Author Topic: Street Shares Business Loans  (Read 2942 times)

Rob L

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Street Shares Business Loans
« on: December 27, 2016, 04:19:16 PM »
Haven't seen these guys mentioned here but I received a mail solicitation for a small business loan for my company today. They specialize in funding "government contractors" and we have certainly done a bit of that. Loans up to $100k. Probably a nice lending niche as the government doesn't often stiff its contractors and pays reasonably close to on time (i.e. very low counterparty risk). Back when we first started our company we borrowed from a small local bank. We would show them a signed government contract and they would lend us really serious amounts of money to provide the working capital to complete it. Now we have enough cash in the bank for our typical working capital needs but it would be very nice to receive a contract large enough to force us to borrow. I'd really like to have that problem.

I looked at Street Shares website briefly and it appears both accredited and non-accredited individuals may invest in this type of small business loans. Anyone familiar with them?

Edit: So I'm looking at Facebook this evening and what do I see but an ad for Street Shares loans. This targeted ad stuff is Orwellian. Wow.
« Last Edit: December 27, 2016, 07:32:39 PM by Rob L »

nonattender

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Re: Street Shares Business Loans
« Reply #1 on: December 28, 2016, 12:36:45 AM »
Small biz loans are really hard to acquire and underwrite - profitably - unless you're sort of in the factoring business and charging really high rates.  This is what I gather, anyway, from a cursory glance at these types of companies over the years - I'm not sure anyone has really delivered on all of the much-promised technologically-induced efficiency gains.  CAN appears to be failing (see Peter's most recent blog post - as well as Sean's reporting at DeBanked.com) and I am hearing rumblings that Credibly may be having some troubles, too...

I don't think most of those outfits - the ones who often seem to have "data scientists" rather than "business/credit analysts" - are ready for primetime.

Just a feeling I've gotten, over the last few years.  I used to invest in BDC's and so I understand why they often wanted warrants, or a personal guarantee (or three), or board representation, or equity sweeteners, or... a much better/closer/safer position to watch dough.

For really small businesses, none of that is worth the time or hassle and it becomes an aggregate numbers game, so the entire "bet" is on the technology doing, successfully, more times than not, what normally would have required a human who understood the business.

ETA:  I have similar reservations about the real estate platforms that are all coming online, now - but the security factor is better (and a larger pool of more reliable data about the value of underlying assets is more readily available - so, one can, maybe, more easily limit downside).
« Last Edit: December 28, 2016, 12:54:42 AM by nonattender »
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Fred93

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Re: Street Shares Business Loans
« Reply #2 on: December 28, 2016, 02:35:35 AM »
Dealstruck just recently went under. 

I agree.  Small business loans are challenging.  The underwriting is difficult.  Each industry has different issues, different difficulties perfecting liens, etc.  Lots of slippery stuff.  I thought dealstruck had good technology.  For example, they hooked to the borrower's bank accounts electronically so they could see each transaction, thus could see the business receipts etc in real time.  They also hooked to tax returns electronically, so could see reported sales, etc.  Made it difficult for borrowers to lie about sales!  Clearly I didn't have the correct insight into what was really important.

SeanMCA

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Re: Street Shares Business Loans
« Reply #3 on: December 28, 2016, 09:55:50 AM »
Haven't seen these guys mentioned here but I received a mail solicitation for a small business loan for my company today. They specialize in funding "government contractors" and we have certainly done a bit of that. Loans up to $100k. Probably a nice lending niche as the government doesn't often stiff its contractors and pays reasonably close to on time (i.e. very low counterparty risk). Back when we first started our company we borrowed from a small local bank. We would show them a signed government contract and they would lend us really serious amounts of money to provide the working capital to complete it. Now we have enough cash in the bank for our typical working capital needs but it would be very nice to receive a contract large enough to force us to borrow. I'd really like to have that problem.

I looked at Street Shares website briefly and it appears both accredited and non-accredited individuals may invest in this type of small business loans. Anyone familiar with them?

Edit: So I'm looking at Facebook this evening and what do I see but an ad for Street Shares loans. This targeted ad stuff is Orwellian. Wow.

Yes, StreetShares has been a regular part of the alternative lending trade show circuit. I first came across them at LendIt in 2014. They have 2 different investment categories, one for retail investors thanks to Regulation A+ and another for accredited investors. Their whole spiel is lending to veteran owned businesses.

What retail investors get is very bare bones. All they can do is buy a StreetShares bond in any dollar denomination they want. The bond isn't tied to any individual loans, you're literally just lending money to StreetShares and in return you get a 5% flat interest rate. You can withdraw your money at any time for a very small penalty. The reward for buying a bond of a small business loan startup is not only the interest rate but the good feeling of helping veterans, they say.
I'm a merchant cash advance veteran exploring the p2p lending waters.

Rob L

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Re: Street Shares Business Loans
« Reply #4 on: December 28, 2016, 11:43:35 AM »
I failed to mention in my OP that borrowing from our local bank required personal guarantees from me and my business partner. Definitely not unsecured loans. We had pretty much everything on the line but figured that came with the territory and didn't think much of it. It never occurred to me that anybody would loan money without collateral. Go figure. I see from their web site that Street Shares loans require "a business guarantor with reasonable credit". Loans have an origination fee of 3.95% - 4.95%.

I gotta say that I continue to be impressed with the accuracy of targeted marketing these days. Not only did my company get a direct mail letter, but Street Shares advertising appeared while I was logged into my personal Facebook account. I guess they put me and my company together from my Linkedin profile. Probably lots of other ways but that seems the most direct and obvious. How my company was identified as a government contractor is much more puzzling. The company web site makes no direct mention of this nor does my Linkedin profile. The probability that my company is, among other things, a government contractor can be inferred but it isn't explicit. Well, it's probably explicit somewhere in the public record; I wonder where.

nonattender

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Re: Street Shares Business Loans
« Reply #5 on: December 28, 2016, 01:16:31 PM »
Dealstruck just recently went under. 

I agree.  Small business loans are challenging.  The underwriting is difficult.  Each industry has different issues, different difficulties perfecting liens, etc.  Lots of slippery stuff.  I thought dealstruck had good technology.  For example, they hooked to the borrower's bank accounts electronically so they could see each transaction, thus could see the business receipts etc in real time.  They also hooked to tax returns electronically, so could see reported sales, etc.  Made it difficult for borrowers to lie about sales!  Clearly I didn't have the correct insight into what was really important.

Do you now have what you think is a more correct insight into what is really important to achieve scale?  (And would you care to share?)

ETA:  "Differentiator" I see over and over is "We, too, built Yodlee-for-businesses!  Now trust us to analyze credit - and allocate capital!"

I think they all kind of get hung up on the (purported) "magic of data" and then engage in magical thinking that they're now financiers...

Something about it reminds me of James Mattis - our new SecDef - and his "Powerpoint makes us stupid!" declaration a few years back.
« Last Edit: December 28, 2016, 01:49:36 PM by nonattender »
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Fred93

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Re: Street Shares Business Loans
« Reply #6 on: December 28, 2016, 06:17:12 PM »
Do you now have what you think is a more correct insight into what is really important to achieve scale?  (And would you care to share?)

Mostly I learned that I didn't know what I was doing, and don't have the skills to judge the people or their skills in this business.  I will now be quite shy about investing in an early stage lending company.


Quote
ETA:  "Differentiator" I see over and over is "We, too, built Yodlee-for-businesses!  Now trust us to analyze credit - and allocate capital!"

Yep.  No matter what their technology is (be it the internet, paper, or tarot cards) there is fundamental skill and knowledge required to get it right.  From what I know about what went wrong at Dealstruck, my thinking is that small business lending is really difficult, and "secured" small business loans are really difficult to get properly secured, as the assets are slippery.  Every industry is different.  Every loan is different.  Not as straightforward as houses or cars as collateral.

RazzleDazzle

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Re: Street Shares Business Loans
« Reply #7 on: December 29, 2016, 02:05:14 PM »
Fred93 is correct.

Being in the business, can attest that it is difficult nigh impossible to be excellent at underwriting for multitude of business. Can be good, but not industry leading excellent. Specially, if one has a crowdfunding/crowdlending platform, then niche business lending is most efficient. While "dealflow" is not gangbusters, credit scoring/underwriting is tighter and processes are easier to implement when you lend to specific/known businesses and when they are your expertise. No matter the "Data analysis" there is place for traditional credit committee style approach. Hybrid model has worked the best (my opinion). Also ditto on "yodlee API usage != insta financing". Can't just underwrite well with machine learning, lest one has similar thinking of replacing their healthcare with a robo-doc.

And regarding collateral in business: well there in lies the "expertise" to be honest. Business lending is tough for a reason, but then again returns are better if done correctly.

I forsee consolidation and many more closures for general business lenders.
« Last Edit: December 29, 2016, 02:12:12 PM by RazzleDazzle »

LonghornSF

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Re: Street Shares Business Loans
« Reply #8 on: December 29, 2016, 03:51:20 PM »
Fred - how would you compare/contrast Dealstruck to say Funding Circle or Lending Club's business loan operation?

I think you've mentioned in the past that you've invested in loans on all three platforms. How has asset quality compared? Any insight into underwriting differences at the latter two vs. Dealstruck, or the future of their businesses? The Dealstruck closure really surprised me especially since they had just raised a bunch of money.
« Last Edit: December 29, 2016, 03:53:25 PM by LonghornSF »

Fred93

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Re: Street Shares Business Loans
« Reply #9 on: December 29, 2016, 04:51:22 PM »
Fred - how would you compare/contrast Dealstruck to say Funding Circle or Lending Club's business loan operation?

I think you've mentioned in the past that you've invested in loans on all three platforms.

I don't have access to LC's business loans (and have not asked for same), so know nothing about them.

I still have money in FC loans, tho I have stopped investing new money there.  I found the numbers shocking... They are willing to write loans with interest coverage ratio <1 and asset coverage ratio <1.  I use API, so I can impose a filter on these values, and I do, but therefore can invest in very few loans.  On the other hand, I am making a bit more than 5% on my FC account.  I expected more, but now that LC has dropped to near that, maybe it doesn't look so bad.  Performance of my portfolio seems stable.  Not really sure what to think at this point.


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How has asset quality compared? Any insight into underwriting differences at the latter two vs. Dealstruck, or the future of their businesses?

I don't have detailed info on each loan at Dealstruck.  I do have performance data on each loan, which is enough to see they had a problem.  I don't claim to be able to diagnose it tho. 


Quote
The Dealstruck closure really surprised me especially since they had just raised a bunch of money.

Yep.  I knew they had a problem with some of the older loans, but I didn't understand the magnitude of the problem until they shut. 

I believe a significant component of their difficulty had to do with perfecting their lien on assets in some industries, and that doesn't show up in the loan parameters or status until the loan goes bad, and you discover you have no collateral.  Also, underwriting for business loans, because of the complexity and diversity of small businesses, has to have a manual component.  Discipline is easy for the automated part.  You just automate some rules.  The manual judgemental part is much harder, and requires that you create processes that enforces discipline across a staff, which requires that you create processes to give visibility over what these people are actually doing, and it seems that DS didn't do an adequate job of this.

Another factor is the ugliness of dealing with institutional lenders.  An institutional lender can say things like "This pool went bad, and I'm going to have to take a mark on my xyz fund..., so I need concessions from you, so I can avoid the mark, or else I won't invest more money."  A loan company needs a continuous flow of new money so it can continue to make new loans, else it can't pay for its staff and other overhead.  Therefore, there is pressure to take losses, even if you were not originally contracted to do so.  Especially true for a small lender who is not diversified across a large number of institutional lenders.  This can snowball rapidly.

In the beginning, Dealstruck intended to take on (accredited) individual investors.  They wrote the software, including web site and API, which I alpha-tested.  They then went the institutional route and gave up on the retail marketplace.

Renaud Laplanche was correct when he said that the retail money has the advantage of stickiness.  If anything he understated the case.  Retail money is also much more blackmail-free.  Sure, retail investors do sometimes shout demands, but nothing like institutional investors!

Because of desire for growth, including the competitive component, ie the presumption that you have to get big before the competitors do, the whole usta-be-P2P industry is moving heavily toward institutional funding, which exposes it to all the same evil forces that fouled the mortgage market a few years back.  The result is not exactly the same, but bad results are beginning to be visible, and more bad stuff will happen.


nonattender

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Re: Street Shares Business Loans
« Reply #10 on: December 31, 2016, 02:41:10 PM »
Very true...  Prosper just learned that lesson the hard way:  when you depend too much on one source of capital, they own your platform.

If all of your money is coming from some institutional guy, that guy owns you.  If you're working with a bank, your incentives are aligned, your capital costs may be lower (through "risk retention" - in part or in full - by your partner bank), the capital is not going to just dry up, and the discipline that they impose upon you to do good underwriting (for their capital) will accrue to all of your other types of investors - back to you.

I feel like I'm about to hand out a free toaster, so, I'll stop there... ;)
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Re: Street Shares Business Loans
« Reply #11 on: December 31, 2016, 05:48:46 PM »
Hi all. Thanks for your interest. I'm Mark, Co-founder and CEO of StreetShares. Feel free to reach out to me directly with any question: mrockefeller@streetshares.com.

I thought I'd chime in on a couple of themes in this thread:

1. Yes, unsecured small biz lending can create traps for the unwary. I believe much of the industry has a structural problem: too many VC-backed small biz alt lenders face enormous pressures to produce more lending volume. So they go subprime to get it. Or they give larger loans than is responsible. Pair this with the fact that most platforms pass on all the credit risk to outside investors, and you've got a cocktail of perverse incentives. Since our launch in 2014, we've resisted that trend. We committed, even back then, to focus more on loan quality. To prove it, StreetShares co-invests in each of our loans so our interests are aligned with our retail investors. We also employ experienced bank underwriters, because there is no substitute for actual underwriting experience...particularly in an industry that has yet to experience a true credit down cycle. We use technology to create efficiency for our experienced human underwriters, not replace them.
2. SeanMCA is correct about our investment products. We have a nonaccredited retail product offered through Reg A+ and an accredited retail investor product. Nonaccredited investors are buying a note issued by StreetShares uncorrelated to any particular loan we make. Accredited retail investors can pick individual loans, but they are subject to the credit risk of that borrower. A portion of each loan is also funded by StreetShares ourselves (as mentioned above) and our institutional partners.
3. On the product side, we have term loans, lines of credit, and products tailored for government contractors, franchisees, etc. I'm pretty confident we offer the best line of credit on the market. And we have absolutely zero prepayment penalties, which is unique in the industry.

Thanks Rob L. for appreciating our target marketing efforts. We work hard to be accurate and efficient. If you reach out personally, I'd be happy to tell you how we do it or how we found you.

And, yes, we have three loan products for government contractors. Our core customer base is veteran-owned small businesses. Many veterans are in government contracting (gov't set-asides and preferences make it a good space for veteran-owned businesses). In response to existing customer request for larger loans, we've expanded into government contracting recently. We lend to non-veterans too, and I'm happy to see if we are a good fit for your situation.

nonattender

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Re: Street Shares Business Loans
« Reply #12 on: December 31, 2016, 06:32:57 PM »
Specifically RE:  StreetShares (and not the above, tangential/general discussion of online SMB lending):

It's an interesting angle, going after a particular type of business owner, rather than a particular niche industry - though, clearly, you are discovering that there's rollover with veterans who own businesses targeting the government as the customer for their business ventures, which looks like it may be opening up an industry niche within which you may build up some specialized analytical insights in the future...

We've seen, on the consumer side, very good behavior/performance from military borrowers...  You may be onto something with that... ;)
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rawraw

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Re: Street Shares Business Loans
« Reply #13 on: January 05, 2017, 10:38:39 AM »
This thread is one of the more interesting I've read in a while.  I don't think there is much I can add, but thanks for the detailed discussion!

 I agree that so far something like factoring appears to be the only successful business lending, likely due to the homogeneous nature of collateral. It's not simple lending, but it does tend to be very process oriented.





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rawraw

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Re: Street Shares Business Loans
« Reply #14 on: January 05, 2017, 10:39:27 AM »
Specifically RE:  StreetShares (and not the above, tangential/general discussion of online SMB lending):

It's an interesting angle, going after a particular type of business owner, rather than a particular niche industry - though, clearly, you are discovering that there's rollover with veterans who own businesses targeting the government as the customer for their business ventures, which looks like it may be opening up an industry niche within which you may build up some specialized analytical insights in the future...

We've seen, on the consumer side, very good behavior/performance from military borrowers...  You may be onto something with that... ;)
Wasn't GEICO founded on this business model?