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Alternative Financing & The Future of Equipment Finance
53rd Annual Convention Monday October 20, 2014
2:30 pm – 4:30 pm San Diego, CA
Alternative Financing & The Future of Equipment Finance
Presenters:
Martin Klotzman
Analyst
Ivory Consulting Corporation
Mukul Mittal
EVP Product Development
Cloud Lending Inc.
Gina Mackenzie
Strategic Partnership Manager
RapidAdvance®
Michael Rabil
Director, Partnerships
Funding Circle USA
Charles Wendel
President
FIC Advisors, Inc.
2
Moderator:
Scott Thacker
CEO
Ivory Consulting Corporation
Alternative Finance and the Future of Equipment Finance
Agenda • ELFF Study Overview
• Alternative Finance Overview
• Alternative Finance Businesses – Typical Business Models
– Deep Dive – Rapid Advance
– Deep Dive – Funding Circle USA
– Growth Rate and Expected Trends
– Regulation
• Technology
• Opportunities and Threats – ELFA Companies
• Q & A
• Closing Thoughts
3
Alternative Finance and the Future of Equipment Finance
Agenda • ELFF Study Overview
• Alternative Finance Overview
• Alternative Finance Businesses – Typical Business Models
– Deep Dive – Rapid Advance
– Deep Dive – Funding Circle USA
– Growth Rate and Expected Trends
– Regulation
• Technology
• Opportunities and Threats – ELFA Companies
• Q & A
• Closing Thoughts
4
Coming Soon!
Look for the final study report November 2014.
www.leasefoundation.org
Alternative Finance and the Future of Equipment Finance
Agenda • ELFF Study Overview
• Alternative Finance Overview
• Alternative Finance Businesses – Typical Business Models
– Deep Dive – Rapid Advance
– Deep Dive – Funding Circle USA
– Growth Rate and Expected Trends
– Regulation
• Technology
• Opportunities and Threats – ELFA Companies
• Q & A
• Closing Thoughts
6
Alternative Finance Overview
Alternative Finance and the Future of Equipment Finance
7
Redefining an industry
Alternative Finance and the Future of Equipment Finance
8
Alternative Finance Overview
Alternative Finance and the Future of Equipment Finance
9
Is banking next…?
Alternative Finance Overview
Alternative Finance and the Future of Equipment Finance
10
Category
Number of
businesses
(Millions)
Potential Dollar
Loan Value
(Billions)
Pct of
Businesses
Pct of
Value
Qualifying 3.7 $544 10.2% 23.8%
Not Qualifying 32.4 $1,745 89.8% 76.2%
Total 36.1 $2,289 100.0% 100.0%
Bank Qualified and Non-Qualified Business
Alternative Finance Overview
Alternative Finance and the Future of Equipment Finance
11
Why won’t banks make small business loans? Reputation risk of high yielding loans Loans are low margin Increased regulatory scrutiny Increased capital requirements Operate within narrowed “credit box” Banks can’t justify the cost Loans must be in excess of $100,000 to cover costs; some analysts estimate $250,000.
Alternative Finance Overview
Alternative Finance and the Future of Equipment Finance
12
What is Alternative Finance? An array of financial services offered outside of federally insured banks
How long has alternative financing been around? Alternative financing activities have existed as long as borrowers needed lenders
Who typically pursues alternative financing? Micro and small businesses, including companies with revenue up to $10-20 million
What is the loan range? Loans can be as low as $1,000 and over $1 million on the high end
Why are investors attracted to alternative lending?
Access a new asset class
Attractive returns
Rigorous underwriting
Alternative Finance Overview
Alternative Finance and the Future of Equipment Finance
13
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
Funding Circle USA Dow Jones Corporate Bond Index
Vanguard Total Bond Market ETF
Vanguard Corporate Short Term Bond ETF
Vanguard Short Term Bond ETF
3 Year
5 Year
1 Representative alternative investment rates (as of September 2014) shown here are illustrative, and many of these investments
have different characteristics or risk profiles than investments in Funding Circle. 2 Expected rates of return across all current risk bands for loans by FC USA, and net of servicing fees
2
5yr N/A
Alternative Finance Overview
Alternative Finance and the Future of Equipment Finance
14
What are the key drivers?
Alternative Finance Overview
Alternative Finance and the Future of Equipment Finance
15
We are always connected
Alternative Finance and the Future of Equipment Finance
16
Alternative Finance Overview
Alternative Finance and the Future of Equipment Finance
17
Technology makes it easy
Alternative Finance Overview
Alternative Finance and the Future of Equipment Finance
18
Alternative Finance Overview
Alternative Finance and the Future of Equipment Finance
19
Alternative Finance and the Future of Equipment Finance
Agenda • ELFF Study Overview
• Alternative Finance Overview
• Alternative Finance Businesses – Typical Business Models
– Deep Dive – Rapid Advance
– Deep Dive – Funding Circle USA
– Growth Rate and Expected Trends
– Regulation
• Technology
• Opportunities and Threats – ELFA Companies
• Q & A
• Closing Thoughts
20
Typical Business Models
Alternative Finance and the Future of Equipment Finance
21
• Reward-based • Donation-based • Lending-based • Equity-based
Reward-based
Alternative Finance and the Future of Equipment Finance
22
Characteristics Creative-based projects Funded in 30-60 days 5% fee for successful projects Easy application and screening Merits – no financial return
Donation-based
Alternative Finance and the Future of Equipment Finance
23
Characteristics Less restrictive guidelines Fund charities, trips, anything Easy application and screening Merits – no financial return
Debt-based
Alternative Finance and the Future of Equipment Finance
24
Characteristics Provides access to debt financing for small business owners Provides alternative structured investment product for investors Creates innovate way to underwrite and evaluate small business loans
Equity-based
Alternative Finance and the Future of Equipment Finance
25
Characteristics JOBS Act could have significant impact Investors receiving stake in company Can raise up to $1 million Investors must be accredited (pending) Build an ownership portfolio
Classifications of Borrowers
Alternative Finance and the Future of Equipment Finance
26
Almost but not quite “bankable”
Banks want a government guarantee
I.E. – SmartBiz profiles SBAs for banks
Borrower: Near-prime SBA Lending
Alternative Finance and the Future of Equipment Finance
27
Heading towards bankability
Usually don’t have sufficient collateral or history
Borrower: Mid-prime: Crowdfunding
Alternative Finance and the Future of Equipment Finance
28
Fully dependent on risk-taking lenders
MCA typically focuses on only sub-prime
Invoice financing firms primarily participate in this space
Borrower: Sub-prime: Merchant Advance Lending
Alternative Finance and the Future of Equipment Finance
29
Alternative Finance and the Future of Equipment Finance
Agenda • ELFF Study Overview
• Alternative Finance Overview
• Alternative Finance Businesses – Typical Business Models
– Deep Dive – Rapid Advance
– Deep Dive – Funding Circle USA
– Growth Rate and Expected Trends
– Regulation
• Technology
• Opportunities and Threats – ELFA Companies
• Q & A
• Closing Thoughts
30
Alternative Finance and the Future of Equipment Finance
31
A Supplement to Traditional
Financing Flexible funding for your small business clients.
Founded in 2005 - headquarters Bethesda, MD
Acquired in 2013 by Rockbridge Growth Equity
– Private equity firm of Dan Gilbert with holdings such as Cleveland Cavaliers basketball team, Quicken Loans, Rock Ventures, Rock Connections, etc.
– Unique access to best practices and resources
BBB accredited and A+ rating
Heavy focus on lower middle market and small business owners – direct and through partners
Over $700 million in funding to tens of thousands of business owners
32
Alternative Finance and the Future of Equipment Finance
RapidAdvance
Alternative Finance and the Future of Equipment Finance
33
RapidAdvance
Alternative Finance and the Future of Equipment Finance
34
Alternative Finance and the Future of Equipment Finance
35
Challenging Credit Environment
Alternative Finance and the Future of Equipment Finance
36
New Programs
“Fill in the Financing Gap”
Business Owner
• Unexpected opportunity
• Short-term cash flow
• Expansion
• Inventory and payroll
• More options for your clients
• Easy: streamlined underwriting
• Fast: funding within 7 days
• Subordinated: no impact on financial institution collateral
Traditional Lender
• Customer unable to meet credit guidelines now
• Strong future revenue potential
Credit Card Advance / Daily Payment Loan
Alternative Finance and the Future of Equipment Finance
37
Alternative Finance and the Future of Equipment Finance
38
No personal guarantees for repayment on credit card advance No security interest taken No points or upfront fees No fixed monthly payments No coupons or checks to write No impact on ability to qualify for other financing No business use restrictions on the funding No hassles - quick application & fast funding
Benefits to Business Owners
Alternative Finance and the Future of Equipment Finance
39
Benefits to Lenders or Leasing Professionals
• Add depth to client relationships.
• Provide additional piece of transactions.
• Additional revenue.
Alternative Finance and the Future of Equipment Finance
40
Flexible terms.
Small Business Loan
• Perfect for businesses looking for a traditional loan – and need it now
• Short-term payback – up to 12 months
• Automatic daily payments and easy to renew
Up to $500,000. Decisions within 48 hours.
Subordinated to financial institution.
Credit Card Advance
• Innovative, unsecured financing for businesses that accept credit cards
• Repayment from future credit card receipts
• Stand alone or with merchant services
SBA Bridge Loan
• Meet short-term funding needs during financial institution & SBA approval processes
• Eliminate obstacles to expedite SBA approval
• Pay tax and other past-due obligations
Line of Credit
• Offers flexibility in funding amount and
duration
• Draw funds only when needed
• Flexible repayment terms
Alternative Finance and the Future of Equipment Finance
41
Credit Card Advance Vs. Loan Advance • Up to 200% of credit card
receivables
• Payments vary with cash flow
• No UCC filed
• No Personal Guarantee
Loan
• 50% to 70% of bank deposits
• Fixed Payments
• UCC-1 Filed
• Personal guarantee
Alternative Finance and the Future of Equipment Finance
42
When Is a Credit Card Advance/Daily Payment Loan a Great Fit?
• Smaller deals – transactions under $500,000
• Insufficient collateral – aged accounts receivable – bonded – inventory – mobilization or manufacturing process
• Challenging industries – restaurants – retail – construction – healthcare
• Obstacles – liens – unsubordinated debt
Industry Thoughts
“Community banks bear a disproportionate cost of regulatory compliance. As a result, loans for less than $100,000 have all but evaporated.”
— Community Bank CEO
ICBA Convention
Alternative Finance and the Future of Equipment Finance
43
How It Works - Example
Daily Payment Loan • $140,000 advance ($200k @ 70%) paying back
$161,000 (1.15 factor)
• 10 month transaction
• $732 daily payments, 22 days per month
Business owner has $200,000 per month in bank deposits.
Alternative Finance and the Future of Equipment Finance
44
Sample Transactions
$100,000 to a trucking company to purchase a new hauler
$25,000 to a restaurant to update decor
$100,000 line of credit to medical office bring in new equipment
Alternative Finance and the Future of Equipment Finance
Agenda • ELFF Study Overview
• Alternative Finance Overview
• Alternative Finance Businesses – Typical Business Models
– Deep Dive – Rapid Advance
– Deep Dive – Funding Circle USA
– Growth Rate and Expected Trends
– Regulation
• Technology
• Opportunities and Threats – ELFA Companies
• Q & A
• Closing Thoughts
45
Alternative Finance and the Future of Equipment Finance
46
Alternative Finance and the Future of Equipment Finance
47
We understand small businesses. Because we are small business owners.
Alternative Finance and the Future of Equipment Finance
• Funding Circle is the world’s leading online small business loan marketplace.
• We originate and evaluate small business borrowers to match them with institutional and accredited investors in a private marketplace.
• To date, we have funded over $600 million in loans to over 5,500 small businesses globally. This year alone, we plan to lend $570 million to small businesses in the US and UK.
• Backed with $123 million in venture financing from Accel, Index, Union Square Ventures and Ribbit Capital.
What is Funding Circle?
Alternative Finance and the Future of Equipment Finance
49
What is marketplace lending?
Business Loan
Interest and
Principal
1% servicing
fee on total
loans
2.99%
origination fee
Investors looking for
good returns Businesses looking for
simple and fast finance
• Marketplace lenders aggregate capital from investors to lend out to individuals or businesses
• The industry is expected to grow to $1 trillion in annual loan volume by 2025 (1)
• Funding Circle is the leading global small business loan marketplace
(1) Moldow, Charles “A Trillion Dollar Market, By the People, For the People” (2014)
Alternative Finance and the Future of Equipment Finance
50
• Fast: capital in under 14 days
• Simple: pre-qual in seconds, 10 min online application
• White glove service: account manager and underwriter for every borrower
• Fair & competitive rates: starting from 8.99%
• Transparent: no hidden fees, loan calculator
Why do small businesses choose Funding Circle?
Alternative Finance and the Future of Equipment Finance
51
Speaking of transparency, how do we stack up?
Alternative Finance and the Future of Equipment Finance
52
How do businesses use our loans?
Alternative Finance and the Future of Equipment Finance
53
Say goodbye to 10 lbs of paperwork
Alternative Finance and the Future of Equipment Finance
54
Snapshot of our pre-qual
Alternative Finance and the Future of Equipment Finance
55
[Partner Logo]
We’re building a better financial world… come join us!
• We offer attractive fees for referrals: 1% to 1.5% of the loan
• Just like our loan application process, becoming a FC referral partner is a simple process
• We make your job easier with your own online portal so you can submit, sort and track applications. You also get your own dedicated account manager and underwriter who specialize in referral loans
Alternative Finance and the Future of Equipment Finance
Agenda • ELFF Study Overview
• Alternative Finance Overview
• Alternative Finance Businesses – Typical Business Models
– Deep Dive – Rapid Advance
– Deep Dive – Funding Circle USA
– Growth Rate and Expected Trends
– Regulation
• Technology
• Opportunities and Threats – ELFA Companies
• Q & A
• Closing Thoughts
56
Growth Rate and Expected Trends
Alternative Finance and the Future of Equipment Finance
57
Yes, today alternative lending is relatively small in size, but…
Growth Rate and Expected Trends
Alternative Finance and the Future of Equipment Finance
58
Growth Rate and Expected Trends
Alternative Finance and the Future of Equipment Finance
59
Recap Currently 1.4% of loans outstanding Growing in size 100% annually Traditional lenders lend to 10% of borrowers or 25% market opportunity Alternative lenders focus on the other 90% and 75% of market Analysts estimate it could dominate US small business lending within 10 years
The Rise of the Branded Competitor
Alternative Finance and the Future of Equipment Finance
60
Increased competition
Lower margins
“Dumb” money
Entry of traditional players
Credit downturn
Consumer Financial Protection Bureau
Future Challenges
Alternative Finance and the Future of Equipment Finance
61
Alternative Finance and the Future of Equipment Finance
Agenda • ELFF Study Overview
• Alternative Finance Overview
• Alternative Finance Businesses – Typical Business Models
– Deep Dive – Rapid Advance
– Deep Dive – Funding Circle USA
– Growth Rate and Expected Trends
– Regulation
• Technology
• Opportunities and Threats – ELFA Companies
• Q & A
• Closing Thoughts
62
Regulation
Alternative Finance and the Future of Equipment Finance
63
Open Discussion
Alternative Finance and the Future of Equipment Finance
Agenda • ELFF Study Overview
• Alternative Finance Overview
• Alternative Finance Businesses – Typical Business Models
– Deep Dive – Rapid Advance
– Deep Dive – Funding Circle USA
– Growth Rate and Expected Trends
– Regulation
• Technology
• Opportunities and Threats – ELFA Companies
• Q & A
• Closing Thoughts
64
Alternative Finance and the Future of Equipment Finance
Traditional model Innovations
As expected, innovation is happening outside of Banks
Banks, as intermediaries, adds to the cost of borrowing and lending
Alternative Finance and the Future of Equipment Finance
Marketplace Lending is Disintermediating
Alternative Finance and the Future of Equipment Finance
Alternative Finance and the Future of Equipment Finance
Technology is an Enabler
Computers Internet Access
Security Authentication
Online Payments
Smartphones Tablets
Cloud Scalability
Cost of Deployment
Online View of Financial Data
Online Banking
Mobile Banking
???
Alternative Finance and the Future of Equipment Finance
Cloud Lending
Open Lending Technology Platform – Cloud Lending!
Flexible Extendable
Multi-tenant cloud
Alternative Finance and the Future of Equipment Finance
Origination Servicing Collections
Back office core Lending Technology
Cloud Lending helps you automate Lending
Front end website
Marketplace Origination Servicing Collections Underwriting
Back office Infrastructure
Accounting CRM
API
HarMoney.com - P2P Marketplace in New Zealand and Australia
Alternative Finance and the Future of Equipment Finance
Brick and Mortar
CRM Origination Collections Recovery Underwriting
Accounting Mobile Back office Infrastructure
Go Capital - Truck Leasing
Alternative Finance and the Future of Equipment Finance
Foundation Capital predicts Marketplace Lending to be a trillion dollar industry by 2025
Alternative Finance and the Future of Equipment Finance
So, what’s stopping the Leasing Industry from taking advantage
of this phenomenon?
Alternative Finance and the Future of Equipment Finance
Alternative Finance and the Future of Equipment Finance
Agenda • ELFF Study Overview
• Alternative Finance Overview
• Alternative Finance Businesses – Typical Business Models
– Deep Dive – Rapid Advance
– Deep Dive – Funding Circle USA
– Growth Rate and Expected Trends
– Regulation
• Technology
• Opportunities and Threats – ELFA Companies
• Q & A
• Closing Thoughts
75
Opportunities
Enter alternative finance industry directly
Provide referrals or join syndications
Lend to or invest in alternative finance companies
Join loan market places
Use as a resource pool for talent
Opportunities and Threats - ELFA Companies
Alternative Finance and the Future of Equipment Finance
76
Threats
Dominant small business lender
Movement into middle market
Visibility – viable and attractive alternative
The technological curve
Social Media
Opportunities and Threats - ELFA Companies
Alternative Finance and the Future of Equipment Finance
77
Final Thoughts
Alternative Finance and the Future of Equipment Finance
78
Alternative Finance and the Future of Equipment Finance
Agenda • ELFF Study Overview
• Alternative Finance Overview
• Alternative Finance Businesses – Typical Business Models
– Deep Dive – Rapid Advance
– Deep Dive – Funding Circle USA
– Growth Rate and Expected Trends
– Regulation
• Technology
• Opportunities and Threats – ELFA Companies
• Q & A
• Closing Thoughts
79
Q & A
Session Title
80
Alternative Finance and the Future of Equipment Finance
Agenda • ELFF Study Overview
• Alternative Finance Overview
• Alternative Finance Businesses – Typical Business Models
– Deep Dive – Rapid Advance
– Deep Dive – Funding Circle USA
– Growth Rate and Expected Trends
– Regulation
• Technology
• Opportunities and Threats – ELFA Companies
• Q & A
• Closing Thoughts
81
Thank you for Participating
Martin Klotzman
Ivory Consulting Corporation
Gina Mackenzie
Rapid Advance
Mukul Mittal
Cloud Lending Inc.
Michael Rabil
Funding Circle USA
Scott Thacker
Ivory Consulting Corporation
Charles Wendel
FIC Advisors, Inc.
Alternative Finance and the Future of Equipment Finance
82