Funding for SMEs Too Small for Banks, Too Successful for Alt-Lenders

When Ethan Senturia started his own business, he encountered a problem. As he described it, it was the curse of success: too young to get approved for a bank loan, in need of more financing than what was available through alternative lenders, and forced to turn to high-interest credit cards. Without access to capital to continue to grow, he figured other rising businesses were faced with the same dilemma. That’s when Senturia founded Dealstruck as a way to fill this SME credit gap. MPD CEO Karen Webster discussed the rise of Dealstruck with its co-founder and CEO, as well as the SME financer’s position as a direct lender that collaborates with – not challenges – the traditional bank.

KW: To get our audience acquainted with Dealstruck, you guys operate an online lending marketplace primarily for small business, but there are a lot of marketplaces for small businesses to look at and to find lending products. What makes you different?

ES: When you look at the landscape for a small business, there are options that SMEs have that are traditional. Think of the bank or a credit union where they could go get a large loan that’s relatively cheap, but difficult to qualify for. Then there are options at the other end of the spectrum where they can get a very small, expensive short-term loan. But the area that we populate is right in between. We refer to ourselves as a mid-prime lender, and our differentiation in the product we deliver – unlike other lenders out there that are mostly doing term loan products or daily debit-type products – we do term loans, asset-based lines of credit, and inventory lines of credit. By having multiple products we can get businesses to the right product at the right price and help them find a pathway into profitability and, ultimately, a pathway to a conventional financial relationship with a bank.

KW: So you guys are actually lending the money, you’re not aggregating lenders and then pointing businesses to lenders that may be interested in extending credit?

ES: That’s correct. We have various capital sources, some of which are directly our own, some of which are other lenders that are providing capital to our marketplace. When a borrower comes to engage in a transaction with Dealstruck, they interact with our sales team, they interface with our credit and underwriting. To the borrower, regardless of where the money is coming from, they are having a seamless experience with Dealstruck, from the time that they first apply to the time that they graduate on to a bank.

KW: What gave you the idea to do this? What gaps did you see in the market and why did you think you were in a great position to fill it?

ES: The gap in the market was one that I had seen firsthand. At my prior company, I was in an Internet marketing role and a friend from college and I had started a business that was growing very quickly and was very profitable, but we had no cash. We never had any money and we didn’t really want to raise equity, because we were profitable and we couldn’t get financing because we were a young business. Because we didn’t have a three-year track record, because we hadn’t been in the industry for 15 years, we were young guys and we sort of felt like we had the curse of success. We were doing so well that we were going to grow ourselves right out of business. When we looked at our options, we couldn’t go to a bank yet and the other options we had to look at were really high interest credit cards and factoring. It didn’t make a lot of sense to us that a really solid company that was growing well and had good fundamentals couldn’t get reasonably priced capital to continue to grow. Having seen that myself and having seen it in a few companies of my other peers, it occurred to me that if I’m having this experience there are probably thousands of other businesses out there having the same experience. And that I could provide a product for them to get past that burden.

KW: Do you target a particular merchant category and a particular size of small business? There are a variety of definitions of small business, how do you define it? What is the typical profile of your client?

ES: When we look at small businesses, we’re really looking at businesses that are beyond startup. We’re not the place where we’re going to be the most effective for a company that’s a few months old and not generating revenue yet, or that’s not profitable. We’re looking at companies that are already successful, and are off the ground, but are looking to take their business to the next level. When you look at the profiles of our companies, we’re financing growth. We’re looking at businesses that have some sort of longevity (at a minimum, one full year operating), but typically five to seven years. They have some meaningful sales volume, maybe $20,000 to $25,000 a month (at a minimum), and they have some profitability and they have some credit, so they’ve been doing business for a while. They have some trade credit, they have maybe some outside capital stake in the business.

But what’s giving rise to their need for money is growth opportunities. They want to open a new unit, they want to hire more people, they want to buy a piece of equipment – that’s the type of growth we’re funding. It tends to be for businesses that are looking for larger capital amounts than are currently available from many alternative lenders. Typical loans range from $50,000 to $500,000 for us, the average being a $125,000 to $150,000 loan, which is three or four time larger than some of the other loan or daily debit options that are prevalent in the alternative lending market.

KW: How do businesses find you?

ES: We really like when they find us. The classic phrase in small business is that businesses are everywhere and nowhere. We put a lot of energy into a direct acquisition effort so that customers engage directly with our brand, our user experience and our technology with our team. We advertise in a variety of channels. You’ll find us doing a lot of the things that others are doing. Direct mail, radio, calling campaigns, email, all of those things that you expect of any sort of diversified marketing approach. But what seems to fit our customers the best and really give them a sense that Dealstruck is the place they should build their financing relationship is that we do have multiple products and we do have a team that is very experienced in non-traditional lending, and that knows how to say yes. When companies come to us, we’re not a one-trick pony where we try to fit a square peg in a round hole. We’re really spending the time and energy to understand what companies’ needs are and making sure that when they get a financing package from us, it has everything that they need that they couldn’t get anywhere in the market to grow. You can only really do that if you have multiple arrows in your quiver.

KW: When you look at the alternative financing marketplace, there are a variety of ways in which companies have approached it. Maybe they’ve decided to be very disruptive, competing against the existing players. There are those that really try to collaborate with existing financial institutions to extend their capabilities through whatever platform they’ve developed, and then there are those that say “well, I’m sort of in between because I’m in the no man’s land of what banks can’t capably serve.” Maybe that’s disruptive, but not really, since these are businesses that the banks aren’t, for whatever reason, able to underwrite. Where would you characterize Dealstruck?

ES: I would say that the biggest lesson that we had early on was that we were not going to compete with the banks. Banks are really good at what they do. Now, they don’t necessarily do as much small business as the small business community would like, but when they do it it’s really good. It’s cheap, flexible, and affordable, it’s very relationship-driven, and people like that. We don’t see ourselves as a bank disruptor. We don’t try to compete with them.

I think we see ourselves complementing two different parts of the market. On the one end, you have daily debit from either merchant cash advance folks and factoring companies, which are shorter-term smaller market products. We provide sort of a graduation from that. So for companies that have used those products for a period of time, and continue to grow and generate profits despite that, we’re sort of the next reasonable place for them to say, “OK, if I need a little bit more money and I think I can qualify for a lower rate, and pay it over longer terms, where can I go?” We do see ourselves as somewhat disrupting the down market players in the short-term loan space.

There is a lot of research out there about the discouraged borrower, the small business owner who has a business, has an opportunity to grow, couldn’t qualify at the bank, and just really doesn’t do anything because the next option is very, very expensive. With the product that we deliver, the sizes, price, terms, etc., these discouraged borrowers get activated and they decide that it’s right to pursue their growth. Now is the time, and something that was once unattainable from a financing standpoint now is attainable. That’s a big market in and of itself. Various research shows one out of three business owners in the U.S. is a discouraged borrower, so that community is one that we hope to serve and activate and start getting them growing and generating jobs and growth and all the things that we are doing for them.

KW: Last question, Ethan. What does 2015 look like for you? What’s next? What’s on the roadmap?

ES: 2015 is a year of growth for Dealstruck. The company itself is going to be growing 300 percent—three times what it was last year. Our goal is to take the new product that we’ve rolled out, our inventory credit line, alongside our other asset line and term loans, and just distribute it to as many qualified businesses as we can. In this market we want to make a big impact, and to make a big impact you’ve got to get your product into the hands of a lot of business owners. That’s the year for us. It’s early, but so far, so good.

Ethan Senturia
Co-Founder & CEO

Before founding Dealstruck, Ethan ran Internet marketing for a lead generation startup – Ampush Media – growing annual spend to $15M in less than two years. Prior to Ampush, he worked as a distressed credit analyst at Lehman Brothers and graduated Summa Cum Laude from Wharton Business School.