Tech — And A Human Touch — In SME Lending

It’s well-documented by this point that banks and other “traditional” avenues of financing are less than chomping at the bit to offer loans to small and mid-sized businesses. Frequently, the loan process is an arduous one and can take weeks or months. Many small businesses may not have the operating history in place to snag the funding they need.

There’s been no dearth of startups that tout the advantage of technology in speeding loans into the hands of small companies that may not otherwise get them. One new — quite new — entrant into the alternative lending space is CapitalFront, which began offering financing (and merchant cash advances and ACH funding) to smaller players just several weeks ago across a range of businesses, including sole proprietors and LLCs.

In an interview with PYMNTS, CEO and Cofounder Brian Simon said that traditional lenders, including big banks, have been hesitant to lend to SMEs because there is typically less collateral available to secure loans. “For example,” he said, “many firms rent and have ground leases” and may not actually own much in the way of physical assets. Thus, they may be perceived as demonstrating more risk. The SMEs themselves may find that the application and approval process takes longer than is practical for them. And, in the absence of collateral, business owners may be asked to put up personal guarantees, which also may be less attractive (to the borrowers) in a lending situation, said Simon.

Simon told PYMNTS that CapitalFront, which launched roughly 12 weeks ago, takes its place in the SME lending industry, beyond servicing the working capital needs of those enterprises, with a few key differences from other models that may be purely tech-driven. He pointed to his own long professional tenure in mortgage lending (prior to helping establish CapitalFront) as helping develop a high-touch model with his new firm that entails “speaking with the merchants and conducting funding calls with the borrowers before funding them … This is a human component,” he added.

In addition, thus far, Simon said that CapitalFront has been able to evaluate each borrower on a case-by-case basis, with attendant decisions to offer loans via partners or to take them onto the firm’s own balance sheet. CapitalFront’s mindset is to develop longer-term relationships with their customers beyond an initial loan. The goal would be to eventually provide deeper financial advice in the future, such as on capital raising.

Speaking specifically to the working capital demand and offerings that are in place and coming through just weeks into the life of the young company, Simon said that the average working capital loan comes in at around $70,000, perhaps as quickly as a few days after a completed application is submitted. Typical terms are roughly six to 18 months, and fixed rates, on average, are in the low 20 to low 30 percent range. Applicants, he said, “tend to want to buy inventory, or, in many cases, it’s a seasonal business that wants to meet payroll, perhaps in construction.” There’s also interest, he said, from franchisees, who tend to have to remodel their stores every few years, as dictated by their franchisors. Longer term, the company may offer partially unsecured loans with longer terms, between 36 and 48 months.

In terms of technology, Simon said CapitalFront is operating with a “proprietary decision-making engine” that works in tandem with the high-touch model mentioned above. While applications are done through the site online, Simon noted that the process still has a manual component and that a dedicated Web portal will be built and offered to applicants soon, which will allow for approval and documentation in a more automated fashion — online and with eSignatures, for example.