Able Lending is an Austin-based startup that aims to serve a segment of the market that's fallen through the cracks. Co-founders Will Davis and Evan Baehr call this segment the "Fortune 5 million," the small businesses they say "generate billions in revenue and employ 49% of our workforce," but often have difficulty securing credit, especially since the 2008 financial crisis.
As the chart above shows, lending to small businesses has plummeted. Peer-to-peer lending platforms are making up some of this shortfall: between them, Lending Club (LC), Prosper, SoFi, Zopa, and RateSetter issued over $2.5 billion in loans in the United States and UK in the fourth quarter of 2014. Still, there is a huge cohort of qualified small businesses that cannot find credit. Able thinks it can reach them.
Hybrid Peer-To-Business Model
Able makes loans of between $25,000 and $250,000 to small businesses for one- to three-year terms, at rates ranging from 8% to 16%. They charge a 3% origination fee, but no penalty for paying the loan back early. Repayments come in monthly installments. The borrower must have been in operation for at least six months before applying and take in at least $50,000 in revenue.
That arrangement might strike the loan department at your brick-and-mortar bank as a bit generous, perhaps even naive, but not alien to the established way of doing things. Except this: borrowers must secure 25% of the principal from backers they know personally, whether friends, family or devoted customers. Able then funds the remaining 75%.
The backers must number between three and five, and only half can be family members; Able verifies the backers' personal relationship with the small business owner, presumably through social media (see below). The idea is to demonstrate that the borrower can recruit a small group of people who believe in the viability of the business and are willing to make a significant financial bet on it.
Able's model is distinct from the crowd lending approach that Lending Club and others employ, since the borrower does not take $25 here, $100 there from dozens or hundreds of people, but $6,250 to $62,500 from three to five people. It's a compromise between crowd lending and the institutional model, in which an unestablished borrower in the trough of a credit cycle must either pay exorbitant rates or find a guarantor.
Able handles repayments, providing clear terms and a legal structure to reassure backers. Of course, borrowers can always default, in which case Able has first claim on recouping its investment. If all goes as planned, however, backers receive interest payments for the first three-quarters of the loan's term, while Able is repaid; in the last quarter, once Able is fully repaid, backers get back their principal while interest payments taper off.
Able uses many of the time-tested tools of the lending trade to assess a business's vitals: revenue, gross margin, net income, current ratio, quick ratio, debt-to-asset ratio and debt service coverage ratio. That the company feeds these metrics into a "machine learning algorithm trained on historical data" speaks to its fintech credentials. But Able also incorporates a data point that lenders have mostly ignored up until now: the borrower's social media presence.
"This isn't a huge one," according to Able's website, which stresses that the willingness of friends and family to invest in the borrower's business is the main consideration. By the looks of it, though, the company has developed a sophisticated method of tying searches, likes, pictures, and shares to foot traffic. Developer Shayan Mohanty provides a description (verging on the dauntingly technical without quite going over the edge) of how social media data can be tied to foot traffic.
This innovation could provide valuable insights and help Able reduce its rate of default, but presumably the project Mohanty posted to Gihub is not the linchpin of the company's competitive advantage.
Because backers have to know the borrower personally, Able is not open for just anyone to invest. Nor can most people use it as they might another peer-to-peer lender, to set aside a small chunk of savings and add some diversification to their overall portfolio. At a minimum, each investment must total $1,250 (25% of the minimum loan of $25,000, which is $6,250, divided by 5, the maximum number of backers), compared to Lending Club's $25. Due to these considerations, achieving diversification through Able requires both considerable monetary capital and considerable social capital in the form of reliable, entrepreneurial friends and family.
On the other hand, it allows those who do have entrepreneurial friends and family to invest in their ventures while avoiding at least some of the pitfalls. Able provides a legal structure so that the parties neither have to go the completely informal route, risking misunderstandings down the line, nor stifle their mutual goodwill by bringing lawyers and accountants into the mix.
The personal relationship element also removes much of the opacity from peer-to-peer lending. Lending Club and SoFi have begun bundling multiple loans into securities, which in turn have attracted larger institutional investors. This increased liquidity responds to regulators' concerns arising from the credit crisis, but the risk is that dud loans will be tied in with the good ones, recreating some of the conditions that led to the crisis in the first place. With Able, you not only know the business you're backing, you know the person behind it.
The Bottom Line
Able is part lender, part peer-to-business lending platform, relying on a borrower's personal connections to establish trustworthiness and share the risk. It provides a platform for friends and family to lend to each other with more clarity than informal arrangements provide. It doesn't allow for the speculative investments crowd-lending platforms provide. Rather, it relies on the "wisdom of the crowds" in a different way, analyzing social media data to determine a business' viability.