A New Lending Model
This wasn’t the meeting I wanted to have with our largest investor.
Evan and I had just blown up Outbox – our wildly ambitious and slightly crazy startup to take over the USPS. We were a couple of months into the “pivot” and things weren’t going well. We had the hope of resurrecting our company, but rigor mortis was setting in. We were becoming a zombie company.
I began to question everything, doubting the most basic decisions I was making as an entrepreneur. So we went to our largest shareholder to seek advice.
“Guys, you don’t need to do this for me. I’ll be fine if you fold. I would’ve been surprised if you had pulled it off!”
That is typical Mike Maples. Nothing shakes him. In fact, he’s optimistic to a fault, just like the founders he backs. It’s also the reason he’s a perennial fixture on the Midas” class=”redactor-linkify-object”>http://www.forbes.com/midas/li… list. But what Mike didn’t realize was that I wasn’t doing it for him.
Early into the initial fundraising for Outbox, we raised a small amount of money from our friends and family. We capped each person to $10,000 thinking that if we failed (likely) no one would be destitute. But if we succeeded (unlikely) we would provide a nice return to mom or dad, uncle or friend.
Of the $7.25m we raised for the venture, only $90k came from this small group, or just about 1.25%.
But here’s the thing: in the face of failure, our small group of friends and family were the only ones I could think about. I knew Mike and other large investors would be OK if we folded. They expect only a handful of their investments to ever pay off. But I had an irrational desire to pay back those people who were closest to me, even though the monetary loss of their investment was negligible.
This is where the story gets interesting. Inexplicably, this semi-irrational motivation to keep building was itself the answer to the problem. The passion became the product.
Building a lending model that increases willingness to repay
If you boil down all lending theory into one formula, you get the following:
Ability + Willingness = Repayment
It’s a remarkably simple model. If you have the ability to repay but not the desire, you won’t repay your lender. While even the strongest desire to repay means nothing if you don’t have the money. You’ve got to have both.
Traditionally, lenders have only had the tools to measure the first part of this equation, and they hope to infer the second part by examining your history of repaying other lenders. But they have never had the ability to increase your willingness. This is what sets Able apart.
On average, there are about three Backers (friends, family and fans who are also lenders) in every loan we make. This single change to the lending model has produced absolutely stunning results: even though we lend to the riskiest group of borrowers – small businesses – we have had zero losses on our portfolio. But that’s not what I’m most proud of.
Able has pulled this off while also becoming the lowest cost non-bank lender in the nation. This distinction is important since banks have low-cost lending capital (customer deposits) in exchange for strict lending standards (regulation). This tradeoff creates exceptionally low rates (around 6%), but only few businesses qualify (about 20%).
For the rest, they have few options. Over the past decade, a group of sketchy alternative lenders have risen to fill the gap, averaging interest rates in the 30-70% range. But the best entrepreneurs have self-selected out of this option, instead turning to the only other source available for cheap capital: friends and family.
That’s where Able comes in. What if you could take this second group – a truly massive marketplace of friends and family investors – and amplify it by 5-10X? And what if in doing so you could disrupt those sketchy alternative lenders? Well, you don’t have to speculate, Able has pulled it off.
Our average blended interest rate is a stunningly low 10.7%, and our average APR is 14.03% when you include our one-time origination fee. There are no tricks or gimmicks to this. And if you calculate what our borrowers would have paid without our model, you’ll find that we’re saving them $31,000 on average. Not bad!
We lend to any business at any stage
In applying this model, we’ve also been able to disrupt a long-standing rule for non-bank lenders: never lend to startups, and make sure you specialize in the vertical you lend in.
So if you’re a startup, forget about applying for a loan. And if you’re an established company, you may qualify for a high interest rate loan, but you’ll likely get stuck in that specific product designed for your vertical – like a high interest rate merchant cash advance.
On our platform, we can leverage your network’s capital to do three things: create and crowdfund your own loan; amplify friends and family money to provide growth capital; and we can also use our platform to refinance existing debt. Here’s how we pull it off:
For early stage companies, even those without revenue, we created Able Start. We let entrepreneurs use our platform as a service to create any loan product, at any rate, with any repayment schedule. They can then crowdfund their loan on our platform from their friends and family.
For growing companies, even those with limited revenues and track records, we created Able Growth. This allows an entrepreneur to amplify their friends and family money by as much as 10X – meaning, we can take $10,000 from mom and dad, and turn it into a $100,000 loan from Able! Unless you can qualify for bank funding (you should always try), there’s not a single lender in the country that will beat our rates.
And what about those companies stuck in high-interest rate products? We created Able Refi, where small businesses can restructure and refinance existing high interest rate loans into longer-term, lower-cost loans through our platform. On average, we’re saving entrepreneurs $5,436 per month! We also created this nifty True Rate Calculator at MyTrueRate.com for borrowers to discover what their actual rate is with their current lender.
Read more about how a 4,058% APR inspired us to launch our True Rate Calculator and Refi loan product in Forbes here.
We Are Able
Why did my friends and family invest in me in the first place? I don’t think it was ever about the monetary return I would give them. I also can’t reconcile my own desire to persevere to a simple investment formula. Instead, there’s a deeper commitment motivating both parties.
Friends and family investing is a two way street: whether you are investing in a friend, or returning an investment to a family member, we are all motivated by a desire to see the other person flourish. This creates the condition for each to accomplish much more in the context of community than outside of it.