National Funding has secured a significant capital boost which will allow it to become a much larger player in American small business loan provision, following the confirmation of a $50 million loan and security agreement with Pacific Western Bank subsidiary CapitalSource.
A provider of such products as equipment leases, short-term working capital and bridge loans, National Funding states the new capital will allow them additional flexibility to capitalize on marketplace opportunities, increase their marketing and invest in new products.
National Funding CEO David Gilbert said he was attracted to working with CapitalSource because of their openness to new ideas in what can be a very staid business sector. Mr. Gilbert said he had seen CapitalSource working on a partnership with non-traditional small business lender Kabbage so he knew they were receptive to creative financial products. “They were very flexible and they looked at the products we wanted to do.”
The announcement is but one of many such actions made possible by traditional large bank reluctance to lend to small business. A National Funding-commissioned study found that nearly half of small businesses that sought financing could not get it from a traditional bank. This aversion has created opportunities for players like National Funding.
“This is a newer space for banks to be in,” Mr. Gilbert explained. “They have a longer learning curve of understanding where the opportunities are and what the risks are. It creates more exposure.”
Given the record ages of American industrial equipment there is soon going to be a rush of companies looking for equipment and other forms of financing and when they do, many of their searches will not end up at a bank. National Funding is perfectly positioned to respond to this void.
“There is plenty of pent-up demand,” Mr. Gilbert said. “Companies that used to replace equipment every three years are now waiting five years. They were waiting to invest more until they were sure. Look for them to take a more active role.”
With 25 per cent of all loans being for equipment, what affects a company’s decision to lease instead of buy?
“It depends on the purpose of the equipment,” Mr. Gilbert explained. “If it’s for a short-term purpose, companies are better off leasing. But if they plan on using it for a longer period, they should buy.”
Another point of differentiation National Funding seeks to exploit is customer service. Given the rush of companies seeking a foothold in online lending, one would think customer demand for in-person service is in a free fall, but that is not completely accurate, Mr. Gilbert said.
National Funding commissioned a study from Northwest University’s Kellogg School of Management’s Experiential Learning Initiative which revealed some interesting results.
“Despite great interest in strictly online alternative lending, many business owners still desire personal interactions with financial providers that will take the time to discuss business challenges and solutions,” Mr. Gilbert said.
They also found 44 percent of all loan applications were completed at the bank, never mind the consulting and product discussions on site that would push that percentage of loan seekers spending time in bank much higher.
“Our average customer is in their 40s,” Mr. Gilbert said. “People in their 20s and 30s are more comfortable online and the concept of a completely online process is embraced only by younger business owners.”
That does not mean the interwebs takes care of everything for the study found that while even the best online platforms help with conversion, they do not significantly influence lender choice.
There are limits to the effectiveness of online lending, areas which can be easily trumped by effective, in-person customer service.
“Small businesses are are so customized in their needs,” Mr. Gilbert said. “Take the different needs of construction companies on the east and west coasts.”
Another is awareness of alternative financial products, which Mr. Gilbert says many consumers are not yet aware.
Not that those desiring the personal touch will shop around. The research also found most owners will use the first lender they meet, meaning word of mouth, excellent customer service, and even physical location are key factors for any company competing in this space.