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Filling The Capital Hole For Small Businesses

While it is hard to imagine today, approximately 18 months from now Americans, en masse, will feel strongly about two things: international competitive gymnastics and the fate of the American small business. PYMNTS is comfortable making such a bold prediction because 2016 is a leap year and leap years always bring with them the Summer Olympics and Presidential elections.

Presidential candidates from both parties love small businesses during elections years. In 2012, both candidates collectively referenced the centrality of the American small business over a thousand times on the campaign trail, usually accompanied by the SBA statistic about how 99 percent of American businesses are SMBs.

Despite the great enthusiasm they engender among politicians, SMBs have nonetheless been struggling in recent years, particularly in reference to securing the capital they need to run and grow their businesses.

While all lending took a hit during the Great Recession and the credit crunch that followed, small business lending was hit the hardest and has been the slowest to recover. And even though things are improving — by the end of the first quarter of 2014, small business borrowing from traditional lenders was up 1 percent from the previous year — small business lending was down 17 percent from its 2008 peak, according to the FDIC.

In 2015, that picture is looking somewhat brighter, with big banks approving approximately 21.3 percent of small business loan applications in January 2015, up from 21.1 percent the previous month. Institutional lenders similarly reflected a very slight increase in their small business lending with 60.5 percent of loan applications getting the thumbs up in January, compared to 60.1 percent in December 2014. However, smaller banks and credit unions continue to lag noticeably, as do the dollar amounts of the loans being granted.

“There is a full spectrum of small businesses – we service thousands of [SIC] category codes – that are perhaps too small to get capital through other financial organizations and those for whom traditional bank products perhaps don’t fit. We work quickly, we work with real-time approvals and with fast funding so business owners can get back to running their businesses instead of searching for capital,” CAN Capital CEO Dan DeMeo said.

CAN Capital provides small businesses access to credit and working capital – and delivered access to over $4.7 billion since it got into the business back in 1998. This, DeMeo says, not only makes them the oldest player in the space, it makes them the largest. DeMeo joined the firm as CFO in 2010, coming from a long background in traditional finance as CFO of Global Technology at J.P. Morgan Chase and prior to that, as CFO of the Chase Consumer and Small Business Credit Card unit.  He was promoted to CEO in 2013.

“I took some great training and professional development from some very smart people and very resourceful companies and applied it to an environment and a sector that has the ability to be more nimble and fast-paced with a higher growth appetite and somewhat of a different mentality in this category,” DeMeo told MPD CEO Karen Webster in a recent conversation about the rapidly expanding alternative lending space. “As it relates to more traditional retail or money center financial institutions competing in this sector, this is the place to be.  Some traditional FI’s have had distractions around regulatory pressures and compliance matters so they haven’t been as focused on providing access to funding for small businesses.”

DeMeo told Webster that, going forward, it really isn’t about competing with the banks, so much as complementing them by offering a service that some may not be in a position to offer in a cost-effective manner. A firm like CAN Capital, DeMeo says, can “dig down” and specialize. He also noted that while there are more players looking to enter this space, CAN’s long-standing experience, which has helped it hone its risk management capabilities, gives it an edge.

“We are able to collect information, use proprietary technology to power and provide access to funding that small businesses can’t find elsewhere,” DeMeo offered. “Yes, there are more entrants now – not that long ago, we were on the track primarily by ourselves. Now with others in the race, it’s made us stronger. We’re one of the few in the category that’s figured out how to do this in a profitable way.”

And that profitability is key – because anyone can hand out money, but making money while doing it is a whole other issue.

“First and foremost, from a market-facing perspective, we’re able to meet the needs of the merchants, the SMBs that are out there looking for access to working capital,” DeMeo noted when asked by Webster about the source of their profitability. “We have years of history collecting data about our SMB customers that enable smart risk and funding decisions. That data has taught us what merchants need and how to serve them.”

CAN’s winning combination of diverse distribution channels and a variety of target segments has allowed the company to grow, in both its total number of customers and the size of its balance sheet.

“As the business has evolved over the years, I would say the amount of the working capital desired has increased. In the earlier days of the business, the request was for lower funded amounts, and now we are starting to see demand for higher funded amounts.”

It would seem, Webster noted, that as CAN’s base is increasing and funding amounts are getting bigger, they could be straying more and more into “traditional”retail bank territory and possibly competing more directly for the same SMB customer base. DeMeo agreed with that to an extent, noting that as alternative lending has become better known, a more diverse profile of businesses are choosing it as an alternative. But, he also noted that from CAN’s perspective, there is still work to be done developing and courting the underserved entrepreneurial base.

“It isn’t like we abandoned where we had previously satisfied a certain section of the market,” DeMeo observed. “Our success has just enabled us to expand our capabilities. At the same time, the market awareness and notoriety of this as an alternate way to access funds has become better known.”

And more than access, DeMeo noted that access has to be done in a way that is compliant and transparent. DeMeo noted that while his firm does face a fair degree of regulatory pressure, he believes that for the alternative lending space to ignite, it has to hold itself to a high standard of clarity when transacting with small business owners.

“There is a significant level of attention that we pay to regulatory and compliance matters,” DeMeo noted. “We run the business in a very strong and transparent way relative to our business and operating practice. There are things that all of the players in this space should do to make the industry stronger over all, providing clear disclosures in general and in particular, any disclosures around fees. I think fundamentally the product construct and product design should be clearly defined and disclosed. There’s a need to continually emphasize the importance of representing the product with a high level of detail – more could be done overall on that score.”

And as fundamentally transparent as DeMeo believes the product must be, he also thinks a firm like CAN needs to be flexible, particularly as they pursue distribution channels through banks. Firms like CAN are able to specialize, not just in evaluating small businesses up front, but also in monitoring the health and capital needs of their partners over time. That type of service, he notes, can be offered in conjunction with a larger partner.

“The business model can be relatively agnostic to product features and branding so we believe that fundamentally how we go to market, how we serve it, how we evaluate is somewhat generic and can be applied to any sophisticated business, it can be white labeled or branded. We want to partner with large institutions that haven’t been able to focus on building out this capability.”

Because at the end of the day, DeMeo told Webster, building out the capability and creating a strong and transparent funding system is what is important. There are 27.9 million SMBs in the U.S. according to the SBA – but without easy access to funding, that number is likely to get smaller, not bigger.

DeMeo will be appearing at Innovation Project 2015 on the From Banks To Non-Banks Panel where he will be among experts trying to answer the following question: “Can alternative players take on the big banks and win?”

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