Small Business

Small-Biz Talks: StreetShares on Small Business Lending

We had the opportunity to interview Mark L. Rockefeller, co-founder and CEO of StreetShares, one of the leading online small business lenders.

Mark L. Rockefeller, co-founder and CEO of StreetShares, isn't your typical CEO. He comes equipped with military experience, which he firmly believes has given him a unique edge in the small-business lending space.

A few years ago, Mark recognized that military veterans, who tend to own their own businesses at a high rate, were also underserved with financing options. Combining his extensive experience in the finance industry and his perspective as a military veteran, he created StreetShares to reach a market that he felt other lenders simply weren't connecting with.

In our interview, we asked Mark to share his thoughts and insights into the small-business lending industry as a whole and he also shared some advice for small-business owners to best take advantage of their loans.

This interview has been condensed and edited for clarity. If you're a small-business owner interested in sharing your funding story, tweet us at @ValuePenguin.

First, Mark, can you tell us a little bit about StreetShares?

StreetShares aims to bring small-business lending to the military veterans community. We also enable the public to invest in the military community that they believe in, which means there is a bit of a peer-to-peer element behind this as well. We found that when veterans provide capital for other veteran entrepreneurs, we typically get very good borrower behavior. Our rates are extremely low, and if you compare us to other online lenders like OnDeck or Kabbage, our rates are, frankly, a fraction of theirs.

Do you offer discounts to veterans?

Yes, absolutely. On average, veterans are getting, through us, about 2% to 3% lower interest rates than nonveterans. That's an internal discount that we give. Comparing us to an OnDeck or a Kabbage, we are probably half the average APR of OnDeck and probably a quarter of Kabbage. They may disagree with that, but that's our numbers.

Are you exclusive to military veterans? What do you offer?

We are not exclusive to military veterans, although the vast majority of our capital goes there—about 80 percent of the capital that we have lent out has gone to veteran-owned businesses. So the focus is certainly on military veteran entrepreneurs, but it is not exclusive. On the product side, we offer term loans, we offer lines of credit, and we have some very unique products around veterans that are in the government contracting space. The federal government spends about $4 billion a year in small-business procurements, buying pencils and chairs and janitorial services from small businesses. Because there are some set-asides and preferential treatment given in the contract awards to veterans, we have some unique products that help that customer set as well.

Once an application is submitted, what are the things that a lender will immediately look for in terms of underwriting?

We'll be very transparent. We are primarily a cash-flow-based lender. This means we're looking at the revenues being generated by the business and the loan that they need. How much can they afford given their cash flow? That is more important to us than the person's FICO score or how long they've been in business, or anything else. We also look at 100-plus factors; many of them are automated. We look at demographics, bank transaction history and liens just like any other lender would.

We will give borrowers a couple of options to choose from right up front. We've found that some borrowers care more about amount, others care more about rate, others care more about term length. So we will give them a couple of different options that optimize for different factors, and let them choose from those two or three options.

I did notice that you have a pretty direct approach in challenging other online lenders on your website. Is that primarily due to a lot of upset customers that come from that direction?

On the consumer side, you have clear disclosure requirements—like a Schumer box. We've all gotten mortgages and car loans and personal loans, and costs are always clearly written out and standardized. That allows you to compare apples to apples.

In the small-business lending world, no such thing exists. It's really kind of the Wild West. Unfortunately, you have a lot of obfuscation around what the actual cost to borrow is. The fair, apples-to-apples number that should be transparent and clear is the APR: What is my total all-in cost to borrow this money? The only way that folks take loans from some of our competitors is because they don't actually understand how expensive that money is. You can verify independently, but I think the average APR on a Kabbage loan is somewhere in the 80s; the average APR on an OnDeck loan is 42 percent. These are very expensive loans, but you will never find those numbers on OnDeck's or Kabbage's website. We try to do right by borrowers and make that kind of information clear, so they won't get misled.

Do you think legislation in the small-business lending space will change in the near future that borrowers should keep an eye out for?

At the federal level, I don't think there's much momentum behind anything changing anytime soon. However, we did participate in an online lender survey done by the New York attorney general. It looks like New York is going to come down on the rent-a-bank model that a lot of online lenders use.

Most online lenders like us or OnDeck are lenders but not banks. We are subject to usury limits in each state we lend in. If you lend to a borrower who is in California, and California has a maximum interest rate of x%, you cannot charge more than x%. A lot of lenders work around that by originating loans through a bank in a state with no usury limits. Most of these lenders originate through a bank called WebBank in Nevada. When a loan is made, it's technically made by WebBank in Nevada. They can lend to someone in California and charge them 80 percent. After about a three-day waiting period, that loan is then assigned to the lender, say OnDeck. So OnDeck now holds an asset, but not a loan that they made. The law, up until this point, said that if a loan was legal and valid when made—in this case, made by the bank in Nevada before being transferred to OnDeck—then it's legal and valid throughout the life of the loan. New York is now challenging that, and saying, "Nope. If you lend in New York, we are not going to allow you to rent a bank charter to get out of our usury laws, and you have to comply with our usury laws."

That is not something, frankly, that we are concerned about. I'm an ex-military guy, and I don't like the idea of a single point of failure. If WebBank goes under, so does every lender that originates through them. We go state by state and comply with the laws in every single state. It meant more upfront costs and time, but tomorrow, New York can put a halt on the practice and nearly everyone else is impacted except us. My hope is that will make things more competitive for honest players like us.

Even though the small-business lending space is really growing, does that necessarily mean every business should be applying for loans?

My answer is twofold. Yes, applying for a loan for small businesses has gotten easier than ever and there is a plethora of lenders in this space. Banks are lending at pre-recession levels, online lenders are here (and) new tech players like Amazon have also entered the market, so borrowers really have options. On top of that, there are so many different products for different needs.

Also, business borrowing is, by its nature, productive. If you're a small business, you should take on debt any time your ROI exceeds the cost of that debt. That's why some small businesses fully understand the insane APRs of other online lenders but are OK with it because they need cash immediately to keep their business functioning or really think they'll come out ahead of those costs. So my advice would be to do the math and determine if your business is really getting the production it needs from the loan even with the costs.

But not every business owner may know how to build out detailed business plans.

I think you're right. I do think small-business owners should at least understand unit economics. A single unit: What does that cost them to produce, to sell, and what's their revenue on it? But I think you're absolutely right. It's a very fair point that a lot of borrowers are really good mechanics and good veterinarians, but they may not be good business people. That's just a problem that we have in the small-business sector.

Do you have any general advice for small-business owners?

If you want to grow, you need capital. That capital will either come from retained earnings, which is ideal, or external financing. With external, there is a trade-off between taking on equity investors, and giving up pieces of your company, or taking on debt. There's a sense that debt is always bad and that kind of thinking is a problem. Get away from that kind of perspective, and move to a practical one. If I can borrow $10 but turn that into $20, do that all day long. Take some of the emotion out of it, and really try to focus on what the growth opportunities are and what the cheapest source of capital is.

Second, really understand what you're signing up for when you take out a loan. Be particularly wary of prepayment penalties. There are some terms out there that you can only go back to that one lender to get additional financing. Unfortunately, regulators won't help you, so you're on your own.

Third, be wary of brokers. Going through a broker is basically a race to the bottom because a broker is going to sell your loan to whichever lender pays them the highest for it, period. They send you to whatever lender gives them the best value. I think there's probably some naivety over the role that some of these middlemen play. We experimented with using some of these brokers—they're called ISOs, independent sales organizations—as borrower channels for us in the early years, and then very quickly moved away from it. There were practices that we didn't like and all kinds of games being played by these folks. It really is a bit of a Wild West out there, and that means the borrowers have to be careful.

Justin Song

Justin is a Sr. Research Analyst at ValuePenguin, focusing on small business lending. He was a corporate strategy associate at IBM.