For those of us in the startup world, where products can be made by a handful of engineers in a coworking space, it can be easy to forget that scaling a business in a more traditional industry can be quite capital intensive.
A local retailer looking to expand to a larger, more attractive location, for instance, requires a substantial amount of working capital to rent and remodel a storefront and fill it with inventory. And for a small manufacturing company, a cash infusion for equipment upgrades could have a significant impact on profitability down the line.
Financial industry veteran George Souri believes medium-sized businesses in situations like these are dramatically underserved by current financial institutions. His startup, LQD Business Finance, wants to leverage data to offer business loans in the $250,000 to $3 million range and help medium-sized businesses scale more rapidly.
Souri said mid-sized business loans have traditionally been hard to come by because of high costs associated with assessing a company’s creditworthiness.
“It typically takes well upwards of 120 days in most cases, and can cost well upward of $100,000,” he said. “If you’re a business looking for $700,000, you can’t afford to spend $100,000 reimbursing someone for their underwriting costs.”
By automating much of the data gathering and analysis involved in a credit assessment, LQD brings the approval time for such a loan down to 10 days at a cost of $500. But the kicker, said Souri, is that his process is essentially identical to traditional underwriting — it just gets there faster.
“It wasn’t like trying to figure out how your Yelp score translates into credit or anything like that — that’s silly,” said Souri. “We see ourselves as doing what Henry Ford did for the auto plant, or what GPS did for the paper map.”
According to Souri, the underwriting process for loans fits with the GPS anology in that it involves countless steps of data gathering and simple number crunching that's trivial for a computer but tedious and time-consuming for a human accountant.
Souri estimates that the size of the lending gap the company seeks to fill is about $200 billion. The segment is currently served by institutions offering small cash infusions on a short-term basis as well as peer-to-peer lending marketplaces.
In Souri's view, both competing options are fundamentally flawed: short-term loans are too expensive, and the underwriting incentives of online lending marketplaces do not align with those of the business or the lender.
“A marketplace finds a borrower, finds an investor, pairs the two and doesn’t hold any risk on its own balance sheet,” said Souri. “Meanwhile, it makes money off the fees it charges, so it’s incentivized to make more and more loans. In the history of finance, where you have a model where you are incentivizing high volume without disincentives for poor performance, it’s never worked.”
In addition to serving the financing gap, Souri said the company is also looking into the possibility of partnering with banks to help make their underwriting more efficient.
Images via LQD Business Finance.
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