can generate their own SBSS score, okay. So as long as you’re in the credit bureau, the Consumer Credit Bureau, you can get an SBSS score and, David from FICO, correct me if I’m wrong there. We have up a slide upcoming dates where BoeFly will be a part or either exhibiting or at the event as will many of our friends if for some reason we’re not gonna be there. Please, please come say hello to us as we travel out at these events, and we’ll have more of these education sessions in the very near term. And with that, we’re gonna go ahead and end the session. Thank everyone. These panelists have been great. Thank you so much for joining, taking time, panelists, from your busy days as well as all the attendees for committing the hour to learn about this fairly interesting – from my perspective very interesting opportunity. So thank you very much and please answer those survey questions as well on the way out. Thank you, everybody.