Investors have cooled off to alternative lending in the U.S. Just look at the near-immediate struggle faced by Lending Club and OnDeck after their IPOs in 2014, or more recently, the knock-on effect Lending Club’s less-than-noble lending practices have had on investor confidence in other marketplace lenders.
Then, there’s the threat of regulation as the CFPB, the Federal Reserve, the Federal Trade Commission and the U.S. Treasury Department all take their turns to probe and poke at the alt-fin space. To some, that means a regulatory crackdown is inevitably close behind.
It’s in this context of stormy seas for the industry that one market player, Able Lending, announced it secured $100 million in debt financing from Community Investment Management (CIM), money that will be lent out to an estimated 500 SMEs in the country.
For Able, the financing was a major confidence boost. CEO Will Davis showed off some of that confidence in a recent discussion with PYMNTS, offering his take on the recent challenges of alternative finance, as well as why he anticipates a light regulatory touch on his company — and not anytime soon.
Industry Road Bumps
In Davis’ view, alternative SME lending players have faced a problem of supply as of late.
The strength of the national economy means there isn’t a shortage of demand among small businesses for working capital to fuel their growth.
“When you look at what happened to Lending Club and OnDeck, it’s clearly [an issue of supply],” he said. “Because of their own unique problems, both companies had their lending capital providers pull back. So, what happened is they couldn’t lend out even though they had strong demand.”
Whether that’s the reality for the two companies, other startups in the ecosystem seem to have taken note. Earlier this year, some companies addressed their peers at a FinTech conference, and sentiment was a bit shaky.
Pat Grady, a partner at investor Sequoia Capital, warned that “upside has been grossly overestimated” in this industry, adding that online lenders are likely headed towards a “culling of the herd.” Ron Suber of alt-lender Prosper, meanwhile, said he noticed many competitors are shopping themselves around.
Recent warnings over loan stacking are the latest scare for the market, with LoanDepot Chief Risk Officer Brian Biglin telling reporters in June that stacking “is causing problems with the whole industry.”
So, what convinces investors to, well, invest?
According to Davis, it’s twofold: transparency and competitive pricing.
Some alternative finance companies, the CEO said, deploy “sleight-of-hand” tricks to hide the actual interest rates SME borrowers will face (Able Lending highlighted this issue earlier this year when it rolled out the True Rate Calculator, a way for SMEs to understand exactly what they would pay for taking out a loan).
But to earn the confidence both of small business borrowers and of the investors that are providing financing through a platform, Davis said, those interest rates need to be low.
“You can’t build a business simply on transparency,” he stated. “In other words, I can say I’m going to be the most transparent, high-cost lender, and I still wouldn’t win.”
Competitive interest rates mean reduced risk for lenders and a higher chance that an SME will actually pay back the loan, he explained, and that’s good for all parties involved.
Regulatory Threat? No Problem
Those two factors — transparency and APRs — don’t go unnoticed by regulatory bodies. But Davis said that Able’s business model, which allows borrowers to nab a lower interest rate by having friends and family get in on the investment action, already survives any potential crackdown headed its way — if that ever comes, that is.
“It’s a little ways off to come into our industry in the first place,” he said about possible legislation. “When they do, they’ll attack the high-cost guys before the lower-cost guys.”
Davis predicts that the CFPB, which has recently targeted consumer payday loans, will focus on the payday loan equivalent of the commercial lending space if and when it does turn its focus to corporate lending.
“I think they’ll follow the same pattern that they’re following in the consumer space,” he said. “I don’t know when they’re going to dip their toe into the commercial space, but I expect that, when they do, they’ll go after the equivalent of payday loans, which are merchant cash advances.”
Again, Davis pointed to OnDeck, as well as CAN Capital, as likely initial targets of the CFPB.
With CIM’s confidence (and cash) behind it, Able seems unphased by both the recent slowdown of alternative finance’s growth in the U.S., as well as the threat of regulation. The key, Davis explained, is to use common sense.
“We basically think, ‘What would the CFPB or any other regulator most likely tell a lender to do in their regulation?'”
“Let’s use common sense,” Davis continued, “like transparency, low rates, no disruptive practices, clear contract, no prepayment penalties.”
By the time regulation trickles down to low-cost alternative lenders, like Able Lending, Davis claimed, his company will have already changed its practices to adhere to what the regulators demand. Of course, it will be a waiting game to see whether the feds impose rules and restrictions on the alternative lending market and to see which companies will get the regulatory hammer first. Only then will analysts and investors know whether Able, or any other lender, survives.
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