We have a brand new episode of Small Business Lending Interview Series here at MonJa. In these interviews with lending 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. Please welcome our guest: Ryan Rosett, Founder & co-CEO of Credibly.
About the company
Credibly (formerly known as RetailCapital) is a FinTech platform, leveraging Data Science and technology with an amanic focus on the customer experience, in order to serve all small and medium-sized businesses, as a trusted and committed partner, delivering the most affordable, and right-sized capital.
James Wu: Hello, my name is James Wu, CEO of MonJa and I have Ryan Rosett of Credibly joining me today.
So welcome to the podcast, Ryan!
Ryan Rosett: Thank you so much, looking forward to talking to you.
James: Likewise, so, Ryan, can we get started by you giving the listeners a little bit of background about Credibly.
Ryan: Sure, so Credibly was started…I started the business in 2010 with my partner. We started primarily as a merchant cash advance company and then we transitioned to about 50% of what we originate today as small business loans versus merchant cash advances.
About eight months in just performing the business, we partnered with a local bank which gave us an interesting financing tool so that we were able to leverage this bank’s balance sheet where we originated. We sold it to an SBV that was set up and we shared in the profits.
They did not own anything of any portion of our business, but it was a great vehicle for us to take off Credibly. Today, we’ve originated over a billion dollars in small business loans.
Our average size is approximately $58,000 and we really go across the gamut of small businesses. So it started out much more main street; today, it’s much larger and, you know, from a product standpoint, we have multiple products and from diversification of what type of businesses we lend to, it’s a fairly diverse portfolio as well.
James: That’s really interesting. Would you say you work with the bank’s funding partner for most of your funding, or how does your capital stock work?
Ryan: So, you know, are you asking like where it originates from, or how we’re financed?
James: How you’re financed. So do you get the capital that you use for financing from external investors, or earlier, you mentioned a bank.
Ryan: Yeah, so like I said, we started out with a bank, you know, the structure was a pure joint venture with the bank, we outgrew that facility and we closed on a senior credit facility with an Alabama-based bank.
We increased that facility to a $100 Million line with a top 20 regional bank and then November of 2018, we completed our first securitization.
So now we’re using the securitization as a vehicle so 3-year revolver securitization, and it gives us the ability to continue to grow. We have $237 Million of capacity in that securitization so it really gives a ton of room to continue to grow.
James: That’s indeed super exciting. So I guess from the borrower side, what would you say….how would you compare yourself with your competitors in the MCA space or the small business lending space? How would you tell a potential borrower….what makes you different?
Ryan: Well, so first of all, we are the direct lender so there’s a number of brokers out there that we do business with. That said, it’s also in our balance sheet so, you know, we have a proprietary scoring model, it’s risk-based pricing so if we see certain characteristics of a loan that meets our sort of credit and risk profile, we’re going to be more aggressive.
I believe in our pricing than some of our competitors and so we have…..like I mentioned, the securitization really gives us like probably some of the most attractive pricing from a capital standpoint in the market so we can really kind of pass that savings on to the small business owner.
James: That makes some kind of sense and it certainly sounds like it makes for an effective set of offers for potential borrowers and you really are in the business of providing capital to help them grow. So I guess in terms of borrowers, what are some of the more interesting or at least memorable businesses that you have funded?
Ryan: You know, so like we have a very diverse group. We started out, it was much more main street retail, it has sort of evolved over the years where 21% of our portfolio is construction, 29% of our portfolio is services and it then it goes from, you know, what was probably 70% retail, today, it’s 17% retail. And then we have like transportation, manufacturing, wholesale, financial real estate, agriculture, legal, like those are some of the other industries that kind of make up our mix.
Geographically, we’re across the board, you know, our concentration almost nears the population so, for example, we’re about 17% of concentration risk in California, 9% in Texas, then you have Florida and New York and so those are the big four.
Obviously, California, Texas, Florida, New York and then it kind of goes down from there.
We have exposure in all 50 states, you know, 50% of the businesses that we lend to or provide advances to have been in business for over ten years and our underlined FICO profile of a business kind of ranges from…will go down to 500, but over 60% of our portfolio is somewhere between 660 and 850 so it’s a fairly creditworthy customer.
James: First of all, it’s pretty incredible how much you’ve grown in upmarket in terms of the borrowers that you serve and I think that one of the misconceptions about direct lending…a lot of people think direct lending and direct lenders are places that don’t have alternatives they can turn, but given your low cost of funding and the fact that you are lending to established creditworthy borrowers certainly seem like you’ve grown quite a bit and you are able to serve a lot of mainstream borrowers.
Ryan: And just keep in mind also that if you look at what banks are lending today, they’re really not lending over, oh, I’m sorry, under $250,000 and that’s kind of where we cap out. I mean, we’ll go up to $400,000, but the majority of our transactions are less than $250,000 so it just doesn’t become efficient for a bank to underwrite a loan for $60,000 which is our average.
So our market is, you know, kind of that sub-250 customer and, again, we’re cash flow lenders so, I mean, we look at a lot of different alternative data points to identify the predictive nature of this merchant paying back and also the risk associated with us lending to that person or business, but it is a fairly voluminous quick underwrite.
So a deal will come in and fund usually same day so it’s a fast cycle and, you know, you compare that to a bank experience and that could take anywhere from 60 to 90 days to get funding.
But, you know, if somebody can afford to wait, they should because a bank’s obviously going to be cheaper than what we are because we obviously borrow from the likes of banks also, but that is the nature of our business.
James: Indeed, as you mentioned, your competitive advantage is your efficiency and your ability to quickly and effectively underwrite these smaller applications so I think that truly increases the market that you are able to serve so definitely that’s correct.
Ryan: Right, right target.
James: So I guess looking around in the small business lending market, do you see some of the things that are changing in the market. You know, what changes do you expect in the market or do you expect them to be more of the same just getting bigger in the coming years?
Ryan: Well, you know, there’s always the talk of a recession. You know, since we started the business in 2010. We haven’t had any real dip in the economy so, you know, it’s like we’re preparing ourselves not to say that we were forecasting, we’re not seeing any deterioration in our portfolio, but this economy cannot continue going as strong as it’s been for as long as it’s been.
So we are kind of inflating that and we were fortunate in 2017, we took over a portfolio for a business where the underwriting wasn’t of the highest quality.
It was a $250 Million portfolio, but this business started in 2005 so we got all the data and payment history through the Great Recession which is built into our models and so we’re looking at that as well.
We feel we’re well prepared for a potential recession and keep in mind the term of our loans are generally like a one-year term, they’re short term. So we can make changes quickly in the underwriting side if we’re starting to see some effects even by states or industries or FICO bans or things like that. We can throttle our models and our pricing to adjust accordingly.
James: Got it and I think looking at a potential recession is definitely important, not that I’m necessarily forecasting a recession, but a lot of people have been talking about the possibility of a recession and I would say a lot of people have been talking about recession for the last couple of years, but, nonetheless, when it’s going to come and they will be well-positioned for it is a good thing.
Ryan: Yes, I agree.
James: So in terms, of…now that you’ve been in the business for a number of years and you’ve grown, certainly grown faster and more successfully than some of your peers, what would you say are some of the essential elements for a small business lender to succeed?
Ryan: So, you know, I think it’s a combination of both tech and data science/artificial science so having a strong risk background is important so we, definitely, are more of a credit shop than a settle shop. Even though we have a strong sales team, our credit underwrites, I think, is where we shine.
I think our underwriting is very strong here and we are always looking for new and alternative data sources that we find predictive and implement and test into AB testing.
But having a strong analytics team is, I think, a differentiator for us because, you know with the power of data-making decisions based on the data that we’re seeing allows us to make decisions much quicker, smarter and we’re sort of constantly iterating around that.
James: Yeah, and I think that’s what distinguishes someone like you from a traditional direct lender that’s really sales-focused. Even though a lot of people lump the non-bank lenders together, the fact that you have strong data science and decision science team and effort are the things that certainly set you apart.
Ryan: Yeah, I mean, that’s something that we completely agree. Like if you look at the landscape there’s not many of us that have like a securitization and the cost of capital that we have and we also have just a very strong model that has really predictable results and now going on four/five years where we’re seeing a very static loss rate which is good for us because we just want to make it steady.
We’re not looking for lumpiness in that regard and it’s been very steady across the board.
James: Got it, terrific. So looking ahead, what are some of your plans for the remainder of 2019? What are some of the things that you’re planning to do to stay ahead of the competition?
Ryan: So we continue to implement various tech products that we’re working on. We just rolled out, what we call independent sales office online application, which really allows somebody to submit business to us on a wholesale basis. It goes through our pre-qual engine which the client automatically looks for, whether or not we’ve seen the submission prior before and then it will go directly into our intake and pricing queues.
This has like become a match making the process much quicker and more accurate and the user experience for us has been very noticeable. So that’s one change that was obviously a big and important change that went in.
We continue to really refine our tech stock and implement our micro services on the data science side to allow it to throttle certain things that we can test around.
That’s something that is important to us because if we can eliminate something and price it in and test around it and see whether or not it makes a difference, that’s where, I think, we can have an advantage as a small nimble kind of business where we can make these changes very quickly.
James: That’s great and I think having spoken to quite a few direct lending businesses, it’s not easy to combine the text tech that you have with the cost of funding and the level of finance stock that you have. So it really is a winning combination that’s pretty awesome.
Ryan: Thank you.
James: Is there anything else that you want to tell our listeners about your business and what else to look ahead in the lending business.
Ryan: Yeah, I think personally it will be some consolidation. Looking at the tech and architecture of the technologies associated with these online businesses are important. I think that you’re seeing some businesses start to become a little more attracted to the online space, they’re looking at the ecosystem, or they’re working within the ecosystem of small businesses and offering different products.
So I do think there will some strategic acquisitions out there that look to buy the businesses via a credit card processing business that doesn’t really offer this product such as Square and whether they buy or build will be certainly a determination that will go through. But having the back data to show the loss curves and sort of having the ability to really look at different industries under different stresses, I think will be a differentiator for Credibly.
James: Got ‘ya. Well, definitely a lot of exciting things to look ahead. Ryan, thank you so much for speaking with us today and thank you for providing our listeners with a perspective about your company.
Ryan: I appreciate your time and, you know, if there are any further questions, please don’t hesitate to let me know.
James: Terrific, have a good day, Ryan.
Ryan: Thank you so much.