The U.S. Small Business Administration bridges the gap between qualified loan applicants and those that fall marginally below the benchmarks set by its approved lenders — each lender having their own underwriting criteria. Some use average financial ratios published by Risk Management Association. Others accept comparative data from industry trade associations. And still others base their underwriting on the experience they’ve had in their own loan portfolio.
On Deck Capital, for example, uses its proprietary credit scoring model that calls up over 300 different variables based upon its own lending experience, according to a June webinar sponsored by Coleman Publishing. A loan applicant’s score is determined in less than 60 seconds. Approval is more dependant upon the businesses cash flow than traditional credit scoring models or collateral.
According to Business Week, Deck’s average loan size is “$30,000 and (they) carry annual interest rates of 18 percent to 36 percent, two to three times more expensive than conventional bank credit.” But they fund loans that banks turn down and keep defaults to a minimum by using a unique payment system. They withdraw loan payments daily, directly from the borrowers’ checking account. So if the check bounces, it is an early warning signal that the borrower is having financial difficulties.
“On Deck will collect the money every day out of the borrowers checking account,” says Lynn Sullivan, a partner with Washington, D.C.-based Capital J LLC and founding partner with PEPP, LLC. PEPP was organized to finance small businesses that are profitable and have revenues between $40 to $100 million. And unlike traditional banking institutions, PEPP will focus on intangible soft collateral instead of hard collateral such as real estate. “In the current bank and alternative bank environment, they are unable to get affordable term loans, and would require personal collateral,” Sullivan says.
To make these companies more fundable, PEPP is creating a non-government guarantee vehicle that is credit enhanced by an asset pool that includes U.S. Government bonds. The pool will partially guarantee the loans against default. Fortune 1000 companies and major private equity firms are the anticipated investors in the asset pool.
PEPP chose BoeFly as its “bank matching site,” Sullivan says. BoeFly has over 2,200 lenders on its matchmaking site. It uses “an algorithm which matches banks with borrowers, within 24 hours,” she says. “And the whole process will average about 25 days,” to fund the loan.
David Nayor, co-president of BoeFly says, “The group is going into fund raising mode.” PEPP is presenting its job-creation and investment plan to potential investors that are willing to form the loan-guarantee pool. “BoeFly will be the front end solution where the borrowers can build a loan package and connect with lenders who are participating in the program,” Nayor says. “Morgan Stanley will be handling the investment account and DonorFirst a Crown Philanthropic Solutions company will handle the administration of the program.”
There is also a venture capital component for small businesses that apply through the PEPP program. It will be attractive for rapidly-growing companies with intellectual properties — intangible assets that banks have difficulty accepting as collateral.
“Banks have not figured out how to lend against intangibles as collateral,” according to a white paper authored for PEPP by Andrew Sherman, senior partner at the prominent Washington-D.C. law firm, Jones Day, and Patrick FitzGerald, professor of entrepreneurship at the Wharton School of Business at the University of Pennsylvania. Sherman will handle the legal work for PEPP.
The white paper is called, “Fueling Rapid Growth Enterprises: Job Creation and Access to Credit in the United States For Intangible Rich Companies.” It says that biggest job creators are small business with intangible assets — often companies with patented intellectual properties.
PEPP will establish a valuation model for intangibles and believes it can help lenders underwrite business that lack sufficient collateral. Moreover, PEPP believes that a sound evaluation model for intangibles and its loan guarantee will make a difference.
“Access to the capital has emerged as a foremost concern for many small business owners in today’s tight credit market,” BoeFly’s Nayor says. “In helping to address this important issue, BoeFly is proud to offer operational support to key programs such as PEPP LLC by providing businesses with access to a platform where they can connect with multiple lenders in the most efficient way possible and obtain the credit they need to start up or expand.”
Jerry Chautin is a former entrepreneur, commercial mortgage banker and business lender. He writes and blogs about business and real estate for several publications and is SBA’s 2006 national “Journalist of the Year.” Jerry is a volunteer business mentor with SCORE, “Mentors to America’s Small Business,” offering free business advice. Post your comments and ask questions on this Blog or send Jerry an e-mail.
Copyright © 2012 Jerry Chautin — All rights reserved.