Virtual Roundtable: Lending After Lockdown
Covid-19 has acted as an accelerant into a new age of funding immediacy in which speed and customer experience are paramount. Learn how agile lenders are setting new standards for small business funding.
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Snippet of Virtual Roundtable Transcript
The question on everyone’s mind is how are you making these risk decisions?
I think at the core of lending is to make sure that we are lending to the borrowers’ needs and making sure that they’re not stretching too much or we are at the same time, it is about maximizing what we can bring to the table. So my background before Kapitus — I’ve worked with a number of different private equity companies rolling up different small companies as well. But the most relevant is working on launching non-card lending at Discover at a time when Discover was spinning off from Morgan Stanley, and the most prominent product that was launched by me, and with the current president of the bank at that time, Carlos Minetti, was the student lending portfolio in 2006, 2007 and today that portfolio is about $10 billion. And I think a number of different learnings as part of my career there. What I’m bringing to bear here at Kapitus in terms of making sure data and technology are used to make the right decision in terms of the right product to the right customer.
Kapitus, most of you might know is a lender founded in 2006, and has been in the business through recessionary cycles with this one being the most deeper one than the 2008. Everything that we have done in the last few years is coming to bear and we are proud to say that we are standing and we are one of the few lenders in the space that have not lost our securitization to rapid amortization events. More on that later.
What are people trying to learn? What secret sauce are you willing to share with the rest of the world as they come to realize just how important cash-flow underwriting and real-time data are to small businesses?
What I wonder, being a marketplace, and what we’re trying to observe is how the lenders will pivot in the interim, which is the cusp of opportunity for their growth to capture market share.
But also a lack of cash-flow data as these businesses are coming back. Right. What are the levers that they are going to utilize in order to underwrite in that environment? And presumably, you know, it’s unlikely that a lender says, well, I will let for cash flow to build up so I can properly underwrite because that’s a missed opportunity. So we’re really watching and talking to our lenders and staying in close contact to understand this very thing that we’re talking about, what are the other levers to be utilized, But again, being a marketplace oftentimes our lenders are interested to know trends, what is happening. You know, where is the majority of the funding occurring right now what is the behavior from the customer perspective, because that’s the other thing like we just have to be conscious of it isn’t just about the supply side right the say there’s lender reluctance and funding, but the SMB customer themselves. There’s a certain behavior there that’s guiding whether they’re seeking business loans outside of the PPP program or not.
So again, to answer your question, the majority of our lenders are wanting to know that sense on customer behavior. And also, what else is happening in the space and predominantly what we’re seeing now even in cases with products that are asset-based. Even they have something in their hand to worry about, even though there is an asset like in the case of accounts receivable. Now lenders are having to worry about the supply chain and diving deeper into that which hasn’t necessarily been the case before. So even these other loan products which are not cash-flow based in their underwriting also have an element of worry.
So again the answer to your question, much interested to know how the market is behaving, not just from the competitive environment from the lender perspective, but also how is the consumer the SMB, what’s the pulse there and that’s what they want to know from Lendio.
I’d love to use that as a little bit of a bridge to ask, for people who are maybe their small businesses, or maybe they otherwise are in a small business ecosystem, are there pieces of advice, tactical things, that the lending community should be saying to businesses?
From a lender’s perspective, are there things tactically that a business could do to improve the signal extending to lenders here, and I don’t know if anyone has ideas. I’d love to see if we can give a little bit of tactical advice to businesses or people in the ecosystem as they think about improving their creditworthiness.
So I would start by almost jokingly, but not jokingly say you change your industry and change your geography, which is, not to see that you should move or get into a different business. But we’ve actually seen some small businesses doing a light pivot, which has helped them maintain cash flow during this time. So people who had been doing in-person retail sales very quickly pivoting to e-commerce and you know it’s easier than ever to say, All right, now I’m going to open a Shopify store and I can pivot to e-commerce, and people who, you know, if they couldn’t do business unless the customer was walking in the door, now they, in essence, changed their geography by offering things to people online and shipping. Obviously, not every business can do that. But it is changing your industry and geography, even a little bit is something that’s possible.
I think the other thing to do if you’re a small business is do everything you can do to be creative and flexible because just like the country where if you think about stimulus to the country. Part of it is, can you finance the country getting through this terrible period so that we’re in a position to come out on the other side. And even if you have to spend a massive amount of capital in order to do so, you want to do that, to provide people, the security and the mental security of being able to stay at home and do all the things they need to do, so we can be healthy coming out the other side.
The same is true for a business. Getting access to whatever capital you have, taking steps to preserve the capital you have. So trying to draw down spending as much as possible, taking advantage of every program out there, figuring out every way to make extra revenue because there is no fixed end date to this pandemic. The more you can bolster your cushion, the better shape you’re in. And then, of course, if you’re applying for funding to a lender, the more you can do to actually demonstrate that one, you have a sufficient capital cushion, and two you have your hands on the controls of your business, such that you can pivot nimbly if you need to. I think that goes a long way, particularly if you’re applying to a lender that has the ability to ingest and make sense of that data.
Phil Goldfeder: Well, it’s sort of what I think most of us sometimes take is common sense, but you know I was watching the news a few months back, where someone has sort of his entire inventory had gotten wiped out. And preparing for a big weekend, sort of repurchased all his inventory and spent a tremendous amount of money. Only for there to be a downturn, and once again, a week later was talking about the second inventory getting wiped out.
I think it’s about small businesses being honest about what the situation is that they’re being confronted with. I think oftentimes in the lending space, we try to force that you know when making the lending decision and looking at underwriting information, we’re trying to sort of dig down sort of what’s common sense here that you have to be realistic about what the outlook is. And while most of us are hopeful that the pandemic is over in a few weeks, and life goes back to normal, it’s just simply not the case. I think the last five months if proven nothing else have proven that it’s not two months, it’s not three months or four months, and quite frankly, we don’t know, and you have to prepare. I think everybody thinks like great you know what can be reopened again next week. Let me refill my entire inventory and we have a great weekend and all back to normal. I think this is going to be a slow burn. And it’s gonna be a slow process of coming back. There’s no such thing as to turn the key and the engine is revving again. I think people have to be realistic about what that would look like.