Despite the fact that small businesses continue to be the lifeblood of the US economy, traditional bank lenders have neglected this important segment of the lending market. Fortunately, innovative alternative lending platforms such as Fundation have come to market by offering loans that can be funded in days. Recently, we sat down with the two founders of Fundation, Sam Graziano and Doug Gordon, to learn more about their company and how it may be the best new way for service-based businesses to obtain financing.
How does Fundation help small businesses?
Fundation provides small businesses with a true financing solution that until recently did not exist in the marketplace. Previously, small businesses only had two principal options to obtain debt financing – either through a traditional bank lender or a daily payment product like a cash advance company. The two key reasons that banks de-emphasize small business loans is that 1) the manual intensive process they employ to screen loan applications is incredibly inefficient and, 2) their tolerance for risk only permits them to serve only the highest quality (lowest risk) customers. On the other side of the spectrum (what Fundation calls the “barbell”), you have short-term, daily payment products that literally draw payments from your account on a daily basis. When you factor in the duration (length of time to repay) of these products, the annual percentage rates are typically north of 40%, sometimes over 100%. We came to the market to fill what we believe was a major product gap – a product with terms that are similar to a bank loan (2, 3 and 4 year term loans), but with a willingness to lend to a broader spectrum of customers.
How is this different from what banks offer?
Fundation provides a similar product to traditional bank lenders but with a streamlined approach in terms of the length of the process and the requirements from customers. We look at many of the same characteristics of customers that banks do, but do it in a much faster and different way. For instance, we use a system that integrates with third party data sources to streamline the collection of information that can, in part, be used to review a loan application.
The other critical difference is the speed in which we work. We appreciate that small business owners are extremely busy people. So we do our very best to limit how much time they would need to commit to a loan application and provide them with decisions as quickly as we can. Typically, within 24 hours of providing us a completed application, a business owner should expect to have one or more offers from us. Moreover, you can complete the entire process within 48 hours — from applying to obtaining the funds in your bank account. In comparison, it may take an efficient bank 30 days to fund a loan application and an average bank 45 to 60 days. The other main distinction to note is that we lend to many small businesses that a bank will not because we have a different tolerance for risk.
What about the other alternative lending platforms like OnDeck Capital, CAN, & Kabbage?
The small business market is incredibly diverse. Therefore, there is a need for a variety of different loan products. We believe that our loan product category, customer profile and lending process is fundamentally different from the other “alternative lenders” in the marketplace. Many of these products are really “payment contracts” that serve a short-term cash flow need; meaning if they advance you $1.00, then you owe them $1.15 no matter when you pay it back. In addition, the loan sizes are typically below $50,000 and the repayment periods are so short that these products are really not designed for business expansion; they are designed for meeting cash flow needs on a short-term basis. This is not a slight on these lenders at all. We fundamentally believe that there is a need for different products for different types of customers and many of us will have successful lending businesses over the long-term. We just think that customers need to understand the products they use and what the implications are.
What criteria do you look at when offering financing?
When we are reviewing a loan application, we review four primary characteristics of the borrower: stability, character, ability to pay and use of proceeds. Each of these characteristics are determined by our analysis of various data sources as well as application data and our “due diligence” phone calls with customers. We want to lend to stable businesses that are dedicated to building a viable business over the long-term.
As a matter of basic pre-qualification criteria, most of our borrowers must have revenue of at least $250,000, have 3 or more employees, been in business for at least 2 years, is in an industry that does not have a historically high rate of loan defaults, and doesn’t have large long-standing tax liens or other material derogatory actions against them. Having said that, we take into account the entire story of the business. No one characteristic of a business tells the whole story. You have to look at it in totality. For example, a clear, concise plan for using our capital will compensate for other potentially negative factors.
What are the interest rates and how long does it take to get funding?
The terms of our loans vary by borrower, but can range from 7.99% to 24.99%. Our offers are based on a concept called “risk based pricing” meaning the loan offer will reflect what we believe to be the statistical and judged likelihood of losing our money in a loan. We encourage customers to think about the convenience factor in our loans and the overall return on the investment they make in their business with the capital we lend. It’s not all about price.
Are there any prepayment penalties or other “hidden fees”?
No, there are no hidden fees. There’s an origination fee to cover our data source costs, but it is simply deducted from the funds we disburse at closing. For instance, if you apply for a $100,000 loan, we’ll provide $98,000 in financing and you’ll be paying that origination fee off over time. We take great pride in being very transparent with our clients. We do not have prepayment fees. If our borrowers circumstances change and they no longer need our capital then they can pay us off for the outstanding balance along with any accrued interest.
Do you have any examples of clients that have used Fundation?
Yes, we’ve helped many clients across many geographies and industries. One that comes to mind is a 25 year old auto repair shop from Georgia that had been working with a traditional bank lender for almost 90 days in an effort to extract equity from his home to invest in his business. The auto-repair shop owner was referred to our service and applied for the loan with the objective of expanding his service to higher-end vehicles and using the loan proceeds for technology improvements, parts and hiring more staff. He applied and was approved within 24 hours and then had the $150,000 from us within 48 hours. We’ve kept in close contact with him and he’s already hiring more employees and increasing revenue.
To that point, we’ve recently rolled out a job creation initiative called “JobFunding” because it was clear that our loans were permitting business expansion initiatives. We have the capacity to offer over $100 million in loans this year to small businesses, which we believe can create over 1,000 new jobs. Based on a survey of our borrowers, we recently learned that we helped create over 100 new jobs already as a result of issuing $10 million in loans to small businesses in this initiative.
How should small business owners that are interested in Fundation get in touch with you?
You can visit our website directly here to apply for a loan or you can call us for more information at (888) 498-4597.