Interviewed By The Asian Banker Live
John Donovan, chief executive officer of Bizfi, discusses the company's evolution from being a balance sheet lender, how it currently works, and how it has automated its documentation processes.
Here is the transcript of the video:
Emmanuel Daniel (ED): I’m very pleased to be able to speak with John Donovan, chief executive of Bizfi, a small business lending platform.
John Donovan (JD): Yes. Thank you very much.
ED: Yeah, and tell me a little bit about Bizfi: Who founded it, at which point did you join Bizfi and what’s the size, in terms of number of loans it’s made. I think it made $2 billion worth of loans, as of last year.
ED: And how is it spread geographically as well?
JD: So, the company was started by a person named Steve Sheinbaum; who started it in 2005 – had raised capital back then, hasn’t really needed any capital since then, though we are currently in the process of raising some additional capital. But the company, itself, Steve saw the opportunity of providing businesses with financing, talked to a small group of people that could help him fund it and got the company going.
I actually met Steve in 2006, 2007, as Lending Club was getting going, and I talked with him about bank partners. And actually, it was a person who worked for Steve who had recommended Web Bank, which is who Lending Club ended up going with. So, I’ve known the company for quite a bit of time and then got involved as the CEO in October of last year.
Bizfi has done $2 billion in originations and what attracted me to the company – and some of the technology that they’ve built – is, it’s not only a balance sheet lender – meaning they lend their own money – but they also have a marketplace. So, they’re tying in with 45 different lending partners, dozens of different products; so, really trying to find: What’s the best product that can satisfy merchants?
ED: So, did Bizfi start off as a lender themselves?
JD: Correct. They started off as a balance sheet lender, lending out money – mostly merchant cash advance.
ED: And so, what’s the percentage now like? How much of it is the old money?
JD: So, now it’s about 70% balance sheet, 30% marketplace. And I think you’ll see marketplace grow more quickly over the coming years.
ED: Okay. Is it important to keep the balance sheet part of the business?
JD: I think so. When you look at the consumer side of the business, when you look even at the business side, I think what a lot of people will argue is that, marketplaces don’t have skin in the game. So, the fact that we balance sheet means we have to understand underwriting, we have to understand how we’re actually moving money, and that’s very important.
At the same time, we don’t have a solution for every business, so partnering and offering the marketplace is, I think, important from a conversion standpoint and trying to satisfy the greatest number of merchants.
Partnering with banks
ED: Alright. As a conversation – in fact, this is, like, the first conversation I’m having with a business lending business, as opposed to a consumer credit platform. Everybody else seems to be going in for the subprime customer or the really distressed customer kind of thing.
How much of what’s happening on the platform for business lending is a reflection of how banks, themselves, are organised for small business lending? By industry segments, by corporate finance advisory roles – like taking customers out to their IPO and stuff like that. Now, that’s how banks would look at the small business customer or the middle market customers, they would call it. So, how much of that is transposed back onto the lending platform?
JD: Well, you know banks have their credit profile that they’re trying to go after and the reality is banks haven’t really ever done small business lending. When you consider the loans we do – or the advances we do – you’re talking about less than $250,000.00; less than $500,000.00. Many of the top banks have policies, actually, that they won’t do anything under that amount; they won’t do anything under $150,000.00 because they can’t underwrite it.
And we’ve certainly seen in the past, if you look at community banks, there used to be 9,000 community banks. There are now 5,000 community banks. So, you’ve had this consolidation and those were the ones that might have been lending to the local pizza place, who really understood what was going on in the communities.
If you look at loss rates for small business lending, the loss rates are directly related to how far the business is away from the bank, and that’s because of that community type of involvement. I think if banks have consolidated, they have pulled away – if they even did offer some of the small business lending – and that’s where partnerships with people who can, to underwrite those small tickets, have been important. And you’ve certainly see that with OnDeck as a partnership with Chase; others have partnerships that have made sense. We have a partnership with Western Independent Bank.
ED: You originate for them? Or, when you say partnership, how does it work? Do you still keep assets from your old book or?
JD: So, it depends on what are the business needs. So, if they qualify for an SBA loan, we’re going to offer them SBA. If it’s equipment finance, if it’s factoring, it’s a variety of products really looking at what that business needs, but really just providing them a, you know, “Hey, based on the credit you’ve given us, based on the information in our application, here are the options you have.” Quick, we’ll send you right through to a third party or it’s something that we may provide. We’ll have that conversation with the business.
ED: And how many loans has Bizfi made? What’s the community that it serves – you know how many SME customers?
JD: So, we’ve done $2 billion in originations; the first billion took about ten years, the second billion took two years. We did $550 million last year.
ED: And numbers?
JD: Numbers – it’s about 35,000 customers.
ED: So, what did you learn from your 35,000 small business borrowers?
JD: I think some of the stuff that I’ve learned is we’re only scratching the surface, in terms of what the need is –
ED: Are they geographically-centric – like, are they all West, East coast?
JD: No, it’s really spread out. You certainly see a concentration related to where existing population is. For us, the average amount of revenue per month is $75,000.00, so I wouldn’t say they’re really small businesses going through. So, with that, they tend to be closer to the populations that can support that type of sense -
ED: Right. But it’s still a small sample size to come up with goals and trends and stuff like that.
JD: I mean, if you look, there are 28 million businesses, right? But the vast majority of those are incredibly small – 25 million or something. You talk about a million numberis significantly larger; it’s a pretty small segment – five million customers that fit into that profile. But again, they’re driving a lot of the jobs; they’re driving a lot of the–
ED: Right, that’s true. But then its 37,000, you said? Are you able to classify them according to industries and see the street trends?
JD: So, we certainly see restaurant, retail – those are places that are large for us. They’re entities that need inventory. They’re entities that need financing relatively quickly. So, if you look on the consumer side, many times consumers are choosing APR first, and then maybe hope that they get the money, in terms of convenience. For businesses, it tends to be: “I need a certain dollar amount and I need that within the next two days” and everything else is secondary to that. So, how can they get that capital?
Now, again, those that may qualify for an SBA loan, those interest rates are much lower but that’s going to take weeks for them to get that in place. So, it’s a real balance, in terms of: What does the business need the money for? How much profit can they make off of that? If it’s inventory that they can turn three or four times a year, then their opportunity to pay as a percentage of the future receivables is greater.
ED: How much of the business is collateralised? And how much of that would you consider it to be?
JD: So, we have equipment financing partners that we go through and do it. I wouldn’t say it’s a significant part of the business. That’s where the banks, I think, do a better job.
If they’re talking about someone who has a large asset that they can borrow a million dollars against, well, the banks will take a lower interest rate. Because the dollar amount is so high, they can actually make money off of it. And from an underwriting standpoint, there’s not as much risk because they can go after that asset.
ED: Right. So, do you securitise? Do you take it – I mean, do you sell off the portfolio that you generate?
JD: So, we have funding partners that are funding us, right? With a typical type of senior debt facility, junior debt facility; that type of structure.
ED: They tell you what the appetite is and then you go look for borrowers or?
JD: So, they give us debt based on a certain set of terms and a certain underwriting policy that we’re, then, going in and looking at for our balance sheet.
ED: But what about the matching business?
JD: For all the partners, they’re also telling us similar things: “Hey, we do equipment finance and this is what we’re looking for.” “We do invoice finance. This is what we’re looking for.” “We factor credit card receivables. This is what we’re looking for.” So, the application – we get a lot of that information from the business and we’ll know, from that very quick application – it only takes a few minutes – what are the different types of debt that they might be able to access and how can we put them in touch with those partners?
ED: And a similar small business lending platform in China seems to have two other components to it. One is the payments component; that is, once you’ve approved the loan, you should be able to send it to the small business very quickly. And the other seems to be, they seem to be taking a position of helping small businesses manage their cash flow and their float. Because they generate a float, in a way, so that becomes like wealth management and stuff like that. Do you see yourself going that way? Or is it still early?
JD: No. I mean, today, we already fund same-day in some instances. So, when we’re doing –
ED: What makes you able to do that?
JD: Oh, so it depends on the business: How credit-worthy they are, if they’re giving us the documents that we need to determine that, and then we can provide them that funding when it’s approved.
JD: From the standpoint of – there are businesses in the past that have tied into credit card receivables or have done what’s called swift processing, with credit card processing companies. So, there’s a variety of those types of entities that are out there. There are great companies that will fund online advertising, that are tied into the online advertisers. So, I think it really depends on how they’re connected into the business, how the business approaches them, what data they have to underwrite and then, how they can provide that funding.
ED: So, how many of your staff are out there, looking for supply chains or floats that they can lend into.
JD: The –
ED: And do you have examples of floats that you lend into, that gives you the comfort level that you’re actually lending into an industry that you understand and that there’s some form of security?
JD:So, if you look at how we get our customers today, a third of them, roughly, we get through direct mail, direct marketing, SEO/SEM. So, we’re going out and we’re finding those customers. A third are through partners, where we’ve partnered with an entity that we may white-label a site, we may go out to their customer base to try to get their customers; and a third are through national sales offices. So, we’ve got different sales people that are coming through. For the types of funds that we’ve put out, it tends to be that they need it more for inventory; they need it more for some of those very specific short-term needs. For invoice financing, we have partners in that space. I think, as you’re getting into where the space is going to grow, I find it very interesting when you look at a Square, you look at a PayPal, you look at an Amazon – they have an entrenched customer base and they’re providing financing to a customer that they know very well.
ED: So, in that regard – like a payment flow, for example – do you at least talk to principals and then work out how many small businesses that are dependant of them, distribution base and –
JD: So, for our invoice financing partners, that’s certainly something that they go through and do. And, I mean, there was a very interesting presentation yesterday that Soul Htite from Dianrong, I had worked with him at Lending Club – you know, that he has some technology that’s looking at the blockchain, in terms of how do you track the invoices all the way back to the fifth-level supplier. I think that’s a lot of the direction that the industry is headed in – that, how do you get deeper and connected in, where it’s much more of an automatic transaction, as opposed to an application that they’re filling out.
ED: Right. And I still feel very uncomfortable with the fact that you seem to have a small sample size.
JD: Oh, yeah.
ED: And you know, like I said, are there plans to ramp it up very quickly or?
JD: Absolutely. I mean, not quickly, right? So, with that small sample size, we’ve done $2 billion in volume. We’re the fifth largest in the United States.
ED: And all of them are repeat customers as a result or?
JD: Well, some are repeat customers. We certainly get our share of repeat customers. If you even look at the largest players, you’re still only talking about – the small business lending market, for some 250K, is about $200 billion. So, when you put all the alternative lenders together, they’re about 20% of that market today, right? So, that’s not a lot of money; it’s $40 billion. We think that’ll be the majority within the next five years. So, that area is growing very quickly and we think it has the ability to break out beyond the existing segment.
ED: How do you distinguish yourself from other places like Kabbage?
JD: So, Kabbage is a partner; OnDeck is a partner.
JD: You know, we really look at it more as: What’s the best way for us to get solutions in front of our providers? And if we can’t provide that and Kabbage has a better solution, we’re more than happy to route that to Kabbage. In fact, our sales people aren’t compensated more if we end up funding it versus somebody else. So, it’s really looking at that approach from – You know, if you think of how Amazon had started, right? Whether they sold the goods or some other retailer came onto their site and sold the goods, they wanted to manage that relationship. I wouldn’t say we had the same aspirations originally, but it’s a very similar philosophy, in that we’ve got the marketplace and what’s the best solution that we can provide.
Automating the documentation process
ED: Right. So, how automated is the documentation process? And how much more automated can it become? You know, you have Inland Revenue documentation, which you can get off the web, but what about everything else for small business?
JD: Yeah, great question. You know, when you go in and look at how small business underwriting takes place versus, let’s say, consumer, small business cash flow is very important, right? So, we’re going through and pulling three months of bank statements. We’re analysing those. As you have partners – let’s say you have a bank partner and you’re trying to underwrite this base and you have access to the bank account – we can automate that whole aspect of it. The second is what industry they’re in, what geography they’re in – that’s very automatable. We have partners that have helped us automate that, to a large extent. Another part is the credit of the business owner, right? So, from the standpoint of pulling their bureau, that’s very automated.
A fourth part that I think people miss out on, to a certain extent – I mentioned before that small business loss rates are directly related to the distance from the banks that underwrote them. The way to combat that is through social data. So, we access a lot of social data to help us understand fraud but help us understand the business. So, if we’re seeing that it’s a pizza restaurant that’s come in and asked for money to get a new pizza oven, but we look on their Yelp profile and somebody put in there that the place just burned down the week before, we’ll see that. And that gives us an idea of how that business is actually operating and allows us to ask the right questions.
I think all of it, we can automate, but the toughest part is that cash flow. And I think there’s a great example of where Kabbage has done a very good job of integrating it into third parties – whether it’s the PayPal volume or whether it’s their UPS deliveries – what’s the proxy for those sales and then how do you use that to translate that into an underwriting decision?
ED: And so, that underwriting decision – the automation of the documentation is one part of it – but the actual credit process is still manual.
JD: The credit process – We’re having a discussion with every single business that we fund. Yes, absolutely.
ED: And so, how many staff do you have in your place?
JD: So, we have 200 employees. We’ve got 60 people in what we call direct sales, which is really managing that marketplace, and we have about 20 people in our underwriting area, who are having those discussions.
ED: Right. And you’ll need to scale that part of it because –
JD: That’s a direct relationship to the volume, as you come through. Technology can scale less, other things you can automate. We’ll automate more of the scoring, but certainly, we’ll be hiring more in directs, yes.
ED: I’m really curious about how geographically concentrated your business is, at the moment. Is it –?
JD: It’s national.
ED: Once it’s national, it’s way too distributed for it to have a profile of Ohio or Kansas or another part of the country. So, don’t you think that you need enough critical mass in different parts of the country to actually understand profiles?
JD: Well, it depends on if you’re profiling geography or you’re saying, “Here’s a restaurant. Our underwriters understand that industry. What’s going on?” Now, is Ohio having any particular issues? You know, if it’s Detroit before the auto crisis, you’re probably going to be really careful about anything you do to anyone in Detroit.
ED: But a pizza restaurant in New York is different from a pizza restaurant in Saint Louis or something.
JD: It is, to a certain extent, but at the end of the day, if you’re getting a call from them in the middle of the day on a Saturday, our underwriting is probably going to be a little concerned that, “Wait – hold on. You’re a retail establishment. Why are you calling us now?” Most of our applications come in after hours and through a mobile device. So, we get the sectors. We know when we’re having those conversations. As far as going in and customising to the geographic level, it tends to be more industry-driven and then there’s other scores that we look at from geography: Did unemployment just change? Were there massive lay-offs in a certain area? Is an industry really getting crushed? That’s the stuff we certainly need to understand also.
ED: Right. Are you pro inventory-heavy industry?
JD: Absolutely, yeah. Yeah, it tends to be – Because you’re really looking at how can you provide funding and what’s the asset, to a certain extent, you’re going to fund it as. And inventory tends to be – inventory, working capital – tend to be larger categories; putting it in equipment finance, we’ll send that off; SBA, we’ll send that off. It’s how we go in and partner. And you’re absolutely correct. As we grow in scale, we’re going to find different specific needs that a merchant base may have. And then, how do we find the best partner for that?
ED: Right. Thank you very much, John, for giving me an idea of how small business peer-to-peer lending, or marketplace lending, is evolving. Is there an appetite for taking some of these branches off your books to – I mean, on the capital market side, are there investors looking to buy?
JD: Oh, sure. Yeah. I mean, if you look, OnDeck has certainly had several securitisations where they put their loans out to the public market – or, at least, private markets. There’s certainly a lot of interest. People have approached us in terms of how can they invest directly in the asset class; things that we’re looking at for the future that we actually call marketplace for lenders, in terms of how we would go through and provide that.
ED: And for small businesses, are the margins much better than for consumer lending?
JD: Yeah, absolutely. Yeah, there’s more risk in that. So, as you look at it in terms of how we’re going out and providing it. Now, again, you look at an SBA loan and that may be 3%. I think that’s better than most consumers are going to go through and get. But if you’re looking at invoice financing or factoring, they may be significantly higher.
ED: Thank you very much for spending time here.
JD: No problems. Thank you.