Weekly Insights from Sol Berkoff
Principal at Charleston Capital, Inc.
Small businesses in the US have trouble getting financing.
According to the Federal Reserve, almost half of small businesses either do not get all the financing they want or do not apply for financing because they believe they will be turned down.
Source: Federal Reserve
But, if small businesses are desperate for credit, then why are so many small business finance companies – from OnDeck to Kabbage to Funding Circle – having trouble growing?
The reason is cost.
OnDeck and Kabbage get most of their business from direct mail or loan brokers. Those are VERY expensive acquisition channels. After factoring in these costs and then adding in losses, their business models are only profitable if they charge small businesses really high APRs.
How high? Well, the weighted average APR for a contract in OnDeck’s 2018 securitization was 46.81%. The weighted average yield for a contract Kabbage’s recent securitization was 41.83%. Few businesses want to pay those sorts of APRs for financing.
As a result, there is a market failure. The demand for small business finance exists but the supply of small business finance does not.
The solution is clarity. Technology can simplify onboarding and underwriting processes. Technology can then count payments and control cash. Store all of these data on the cloud. Make the technology available to a broad array of originators. Use senior loans to these originators to control the ecosystem and align the interests of investors and the technology provider. The result should be more credit to small businesses and lower APRs.
Sound like a good strategy? We at CCI certainly think so!