With any business, there are two types of financing requirements. The capital cycle requires spending a lot of money up front and generates little cash flows over time. The operating cycle needs working capital. If the business is widget-making, there will be a 30-60 day wait to get paid by the customer, but the business still has to make the widgets, pay suppliers and staff, and take care of all the overhead costs. Cash is needed to float the business until the money comes in.
The lending marketplace has originated tons of loans in response to the need for financing. Early adopters used technology to make origination more efficient, ignoring underwriting or taking it for granted. But when those loans are incentivized by volume where the lender takes 100% of the risk and sells to investors, “in the history of finance, it’s never worked because people act irresponsibly,” George Souri said. “If you are lending $800K or $3M, you can’t just gloss over points and make good credit decisions.”
The Future of Non-Bank Lending
Souri is the CEO and founder of LQD Business Finance. He sees the future of non-bank lending in companies that have a focus on underwriting quality and credit risk management in their DNA. In the tech space, they are defining a new market from the supply side by servicing deals banks can’t service.
“Our message is about quality of loan, not quantity,” Souri said. “We understand the entire needs of business and create customized facilities to meet those needs while mitigating risk.”
The LQD Matrix is a quantitative risk module simulating probability over time. It looks at the volatility of cash flows and extracts distribution so the EKG dynamic is understood when they price the loan. Credit risk is not just about numbers and financials because financially successful companies can go bankrupt. LQD looks past a straight financial analysis to the organizational behavior of the borrower.
“It’s not true that quality of management is wrapped up in financial performance,” Souri said. One example is the quality of bookkeeping. “A borrower that uses an outside CPA and closes the books monthly is generally less likely to default than a borrower who uses a sister-in-law with no formal training. When we see how they run operations, we get a statistical model that says if, behaviorally, this is a high or low risk company.”
The LQD Decision-Making Process
Instead of onsite visits, the company goes through a series of five dozen questions and documentation checks. They look for objective, verifiable data revealing best practices employed in the business. In about 10 business days, LQD can process the loan.
“Banks take too long,” Souri said. “The borrower pays more for our money, but they can then make more because we are more flexible and faster. The structure and sophistication allows them to deploy in a better way with fewer restrictions on the money. If they want liquidity, they need to take on some of the risk.”
By taking robust underwriting and using technology to make it more efficient, LQD hopes to define a sustainable model for non-bank lending and capture the market.
Written by Nicki Jacoby.