Amidst a slackening in investor interest in alternative online loans, Austin-based Able Lending announces Tuesday that it has received $100 million to fund its online small business loans from Community Investment Management, the first impact investment firm focused on marketplace lending.
“We’re very excited that within this difficult market, Able is bucking the trend,” says chief executive officer Will Davis. “We were able to do that because of the strength of our model, the strength of our portfolio, and the strength of the backer concept. Securing $100 million at this point, at this stage of the company but also given where the market is right now, is a huge story in and of itself.”
The two-year-old company uses a singular loan structure in a competitive space that has seen the growth of early leaders likeOnDeck, CAN Capital and Kabbage plus a proliferation of startups over the last few years. Able has borrowers get “backers” or other friends, family or customers to fund part of the loan. The company says that, in addition to offering longer repayment periods, this enables it to charge lower APRs than its competitors because Able has found that having someone the borrower knows contribute to the loan increases their willingness to repay.
Including the 5% origination fee, Able’s average APR is 16%, compared to small business loan APRs that can be not only high but even abusive — 40% or 80% at competitors and 200% or even 4,000% among even less reputable lenders.
Able Lending dynamic loan proposal
Bryan DeLuca, CEO of sock subscription service Foot Cardigan, took out a loan this summer for $500,000 with one backer who lent $50,000. Foot Cardigan will pay it off over four years at a 12% interest rate, plus the 5% origination fee. Although DeLuca did not shop around and compare rates, he says, “As someone focused on running a business, I was wary of something that would wear on my time. The time it took for the loans was easily worth the process.” Altogether, it took two weeks; Foot Cardigan plans to use the financing for its holiday inventory order.
“Able’s unique loan structure, where friends and family contribute a portion of the loan, allows small businesses to access more capital at lower rates,” CIM Managing Partner, Jacob Haar, said in a statement. “We believe Able’s tight-knit peer-to-peer model, responsible rates, and transparent approach is a big win for small businesses, and we are pleased to partner with them.”
Able’s backer model has also helped expand its network, which remains small compared to competitors. The company says that for every two loans it funds, it receives one referral from the network, which includes not just the 150 borrowers but also the 550 backers. “What we’re building here is not just another loan originator,” says Davis. “We’re building a network of borrowers and backers. The theory here is that when a borrower recruits backers to help unlock capital from Able that those backers in turn will help us find other great businesses around the country and become backers in more than one deal.”
So far, about 35% of backers are friends of the business owner, around a quarter of the backers are customers or fans of the business, another quarter are family and the final 14% are the owners themselves. Davis says many of the backers are serial advisors and investors who often want to back more businesses after their initial experience with Able.
Able, which initially launched in Austin and is now in every state except for California, Delaware, Nevada, North Dakota, South Dakota, and Vermont, plans to use the new debt financing to lend to 500 new businesses, which need to have at least $100,000 in revenue and be a year old. In addition to being known for its low fees, Able has also signed the Small Business Borrowers’ Bill of Rights, an initiative formed last year to combat unethical and even rapacious practices being seen in the small business borrower space. The bill of rights informs potential borrowers they have the right to demand, for instance, that their APR be disclosed or that their financing be sized to meet their need rather than to maximize the lender’s profit. Earlier this year, the company launched a refinancing product that aims to lend, at lower rates, to borrowers who had previously signed on for pricy financing with other lenders.
Davis says the partnership with CIM grew over time but made a lot of sense: “Our model does lend itself to their strategy in a natural and organic way … in that we allow businesses of different sizes and backers of different backgrounds to unlock capital that they wouldn’t otherwise have just by their credit rating or years in business.” With the backer model, the borrower can, say, bring on more backers in order to lower the cost of capital.
As part of its effort to give the borrower more control of their loan, Able also has created a dynamic loan proposal tool with which a potential borrower can use sliders to see how variables such as the loan amount, term length and amount funded by backers affect the price of their loan.
So far the company has zero defaults, but it’s only lent out $30 million to a tiny number of borrowers, especially compared to the giants of online business lending such as OnDeck, which in its latest earnings revealed it originated $590 million in loans in the second quarter of this year alone, reaching $5 billion over the company’s lifetime. Whether or not Able can continue to attract buyers for its loans and expand its operations which are more high-touch than other online lenders with more automated underwriting processes are open questions. This year has indicated that the hunger for loans may not always be so ravenous, as both OnDeck and peer-to-peer loan marketplace Lending Club have had some difficulty finding investors. But perhaps if the thesis behind Able’s backer model continues to bear out, that may not be a problem.