StreetShares brings new opportunities to veterans with an innovative approach to peer lending and small business loans
Our post today comes from an interview I had with Mark L. Rockefeller, co-founder and CEO of the peer lending site StreetShares. While many lending sites are settling into one of a few business models, StreetShares is offering a really unique concept focusing on small business loans for veterans. Mark began his career as a military officer and a federal prosecutor. After working on a pro bono micro-finance project in Africa, he joined a global financial securities law firm before founding StreetShares in 2013.
When I got out of the Marine Corps in 2001, the economy was just recovering from the bursting of the internet bubble but the lending market was still fairly open. I was able to get loans to pay for college and then to buy a house a couple of years later. Veterans leaving the service lately haven’t been as lucky.
Addressing the problem in veteran small business loans, combined with a unique way of setting interest rates, could make StreetShares a strong contender for my favorite peer lending platform.
Mark: Veterans today face unique challenges not seen in other periods. I came back in the summer of 2008. Bear Stearns had just collapsed, Lehman was about to and the crisis was just kicking off. So for our generation of veterans trying to make the transition now, there are so many challenges. And we think the peer lending model can be especially helpful for that.
Right now, borrowers have two options. They can go to a big bank, where the interest rate is lowest because the cost of capital is lowest. The problem is that it is very hard for banks to lend below $150,000 because of costs. Underwriting and regulatory costs are the same for a $150,000 loan are the same as they are for a $2 million loan, so there’s much less profit and less incentive to make the smaller loans. You get business loan approvals around 18%, so the odds are not good. You need a business with several years of revenue in the hundreds of thousands.
The other option is going to some of the short-term lenders but most are basically just the business equivalent of payday lenders. Rates average around 50% and as high as 300% annualized. It’s crazy.
Small business loans for veterans are the platform’s target audience and what that allows us to do is there is an additional connection between the investors and the borrowers. There is an additional feeling of trust, a commonality between investor and borrower. That trust in the affinity group can lead to lower rates with our auction-type bidding model.
That auction-type bidding model is really interesting. Could you talk more about it?
Mark: Investors can see all the borrower information including business financials, debt ratios, social profiles and a pitch by the borrower. If it is something in which they want to invest, they set both the amount of that loan they want to back and the interest rate they require to back the loan. Then we run it like it was a reverse auction. We fund the loans with the lowest interest rate and up. Loans are being funded very quickly, in a couple hours for most.
So the investor gets to set the rate they need and borrowers benefit from lower rates than may otherwise be possible.
The loans are fully amortized, right now between one and three years. We experimented with five-year loans but investor appetite was just not as strong. Loans are available from $5,000 up to $75,000 and rates tend to be in the mid- to high-teens on average. As more investors come on, rates will go lower even from there because of the bidding process.
That’s still a really good return for a fixed-income type of investment.
Mark: It is. I feel really good about what we are doing. I was at a lending conference last year in San Francisco and one of the panel members said, “You cannot do a platform that is both for the social good and for economic purposes. You just can’t run the thing.” And I sat there and I said, “Nonsense, there’s no way you can’t do that.” The way to do it is what we’ve done which is as a true marketplace. Not only do investors get strong fixed-income returns but they have the opportunity to back a veteran-owned business. It’s not just individual investors who are interested. I’ve got a hedge fund investor that bids on the site side-by-side retail investors.
And so I think we’re truly blending economic and non-economic returns or incentives in a very unique way that other platforms are not able to do.
I see you also co-invest on the loans.
Mark: We think our investors have a lot more confidence if we co-invest with them. So we invest 5% of the loan along with investors on every loan. We underwrite the loan and look deep into the financials ourselves so investors get the benefit of that extra stage of vetting we do for each loan.
How has growth in peer lending and small business loans affected borrowers?
There are a number of small business lenders popping up all over the place. Choice is usually a good thing for consumers, but in this case it’s leading to a lot of confusion because there is no standard way that small business lenders communicate rates. If you look around, you’ll see what’s essentially the same loan presented five different ways from five different lenders, with no way of knowing which one is actually the best deal. This poses a big problem for borrowers because they have to research all these different rates, some of which aren’t even rates at all. You have interest rates, APRs, factor rates, loan fees, etc. to try and compare, but there’s no easy way to do that.
This has been a point of focus for StreetShares because we truly want our borrowers to get a fair deal. We were one of the first lenders to sign the Small Business Borrowers’ Bill of Rights, which is a commitment to eliminate predatory lending to small business owners. There are six principles in the Bill of Rights, but the first one is the right to transparent pricing and terms. We believe that all lenders should be doing this already, but the reality is that the industry is inconsistent at best.
One way StreetShares helps borrowers navigate it all is with our guide to understanding business loan rates. We can’t change how other lenders present their rates, but we can at least help borrowers understand what they’re saying. Until the industry becomes more transparent as a whole, we’ll keep giving borrowers tools to make better-informed decisions.
Any advice for borrower’s looking to get a loan, a small business loan? What they need to do? What they can do to improve their chances and their rate?
Mark: So preapproval takes about ten minutes. Right now we are preapproving about 45% of the borrowers. Then they build their pitch and get all the financial documents in order. Investors really care about what borrowers are saying so if there’s a compelling story behind your business then you’ve got a chance for a really good rate as more investors get interested in the loan.
Borrowers do need one year in business so we don’t fund pure start-ups but very early stage businesses are will get funded. What is really attractive is that businesses only need $25,000 in revenue. Almost no other platform or traditional lender is offering to businesses with less than $100,000 in revenue so there is a great opportunity in the market.
I would add that it cost borrowers nothing to get on a platform loan. If they are accepted in the marketplace, at the end of the auction they get a loan offer which they’re not obligated to accept. So from the borrower’s perceptive, in my view, every small business in America should see what kind of rate is available. It is absolutely risk free for folks to go online and see what investors think of their request.
I want to thank Mark for the interview. I share his view that peer lending can be done in a way that promotes both the social good and economic profits. It’s the reason I started my two blogs on crowdfunding and peer lending. The two movements are revolutionizing finance and opening up opportunities for borrowers, lenders and investors. If your small business is looking for a loan, your first stop should be StreetShares and its unique rate bidding process.