Podcast Transcription Session 59: Rohit Arora

Transcription

1 Podcast Transcription Session 59: Rohit Arora Welcome to the Lend Academy Podcast, Episode No. 59. This is your host, Peter Renton, Founder of Lend Academy. (music) Peter Renton: Today on the show, I am delighted to welcome Rohit Arora, who is the CEO and Co-Founder of Biz2Credit. It's the second time I've had Rohit on the show. I wanted to get him back on again because they're always doing such interesting work, it feels like. I've seen some of their surveys and some of the studies they're doing, the partnerships they're doing. A lot has changed since we last had Rohit on over a year ago and also not just inside his business, but I think inside small business lending in general. So we'll get an update on Biz2Credit, we'll get an update on Rohit's view of the economy today and where he sees small business credit going and the trends he's seeing there and we also talk a little bit about the industry and where he sees his company going. Hope you enjoy the show! Welcome back to the podcast, Rohit Rohit Arora: Yeah, Peter, thanks for the opportunity. Peter: Okay, so for those people who are listening who aren't really clear about Biz2Credit, can you explain exactly what you do? Rohit: Yeah, Biz2Credit is an online small business credit marketplace, which me and my brother co-founded seven years back, with the mission to help small and mid-size businesses get access to credit in a seamless and intelligent manner. We have done over now $1.4 billion in lending, we have over 250,000 small business clients on our platform who use it for access to credit as well as to get business intelligence for their businesses. Peter: Okay, what kind of loans are you offering today for these small businesses? Rohit: Yeah, so that's a good question. We offer four kinds of loans, we offer them short to medium term working capital, ranging anywhere from six months, now we go to five years, we offer them loans against commercial real estate, we also are launching the product to offer them equipment financing. Peter: Okay. Rohit: Besides these three-product categories, we also do bridge financing. Peter: So who is the typical small business? Are these like really micro businesses or are they small businesses with profits and revenue? Can you give me some examples of the kinds of businesses that are coming to you for loans today?

2 Rohit: Yeah, so I think that s a very good question because we have seen a big sea change in the demographics of the businesses which are coming to us for loans. Just to give you an example, just 14/15 months back, we only had 3% of our customers who are more than $10 million in revenue and more than five years in business; now, that percentage has gone up to almost one third of our customers Peter: Wow! Rohit: which are borrowing are more than $10 million in revenue and more than five to seven years in business. We have seen average credit scores on our platform jumping up from 660/670, right now it s 696, actually. We are seeing a lot of disruption moving upstream, we are seeing actually, in the last one year at least is that more and more people actually are looking for access to credit who are actually more well established and that s a function of the economy also because as the oil prices have significantly dropped over the last one to one and a half years, a lot more well established businesses are looking for longer term, cheaper money and also they are looking to refurbish their equipment or do more expense towards their capital improvements and all that in their businesses and that s where we are seeing more money now going towards than just working capital. Peter: Right, okay so that s interesting that you re getting businesses that are obviously are a lot more established so I imagine at the same time the average loan size is going up. Would that be fair to say? Rohit: Absolutely, so three things have happened, you know. If we look at our 2014 cohort data our average loan size on the working capital side was around $80,000 and we are seeing a lot more renewals, new loans so that has gone up to $110,000, we launched CRE (Commercial Real Estate) products where the average loan size is around $750,000. On the equipment financing side we are seeing the loan sizes of around $250,000 to $300,000. And the other thing that we ve also seen is our 2014 cohort data shows that our default rates were around 1.6% and actually that has also gone down right now to 0.56%. Peter: Wow, that s... Rohit: And that s a combination of both better quality businesses and better data analytics and more mature scorecards also. Peter: Right, right, because that s right. I just want to spend a little bit of time talking about that Virtual CFO product, is that what it s called? Rohit: Yes.

3 Peter: This is where you get all this incredible intelligence about these small businesses that allows you to make better underwriting decisions. Can you explain a little bit about that. what that Virtual CFO product does? Rohit: Yeah, so one of our visions always was when we set up the company and as we keep growing the company has been that most of these small business owners don t have any CFO, in-house CFO in their company so we said that if we can provide them with an intelligent platform where they can sync up their accounting, their payroll, their payments, their marketing and their tax data directly to our platform then we will be able to provide them with an ability to benchmark their business. We will provide them with an ability to do a lot of business intelligence on their business in terms of their personal credit scores, their cash flow analysis, their revenue projection and that we have found to be a very successful strategy. Now we have over 250,000 small and mid-size businesses which are using that tool of ours. On an average, they will log back in at least once a quarter they get alerted if their credit score has dropped or if the cash flow of their businesses has gone down. Sometime in December of 2015, we also launched a simulator tool because we were finding that a lot of these businesses were coming and they were actually looking at different scenarios. One example was that in a certain month they had more bounced checks, in certain months they had more deposits. Right now, it s time to file their taxes so they are looking to file their taxes late, what happens to their business and all that kind of stuff so we actually came up with a new version of that tool. The businesses can simulate all these situations and then they can see what impact that will create on the cost of credit and the overall credit worthiness of the business. We have found that to be a very good tool because not only are we getting data now, we are also getting behavioral analytics on top of it. Now we can see what is worrying a business owner and since this is free for every small business owner on our platform, irrespective of the fact of whether they get money or not, we are seeing some very high re-engagement rates. When we launched our commercial real estate product, we found that within the first six months of launching it that we are at a 26% plus cross sell rate to our existing customer base. So that clearly shows that if you engage the customers well, if you give them tools beyond credit, they will become better credit worthy customers and they will also give you more intelligence that can be incorporated into the scorecards and other behavioral analytics that you can do on top of it. Peter: Right, yeah, it s a real win-win, win for you and a win for the company because they get useful tools, that s great. I want to talk about the other side of your marketplace and who is funding these loans. I know you have a variety of different kinds of investors, can you just take us through those different types of investors? Rohit: Yes, so we have family offices, we have credit funds like Direct Lending, Ranger Capital kind of guys. We also have now some international pension funds which have come to us and

4 they have started buying loans so that s the other thing and I recently wrote an article in Forbes also around that, that we are seeing more international investors, institutional investors, who are coming in and one big reason for them to come in is that they re looking to book more assets in dollars. With the China slow down happening, more Asian investors are looking to have more assets in US dollars based out of the US and sell directly. What they are also foreseeing is that since the US economy is going to get better or at least it is the most stable economy in the world so this is a good time for them to book these assets into the fixed income groups. We ve also seen banks starting to come back and starting to buy seasoned assets. They are still not there to buy loans upfront, they are trying other things to do that which I will come to later, but at least we have seen the moment where these banks are now coming in (inaudible) these loans that have been paid down for six months or a year. If it is a five year loan, they are willing to buy these loans from institutional investors and also give better pricing and a longer term to the borrower while Biz2Credit is still doing the servicing of those loans and still gets all the data to be inputted back into our credit models and also the customer experience doesn t change at all so there is no disruption in that while the customers who are paying well get rewarded to actually get better products down the line on their own. Peter: So does that mean you are also funding loans off your own balance sheet, right? Who are selling to these banks? Rohit: Yes, so we are not funding anything through our balance sheet. What we are doing for all these institutional guys is set up like a back-end securitization. Peter: Okay. Rohit: Typically, these institutions will go and get a securitization done with the investment banks and all that, but this has become like a securitization channel for them. They do not have to go to an investment banks, they can directly go to banks through our platform and these are the banks who are traditional lenders or they are large wholesale, commercial lenders, but now they also come under the purview of federal reserve so they have to book their small business loans, both for CRA requirements which is the Community Reinvestment Act as well as if they want to book loans under the SBA. They have to do that so for banks and for these institutional investors it becomes a win-win situation while our platform can take care of all the data, all the scorecards, all the servicing, post servicing, closing and also transferring the title over from the institutional guys to the banks in a very seamless manner. Peter: Right, that s nice to get that kind of liquidity outside of the securitization market, you can bypass the investment banks and do it directly. That s got be a nice offering to have. Rohit: And also less credit market dependent, you know. Peter: Yes, yes, indeed, that s a good thing particularly it seems like these days.

5 Rohit: These days. Peter: (laughs) So I want to talk about some of the partnerships you ve done. You did this partnership with Univision last year, can you give us an update on how that is going? Rohit: Yeah, so the Univision partnership has gone pretty well, we are now expanding it. We started it in the Dallas area, now we are expanding it in Miami, New York and LA area and what we have found out at the end is that for any ethnic communities, not just credit, it has to be a lot more than credit. They are also seeking a lot of education, they are also seeking a lot of guidance, whether it s ethnic communities or women owned businesses and what we are now doing is we are...actually, as the next phase in the partnership we are actually investing a lot of money in creating that value added content with Univision and going to these different areas where there is a large Hispanic population of small businesses. Also, doing on-ground conferences and seminars where both the business owner as well as their accountants, CPAs...which we will deal with them on a day to day basis can get educated and they can also start using our platforms, especially CPAs and accountants, to start offering access to credit and other value added services especially the Virtual CFO platforms to their small business clients also. Peter: Okay, so also speaking of accountants, you also have a partnership with CPA.com. Can you tell us about that one and what that s all about? Rohit: Yeah, so the partnership with CPA.com is a very interesting partnership and like if you go on CPA.com there you can see we are on their homepage and we have created a whole micro site. What we are doing is that we are following the footsteps of guys like PayChex or some of the other large providers in other parts of the, I would say, like doing payroll services and all that. What we are doing is beyond just offering a micro site and all that, we are also starting to offer three things; we re starting to offer the services to CPAs themselves to have a cloud-based platform, white label platform where they can offer all the business intelligence tools, access to credit and they can know their customers better through a white label platform of Biz2Credit. The second thing we are also doing is we have developed a new piece of technology which is pretty cool. Now CPAs can just sync up their accounting software or they can generate all these bevy of documents from the accounting software, drag and drop directly into the white label platform. And then we have the ability to do OCR and and extract all that data, do the data analytics in real time and show all the covenants, all the visual analysis, bank statement analysis, financial data analysis directly back to CPAs and their clients. So now CPAs can also offer this platform to their clients so that means that now we are rolling out this platform to 45,000 plus CPA firms in the country over the next twelve months time and all these firms will have access to credit for their own needs because there is a lot of need for financing right now as well as for their clients. The third thing that we are doing is very interesting. EICPA and Biz2Credit are setting up a clearing house in the US so if you see...in the US one of the big challenges in the SMB space

6 has been, especially if you are a privately held company which 99.9% of the SMBs are, is that you don t need any audited financials so you can have a compiled financial and then you can file your tax returns which are all cash-based kind of stuff so tax returns are not really accrual based. One big challenge that happens with that is when you re looking to do financing, especially banks or lenders who are trying to lend more than let s say $250,000 for multiple year terms, that data gets very difficult to extract and it s very expensive to keep getting that data on an ongoing basis. So in a country like the UK there is something known as Companies House which is mandated by the UK government where every privately held company every year has to file their financials and then any lender can get access to those financials directly from the Companies House select. They know that these are audited financials. So one thing they are setting up in the US with AICP which is a statutory body is a clearing house where...you know, now CPAs will be able to just sync up their accounting platforms directly there and we will be able to extract a lot of data on their private clients and with the consent of those private companies then...you know, if they are looking for access to credit or ongoing loan covenants, we will be able to extract all that data, do all the analysis in real time, assign them a score and then the lenders can use it from one single place as a data repository to get all the data which is already pre- authenticated and pre-validated by the AICP actually. So that we feel is going to be a big change in the market because that will clearly mean that now you don t have to go from CPA to CPA to get access to the data of the financials of the customer. As a lender, you can just get it from one single clearing house and that way it streamlines the processes and then you can get ongoing data also. Peter: Wow, that s really fascinating, Rohit. I think that could be a real game changer. I mean, that s one of the things that I ve always thought...you know, like Companies House in the UK is something that everyone refers to if they re in the small business space and there isn t an equivalent here in this country. I think if you can pull that off that s going to be really impressive and I think a real benefit to many, many people. Rohit: Absolutely, not just to alternative lenders, but also to traditional banks, anybody who s going to deal on the assembly side will get benefited tremendously. Peter: Yeah, now that sounds great. So you ve also done...i mean, it seems like you ve been busy recently. I just was reading, I think it was last week, about a recent study you ve done on women owned businesses and you ve found a whole bunch of interesting data on that. Can you give us some of the key takeaways from that study? Rohit: Yeah, every year, Biz2Credit does an annual study on small businesses. We do it in partnership with CNBC and then we also do a webinar on the International Women s Day and this year the study has been very interesting because of three reasons. Obviously, the markets are improving, you know, small businesses have seen growth back and what we have seen is that obviously businesses owned by women as a percentage of overall businesses are growing

7 pretty quickly in the economy, but having said that, we actually found that in this economic recovery we are seeing men-owned businesses outpacing the women-owned businesses, both in terms of revenue as well as in terms of the profitability. So that s something very interesting that we are seeing as more money comes back into the market in terms of easier credit standards and everything else. We have seen actually womenowned businesses...their revenue grew by 12% from last year which is the largest jump over the last six years after the Great Recession, but at the same point of time, we have found that menowned businesses on average are 60% bigger than women-owned businesses in terms of revenue. We have seen also that in terms of even profitability there is a gap of almost 40% to 45% and that means that today what s starting to happen again is that if you are a woman-owned business the probability of you getting a loan from a lending institution or from a traditional lending institution is at least 30% lower than a man-owned business because of these reasons; smaller size of business, lower profitability. We are seeing that has been happening quite a bit now. That clearly means that women owned businesses in their own cohorts are doing better than anytime in the last six years, compared to non women-owned businesses, they are worse off this year than last year. The other thing that we also found out is their default rates right now are actually a little higher than men owned businesses. Again, which is a little surprising, because typically in the last few years of our study, we have found default rates to be lower. What we are finding out now is that because they have less access to credit, they re smaller businesses so the competition is going up again, you know, cost of acquisition, cost of doing business because of increased competition, we are finding them to be under a little more stress than the men-owned businesses. So that s something a little (inaudible) of our findings this year, but that is something very interesting and that clearly shows that in this time of recovery when the economy is coming back, women-owned businesses...my expectation was they should be doing better than what they are doing right now. I think there is still a lot of ground to cover for women-owned businesses to get parity with men-owned businesses. Peter: Right, right, that is interesting, certainly it s not a message that many of the women in the industry would like to hear, but, I guess the data is showing reality. I guess from a lender s perspective, it is obviously...it doesn t matter to you whether a woman owns a business or a man owns a business, it s the metrics of the business. What you are saying is the metrics of the business are better for men-owned businesses than women. Rohit: Yes, they are and I think that s what a lot of people don t want to hear, but we look at numbers, we are not looking at surveys. We are not doing any opinion-based surveys, we are looking at hard numbers and we are looking at the performance data because we are handling almost 7,000 to 8,000 new applications a month and we can see who is getting approved, who

8 is not getting approved at the end of the day. What we are seeing is that this is something that is...overall, it s good news, growing pretty quick, 12% year on year growth which is very impressive, but we are seeing some slippages in the overall performance of these businesses which is not good news. Peter: So let s talk about those approval rates. I know that you study those as well approval rates at banks and credit unions for the small business loans. What trends are you seeing there? Rohit: So we re starting to see some very interesting trends. We re starting to see that big banks have come back not as forcefully as people expected them, but still they are getting back. We are seeing slippages, continuous slippages in credit unions and small banks and one thing that we are seeing is that a large number of big banks are now looking to go digital and my take is over the next one to one and a half years, we will see a lot of investments from banks, a lot of announcements of partnerships with fintech firms and all that is going to happen, but all these activities are mostly going to be by big banks so the smaller banks are trying to use the technology and everything, but I don t think that they have the resources or even the understanding today to do that. Now talking about credit unions, I think their biggest challenge has been that they have been trying to get that bill passed in the Senate and Congress, especially the Senate where the cap on the lending limit for small businesses for credit unions is only 12.5% and they have been trying to get that up to 27.5%. What that does is that the credit unions which are bigger and wanted to get deeper into small business lending have hit their cap or are fearful to hit their cap and that s why they haven t invested a lot of money in small business lending and the smaller credit unions don t care about it because they have very little capital as it is to start with, actually. So I think credit unions have been really...they were one of the winners during the Great Recession, but we are seeing a continuous slippage in their performance. Having said that, we are seeing them also actually getting more aware about going digital so we simply...there s one very progressive credit union known as JetStream Credit Union which took our white label solution and they are now experimenting a lot with that in their footprint. They are offering these digital loans through a white label platform of ours so that s a very interesting experimentation we are doing with some credit unions because we strongly believe that credit unions have a big role to play because they are very good in their local community, they really understand, know people well and businesses well. They could be very good in terms of not doing any reckless lending also, but I think the challenge for them also has become as more and more business owners have stopped going into branches and are searching everything online like the other data I gave you. More than one third of the businesses that we are seeing today are more than $10 million in revenue so we are starting to see more businesses graduating online pretty quickly and that s

9 why they re facing that whole challenge, small banks as well as credit unions. I foresee next year that the approval of big banks will actually go up while approval rates by small banks and credit unions will stay stagnant or it can even reduce. Small banks will still do well because if you see they are very active in the SBA loan market so they can still cover up that gap. Peter: Right. Rohit: But not the credit unions so I think that s where the challenge is for a lot of credit unions. Peter: Right, I want to touch on that. You mentioned your white label solution, is that specifically for credit unions or can you just talk a little bit about that? Rohit: Yeah, so you know one of the things that I have been seeing and I have been writing a lot about is the growing convergence that s going to happen and I think the Chase/OnDeck deal was the first example of that, actually, which is still getting implemented. So we are seeing a lot of demand from banks and other institutions coming in who want to now white label the platform, both the technology as well as data analytics. I think one thing which nobody has talked about which I am really surprised is why big banks are going to do it even more than anybody else is because of Basel 3 because what Basel 3 does is that by 2017, any bank who is above $50 billion in assets needs to either have a scorecard model for small and mid-size loans or they will have to allocate 100% risk capital for those loans, actually, and that s going to create a lot of issues because the ROE and the ROI is going to just keep going down. As you know, big banks are under a lot of pressure to, you know, shore up their return on equity and Basel 3 is going to make it even more tough for them if they don t have scorecard models. If they have scorecard models then that capital allocation can go down up to as little as 20% so like you make a loan for $100,000 and you can only allocate that as capital, $20,000 otherwise it could be 100% to start. So one of the things that we are seeing is a lot of demand from banks right now who are coming and saying that we need to license the technology. Obviously, we cannot develop it in house, but we also need all the scorecards. We announced a deal with Customers Bank which is a $10 billion bank in Philadelphia so we re launching that platform with them sometime in April/May timeframe where it will be in all the bank branches and everywhere else. We have done some other partnerships like with this credit union, JetStream. We have a partnership with the US Treasury and Citi Community Reinvestment, an arm of Citibank known as DC Small Biz Loans and we are in the process of also doing some very interesting partnership announcements with large banks over the next few weeks time. They are coming in and licensing the whole platform to put it on their website in the branch networks as well as use our scorecards from a retro analysis perspective as well as going forward.

10 So we think that s the way the future will look like. There will be a lot of convergence between fintech players and banks, there will be more acquisitions which will happen, there will be more cross pollination of technology and data science and banks are also looking or they are under pressure to start doing more risk based pricing also. Peter: Right, yeah, for sure, and that s great. One of the things about credit unions, as you say, they re very strong locally, but they don t have the intelligence or resources to be able to create a sophisticated small business credit scoring card like you guys have got so it s a logical marriage if they want to expand beyond their local district, they ll be able to do that intelligently and I think that s sort of a win-win again. So, anyway, before I let you go I really want to talk to you about the economy. You have a pretty unique perspective, I mean, you ve got your Virtual CFO product, you ve got all these studies that you do and different partnerships and your own people who are coming to you for loans. I m curious to see how you see the economy like today and what trends you re seeing if we might be starting to see things get worse or if things are actually looking okay. Where are you at with that? Rohit: I think that s a very interesting question and the key thing here is the main street economy which is the small business economy is actually doing pretty well right now. It really doesn t get much impacted by the stock market unless they did a big squeeze on credit kind or that increases the joblessness rate. Until that does not happen the main street economy will do well. Actually, over the last one year it got the tremendous benefit of low gas prices, not just because of the fact that consumer spending has gone up. Consumer spending has gone up only in few areas like hospitality, travel, dining outside like restaurants. Those segments in our small business portfolio have been doing very well right now. They are like up 10% to 15% yearon-year right now, such a tremendous growth we have seen. It s also a question of, for most of small businesses their operating costs have gone down. So we have a lot of large transportation and logistics businesses on our platform...there are a lot of gas stations that we finance and we have seen that the drop of the oil prices has helped tremendously to lower their operating cost as well as get more money to be spent in areas that are more profitable. So an example is a gas station, when a consumer is coming in and they have to spend less money on filling the gas tank up, they are buying more stuff from the convenience store where the margins are a lot higher compared to the fuel pump, actually. So we are seeing that the revenues have gone down in most of the gas stations, their revenues have dropped like 40%/50% because the gas prices have dropped so much, but the profitability actually has gone up so their need for working capital overall has gone down. Now they don t need so much money to buy fuel all day long because the fuel costs them less, while the profitability has gone up so it is good news for them in that sense. Various negative signs are...is that the sentiment is still a little fragile especially what happens that at the end of the day, most of these small businesses just depend on the sentiment and the

11 motivation of the small business owners unlike large companies and they are also consumers so at the end of the day these people when they see negative news, they don t feel very confident about investing a lot of money or re-investing a lot of money back into business and that s where things slow down when any negative news comes in. Having said that I have seen a lot of historical economic data, whether it was 1987, 1997, 2007, I think it happens almost every ten years, nine to ten years. Whenever the global economy or some of the other large countries get into a funk. It actually helps America so the next three, four, five months are very volatile. All this volatility started sometime in August/September, but if you see the historical 1987 and all that, six months was very rough and tough including Black Monday, but after that the next two years were the best for the economy, before the recession came in. So my take on that is that if things move the way they are moving, the economy will do pretty well. The only thing is some lenders will go over exuberant and then they will lower their underwriting standard and that can create issues and I think that should not be a big challenge right now because markets are pretty credit starved. I think there will be some increase in the interest rate, but I don t foresee much of that because the inflation is so low right now. Peter: Right, right, good point, that s good to hear. So last question, what are some of the interesting things that are coming down the pipe of Biz2Credit, what are you working on? Rohit: There are two or three things...one, obviously, we are working with a large number of banks, both in the US as well as internationally, and we are about to announce some large transformational deals. As you know, we are...our technology, our data science will start getting used by these very large global banks to run their whole SMB businesses, you know, portfolios and also the loan origination underwriting kind of businesses using our scorecards so that is happening. I think the other thing we are seeing is a lot of convergence coming in so we did a partnership with Heartland Payments who were just recently acquired by Global and now a lot of other payment guys are talking to us to actually have a similar partnership where we can extract all the historical data of credit card transactional data and then data going forward and can put it back into our scorecards. I think the third thing which is the most exciting is that we are seeing a huge, huge migration of businesses now in the online space. I think our last one, one and a half years this has just accelerated and my prediction is that in the next 18 to 24 months we will see that most of the good businesses, viable businesses will first go online and then they will look at any other options. So that really means that banks will have to restructure their branch networks pretty quickly, they will have to go digital very quickly and they will have to provide a mobile first kind of experience very quickly. That s the other thing that the mobile traffic is just exploding right now.

12 Peter: Right, that s good news for people like you and not so good news if you work at a traditional bank. Anyway, I have to let you go, Rohit, I always find it fascinating chatting with you. Thank you very much for your time. Rohit: Yeah, and, Peter, thanks a lot for the opportunity. Peter: Okay, see you. We ve talked a lot about the growth of this industry and about the disruption that s happening, but I think Rohit hit it on the head in one of the last things he said there was when he said...the small business owner today is going online first in more and more circumstances so looking for a loan online and not going to their branch, they re not going to their local bank or where they have their checking account because let s face it, all these small business owners have a banking relationship already, but they re often now choosing to go online first. That is and will continue to be a major tail wind for this industry and it s something that if I was working at a traditional bank I would be most worried about. Traditional banks right now still have not got their online processes down. Companies like Biz2Credit and some of their competitors make it extremely easy now for small business owners to obtain a loan and word is getting around. So I think these companies like Biz2Credit are going to continue to thrive because they ve made it easier for their target customers to obtain their product and I think it s something that is not going to change back to the way it was before. We are going to have more and more people go online for loans than ever before and it s a trend that is just going to continue going for many, many years to come. Anyway, on that note, I will sign off. I very much appreciate you listening and I will catch you next time. Bye. (closing music)