Alternative Small Business Lending 101
February 14, 2013
Coleman Report: Alternative Small Business Lending 101
With Scott Griest, CEO American Finance Solutions
Bob Coleman: We’re talking with Scott Griest down at the Anaheim California American Finance Solutions in the growing world of alternative lending for small businesses. Scott, give us a 101 on what alternative lending is.
Scott Griest: Alternative lending is alternative to traditional bank loans for small and medium sized businesses; comes in a couple of different forms. The fastest growing is what is called a Merchant Cash advance. And what that is, it’s not a loan, it’s actually a sales contract where a business is selling their future receivables through the finance company at a discount.
Bob: Now some people have called this Pay Day loan type lending for small businesses. What are the rates that you charge your typical customers?
Scott: Well a typical customer is going to range in a rate anywhere from a 20-30% discount.
Bob: And to be fair, the other side of the coin is, the advantage you guys have over traditional banks is I call it speed to market. I mean give us a typical example of how someone would utilize your services and why speed is important.
Scott: Our clients typically use us to take advantage of an opportunity; occasionally use us to get them out of a small jam. How they use this is they apply with us and in about a week they get their financing. In a typical transaction, the average client gets about $25,000 in financing from us.
Bob: And for that $25,000 what’s their daily payment? I’ve always been intrigued on the daily repair on that.
Scott: On that $25,000, we may be purchasing $30,000 of their future receivables, on their credit card receivables; so you can see we’re talking about $5,000 to access $25,000.
Bob: And over what period of time do they have to repay this loan?
Scott: Generally about 9 to 12 months. Average contract runs about 9, we do go up to 12; obviously the longer the time frame the less expensive the money is.
Bob: Tell me your underwriting. Now if you can fund these loans in a week, pretty sophisticated computer algorithms; tell us how that works.
Scott: We use a proprietary data algorithm to score our business risk. We also price our contracts on the basis of risk. Now interesting enough, we don’t use a personal FICA of the business owner as the main driver of that risk. We idealize and that’s why these loans and finances are quickly growing; we don’t look at the FICA, we look at the overall health of the business. We look at the time in business; whether they rent or own the location; what their cash flow situation looks like; the past 2 to 6 months of the bank statements. We do a little background check on the business, the liens against the business affect heavily, obviously. We look at a complete picture of the business and we look at it very quickly. It usually takes about a day to score and provide a firm approval to the client.
Bob: Great, Scott. Tell me about, I want to close with this, tell me about industries. Any particular industries that you like or that you avoid?
Scott: We really like medical; we like restaurant and bar hospitalities,
Bob: You do like restaurants, okay.
Scott: Yes, we like lodging a lot. We also like entertainment, such as golf courses – really use our product a lot; ice-skating rinks; bowling alleys use us a lot. Any place that really is a consumer place that takes credit cards. And of course, retail is our bread and butter. Things we don’t like – we don’t touch the adult industry, that’s one of the things we don’t like. And pure online e-commerce is something that we don’t touch.
Bob: Great. Scott Griest out of Anaheim. American Finance Solutions. Thank you very much for joining us today.
Scott: Thank you so much for your time today, Bob.