Recently we wrote about the Top 25 global lending startups to watch out for. However, you may wonder what the alternative lending space looked like before the entrance of fast growing startups like Lending Club, Funding Circle or Proper. If you think that the alternative lending concept is new and nascent, you are wrong. We had an opportunity to chat with Dave Gilbert, CEO and Founder of National Funding, which is one of the oldest players in the alternative lending space. National Funding was found almost 17 years back and it is now one of the only profitable alternative lenders in the space. Dave founded National Funding right out of college. National Funding is an alternative lending company that focuses on small businesses. Dave also overcame the recession in US and brought National Funding to where it is today. Here’s the transcript of the interview with Dave:
LTP: Congratulations on the 172% hike that National Funding has seen in the past 3 years. However, what was it like 3 years ago? The industry is booming since 2007 with so many players in the alternative lending space. Was it different in the early 2000s than it is today?
Dave Gilbert: I think it is the innovation. I started the company in 1999 and we were focussed primarily on leasing equipment to small business owners and around 2007, we had over 200 employees and funding of over 120 million lease paper. This product wasn’t out there. There were very few alternative lenders and the market was very small. A lot of people were borrowing from their homes and credit cards. There wasn’t so much free flow financing available. Manufacturers had great financing from banks and they would extend credit, which would really disrupt the whole system from resellers to vendors to end users.
When you look at post 2008, the whole food chain kind of rose where people weren't flexible in terms of giving loans to each other and supporting each other’s growth. The flexibility in financing from the top end of funnel wasn’t there. Home equity loans had driven up and credit cards hadn’t really done much. So all of a sudden, people saw a void. That void was even there during pre 2008. There were no real products that were innovative back then. I just think that there was a lack of innovation. But these products were needed all the time. And now that they have come out, business owners don’t go for home equity loans and don’t borrow money from friends and family. Alternative lending became the quickest, easiest and most flexible way to get money from and that’s what business owners always look for; they look for capital in different forms and structures. So that’s why there are different types of alternative lending and some of them are complementary while some are same.
There’s a big difference between National Funding and Lending Club. Some are focussed on consumers, some are focussed on small companies and we are really focussed on the sweet spot of the million dollar revenue customers, which is really a lot of America.
LTP: Do you think that the role of banks in the lending space has changed from what it was in 1999 to what it is today? Are banks still stringent? Is the process still complicated?
DG: The process is not complicated. I just feel that one thing that’s not much talked about in the media is that manufacturers used to be a lot more flexible with the retailers and everybody would work with one another on net 30, net 60 and net 90 terms. But because the capital constraints came so hard to all forms and sizes of businesses, it collapsed a lot of that marketplace. People weren’t paid upfront. They didn’t have that kind of flexibility anymore. So these new products in the alternative lending space are now offering that flexibility and making the lending process much smoother than it is with the banks. Regulations of banks have tightened up. They are concerned about who they lend to and there’s a lot of cost associated with deploying money. For banks, the cost of deploying a $20,000 loan is equivalent to the cost of deploying a million dollar loan. The banks have definitely moved away from small lines of credit and small business loans and they have moved towards the middle market type companies now.
LTP: From a strategic point of view, would National Funding look for partnerships with banks or would you prefer working independently as you are doing today?
DG: I think eventually the banks will partner with the largest FinTech companies because it is more effective and efficient for them to deploy capital to small business owners. Banks want to deploy capital to that market but they don’t have a very effective and efficient way to do so. And I do kind of see more of those partnerships in the future.
LTP: So banks are definitely one of the most important stakeholders in the future of alternative lending. What about borrowers? Have you seen a shift in their behavior from 1999 to 2015? Do you think that the number of small businesses are rapidly increasing in the US and is that the reason that National Funding and other players like Funding Circle are growing?
DG: There are a lot of startups that are coming out. But we don’t really focus primarily on startups. We do finance a lot of people who are one year old in growth. I just think that the demand for working capital is always going to grow as businesses grow. It is really going to flow through the economy based on how the GDP and the market is growing. I think that more and more innovative processes might continue to come out in the lending space where people might need a one month loan to where people might need a 5 year monthly payment loan. So you just have to partner with these customers in a more strategic way and have products that fit right in different scenarios to help support their growth. And that’s what we are focussed on here. We have created more products to work with our customers and help our customers go through different cycles with them.
LTP: What about the recession? Being one of the oldest players in the lending space, how did you cope with it?
DG: That was a very aggressive recession. We had to balance ourselves with our leverage ratios and our margin spend and make sure that we met the same demand as small business owners. The recession not only hit our company financially but also it really hurt the demand of small business owners wanting capital. A lot of small businesses went straight out of business. So for me as a watcher of the company in terms of infrastructure to handle that recession, it was a hard time. We are always more of a conservative lender than some other FinTech players who are probably more leveraged on their balance sheets. So I think it is a function of leverage and product offering. That was a very harsh time.
LTP: Right. And National Funding came out of it successfully.
DG: Oh yes. Hope it doesn’t go to that level again!
LTP: We attended SVForum’s conference, The FinTech Revolution last week. From the lightning talk given by the CEO of LendUp, Sasha Orloff, we got to know a very interesting data point that it is the time first time ever in Q1 of 2015 that banks did not lead personal loan originations. How do you feel about that? Do you plan to expand in the personal loan lending space?
DG: National Funding is not into personal loans. It is a whole different customer base, different regulations and a very different market. We are focussing on expanding to more mid-sized to larger companies. Going to personal loan arena is not something that we are focussed on. However, the personal loans market is going to explode in a positive way. Lending Club is a great company, I believe.
LTP: You are in an industry full of regulations and risks. What keeps you awake in the night?
DG: What keeps me awake in the night is really the global economy and understanding its impact in the US. We are focussed in the US market. We just finance the small businesses in the US and I get lost with all the different uncertainties in the world and how that is going to impact the US GDP. People really borrow money when they are doing well and they are growing. We are always imagining how to acquire customers. We also think of ways to measure the demand risk and the market size opportunity if the market turns. But this is the stuff you can’t control. And that’s what I am worried about.
LTP: How do you differentiate National Funding from the existing players in the alternative lending space and competitors like Funding Circle? How do you stand out? Why would borrowers prefer you?
DG: We offer a wider product selection. Some of these companies focus either on daily payment loans or pure working capital loans. We have a variety of other products such as leasing equipment, etc. We did a study when we were focused on the working capital space. The results were that 20% loans that small business owners were taking were to buy equipment and that was never the purpose of these types of loans. These types of loans were really good for short term, inventory, payroll and goods financing. There is a lot of growth opportunity to help people finance equipment and in a variety of different loan types that we offer and that we are working on to offer. So I think it is about matching the product with the customer and having multiple products; that is a differentiation point. Funding Circle mostly has term loans that are 3-5 years in duration. What is interesting about National Funding is that we use a high tech platform whereas the other players are more into algorithm and online lending. The way National Funding works is sort of both ways. They have people on the phone with small business owners who guide them on what products would work well with their businesses instead of just online lending. Note that that we are the only profitable alternative lenders in the industry!
LTP: Does National Funding have any specific goals in 2016 and any other milestones that the company is looking forward to?
DG: We do loans upto 500k. We want to move it up to a million dollar next year. We are working on some microloan products for customers who are small in terms of revenue. We don’t really have a good product for them yet. So microloans would fit in an enormous market which we still haven’t focussed on.
LTP: Dave, thank you! Anything you want to add before we end the conversation?
DG: I think it is a growing space. It is exciting to watch all the different players and all the different models in the alternative lending space.