Entire Industries Still Unbankable Despite Big Data Boom

The use of data and technology for assessing risk shows promise for new borrowers, safer bets and fewer delinquencies. Big data has been credited for overhauling traditional lending models and ushering in a new crop of lenders that do not shy away from risky businesses and low credit scores. But has it been successful in narrowing the list of industries previously ineligible to even be considered? And perhaps there’s a bigger story, that some lenders still maintain a list of industries they cannot or will not lend to despite the boom in data. AltFinanceDaily checked the temperature on restricted lending practices today with three lenders and here’s what we found.

Jersey City-based World Business Lenders whose average loan size is $150,000 does not lend to startups. According to chief revenue officer, Alex Gemici, startups usually don’t have revenues to justify payments. “Startups fail the ‘ability to pay’ test,” he said.

The restricted industries for WBL are the usual-suspects that fall in the federal legality grey areas like Marijuana related businesses and adult entertainment websites and weapon manufacturers that the company takes a moral stance against. Gemici said that the company has never lent to these industries and will evaluate the policy only if the need arises.

Apart from these WBL also classifies certain establishments as ‘high risk,’ either prone to defaults or without a steady cash flow like car dealers, childcare services, gas stations, real estate speculators, stock brokers, insurance brokers etc. which the company lends to with increased scrutiny and tighter checks.

Often, the risk appetite of a company depends on how long it has been in business and its funding track record. For instance, San Diego-based National Funding is 17 years old but is gun shy when it comes to lending to auto dealerships, thanks to sustained losses. “We don’t lend to auto dealerships because they already have enough MCA plans out there,” said CEO Dave Gilbert. “It’s too risky to be in that environment without being tied to actual assets, we have had too many losses.”

Government agencies, membership organizations (usually, non profit), insurance brokers, online dating services, weapon manufacturers, credit repair services, gambling and ticket sales websites are also industries the company does not lend to.

However, construction companies, oil companies, transportation and industries with high subsidies like solar businesses are what National Funding considers high risk and will finance cautiously, by tightening the credit window, advancing smaller amounts, demanding higher FICO scores and increasing scrutiny on cash flows.

Irrespective of whether a company automates underwriting, few contest the need for rich and varied data for calculating risk and approving a loan. Kennesaw, Georgia-based IOU Financial, which recently started lending in Canada, has a proprietary ‘Risk Logic’ score for underwriting which includes credit data, financial and non-financial accounts, public records, transactional data and a business owner’s personal credit information.

Despite this, it restricts lending to businesses with seasonal cash flow like tax prep services, industries that invoice out for larger orders including manufacturing, and marijuana dispensaries. IOU also does not lend to industries where it has faced high delinquencies in the past, like oil refinery service related industries and supply chain service providers that are subject to fluctuations in commodity prices.

And if OnDeck, the touted leader in deploying big data for underwriting prohibits 60 industries in five different categories including blood and organ banks, payroll companies and its own kind — non-bank financial companies, has big data really changed underwriting?

Year of The Broker Concludes – 2015 Recap

It was the Year of the Broker, a phrase that often conjured up images of easy money and inexperience. Lenders like OnDeck reacted by reducing their dependence on them. Responsible for 68.5% of their deal flow in 2012, OnDeck only sourced 18.6% of their deals from brokers in the third quarter of 2015.

But there’s money being made. One broker is on pace to do more than $100 million worth of deals annually after working as a plumber eight years ago. Another went from sleeping in his car to driving a Ferrari. Meanwhile, brokers like John Tucker are basically saying just the opposite. Tucker has repeatedly taken to AltFinanceDaily to preach things like “minimalism,” a practice of living below your means to a point where you can survive, and telling everyone it’s okay to embrace the satisfaction of a middle class life.

So is it the end of days or just the beginning?

In October, initial survey results of top industry CEOs revealed a confidence index of 83.7 out of 100, but out there on the street for the little guy, it’s been a tumultuous year. Things like commission chargebacks have hit brokers at unexpected times, with several funders privately telling us over the year that rogue brokers have closed their bank accounts or frozen the ACH debits in order to avoid giving the commissions back.

In 2015, brokers sued their sales agents and sales agents sued their employing brokers. Deals got backdoored, deals got co-brokered, and soliciting deals anonymously got banned from industry forums. Stacking continued mostly unfettered but is being pursued in the court system by funders allegedly injured by it. Brokers took over Wall Street and are supposedly being watched by regulators. Oh, and robo-dialing? Brokers should probably steer clear of that, just as underwriters should ditch paper bank statements.

It’s a lot to manage. Sometimes for a broker, just losing a deal can make them so sick that they have to go home. That’s apparently what happens when you don’t answer the phone fast enough. At least one said there’s no room left for more competitors so if you were thinking of starting a brokerage now, $2,000 won’t be enough.

But things could be worse. In 2015, IOU Financial was under attack by Russian nuclear scientists, a story that was more truth than exaggeration. In the end, Qwave Capital acquired a 15% stake in IOU.

An OnDeck class action lawsuit that looked bad at first turned out to be mostly based on the words of a convicted stock manipulator with a short position in the stock. The case is still ongoing and OnDeck’s stock price is down 50% from their IPO.

In 2015, two guys lost God but found $40 million (although numerous sources say that number is off).

“Madden” no longer means the football video game and Section 1071 is not a seating area in a stadium.

An RFI turned out to be something not to LOL about. Despite an overwhelming response from lenders and funders, the Treasury isn’t completely sold.

Things weren’t so automated in 2015 despite the cries of technological disruption. Maybe that’s why it feels like 1997. Manual underwriting still dominated and bank statements still matter as much as they ever did. God declined loan applications, Google rigged the search results, and a mayor declared war on merchant cash advance (and then never spoke about it ever again after being re-elected).

Lobbying coalitions formed. NAMAA became the SBFA. The CFPB lied and community bankers testified.

But things are looking up. Brokers can obtain outside investments, get acquired, or make millions through syndication.

Bad Merchants are now ending up in more than one bad database, though a deal for the ages slipped through the cracks. Other merchants went to jail. Square went public and brought merchant cash advances along with them. The industry beamed its message through Times Square and one Democratic congressman has asked God to bless it all.

It was a crazy year. Marketplace lending became an acknowledged term (and the name of a conference) and already companies under that umbrella have been linked to presidential candidate (and desperate loser) Jeb Bush and the San Bernardino Terrorists. The FDIC had a few things to say and SoFi went triple-A. Marketplace lending is making a lot of people money, but when looking at the tax implications is there something funny?

In 2015, the big boys shared their wisdom and their figures. Turns out, it was beyond hyperbole. Brokers experienced an incredible rise or they pawned their ferrari to the other guys. Some focused on a specific crop, while others are trying it over the top. California sucked, John Tucker tucked, and one lender got totally F*****. In 2015 some funders got tanked, so in 2016 we’ll all be AltFinanceDaily.

Happy New Year!

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