Please welcome our new guest of MonJa’s Small Business Lending Interview Series. In these interviews with industry leaders, we cover their stories of success, challenges, and secrets of their competitive advantages in small business lending arena, as well as their perspectives on the online lending industry overall. This time we are welcoming a new guest: Christopher Hurn, Founder and CEO of Fountainhead Commercial Capital.
About the company: Fountainhead is a nationwide, nonbank commercial lender specializing in the financing of owner-occupied commercial real estate for business owners. They are SBA 504 loan specialists, originating their loans directly from business owners and their trusted advisors, but also originating loans from banks, nonbank lenders, credit unions and mortgage bankers/brokers through their new secondary market program: FastTrack504.
James Wu: Welcome to the podcast, Chris.
Chris Hurn: Thank you, thanks for having me.
James: Great to have you as well. So can you get started by giving the listeners a little bit of a background about your company and what type of financing you do.
Chris: Sure, sure, happy to. So we finance commercial real estate only for business owners all over the country. We do that through a couple of different programs. We’re national experts at the SBA’s 504 Loan Program and then we also have a low loan-to-value conventional loan program, but it’s all about commercial real estate.
We believe in creating wealth through commercial real estate ownership for business owners.
So that’s what we do, and we are a nonbank direct commercial lender.
James: It sounds like you are very focused on the real estate owned by businesses. Tell us a little bit more about how you set on that niche?
Chris: Well my background goes back twenty years to GE Capital and then Heller Financial. I actually started another company, that was started before the alt-lending fascination, before it was cool to be in alt-lending I guess. I started that company in 2002. We were the largest nonbank specialty lender in our space, and actually became the third largest nationwide behind some household name/To-Big-To-Fail banks, as recently as 2012. But I sold it to a large local community bank back in 2010.
That went okay for a little while, but then I guess the local community bank decided they wanted to sell themselves to a larger bank which they did, and I used that opportunity to try to spin out my baby back to myself, but that didn’t work so well. They were negotiating with all sorts of folks besides just me at that time so I left and I started over with Fountainhead Commercial Capital. We are three years and one month open, already very profitable which I’m very grateful for, very blessed.
We are on our way to becoming the largest in our space again and we’re doing a lot of things differently than what I did originally, sort of in my “First Chapter.” There aren’t too many entrepreneurs that get to have a restart in an industry and get to do things a little bit differently the second time around.
So that’s been pretty gratifying and pretty exciting, and I’m having more fun than I’ve ever had in the lending world for the last 20 years. It’s gotten to be a very interesting space these days with everybody kind of coming out of the woodworks –all sorts of innovative lenders here and there.
My traditional competitors, banks and credit institutions are continuing to shrink and yeah, I feel it’s a little bit like the Wild West some days.
James: Well it must be very interesting, you know, you have been in alt-lending before alt-lending was the thing with, I guess, the “tech bros.” Obviously, we’re making fun of ourselves too, but, you know, what’s your perspective on the new FinTechs that are coming into alt-lending? Obviously, this is not new, but tell us about your perspective here and things that are new, that’s good versus otherwise.
Chris: Yeah, I grew up in a nonbank lending world, as I said before, with GE Capital and with Heller before GE bought Heller. I started my own nonbank lending company before that was the trend. So, I come at it from a financial perspective first and foremost, as opposed to what I see some of the folks out there in the space these days. Not so much in our world of small business lending and small balance commercial, but I see a lot in consumer loans, merchant cash advance and things like, where it’s really…. they’re more of a technologist first and a lender second.
I hope it ends well for them. I don’t know if it will, because there are certain mindsets about being a lender that you have to consider, and you just approach things a little bit differently.
That said, what’s been exciting is I have always been considered an innovator in our space. I’ve always wanted to be a niche lender. I think the more you can focus on a niche, the more you can dominate a niche as opposed to many of my colleagues who I compete against in the traditional banking world, who try to be generalized and try to be all things to all people.
I’ve always fought against that, so I’ve always done things a little bit differently. It’s exciting to see some of the new folks that are coming into the financial services industry in general and what they’re bringing [to it]. It’s forcing me to level up and do some interesting things ourselves, and we can talk more about that in a little bit. But I think we are fundamentally in an era where things are changing.
There’s not the loyalty to a bank that there was 20-30 years ago.
Banks still have a very low cost of funds by virtue of their charters, but they’re not nearly as creative, nor fast moving for a variety of reasons, some of which deals with compliance and some of it also deals with just mindset. They’re not as fast moving as perhaps society requires of them these days and again, we can talk some more about this.
But that’s where I have a lot of fun. I like to be the fastest guy around in my space, I like to be the guy that’s coming up with new things, I like to try to see what is working well in other areas of finance and apply it to our little niche and I think I’ve done that pretty successfully thus far.
James: Yeah, and it sounds like you’re focusing on an area that is really not, I would say, your competition, you don’t have a lot of new FinTech competition. In some ways, you’re taking the bread and butter loans made by banks and you’re making the process better and more efficient.
Chris: For sure, yeah, better customer experience, much faster, everything, and yeah, it’s interesting. I think FinTechs will naturally evolve into our space, I mean, I’ve sort of had that contention for a good couple of years now thinking that they’re going to head in our direction. I haven’t seen it much yet, but in some ways, I’m not exactly welcoming it (laughs), but I think it’s the natural evolution for some of these folks.
That said, I still think we’re a few years ahead of the game compared to our more traditional lenders in our space and some of the things that we’re doing versus what they’re doing, at the moment… but, you know, it’s not always going to be that way.
I mean, I do think you see more and more traditional banks and credit unions trying to adapt to some of the more cutting edge, innovative ways.
So I don’t know that we’re always going to have this advantage… part of my job is to try and stay ahead as much as possible.
James: Yeah, I think the fact that you are a alt-lender but have a ton of traditional lending experience really helps. When you look at what FinTechs are doing, usually the most successful models are the ones that can take a pretty straightforward product and scale it up quite a bit. On the real estate side, I think you see a lot of activity on fix & flip or I guess rehab loans for direct investments…
Chris: That’s right, that’s right.
James: ….and those are obviously much easier to grapple with, right?
Chris: Right. In our space, I’ve always thought of it as more aspirational. I mean, I have the direct experience of having been very successful even coming out of the Recession.
I mean, what happens as we go into a recession, and I’m not suggesting we’re there just yet, despite what’s happening with the yield curve and the tariff wars and a lot of stuff that’s going on right now, but in another two/three years, who knows?
And as we go into that, what happens is that most of my competition goes to the sidelines and they stop lending. It’s kind of an immediate reaction. So as long as I have continued access to capital supply, and we’ve been through a few rounds of funding, and we have large warehouse lines of credit, we have exclusive buyers of our paper and whatnot….so long as that continues, then we’ll be fine. We’ll actually be able to take more market share when that eventuality happens.
In the meantime, obviously we’re duking it out in the trenches on a daily basis and we win a lot. Occasionally we lose, but the commonality is that all of our credits are very bankable credits. They’d be the envy of any of these FinTech guys in terms of collateralization and in terms of debt service coverages and personal guarantees, minimum FICO scores and everything else, but we’re not getting the kind of coupons that perhaps some of the FinTech guys have had and gotten fat, happy and lazy about. Ours are a little thinner, let’s put it that way.
James: Yeah, it’s ironic when the FinTech coupons……and you are the ones that are called fat and juicy. And speaking of competition, you know, recently Goldman Sachs has come into the investment real estate financing market and it probably wouldn’t be a huge stretch to think about them looking at the other types of real estate financing. Any thoughts about that? Goldman Sachs as well as other potential bank competition coming into the space?
Chris: Well I have, and I obviously keep an eye on it regularly, but the reality is I have some insulation and what I mean by that is there’s some serious barriers to entry in terms of some of the competition, whether it’s just other entrepreneurs coming into the space or even legacy banks. And part of that is because our niche has a tremendous amount of specialized knowledge [required].
I mean, a big chunk of what we do is SBA-related, is Small Business Administration related. You don’t just jump into the SBA space without any knowledge and without experience. It usually takes a couple of years at least to get up to speed to the level that you need.
So, yeah, I think you’re going to continue to see some folks dabble in fix & flip and perhaps investment small balance commercial, but what we do is owner-user or owner-operated stuff that usually has the SBA guarantee on it, and like I said it’s not …
you don’t just wake up in the morning as a lender, get out of bed and say, “You know what, I think I’ll make an SBA loan today.” You can try that, but that’ll be a disaster.
Chris: Yeah, yeah, so we definitely have some specialized knowledge that’s just not readily duplicatable and frankly, our world, in some respects, is kind of shrinking. It’s definitely aging to some extent, and we’re not getting as much fresh blood into our particular area of the lending space perhaps as others are, which is kind of interesting. You know, we’re traditionally…having done this for a couple of decades now, a lot of traditional, conventional bankers, ordinary bankers sometimes have a tendency to look down their noses at the SBA world.
Now after this last recession, I think they realized SBA kind of saved everybody’s bacon a little bit, and it’s a much more profitable area of banking perhaps than some folks have given us credit for.
It doesn’t deserve the sort of the bottom of the barrel reputation that sometimes occurs. It certainly doesn’t deserve being looked down their noses with scornfulness at the space, that does happen from traditional lenders, but that’s okay.
The more people want to be arrogant and ignorant, that’s fine. I’ve got no problem with that. I’ll stay below the radar screen doing what we’re doing.
James: (laughs) Yeah, I think a lot of the bad rap with SBA loans and especially with just how sometimes it can be tedious and time consuming and so on. It probably has to do with lack of rigorous process sometimes, right? It sounds like…
Chris: It does and some of that is just a lack of understanding. I mean, the beauty about SBA lending in many ways… we’re still light years away from desktop underwriting like with residential mortgages. But there are a lot of similarities from deal-to-deal in terms of the documentation, which is part of the reason why we came out with the first artificial-intelligence-enhanced software, basically where we actually have code now that’s reading all of the tax returns, different kinds of tax returns, financial statements, debt schedules, etc. Doing all of our underwriting calculations for us, auto populating our approval letters, etc.
We’re the first ones to come out with that and that’s what allows us to do approvals in under two hours, which is completely unheard of. I mean that’s a 10x multiple enhancement versus what we normally compete with.
Most banks and credit unions in our space take two to three weeks to approve a loan.
We’re now doing it in under two hours, which is truly revolutionary, but we’re able to do it because it is, for the most part, fairly cookie-cutter in terms of information that we need to look at from deal to deal.
James: Yeah, absolutely, and I think that’s a very interesting perspective, you as an industry veteran speaking about AI. As you know, part of our own business deals with AI. What do you see as the state of AI and underwriting?
I think there is certainly some perspective from more conventional lenders and bankers believing that AI is not being able to replace much of the underwriting. On the other end of the extreme, obviously you have people coming from the technology side saying AI can do everything. What is your perspective?
Chris: Right, well naturally I disagree with both ends of the spectrum. I think like a lot of things, the truth is somewhere in the middle. I don’t think commercial real estate lending, commercial lending, SBA lending…I’ve often said this for a long time: it’s a little bit art; a little bit science.
The problem with complete automation is you take out human subjectivity, and I understand that’s the goal and that fortunately [it] has some benefits, but it also has some downsides.
If you’re in a space, like we are, it can’t be 100% objective, independent, science-based. You’ve got to allow for some subjectivity. You’ve got to allow for some of the art.
That means you probably can’t go all the way to the extreme and completely automate like you can in a residential mortgage world, for instance, which even then I’m sure there’s a residential mortgage guy that will say, “No, no, no, we have some art of our own,” and I’m sure you do, but that’ll be the exception.
The commercial real estate world, SBA lending world is, you know…. I mean, I can give you lots of examples of situations where if the following variables were to occur in certain trends that I saw, we may very well still approve that loan even though the code tells we shouldn’t. So that’s where…we’re kind of in the gray area a little bit. I mean, I don’t think either extreme is correct.
From our perspective, it’s extremely valuable to have built what we have so that it pre-loads all of our documentation, it pre-loads our internal reporting, it pre-loads our internal database so that we don’t have to replicate as much data entry as we probably did historically.
It literally shaves hours and hours off the time for our underwriters, so from that perspective it’s extremely helpful, but you know, I don’t entirely trust the machines either, so we definitely include a human element in terms of our review of these [things].
And while the code does everything in about ten minutes, at the moment, it probably can even go faster if we ramped it up even more. But, we only agree to approve things or disapprove things in under two hours. The question is where we spend the extra hour and 50 minutes? For us, it’s not to go to lunch, things like that. I mean, it’s to do other basic due diligence things that you would do on a traditional commercial real estate deal.
Unfortunately, at the moment, we can’t interface with the credit bureaus, for instance, so we have to pull that manually –FICO scores — and we have to look at personal debt obligations manually.
We always jump on things like looking at the property, looking at the neighborhood, doing some other Google searches to see what’s out there on our borrower or on the property, etc., and then we double and triple-check the numbers.
So all of that takes a bit of added time, but again, that’s to take nothing away from the fact that we’re still about a 10X improvement versus what’s the norm in our space right now, and I’m not convinced Amazon’s coming into our space anytime soon, like they seem to be coming into so many other spaces… but the mentality that Amazon has shifted in every one’s head is that we need things done immediately. We need things done tomorrow.
If I can order a book or a pair of socks or dog food, and it arrives tomorrow through Amazon Prime, then by God, why shouldn’t I be able to get a $3 million loan on the property that I went and visited this morning, by tomorrow?
And with us you can.
With most others in our space, you can’t; you have to still wait a few weeks. But, you know, I do think they’ll catch up to us in time, probably.
James: Yeah, and that’s so fascinating. I think you can see the waves moving, right? So first it’s the credit cards that are, you know, entirely automated then…
Chris: Yeah, credit scoring and things.
James: …so I think the state-of-the art is moving ahead and you’re certainly riding that wave and on the forefront of it, I think particularly with commercial property. I think the use of automation and artificial intelligence is still not completely widespread, so it sounds like you have the formula for that.
Chris: Well we’re trying. We’re certainly trying. We’re adding more things to it. I mean, I’m now building a CRM on top of it. I’ve told my guys internally…I’ve always felt like the biggest issue with CRM systems is the humans, human input, right? I mean, it’s only as good as the information that’s in there and notoriously, salespeople hate, hate to sit there inputting all the data fields and whatnot.
So that’s what’s kind of interesting about us in that our Pronto system now takes all that information on the front side so that we’re actually minimizing the “human resistance,” let’s call it, of putting in all the information we need.
So, we’re sort of tying them together, and we’re also tracking where we’re at in the process so that if there are intermediaries in this transaction, they’ll know exactly where they’re at in each stage.
So, yeah, this is something that we’ve been doing internally for seven/eight months testing it, making sure it’s doing everything we need it to do, and we’re continuing to improve it. And, who knows, maybe it’ll be something we spin out of us eventually? I’m not really sure, but it’s definitely giving us an unfair competitive advantage in our space right now, for sure.
James: Yeah, absolutely. Shifting gears a little bit, let’s talk about what’s ahead. So, do you see any economic or political factors that could impact the financing that you do to help out businesses?
Chris: Oh, I mean, you know, you can always have that “black swan” event. There could be another 9/11 type of event that radically changes everything. I am not real keen on the tariffs that are being thrown back and forth across the Pacific Ocean at the moment. I don’t think, long term, that’s real helpful. I’m certainly a big believer in free trade, but it’s also got to be fair, and I think sometimes we’re so hell-bent on an idea in a society, trying to push the narrative of free trade, that we sometimes get taken advantage of.
So I hope this is a temporary thing, because I don’t think it’s going to be helpful for the markets, and I think it will be destabilizing if it continues too long-term.
But, beyond that, as I said earlier, what we do is very aspirational in nature so most of our clients…buying their own commercial real estate, a home for their business, because they can’t have people “remoting” in from all over the place. You know, the magic really happens when people are shoulder-to-shoulder, and that still exists for a lot of businesses.
Not everybody can remote-in from somewhere else, so if that’s the case, then what we’re doing fundamentally is creating wealth for a business owner when they decide to stop paying their landlord and pay themselves.
It’s one of the few things that a business owner can do to really…without too much trouble… really sort of flip the switch and help create wealth for themselves by owning an appreciable asset like commercial real estate.
Oftentimes, even right now, with rates as low as they’ve been for many, many years and even as they’re rising, it’s still oftentimes a lot cheaper on a monthly cash flow basis to own the real estate than to continue leasing it.
So it makes a major impact, and most of my clients have gone through the experience of renting an apartment, but they decide to own their own home.
It’s really the same type of shift mentally with what they’re doing when they want a home for their business.
Most of the time, it’s the largest purchase of their lives so they take it very seriously. But they’re interested in good times to do this, as much as they are in bad times to do this. Particularly in bad economic times, a lot of business owners get very interested in this if they’ve proven the business model and they’re fairly stable. Oftentimes, they get very excited about the fact that they can kind of be “contrarians,” and most business owners/entrepreneurs are contrarians at some level. They had to resist everybody who told them at the beginning,
“Don’t go into business for yourself; it’s risky.”
But they did it anyway. So they have that kind of contrarian streak within them anyway.
So I’m not saying we’ll have a repeat of what we did ten years ago with the Great Recession, but, if we have an economic hiccup here and there, values come down a little bit, I think you’ll continue to see growth in the small business lending sector because you’ll continue to see small business owners trying to take advantage of the opportunities that are out there.
What happens in Washington, yeah, has some impact on us, but, you know what, I think it’s better when business owners keep their heads down and stay focused on doing what they do best, rather than getting distracted with what’s on the nightly news or Twitter feeds.
James: Very well put. So, I guess finally looking ahead, can you tell our listeners a couple of initiatives that you’re working on to stay ahead of competition and keep moving the business forward?
Chris: Yeah, one of the things that we’ve done over the last couple of years is that we’ve created our own….I should back up and say, in our space, the secondary market and the 504 space, but even for owner occupied first lien conventional loans… it was pretty well decimated by the Great Recession to the point where the secondary market in our space has shrunk, 90% or so.
So we’ve sort of taken it upon ourselves to try and restart that as well. That was one of the initiatives we’ve done at Fountainhead since the beginning, and it’s kind of turned us into … we’re still an originator, but we also sort of have this platform business whereby we sell off our paper from things that we originate, or we even have the ability to buy loans from others and turn around and sell it on our platform.
I think you’re going to see us continue to grow that piece of the business in the future because I think we really are in an era where traditional banks…they don’t have the kind of loan demand perhaps that they should in certain areas or they don’t have the ability to generate assets that they need.
And so I think you’re going to start to see a lot of banks and credit unions being net buyers of assets from folks like us.
And when you do it right, and you’re confident and you’re organized and you’ve got good credits, I fundamentally believe there’s an appetite for that, and I think it’ll continue to expand.
I think that’s very exciting for us because it’ll be good to sort of almost be that portal to somebody’s banks and credit unions who just don’t otherwise have the kind of deal flow that we have. Now we’ve gotten there because of our reputation…because we’ve been sort of on the frontline for a long time, myself especially in the 504 sector and we will continue to do that. But that’s one of the things that we’ve got that’s continued to expand.
I think what we’ve done technologically over the last nine to twelve months is continuing to expand in the space to the point where, like I said earlier, it may become something that we eventually spin off let other lenders utilize what we have… our clearly better mouse-trap. There’s not much else out there like what we’ve built because I’ve tested and looked at everything, I can assure you.
So I think that’s where we’re headed. We will probably get into some other tangential sectors in the small business lending space.
You probably shouldn’t be surprised to see us doing a few other loan programs here over the next six to eighteen months, and it’s all toward our vision: we want to be the largest small business lender in the country, that’s a nonbank.
It’s kind of like that old PowerPoint that we all saw a couple of years ago. I think it was at IBM or something where the largest taxi operator doesn’t own their own taxis anymore, which is Uber… or the largest movie shop doesn’t actually own the movies, which is Netflix… and I can keep going down the list.
The largest retailer doesn’t have a lot of brick and mortar retailing locations, Amazon, on and on and on. I think we’re into an era now where the largest small business lender might just not have loans on their balance sheet, or not for very long — that’s kind of where we’re headed with all of this, I think.
James: That’s super exciting. Chris, thank you so much for taking the time to talk today.
Chris: My pleasure.
James: This is very illuminating for our listeners.