Since online lending is a new industry there are very few, if any, true veterans of the space – those people who have spent more than a decade honing their craft. Glenn Goldman certainly qualifies here with 12 years at the helm of the original online small business lender, CAN Capital and now CEO of Credibly.
Since coming on board at Credibly in 2014 he has transformed this business into one of the market leaders in small business lending. His deep experience and creative thinking are evident in this latest edition of the Lend Academy Podcast.
In this podcast you will learn:
Glenn’s time at CAN Capital growing that business to over $1 billion a year.
The origin of the merchant cash advance product.
Details of his investment thesis that led him to Credibly.
Why it was love at first sight between Glenn and the founders of Credibly.
The thought process behind the rebranding from Retail Capital to Credibly.
The types of loan products they offer today.
The kinds of small businesses coming to Credibly for capital today.
How they source these borrowers.
How technology and data science is used in their underwriting.
What kind of data sources drive their underwriting.
The different kinds of funding source that Credibly uses to fund loans.
Why Glenn believes that securitization is important part of a vibrant funding strategy.
What is different about today’s liquidity crunch.
Why offering a suite of products is important to increasing the lifetime value of your customers.
Welcome to the Lend Academy Podcast, Episode No. 70. This is your host, Peter Renton, Founder of Lend Academy.
Peter Renton: Today on the show, I am delighted to welcome Glenn Goldman. Glenn is the CEO of Credibly and he is the former CEO of CAN Capital so he has been around this business for a long, long time. Credibly are a small business lender and they are doing I think some very interesting things today. We talk about what Glenn has learned over his many years in this industry, how Credibly is sourcing borrowers, how they’re using data science and technology to really make better underwriting decisions. We talk about the funding side of the equation, the downturn in the capital markets and what he thinks it means and much more. I hope you enjoy the show!
Welcome to the podcast, Glenn.
Glenn Goldman: Happy to be here, Peter.
Peter: So let’s start off with giving the listeners a bit of background about yourself. I know you’ve been around this industry for quite some time so why don’t you go back to the beginning to when you started in this industry.
Glenn: Sure, happy to. You know, and I look back very fondly at those early days. I was very fortunate to be invited to become the CEO of a very early stage company called CAN Capital back in 2001 and I think in that first year we provided, I don’t know, something like $15 or $20 million of capital to only restaurants in three states in the United States. We were looking to really learn a particular vertical and to really kind of take a very close look at what data is relevant in making credit decisions and so focusing on a particular vertical within a tight geography gave us that opportunity.
We had come up with this very interesting new product called a Merchant Cash Advance which really solved for the challenges small businesses face in accessing capital, didn’t require a FICO score, didn’t require collateral, financial statements or tax returns and so it was a great opportunity to begin to prove out this model and solve this very big problem small businesses have in accessing capital. So over a period of 12 years surrounded by an amazing management team we grew that company to the point where when I left in early 2013 we were then 450 people on our way to originating about a billion dollars of mostly loans to small businesses throughout the US; all different types of business, probably 500 or 600 different types of businesses.
We were at that time the largest non-bank lender to small businesses in the US, collecting big data before it was sexy to call it big data and develop some of the most sophisticated and predictive scoring models in the space that existed anywhere. So it was a great run. It was a great run and really opened up my eyes in a lot of ways to a lot of opportunities that were still yet to be pursued.
Peter: Right, okay so then you left there in 2013 and sounds like you didn’t have a long time away from the industry. Why don’t you tell us a little bit about Credibly and what basically…why you decided to come back into this industry?
Glenn: Sure, so after leaving CAN I wanted to go back to school and I say that figuratively in that I really wanted to get out and understand two areas that had developed quite rapidly over those previous few years and that is the peer to peer marketplace model which was in a much purer form back in 2013 and really understand what was real and what was hype, there was a lot of hype around that space, but there was a lot of very real, tangible, unique elements of those business models that are quite valuable.
I had the opportunity to meet with probably every consumer and small business platform of size in the US and the UK…great opportunity to meet management teams and investors and lenders and board members and made a similar journey through the big data and predictive analytics space, even more hype there, but again, significant value creation opportunities.
Over about a years time I developed an investment thesis, partnered with Flexpoint Ford, a $2.5 billion private equity fund focused on financial services and on healthcare, shared this investment thesis which I’ll talk about in a moment. It aligned with their view of where opportunities resided in this space and so we got together. I joined as a senior adviser in January of 2014 with the intention of finding a platform that we could execute this investment thesis on.
We could have certainly started something from scratch, but certainly with the velocity of change in the marketplace, speed to market was paramount and so we were very fortunate that right around March or April we were introduced to a company then called Retail Capital, a four-year old company, it was founded in 2010 which is really quite extraordinary. We were still in the depths of the recession and yet the three founders, Ryan Rosett, Edan King and Erik Stamell said, you know, now is a great opportunity to start a small business lending platform so quite a contrarian point of view although in retrospect it was a brilliant decision and between 2010 and when we met they built a profitable business, 55 employees based in Troy, Michigan and were very smart in crafting one of the first bank partnerships in the space.
Most of the business they originated was originated through a partnership with Crestmark Bank, the asset sat on Crestmark Bank’s balance sheet. And so the implications of that were many, the one that was most significant…really two things; number one that bank partnerships do work when structured properly and there is an alignment of interests and number two, from my and Flexpoint’s perspective, they were audited by the FDIC two or three times a year so really kind of imbedded in their culture, in their DNA was an appreciation for compliance and regulation and auditability, transparency, documentation; really critical elements of what we all believe are important for a successful platform that are difficult to retrofit if they don’t already exist.
Glenn: ….and so for all those reasons it was love at first sight. I think our first meeting was in May 2014, 90 days from term sheet to close and on August 1, 2014 we closed equity investment, we closed on a bank facility because we were starting off as an on-balance sheet lender and I joined as CEO.
There’s one other reason why it was love at first sight in addition to kind of the culture and the quality of the management team and the people themselves and that is, notwithstanding the fact that they had built a successful platform that was profitable and doing great business, they had not yet gotten around to making significant investments in data science, in marketing and product development and tech and so we had the opportunity to build those capabilities from scratch and build really strong teams in each of those functions that allowed us to effectively execute on our investment thesis.
Peter: Right, then you also re-branded, right? That was after you came on board. Just tell us a little bit because it was Retail Capital and it’s now Credibly, just tell us a little bit about the thought process there.
Glenn: Sure, so what came out of this journey through meeting with folks in the big data and predictive analytic space and in the peer to peer marketplace space was the realization that virtually every provider of capital, certainly in the small business space and I think it applies in the consumer space, was clustered around either the subprime end of the spectrum or the prime end of the spectrum. They tended to focus on a narrow slice of the credit spectrum and they tended to offer really only one product, maybe two and you know, for a lot of reasons, most of which were good reasons, but the reality is it’s the same data and technology layer that supports the entire credit spectrum and the three or four products that small businesses need.
So the underlying investment thesis for Credibly was that if you had the opportunity to build something from scratch or partner with a platform that was already three or four years old with a really solid infrastructure in place, why would you do it any other way? And so that’s the underlying thesis for what we now call Credibly and so after closing the transaction in August of 2014, we began in earnest to build out data science, risk management, marketing & product development and tech and begin the process of building out an infrastructure that would allow us to partner with a bank partner like WebBank and begin to offer loans not simply targeting one slice of the credit spectrum but the entire credit spectrum.
And so coincident with that, last summer, the summer of 2015 we said you know, Retail Capital as a name and as a brand. On one hand might suggest to folks that we only fund retailers and we fund 300 to 400 different types of businesses, but it also doesn’t necessarily capture where we’re going as a business and so we spent a lot of time talking to small business owners and we asked them, what’s important to you in a relationship with a lender? Of course number one was price and term, but speed was number six and that was surprising only because if you look at a lot of the branding and positioning out in the space, a lot of it is around speed.
So everything between number one and six was about transparency and trust and integrity and so the name Credibly immediately came to mind, it didn’t take us too long to get to that place and we felt that it truly represented how we think about who our customer is, delivering right-sized capital, creating the right Credibly experience which means grow, don’t just owe. So that summer we took all of the things that we had done up until then as an opportunity to rebrand the company, completely redesign the website and begin to now introduce the loan products that would cover the entire credit spectrum.
Peter: Okay, so let’s just tease that out a little bit. Can you just go through the different products that you have today?
Glenn: Sure, so we offer a range of different types of loan products with interest rates starting at 9% for our best borrowers, all the way down and we refer to that as the business expansion loan, rates from 9% to 36% and then we have what we refer to as working capital loans for the riskier end of the credit spectrum and rates there tend to average in the 40% or 50% range. So kind of core to our investment thesis is that all small businesses have a right to access capital and if we were to look at ten small businesses, banks say yes about 20% of the time so they might be able to fund just small business owner number one and small business owner number two, but that leaves three through ten.
There are some providers out there who only focus on three and four, there are other providers who focus only on eight and nine. Let’s just assume number ten is kind of like, you know he’s here in my neighborhood, throws great dinner parties and everybody convinced him to open up his own restaurant and nobody should lend him money so he’s number ten. Then you’ve got everybody in between and so our product set, whether it’s a working capital loan or a business expansion loan, is designed to have a price and a set of terms that covers that entire spectrum.
Peter: Okay, so you decided not then to offer like the merchant cash advance product that obviously you had a great deal of experience with at CAN Capital. What’s the reasoning for that?
Glenn: We offer merchant cash advance but it’s a small slice of what we originate.
Glenn: Why do we still offer merchant cash advance? Unfortunately, in many ways the MCA has become almost like a four letter word and it’s unfortunate because there are elements of how that product is structured. It’s really quite cash flow friendly and what I mean by that is that a merchant cash advance allows us to structure a funding for a small business in a way where we get funded back through a fixed percentage of that business’ daily sales and that creates a variable payment that ebbs and flows with the small business owner’s cash flow so it’s very cash flow friendly particularly for highly seasonal businesses.
It’s very difficult to embed that structure within a loan product. We might endeavor over the next few months to do that, but to satisfy the desire on a segment of our customers who want to be able to enjoy the benefit of that cash flow variability, in those cases we offer the merchant cash advance because it really is the only choice we have for being able to offer the cash flow flexibility.
Peter: Right, okay so then let’s just talk a little bit about the actual small business owners. You said you’ve got many different types of businesses. Can you just give us some examples or run through some typical borrowers that are coming to Credibly today?
Glenn: Sure, happy to. So we are funding doctors’ offices, we are funding trucking companies, we recently funded an architecture firm, a law office. It really runs the gambit and what it comes down to really is what’s driving. What’s driving this kind of wide variation in business types and shapes and sizes is really two things; the first one is incredibly obvious and that is that these are folks that banks haven’t traditionally been able to figure out how to measure the risk of or are looking for loan amounts that are too small to be provided by banks profitably, but also because there’s a growing awareness that there are alternatives to banks.
We used to have a rule of thumb that said 50% of small business owners didn’t know that there’s an alternative to their bank when their bank says no and of the 50% who did know, less than 50% actually pursued it. What we’re seeing now is that there is a growing level of awareness and so…I know soon you’re going to ask me the question: All right Glenn, what does it mean now that folks like Wells Fargo are offering small business loans and we’re seeing larger players and banks come into the space?
My answer continues to be the same and that is with awareness still being our biggest competitor to the extent that other players come in and let folks know that there is an opportunity to access capital online or without having to walk into a branch that increases the awareness in a way that benefits our business as well.
Peter: Okay, interesting. So then how are you finding these borrowers? Are you working with brokers, are you going direct, how do you find them?
Glenn: So our view is that if you rely upon any one particular distribution channel, you’re creating a business model with a higher level of inherent risk and so ours is a multi-channel approach. We do work with brokers, we do work with what I would refer to as more traditional partnerships, folks that are referring business directly to us, folks who have other relationships with small business owners.
A growing channel for us is direct customer acquisition and there’s a number of strategies, both online and offline that we use to drive inbound interest under the Credibly brand. That represents almost 35% of our business today where we can control the brand promise and deliver an incredible user experience. So broadly defined it’s brokers and third party referral sources, it’s partners and direct customer acquisition, both online and offline.
Peter: Okay, fair enough. So then I want to switch gears a little bit and talk about underwriting. You mentioned data science, that’s very important to you and actually you talk about it on your website, can you explain your approach there and how you’re using technology to underwrite these borrowers?
Glenn: Sure, so what we talk about on our website and what you hear us talk a lot about internally is that data science is really at the core of everything that we do. In fact, I mentioned before that it was August 1, 2014 that we closed our transaction with then Retail Capital, now Credibly and my first hire was our Chief Data Scientist and Risk Officer who started about 30 days later.
She came on board sharing the philosophy that data science should not be limited to driving outcomes that relates solely to risk and risk management, but rather that data science could impact every stage of our work flow, meaning that we have a data scientist that is committed to driving results starting with customer prospecting and customer acquisition, automation and work flow efficiencies, risk and underwriting, collections and asset management, supporting finance and supporting marketing and product development.
So our data science philosophy in addition to it being at the core of everything that we do…in fact if you were to come and visit us in the New York office and I know we were happy to have you come visit us a few months back, you saw that the data science team literally sits in the middle of the floor here, sandwiched between technology and marketing and product development. So as a core philosophy, it’s at the core of everything that we do and our data scientists are true data scientists.
You know, I have somewhat of a jaundiced view of this. As I was kind of doing my journey through the industry it seemed to me that anybody who can run a pivot table and was called an analyst suddenly got a title change to data scientist. The fact is is that we take a different approach. We have folks with advanced degrees in econometrics and statistics and financial engineering, but who also have come out of places like Amex and PwC and CapitalOne.
So you know, talking a little bit about myth busters this view that data scientists are somehow these propeller heads that kind of drop out of the sky and they’re off in a corner someplace and you only go and ask them questions and hope you can get an answer you understand, here it’s a very different view. These are folks who truly understand financial services but got to a point in their career that they could not innovate as quickly as they would have liked at some of the larger financial institutions and so they came and joined us.
Peter: Okay, so what kind of data sources are they using to basically create the underwriting models?
Glenn: Sure, so let me start off by saying that all of our models, and we have multiple models, it’s not just risk models per se and within those models there are multiple modules, are all designed to be compliant and so they can very easily plug into a bank partner model and pass any FDIC audit. So the data that goes in…here’s something, let’s talk about myth busters. When people talk about big data I think…you know, there was a period of time where everybody liked to talk about the role that social media plays in informing credit decisions and how well you do on Angry Birds is now somehow going to be an indicator of your credit worthiness.
At our core are the five or ten C’s of credit, depending upon your traditional credit training. The five or ten C’s of credit are cash flow, collateral, character and so we look at a wide range of different data sources. I’ll give you a couple of examples in a second, but they all have to somehow be directly tied to measuring the five or ten C’s.
So one very interesting one is health department records. For restaurants you have to publish your health department rating and anytime it’s changed that becomes part of the public record. Most large cities have that information available online. That’s the kind of thing you’d like to take a close look at when you’re about to fund a restaurant. There’s a direct correlation between a reduction in your Department of Health rating and a reduction in revenue and so that’s something we’ll look at before we fund a customer and it’s also something that we’ll look at as we are watching that customer perform post funding.
There’s a lot of examples of that kind of information that’s out there, but for us it’s also not just about the data, it’s about the techniques. So what do I mean by that? We like to innovate and test things and draw conclusions as quickly as we can. So sometimes we might not have the luxury of creating data sets that include thousands of data points, i.e. if we wanted to test a new type of loan product, it would be ideal if we had the luxury of time to make a thousand of those loans and watch how they perform over the next 12 to 18 months.
So in lieu of that we might apply techniques to smaller data sets that we draw from. For example, the pharmaceutical space or the medical space where the FDA might say, you know what, you can test this on subjects, this drug or this new technique, but you know what, we want to limit it to 100 subjects or 200 subjects. So you have to apply techniques to the smaller data sets that allow you to draw conclusions without needing much larger data sets. So when we think about data science and data I always like to talk about the techniques because that’s a differentiator as well.
Peter: Okay, I want to move over to the other side of the equation here and talk about loan funding and how you’re actually providing the capital for these loans. You talked about…you have a bank line, yeah let’s just talk a little bit about…do you have a marketplace, how are you funding the loans exactly?
Glenn: So we firmly believe like you should diversify how you originate your assets, you should diversify how you fund your assets and I think about the alternative ways of funding your assets in say three broad categories. Number one is on-balance sheet, that one is pretty straightforward; number two is securitization and number three is whole loan sale and whole loan sale could be actual sale of whole loans, it could be sales of participations, they could be lightly structured where you take a first loss position, but broadly defined whole loan sale.
Amongst those three I would also suggest that if you had the opportunity to make a choice that you start off with on-balance sheet because funding assets on-balance sheet where you are truly living with the risk day-to-day does force a level of discipline and rigor around credit that no other funding strategy forces one to develop and apply and so that was how Credibly started off it’s life, as an on-balance sheet lender. Today, we are selling whole loans and we are also doing participations as well. In our whole loan sales we’ve got a couple of folks that are buying whole loans from us and over time we’re going to add whole loan buyers.
From a participation perspective, we are sharing the risk on certain transactions which, for example might result in us exceeding a covenant or a limitation in our bank facility. We’re very happy to be partnered with SunTrust Bank and so we might be limited to no more than 20% of our portfolio in any one particular large city or MSA, but if we have a good loan opportunity we might say, you know let’s, in order to keep this within our covenant restriction let’s participate out half of this loan, but in all of those cases we are sharing in the risk.
Peter: Right, right, okay. Down the line would you move towards…add the securitization piece, is that your plan?
Glenn: Absolutely, and the reason why I say that is number one, it can be a very effective cost of funds and the other benefit is that all of these different sources or different ways of funding your business help keep the others honest. So what a borrower might pay on their senior credit facility or on-balance sheet warehouse facility needs to be competitive with the securitization market and vice versa for each of those two markets to be viable.
Whole loan buyers recognize that they are giving us the benefit of being able to sell our loans at a premium, but knowing that we also have the choice of simply holding those loans on the books if we don’t like the price that’s being offered, allows us to be a bit more bloody-minded in how we go about negotiating the prices for our loans. So the short answer is absolutely yes, securitization when that market firms up a bit is going to be a market we’re going to look at and we think it’s part of a healthy, vibrant, overall funding strategy.
Peter: So then I want to talk a little bit about loan volume and also the capital markets which have…they have certainly changed in 2016 from what it was like in 2015 so can give us some idea of where you’re at today in loan volume and are you increasing, are you decreasing and if so, tell us about the impact potentially on the changing capital markets this year.
Glenn: Right, so let’s work backwards on that one because the change in the capital markets is something which is kind of fresh in my mind. You know, I think we’re going through a very, very interesting transition in terms of the availability of capital. I say that in that typically…so I would define what the industry is going through right now as a liquidity crunch. Personally every cycle I have seen over my career is a liquidity crunch that’s preceded by a credit crunch and that’s not the case here.
You know, there maybe are one or two places where credit is not performing exactly as folks would have liked or had expected, but I think most of it is greatly exaggerated and I think in many ways we’re still in a relatively benign credit environment. My sense is that if anything, if there is going to be a challenge to credit quality they’ll be driven less by macroeconomic forces and more by over-lending, but with that said, with a lot of players starting to kind of pull back on their origination volume I think that becomes less of a risk, but we’re moving from a time where there used to be probably $6 or $7 of lendable funds for every $1 of loan platforms originated to a place where, depending upon who you are, it might be $.50 to a $1.50 or $2.00.
Glenn: And so that I think is what’s really driving what we’re seeing happen here and so it’s forced a lot of platforms to not kind of lightly tap the brakes, but in some cases, again if you didn’t start off with on-balance sheet funding, to really have to hit the brakes hard. In hitting the brakes hard it created opportunities for bottom fishers to come into the space, which frankly is typically a good sign because it puts a floor on asset values.
Now what I’m starting to see are even more sophisticated lenders coming into the space who have said, okay the industry went through its first five, seven, nine, ten years of development, went through a really frothy period of time, has gone through a trough and the fact is asset values to a large extent have held up, credit has held up, there’s a real opportunity here. All of this tumult has forced platforms to be much more focused and invest much more in credit and underwriting, now is a good time to come in. So I see us now kind of at the early stages of those larger, sophisticated buyers coming in who will kind of re-stabilize the capital structure for this industry.
Peter: Okay, I think that is something that I’m looking forward to because I think we certainly need some stabilization. As you pointed out there, there are several platforms out there that have hit the brakes very, very hard and I think stabilization will be a good thing. We’re just about out of time so before I let you go, I just want you to sort of give some perspective on what’s next and what you’re working on at Credibly, where are you guys going?
Glenn: We are very excited about what the future holds and you know we just recently over the last few months saw the kind of proof of our original investment thesis. That original investment thesis being that if you’re only focused on a narrow slice of the credit spectrum or you’re only offering one product that you’re going to have a very high cost of acquisition because your sales funnel captures all small businesses and your lifetime value of customers is going to be low because you really only have one product or one price for your customer and it’s hard to grow with that customer.
So over the last few months we’ve watched cost of acquisition come down and we have seen our unit economics improve and by improve what I mean is get to those levels that we had anticipated they would get to when we were able to deliver a suite of products and prices that allowed us to monetize the entire sales funnel. So that was a big, big deal for us and so we’re really focused on continuing that trend right now, nothing fancy, just continuing that trend and we continue to invest in our data science and technology platform to support partnerships and to create this really important distinction that we view our data science and technology as an extension of our partners’ data science and technology, not a replacement. So you’re going to see us continue to invest more in the capabilities and bring on more partners who are not looking to replace their current capability, only expand it.
Peter: Okay, that sounds good. On that note I’ll have to let you go, I really appreciate you coming on the podcast today, Glenn.
Glenn: Anytime, it’s a real pleasure, Peter.
Peter: Thanks, see you.
Glenn: See you.
Peter: I just want to pick up on something that Glenn said earlier and it’s around the fact that we are in a relatively benign credit environment and yet we have seen a lot of capital stop, pause, what have you, deciding to kind of stay on the sidelines for a while. I know that some of the platforms have increased interest rates to try to make it more attractive, some platforms have added incentives, but the reality is this industry, apart from some pockets of under performance which are relatively small, this industry has continued to underwrite well. The reality is the fundamentals haven’t changed over the last 12 months, we kind of got away from ourselves with growth and we had those internal problems at Lending Club that have had ramifications, but the reality is this industry has performed well. Investors who have been in it for a while like myself, we continue to enjoy very, very good returns.
I was talking with Ron Suber the other day and he was saying, really today is probably the best time in many, many years to be an investor in this industry. I think that really is true and I think we will get through this challenging period. As Glenn talked about stabilization, I think we’re going to have that simply because the fundamentals are unchanged.
On that note, I will sign off. I would like to thank you very much for listening and I’ll catch you next time. Bye.[/expand]
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Peter Renton is the chairman and co-founder of Fintech Nexus, the world’s first and largest digital media and events company focused on fintech. Peter has been writing about fintech since 2010 and he is the author and creator of the Fintech One-on-One Podcast, the first and longest-running fintech interview series. Peter has been interviewed by the Wall Street Journal, Bloomberg, The New York Times, CNBC, CNN, Fortune, NPR, Fox Business News, the Financial Times, and dozens of other publications.