This month, LendingTree had the opportunity to interview Business Backer CEO, Jim Salters, and ask for his insight into the business loans market. We wanted to know what Jim was seeing first hand and how he expects this emerging market to grow over the next few years. LendingTree’s Communications and Public Relations manager, Mike Ouyang, had the opportunity to sit down with Jim over Google Hangouts and speak:
LendingTree: So Jim, before we get started can you tell me a little bit about yourself and little bit about Business Backer?
Jim Salters: Sure. So the company was founded in 2007. So, it makes us feel a little old, like we’re one of the older companies in the space. We’re based here in Cincinnati, Ohio and we’ve been enjoying some pretty remarkable growth over the last six years. It has gone from about four people to about 75 people since I became CEO in 2009. And we’re excited not only to be participating in this industry and serving small business owners, who truly are what we can call our American heroes, but really trying to go about it in a different way. And that’s something that we hope that we can continue to be successful in, that our different way of approaching this business, and putting the customer first, and really organizing the entire business around better serving the small business owners hopefully influences other people in our space and around small business to adopt some of the principles and things that guide us.
In terms of me personally, I’m not sure how I really got in this business. I didn’t have background in lending, I didn’t have a background in any sort of finance–but I definitely came out of a family of small business owners. My dad was a small business owner, self-employed, and my mom actually had several small businesses including running a daycare out of our home when I was a young child. I’d come off from school and 15 other kids would be there, because she was running a daycare in our house. So that whole notion of taking risk, I think also the individuality, creativity, and the contribution to our communities as small business owners, is somewhat in my DNA. So when I saw the opportunity back in 2009 to leverage the skills and experiences that I had developed up to that point, and really help to shape-in this very early stage industry, non-bank access to capital for small businesses, I jumped up to the opportunity. In 2009, we mortgaged everything we owned and my wife and I really sort of took the leap and it’s been a wild ride ever since.
LendingTree: Great, thank you for joining us, Jim! So jumping right in, how many loans does Business Backer currently fund each month?
Jim Salters: Right now we’re doing about 400 a month. What we do here internally is that we offer alternative financial products. But also depending on the customer’s credit qualifications, look at other things and what their goals are, we actually put small business owners into the full range of small business financing, primarily debt-based to lending-based products out there. So we place people into SBA bank loans, near prime products, premium alternatives, standard alternatives and high-risk alternatives. And so, across that entire spectrum we’re serving between 400 and 500 actually funded deals monthly.
LendingTree: What exactly makes Business Backer unique from a lot of the other small business lenders out there?
Jim Salters: It’s our philosophy. It’s just how we started the conversation about how we want to be in this space, how we want to serve the customer, how do we want to be different. And it started with a simple, very profound, and powerful thought that’s guided our business over the eight years that we’ve been here. And that is our customers well-being is as important as our own.
Everything that we’ve done as a business then has been organized around that thought. So for example, rather than look at customers as companies to make money off of or to extract profits from, we look at it as much more of a symbiotic relationship. And why wouldn’t it be? Given the nature of the relationship where in many cases we have risk, we have capital at risk based on the performance and the success of our customer. But we find the prevalent philosophy is customers are there to harvest profits from, it’s become deeply dehumanized. And then what you see then is games with themes, or pricing, or different ways of structuring products with the goal being to get more profit from the customer, usually at the customer’s expense.
So in that exact same scenario, we asked ourselves how could we approach what we do with the customers so that their success is just as important as our own? It means we basically ask ourselves how do we charge the customers less, not more? How do we provide broader access to capital and a lower cost in a way that feels like a trusted partnership as opposed to an institutional sort of commodity relationship? And, when we are working with customers who are having issues paying us back, how shall we treat them? Should we be aggressive, and firm, and eager to use legal kinds of reports? Or should we act as if they’re doing their best and we have an opportunity to be flexible and help them through that patch?
And so from really top to bottom, our culture is about serving a small business owner as if their well being is as important as our own, but it’s not charity, it’s not altruism; it’s something that we’ve found is also more profitable. Our loss rates are much lower than what we understand our competitors’ to be. We do similar things and charge less than our typical competitor. It’s not just sort of nice from a emotional standpoint, it’s actually better business given that we’re in a financing and risk based business with our customers.
LendingTree: Sounds like you’re very relationship focused. Do you follow up with your various clients after they’re funded a loan?
Jim Salters: Absolutely. We have an extensive process in terms of really understanding those customers’ needs and what they’re trying to accomplish, and then obviously we work to find, again from all of the options on the market, all the products on the shelf at our disposal. So we really are doing what’s best for them. So say if we can put them into a SBA loan and that’s the best thing for them, but it’s going to take maybe three or four weeks to get that done and they need something now. Then you might create a strategy to offer something short-term – it’s kind of bridge financing, because they have a need right now. They can get through the time of a month or two it’s going to take to close on an SBA product, which is obviously much longer terms, much lower rates than most alternatives. In this whole process, we’re talking extensively with customers upfront and then throughout.
One of the unique things that we have as an in-house product is an always evolving alternative line, which is like a line of credit. What we’ve found is that our customers – most of our customers, are looking for a line of credit type of capability. They’re not really looking for a one-time term loan for a single product, a single project. They’re looking for ongoing access to capital, a liquidity tool that helps sort of smooth out the ups and downs of cash flow.
We’re talking to those customers throughout and as the relationship precedes, the business could be growing. We could be increasing their availability of capital. We could be lowering their rates as they are hitting milestones, and building a track record with us. Or of course there are times where there is some negative event that affects their business. We work with them to understand those things and how we can support them without just turning off the access to capital, which many companies kind of jump right to that, turning off capital as soon as there is a blip.
LendingTree: What are some of the factors that you look at evaluating a loan?
Jim Salters: Well I will say there are two things to that. The first one is we have over 10,000 transactions that we’ve done over the last six, seven years. We have extensive algorithms and data science and typical kind of really hardcore quantitative underwriting scoring models. And we use a few of those in various degrees of production and testing and development.
LendingTree: By scoring do you mean a consumer’s credit score?
Jim Salters: No, I mean our proprietary scoring model which produce scores for us here to use internally. But I think one of the big things we talk about is a 80/20 rule here. So about 80% of the decisioning and the efficiencies that come with it in terms of making it fast, easy, and predictable, something as important to small businessowners, is quantitative, so that helps us do that. But that other 20%, is more of a qualitative part of our decision making. So many times the models will tell us, “Hey, there is an issue here, and here is a decline reason,” or, “Here is a red flag.” Well, rather than just sort of let the machine spit that out and then send them away, or act solely on the credit models, we’ll actually follow up with that prospect or existing customer and understand the story with a verified type of approach. So, somebody can tell us that there was an issue with maybe an account on their personal credit. They can explain what it was, and they can verify to us that it’s not relevant to the business or the health of the business.
What that allows us to do is to push people back into lower rates, better terms without an arbitrary demotion on the credit spectrum because of something that’s kind of silly and not really relevant. Sometimes the computers can’t tell a difference between a legitimate issue and small insignificant issue. 20% qualitative decisioning is just common sense in many cases. It’s understanding the circumstances that explain the numbers. It goes a huge way towards allowing us to offer superior experience for the small business owner, and ultimately better terms, and better rates on an apple-to-apples basis for a particular customer compared to other companies that we compete against.
LendingTree: That’s great. It sounds like you’re treating your clients like people, not just a number in a system.
Jim Salters: Absolutely. One of the things that we hear all the time in speaking with our customers, both customers that didn’t go with us and customers that did work with us, the number one thing that we hear is that they miss the relationship they used to have with their bank. And the opportunity they saw in working with Business Backer was that their financial advisor was going to be there for them in that way. It’s not just “being there” like sort of ready to answer the cell phone. It’s being there when they need it the most. So if they build a track record over three, four years with us and then they have a hiccup, and that’s when they need us the most, then because of those years of performance where we built this relationship and they’ve demonstrated to us that they have a successful business, we can work with them on the financing. They need us to be there when sometimes things aren’t pretty and that’s a big part of that relationship.
Back in the old days lenders knew your family, they knew the community, they – maybe they were actually a customer, and so any short-term blip or problem was seen in the context of a broader relationship and a broader reputation of trust in that knowledge. It was all the automation and in many ways the extraction of that human element, one of the things that many small business owners today has experienced, that has lead to a complete dehumanization of the process.
For us it’s two things. That’s customers having some influence on frontline, financial advisors to understand the situation of a small business owner and take into account the 20% qualitative piece. Then it’s – the company actually understanding the bigger picture when it comes time to make a credit decision or a funding decision on credit. Those are two things that we really focus on. And that’s why we call it true relationship financing. For us, a relationship isn’t about how many products we’ve sold you, a relationship is truly a human relationship where we know each other and we trust each other. And, that we are going to do everything in our power to help the other person, but that’s got to be a two-way street. That may not be for everyone – but we can help that way.
There are going to be people that may look to deceive us or do those kinds of things. We have to take that in stride, but that doesn’t stop us from being focused on the mass vast majority of our customers as we focus on delivering that relationship experience. So if somebody calls, just as a small example, somebody calls here directly. They’re always going to get a human being picking up the phone if they decide to call us and need us.
LendingTree: You’re adding the human element back into the financing relationship.
Jim Salters: Absolutely.
LendingTree: How easy or hard do you think it is for the consumer to get a business loan today compared to say five years ago or 10 years ago?
Jim Salters: In terms of ease of getting a loan or funding, I would say it’s by far the easiest it’s ever been, but I would also say buyer beware.
LendingTree: Why do you think that?
Jim Salters: Well I think there are a few different things that are happening. I think first of all, there is just a tremendous amount of investment and innovation in serving this sort of non-bank or sort of beyond the traditional credit models, and business models, and capital structures that existed in the past. So we’re seeing a lot of non-bank companies that are seeing increasing amounts of investment from venture capital, private equity, and lending capital funds. All those things are becoming much more available to the alternative lending industry.
And so, you’re seeing a lot of companies starting up in the space, which actually has relatively few barriers to entry to start operating. I think you’re seeing also just a proliferation of providers, and intermediaries, and different players in the space. All that investment and innovation is definitely just increasing supply. Now how many of those players will be here five or ten years from now, I think is a different conversation. But for now, these companies are coming out of the gates, they’ve been very aggressive, and for the small business owner it’s a net positive thing. However, I think there is a big red flag to watch out for in the same conversation.
Now, people are using technology and automation to make it more efficient to get financial information, and using credit models and decision engines like we talked before, to determine lending. But often times I think what you’re seeing today is the easier and the faster it is in general, the more risk lenders take in the lieu of getting more information or taking time. And so, there is more interest being added to the capital to cover for that increase in risk.
I think that’s going to be a key place where innovation, maturity, and improvements are going to occur. If you look at some of the companies out there that are really going the fast and easy route, what you’re seeing is their loss rates are for example, about 2x. For companies that are putting a little more due diligence in and getting a little bit more information, the difference in underwriting performance is enormous. So at the end of the day, what’s happening is the faster and easier it is these days, the more risk lenders take. I say “beware” as that’s probably going to show up in some rates that you see from some lenders, because they’re going to have to cover up the losses. It’s somewhat of a double-edge sword.
LendingTree: That makes sense. Moving along, we recently ran a survey asking questions to small business owners, and we found out that one the major frustrations for business owners was that the loan application and approval process was very long. How is the industry is addressing that?
Jim Salters: Yeah. I think to the so called old days where we had a lot of paper documents that had to be found on the part of the small business owner, that may be was not organized very neatly. So you had to have a lot of the time and put in the effort to assemble that information, get it together, and submit it to a finance company lender. Then you would have the issue of what other kinds of information and follow-up does that particular lender or finance company need and is going to ask for. It could potentially be business plans, or contracts, a lot of verification of documentation. I think what we’re experiencing now is the market is seeing that customer sentiment. We’ve seen this and people in the industry talk about the same thing.
This is not necessarily common sense, but I think the customers’ behaviors speaks for itself. This is speed, there is easiness, and then there is also reliability. That’s probably another really critical need. How quickly can you tell me, that as a small business owner all of this work you’re asking me to do or you’re going to ask me to do later on, is not going to be in vain? I want to know I’m not going to be declined at some point after doing all of this work.
And so, I think from the lender side you’re seeing people moving with decision making, firm decision making, closer to the beginning of the process. And, what we’re also seeing is the automation of a lot of that information. There is a number of vendors out there that are doing a great job of innovating such as by making it literally as quick as logging into an online banking account and uploading the bank statement data directly to the finance company. Those are two big areas where I think historically, that’s where a lot of the manual work came from, bank statements and financials. Perhaps also even tax returns.
There is more innovation around –the customer being able to now pretty much just sign authorization and allow us (lenders) to get that information directly from the IRS. We think a lot more of the vendors innovating and providing that connectivity is helpful. Innovating to where it becomes almost instantaneous and all the customer has to do is fill an application with information, potentially input their bank logins, and connect it to their accounting software. Potentially also with a login and for all that information to be instantly uploaded to the finance company assuming that finance company knows how to use that information. As main points there, I think that connectivity has really continued to further streamline the origination process.
On the other hand I think what you’re also going to start seeing is a lot more of companies trying to make decisions with less customer information. And again we’re not there yet and I think some of the companies doing that are seeing Wall Street and that process are just not going to work long-term currently. But, we’re definitely going to find over the next few years, just because the way people are pushing and innovating, that breaking point where you can kind of minimize the amount of the customer information needed, but still be able to make repeatably, profitable credit decisions on the backend. And I think that this is very much – I say the second or third inning of a nine-inning game in terms of the majority of these platforms emerging over time.
LendingTree: I see. So what are some of the common mistakes that we’re seeing business owners making in the loan search and the actual process of applying for a loan? Would you have any advice for them before they jump into the loan process?
Jim Salters: Absolutely. Frankly one of the things – obviously I’m a little biased, but I think one of the mistakes the small business owner makes is they try to go it alone. I would say the number one thing that we recommend regardless of who it’s going to be, and obviously we want it to be with us, but regardless of where you go, our number one piece of advice would be to work with an expert advisor. That’s somebody that understands the vast array of different products, providers, pros and cons of different choices amongst those products and providers, and the implications to a particular business situation. What are their goals and what products do they actually qualify for based on their credit?
For a lot of people going in alone unfortunately, often times things end badly for that small business owner. Where if an expert advisor were out there, it really would have helped them not only save time, and energy, and stress, but help them make a better decision on sometimes what will be probably the most important thing. But even when someone goes out on their own, I think the other common mistakes we see are fixating on one of the main terms of the deals. So for example, we see some of the business owners come to us and they are fixated on a dollar amount and they’re almost blind to the rate or more often, they’re blind to the cash flow impact that the payments are going to represent.
They’re so intent on getting their $50,000 or $60,000 or whatever it is, they often times will only take that amount or probably find somebody that will give it to them, but in terms that are unsustainable for their cash flow investments. Thus, payments that are much too high is the typical thing we see. All of a sudden they got the amount of money they needed, but they didn’t have the foresight to really analyze whether they can really support those payments with their cash flow and often times they find they can’t. And then that can lead to this really unfortunate, but ugly and much too frequent dead track. Sometimes what happens is somebody gets fixated on a dollar amount, and maybe a broker or even a lender –inflates the dollars on what they’re looking to get, because ultimately the providers make more money when the customer takes more money.
The only way to get to a higher funding amount with the customer is either to increase the payments and/or increase the duration of the financing and typically it falls back on the payments. So after set payments are much too high, two, three, four months down the road the customer is in a crisis, because the cash flow impact of that financing is becoming a major, major impediment to just being able to operate. And then they need more financing to solve the cash flow issue of making the payments getting them stuck in this borrowing track again. Unfortunately we see it every day. Our number one advice here is if there is any one thing to fixate on, it’s the payments and the cash flow impact of those payments. Those payments being too high can single-handedly drive an otherwise successful business to go out of business, because they literally can’t even afford to replenish inventory, their payroll, or other things, because the loan payments are just much too high.