We are excited to introduce MonJa’s new project: Small Business Lending Interview Series. During these interviews with industry leaders, we will cover their stories of success, challenges they overcome, and secrets of their competitive advantages in small business lending arena, as well as their perspectives on the online lending industry. We are very honored and pleased to welcome our first guest: Brett Baris, CEO and Co-Founder of Credibility Capital.
About the company: Credibility Capital is a technology-enabled platform serving the financing needs of small businesses. It was founded in 2013 and is headquartered in New York. It offers loans ranging from $10,000 to $350,000. APR ranges from 7.99% to 20% and loan term is usually 1 to 3 years.
MonJa: Thanks for making the time to chat! Can you tell us a bit about how you started Credibility Capital?
Brett: I co-founded Credibility Capital in 2013 with my long-time friend Mark Rambler. At the time, I was a partner at a private equity firm making growth capital investments in innovative financial technology companies. While I became infatuated with the developing alternative lending industry, it was obvious to me that the borrower acquisition model — relying on direct marketing, paid search, and brokers — was severely flawed. Simply put, it cost too much money to source borrowers and the incumbents weren’t making any money — and weren’t going to be profitable anytime soon.
MonJa: What was the main challenge for small businesses that made you see the opportunity to better serve small business borrowers?
Brett: My co-founder Mark was in the credit group at Fortress Investment Group. From his vantage point, there weren’t many appropriate borrowing options for higher-quality small businesses. The banks curtailed their lending activities post-crisis and as a result many of these higher-quality businesses were borrowing at very expensive rates because that was all that was available. Together we had the idea that if we were able to source high quality borrowers through a partnership model, we could effectively pass on the savings to the borrower in the form of a superior product.
MonJa: sounds like lead sourcing was a real challenge…
Brett: Enter Dun & Bradstreet, a perfect partner with access to virtually every small business in the country. What we ultimately structured was a multi-year exclusive partnership whereby applicants are identified by D&B’s salesforce and passed through to Credibility via a dedicated API with contact information, firmographic data, and D&B scores. The key is that we share a portion of the origination fee with our partner only when we close a loan. This success-based model drives down the cost of borrower acquisition since we don’t buy leads and aren’t competing with some of our peers in direct marketing.
MonJa: What is the most exciting / surprising business that you funded?
Brett: There have been so many great businesses that it’s hard to pick just one! One that comes to mind is Vibe Kayaks. Based in Georgia, the company provides fishing and recreational kayaks and kayaking accessories for beginners to experts. The company sells their kayaks through Amazon, eBay and direct through their own very cool website. While the company was a growing multi-million-dollar success story, they still had difficulties securing traditional financing and were utilizing expensive daily-pay products. Credibility Capital recently completed its third loan with the borrower enabling it to refinance its daily pay products and also purchase new inventory of kayaks.
MonJa: Who are your borrowers, and what kind of unique problems are you solving for them?
Brett: We’ve now originated loans to a diverse set of borrowers across the country. We’ve funded so many types of businesses including doctors, IT consultants, fitness studios, restaurants and HVAC businesses. The common thread is that our businesses have multi-year track records of success combined with strong credit profiles. Because our rates are so low, we can’t take on the risk of lending to start-ups and businesses that have demonstrated repayment difficulties in the past. Typically, we’re providing our borrowers with growth capital to enable them to open that new store or hire those new employees, or refinance out of that high APR product that they shouldn’t have taken on in the first place.
MonJa: What advantages do business borrowers have getting funded from an online lender like you, compared to getting funding from a bank?
Brett: We lend as little as $10,000 up to $350,000 at rates starting at 8%. Our average loan size is approximately $100,000, which is below the sweet spot for many banks that don’t have the desire or capacity to underwrite loans unless they are larger than $350,000 — it takes a bank the same amount of time and effort to originate a large loan so that’s where they are focused.
From the borrower’s perspective a Credibility Capital loan looks a lot like a bank loan: it is fully amortizing with a fixed monthly repayment. The primary difference is that our borrowers can get funded quickly – typically within a week from submitting an application. This is far shorter than any bank I’ve ever come across where the process could drag out many months. While the rate is, in many cases, slightly higher than what a bank could offer directly (if it were interested in making the loan), the time and convenience of working with our online / mobile platform provides a much better borrower experience.
MonJa: Do you work with investors who buy your loans, and how do you see their role evolving for your platform?
Brett: Ironically, Credibility Capital originates loans primarily for banks, which purchase whole loans through a forward flow agreement. To our knowledge, our 2016 forward flow arrangement between a bank and a lending platform for purchasing commercial loans was the first of its type.
MonJa: How has small business lending evolved during the last few years?
Brett: While commercial lending generally has returned to pre-crisis levels, banks are much more focused on larger lending opportunities. This is partly a result of bank consolidation – there are fewer and fewer community banks that are making sub-$350,000 loans. This has created an opportunity for platforms like ours – we have the ability to source these borrowers and efficiently underwrite them.
MonJa: What major changes do you expect in the small business lending market in the near future?
Brett: I expect to see continued consolidation for both banks and non-bank lenders. Lenders without competitive advantages will struggle, but those that have an edge — whether it’s borrower acquisition, data, or cost of capital – will always have small businesses to lend to.
MonJa: How will small business lending fare during a recession?
Brett: Banks will always have deposits and will always have to deploy capital – we plan to continue to help them deploy their capital to prime borrowers. In recessions, there is a flight to quality — I can’t speak for other lending platforms, but we expect our loans to perform quite well in a recessionary environment. Our underwriting process is robust and our credit models include tried and true variables that historically have been excellent predictors of default. Because banks are purchasing our loans, we’re strict about documentation and verification. We look at cash flow and the applicant’s ability to repay debt. Our decisioning is not instant and we like it that way. Only after a diligent review of a file can we offer the best-in-class product to the highest quality US small businesses.
MonJa: What do you think is essential for a small business lender such as yourself to succeed?
Brett: As discussed above, small business lenders need a competitive advantage. We worked hard to secure two significant advantages – borrower acquisition and low-cost capital. Both go hand-in-hand to deliver a best in class product to the most creditworthy US small businesses.
MonJa: What are your plans for 2018?
Brett: Continue to grow but at a responsible rate. Our originations have doubled in each of the past two years and we anticipate this rate will continue. In 2017, we crossed the $50 million origination milestone and in 2018 we plan on surpassing $100 million. We continue to work with banks to solve a major issue for them: sourcing and underwriting “A-paper” commercial loans. We do all the work for the banks, making it easy to participate in our whole loan purchase program. We take a traditional, fundamental view of credit that is consistent with how banks have been underwriting for years. The only difference is that we do it through a high-tech, more efficient platform – and of course we bring our own borrowers to the party!