Marketplace lending and investment firm Direct Lending Investments (DLI) recently announced a $250 million investment in small business marketplace lender Biz2Credit. The money, spread out over three years, will be allocated toward different financial products and straight loans.
The deal allows DLI to continue its history of providing short-term, high-yield loans to small businesses while accommodating accredited investors looking for solid growth.
“We are excited to partner with the small business lending experts at Biz2Credit, a company that has made it easier for entrepreneurs to quickly and efficiently secure the funding they need to launch and grow their businesses,” DLI president Brendan Ross said at the time.
“Direct Lending has already invested millions of dollars on our platform. Our two companies have great synergy, and I am excited to expand our partnership,” said Ramit Arora, president of Biz2Credit. “Many times, small business owners cannot afford to wait for an infusion of capital. Our credit marketplace provides a faster options than traditional bank loans for entrepreneurs who need money quickly to close a deal.”
Mr. Ross recently spent some time discussing the Biz2Credit deal and the state of marketplace lending while also sharing thoughts on several coming events which could alter the industry.
Talk about Biz2Credit and what about them attracted you to them.
“They are making their mark in small business lending through unique deals with sources of prospective borrowers.”
“They offer a unique deal flow. Instead of dealing with brokers shopping loans extensively through an affiliate, you get direct interaction with borrowers. The files are not adjusted with an eye to what a lender is looking for. These are clean files, with good borrowers handed off by a channel partner. They are good transactions with a high level of trust and a low default rate.”
How important is it in this environment for small businesses to have accessible financing resources?
“Look at what they are not being able to do. When they buy equipment they are creating jobs for the operator using the equipment and for the sales person selling the equipment.”
“We want small business to be able to do a few things. When they buy their inventory they are buying from someone else and keeping them in a job. Then they sell the inventory and they keep their job.”
“They also get access to working capital. Without it they have a shortened runway and everything is harder to do.”
How will the GOP Congress affect the financing for SME’s?
“With the widespread acrimony in government circles we have a problem and small businesses are not getting the funds they need.”
“The problem cannot be boiled down to a simple regulatory issue that can get flood gates opened.”
“Many small businesses are undercollateralized, so traditional lenders do not want to lend to them. If a dentist goes bankrupt, they’re not going to want to go in there and take the few assets.”
“The Federal Reserve does not want undercollateralized borrowers at high leverage, so they are punting the problem to the private sector. The Fed does get it but they don’t trust banks to make loans.”
When do you expect interest rates to begin rising and how quickly do you see them rising?
“What will rising rates mean for borrowers? Very little. Low defaults mean the economy’s doing well. If rates go up they are correlated with higher returns for partners and investors. If the rates go up by more than one percent the default rate will fall by less.”
“The Federal Reserve will only raise rates if they were good for everyone. I don’t see it happening for a while. They need to see more steady growth.”
Banks are starting to show interest in P2P. How will that affect the marketplace?
“The inclusion of banks and pension funds will increase quality of borrower peer-to-peer lenders will go after.”
“For example, take a loan at a 4.5 percent. That isn’t that good for us but for a bank borrowing at .25 percent it’s great. It is only bad for credit card companies. The smallest banks benefit from having loans in their portfolios. The big banks suffer through fewer interest payments on their credit cards.”
“This may tilt the playing field bank in favor of smaller banks.”
What are some key advantages alternative lenders bring to the marketplace?
“I love to work with spread lenders who want to sell loans. It brings the ability to buy loans and get into marketplace with me as the first customer.”
“A $ 100 million balance sheet lender can become a $1 billion marketplace lender by converting huge valuations.”
“If you have $100 million balance sheet, $25 million might be your own and $75 million borrowed. You grow originations and sell off the loans to grow your company. Take that same ratio into other fields and think of a $400 million company. How do you get that extra $300 million, sell part of your company? People hate giving away equity,when they do they prefer it to go to marketing and technology.”