There are very few companies in this industry that can say they have been through multiple credit cycles. CAN Capital is one of those companies having started in 1998 and they have been profitable every year since 2007. That is quite a track record.
While Dan DeMeo has not been there since the beginning he started as CFO back in 2010 and moved to CEO in 2013. Online small business lending is a vertical that has really started to take off as time starved entrepreneurs shy away from the traditional bank loan application. CAN Capital continues to be one of the beneficiaries of this shift.
In this podcast you will learn:
- The history of CAN Capital and how they developed their first merchant cash advance (MCA) product.
- The loan products that are on offer today from CAN.
- Why they are phasing away from MCA into a flexible loan product.
- The range of loan terms available on CAN Capital today.
- What the typical borrower looks like.
- Their approach to underwriting and the importance of both personal and business data.
- How long the origination takes assuming good information from the merchant.
- The scale that CAN Capital is at as far as overall funding and transactions goes.
- Why Dan believes that the market opportunity is huge for small business lending.
- The big banks that provided their $650M syndicated debt facility.
- Dan’s view of the economy today based on their own as well as external data.
Download a PDF of the transcription of Podcast 60: Dan DeMeo of CAN Capital.
[expand title=”Click to Read Podcast Transcription (Full Text Version) Below”]
Podcast Transcription Session 60: Dan DeMeo
Welcome to the Lend Academy Podcast, Episode No. 60. This is your host, Peter Renton, Founder of Lend Academy.
Peter Renton: Today on the show, I am delighted to welcome, Dan DeMeo. He is the CEO of CAN Capital. Now CAN Capital is a little different to most other companies in this industry in that they’ve been around awhile. They actually were started last century, back in 1998, so they have been lending money to small businesses through several cycles of the economy which is something that many other small business lenders simply cannot say. So I wanted to get Dan on the show just to talk a bit about CAN and what makes them different, why they have continued to thrive after all these years. So we’ll talk about their underwriting, we’ll talk about some of their scale on the funding side of the business, we cover some of those topics as well. They’re a fascinating company and I hope you enjoy the show! Thanks!
Welcome to the podcast, Dan.
Dan DeMeo: Thank you, thank you, Peter, very much. Happy to be here.
Peter: Okay, so let’s talk just a little bit about your background here. I know you haven’t been at CAN Capital since the beginning, but give the listeners a bit of a sense of your background.
Dan: Yeah, I have been at CAN Capital for six years now, March it was six years. The first three years I was the CFO and the last three years I’ve been leading the company. My business experience is across larger financial institutions primarily had great training, great inspiration, fantastic experience, worked with a lot of really smart, skilled people, but when you look within my skill set, it’s really a combination of marketing, classic marketing and accounting & finance which puts me in a very fortunate position, I’m sure, as our shareholders would attest because I have a really strong appetite and deep experience in the growth side specifically how to grow direct businesses and then also have a really good handle on the financials including the balance sheet side which is really important for an independent company like ours.
Peter: Yeah, for sure. Just give us a little bit of a sense of the history when the company was started and how it’s kind of developed over the years.
Dan: Sure, we’ve been in business since 1998. It was founded by an entrepreneur and his wife and basically, he and his wife were looking for working capital, they couldn’t find a solution without putting up all kinds of guarantees or collateral and what they had was future business as a promise, if you will, or as credit criteria for why they should be an able person to fund. So she had a Gymboree, she was looking for money, there was no avail to the money in short order and also without jumping through a lot of hoops so over the years they developed what’s now become CAN Capital. Early on, we went to market with a MCA product which was a true sale and what was the basis for that is the daily remittance where actually it’s a purchase and sale of a future receivable so we provide funding in lieu of a commitment to the future receivables that was remitted to us on a daily basis. We actually approached merchant acquirers at the time and struck an agreement that would allow us to split process at the acquirer. So the settlement would occur where we would get our remittance amount and then the merchant would actually get their settlement minus the remittance amount. So that gave us a great advantage into the visibility and the health of the asset on a very current basis and allowed us to go further in terms of traditional credit screens or underwriting or eligibility and really launch where we are today.
Peter: So is it fair to say that you guys invented the MCA product then?
Dan: I would say that absolutely we were the pioneers. I would have to do some pretty significant fact checking, but I believe we were the first ones out there…I just refer to it as we were the pioneers of it. I don’t actually want to have to check all the legal documents to see if we were absolutely number one in there. Clearly, early on, this was how we ran our business.
Peter: Right, so what is the product mix today? You still have your MCA business I take it, but what else are you doing?
Dan: Yeah, our product mix today is the MCA. We also have a direct loan product that has a fixed term and a fixed payment amount. We launched last year a flexible loan product called TrakLoan which will over the next coming months, presumably by the end of the year will phase out the traditional MCA, but what we’re preserving is the flexible payment feature. So we will have a TrakLoan which is the flexible payment feature product, we will have a CAN Capital direct loan, fixed payment, fixed terms and we also launched last year a bank-like installment loan which is slightly longer in tenure, on average are high ticket and priced more aggressively to an up market target.
Peter: Okay, so I just want to clarify. That flexible loan, you said it’s going to replace the MCA? So the flexible loan isn’t tied then to future receivables, it’s going to be a loan, is that correct.
Dan: It’s going to be a loan, yes, it’s going to be a loan and we see ourselves evolving into that product.
Peter: So why are you abandoning the MCA, why are you moving away from it?
Dan: Well, we’re not moving away from it, we’re actually running to an opportunity for clarity, for merchant understanding and take all of the benefits of a direct loan product and the familiarity of a direct loan product to merchants and package it as a loan. We think it’s really a strength of ours to provide either fixed payment or a flexible payment and that’s really what the allure and the attraction is for us.
Peter: Right, okay, that makes sense, that makes sense. So then let’s just talk about the borrowers. What are some typical businesses, small business owners…who is coming to CAN Capital and has that been changing?
Dan: Yes, it has changed over time, but the market profile that we’re most active in and produce our typical customer is a working capital request. I’ll give you some ranges between $5,000 and $350,000. The term would span from six months to as much as 48 months, very broad credit spectrum. If you were to measure it by the familiarity of FICO, it would be as low as 500 and as high as 700 and above, greater than 700. Average funding amount across the portfolio on our flagship products is about $50,000, average term 14 months about and some of the industries that we would cover would be retail, restaurant, grocery, health care, professional services. That gives you a general sense for how we play.
Peter: Right, okay, so then how do you find these borrowers? I presume you’re using brokers, tell me the main channels of how you get these borrowers coming to you.
Dan: Yeah, full channel mix our direct program which is led by digital is a growing aspect of our business and somewhere where we’re investing a lot in the technology, the drive, the customer experience so direct digital online, direct mail, telemarking which is inbound and outbound and also have a very, very healthy partner business which has been the heritage of CAN Capital.
Peter: Okay, so you mentioned before that the underwriting is down to 500 FICO and up over 700. Obviously, you’re not just underwriting on the personal credit of the owner, I imagine, so can you tell us a little bit about the underwriting process you have there?
Dan: Yeah, we believe that about the best underwriting and the underwriting and the approach to underwriting is a combination of things.
First it is about the score and the decisioning in terms of what are the variables that you look for in a particular business profile. Much of the underwriting decision and I would add is that we originate our loan products in partnership, in a bank affiliation structure with WebBank which is a Utah chartered bank. So effectively, the underwriting is done through variables that are making decisions that drive basically the credit worthiness. So in our 18 years of experience and tens of millions of observations, we’ve been able to structure that information and turn it into decisioning and the score is primarily the first opportunity for us to determine the credit worthiness.
From there we’ll look at experiences that we have across certain industry codes and also use that as an opportunity to juxtapose cash flow from businesses which is different to your original question of personal credit history. However, there are some observations of their personal credit history, but more weight is attached to the health of the business; how long they’ve been in business, the size of the revenue and that really determines the need for the particular merchant.
From there we go through various verification steps to make sure that we can service the loan properly. Is it a real business, do they have tax returns, positive cash flow or not and all those are determining factors in us making a credit decision, a yes or no and what would be the size of the funding that we would be comfortable in offering a particular merchant.
Peter: So how long does that process take from the time…let’s just talk about your direct channel, the time the borrower goes on to your website and requests a loan. How long does it take for you to approve them?
Dan: Some of it depends on the merchant because often they need to provide you with information. If you don’t have some kind of electronic hook-up be it an API or a portal…but to answer your question more directly, more than 50% of the origination can be done same day or next day if you can connect, have the right information and the merchant is motivated for an expeditious transaction.
Peter: Okay, that sounds good.
Dan: ….which comparatively speaking, the banks or an SBA.
Peter: Right.
Dan: It’s extremely more convenient.
Peter: Right, exactly and that’s one of the reasons I imagine you are growing just like a lot of the other online lenders are growing because it is so much more convenient for the borrower.
Dan: Yeah, I also think too with the banks which perhaps you have heard is that they’re really good at perhaps providing million dollar and up kind of financing and we would be in a smaller category where what I understand is the cost of acquisition doesn’t make sense in terms of the overall economics for some larger institutions.
Peter: Right, so I want to just talk about transparency for a little bit because this is something that has come up with others. There has been some press written about it, where do you stand and how are you presenting the information to the borrower and explain how you are committed to the ideal of transparency.
Dan: Yeah, I mean we are all aware, Peter that there’s a lot of discussion about disclosure, I mean our form agreements are very clear, everything is simple, easy to read, the terms & conditions are very easy to understand, there’s nothing hidden, there’s no trickery, there’s no attempt on our part at all to be unclear relative to what the funding opportunity is with a particular merchant. So we’ve always run our business that way, we’re very compliant, we run a compliant business model, we take great pride in the professionalism by how we go to market and we go the extra mile to make sure that the arrangement between us and the merchant is very clear.
Peter: Okay. that sounds good. So then can you give the listeners a bit of a sense of where you’re at today as far as loan volume goes? What’s your scale these days?
Dan: Thanks for asking. We’ve done north of 170,000 transactions, sometime this month we’ll cross the $6 billion mark in terms of overall funding done by the company and that puts us in a position to be larger than anybody in this category, specialty finance, fintech…you know, whatever the naming would be, we have great, great experience, we’ve saved all that data, we continue to use it to evolve decisioning and to find ways to say yes, and drive a higher approval rate for merchants because we know what we’re doing, we’re confident, we’ve had experience and it gives us the advantage of how to more deeply penetrate the market.
Peter: Yeah, that makes sense and I think one of the biggest assets for companies like yours is your track record and your own loan book and seeing how it has performed over time. It is something that can’t be duplicated by a start-up, that’s for sure.
Dan: Yeah, and if I could say a couple of more things. I mean first, you’ve asked about the market and the basic situation or the dilemma you would be in the niche that we are all fulfilling in small businesses at least in obtaining working capital that can be very difficult. We phrase that out in an equation that says, one, as surveyed, 81% of small businesses need working capital, only about half of them apply for it because they’re time-starved. So if you go through the equation, 81% need capital, only 37% or almost half would apply for it and of that 37%, 57% of them are successful in obtaining working capital. When you multiply that through, that’s basically a 17% success rate so not only is the market large, but it still remains under penetrated.
Two, you asked about the strength of our business, first and foremost, extremely strong financial foundation. We have a very large syndicated debt facility which have some of the largest financial institutions across this country that are participating in that, we’ve done a $200 million securitization, we were the first in this category to get investment grade rating and we’ve had some great investment and advice from some notable private equity firms. So if you look at what our success rate has been, you look at our financial wherewithal, that’s really why we have stood out and will continue to stand out in this category because all that adds up to a very distinct advantage for us too and that is, we are profitable, we’ve been profitable and our intention is to stay profitable. This business has been profitable every year since 2007.
Peter: Wow, that is quite impressive! I know you got to get going soon, but I want to ask you two more questions.
The first one, I want to talk about the…you mentioned how you’re funding these loans, can you just take us through that. Obviously, you have a line with some of the major banks, do you also have a marketplace where you’re taking on other investors, how does it work on the investor side of the equation?
Dan: Yeah, right now, we are not in what has been defined as marketplace lending, we’re not doing, in essence, institutional term or whole loans. What we are doing is funding this business through…as I said, a $650 million syndicated debt facility and a securitization that we had done last year. The total of those two is more than $850 million and we do believe that both of those represent expansion opportunities in the future.
Some banks that participated in our syndicated debt facility are Wells who leads it, Morgan Stanley, Barclays, JP Morgan, UBS, SunTrust, AloStar, Cap Source Region, Fifth Third, First Tennessee and Amalgamated Bank so you can see that that’s a pretty star-studded line-up of folks that have looked real hard at us and decided to help us support our business and then, again, the other piece was the securitization. So we’re well funded and we like the rate of our cost of funds too, really have a strong balance sheet, keep the assets on the balance sheet and that’s really one of the elements of how we drive for success, notably profitability.
Peter: Yeah, that makes sense. Last question then, I want to get your view on the economy. I mean, obviously you’re sitting in a seat with…you’ve got a massive history of data, you’re one of the few companies who have seen cycles comes and go, where do you think we’re at today? Are you seeing anything in your data that suggests where a downturn is imminent?
Dan: No, what we’re seeing is continued demand at similar level for our product. I will tell you though that we’re consciously cautious about the unforeseen so daily monitoring because we have a daily remittance product, we’ve built the business and in our history have been able to develop techniques for us to stay ahead of any potential peril so I would call very high monitoring at this point and being very careful based on any kind of existential information that we can glean or that we’re fed, but so far, demand remains high and we have not seen any fall off in portfolio quality at this time.
Peter: That is good news. On that note, I will just say thank you very much for you time Dan, I really appreciate it.
Dan: Peter, thank you very much.
Peter: See you.
Peter: So I have asked many guests that I have had on the show over the last few weeks their take on where the economy is at because a lot of these people, as I mentioned just there, they have a very rich source of data, their own customer database, particularly with CAN Capital where their data goes back through multiple recessions and they would see any kind of leading indicators that would show up easily in their data. And the fact is they are not seeing it, no one has said they’re seeing anything that suggests a recession is imminent. That is good news, we’ve had this quite a long run since really 2009 without a recession and certainly we are closer to the next one than we are to the last one I would say, but it certainly doesn’t seem like we have to worry about a recession on the horizon.
On that note, I would just like to say thank you very much for listening. If you enjoy the show, I encourage you to go to iTunes or Stitcher, send us you comments and give us a rating if you like or don’t like the show. I always like to get feedback from the listeners. So thank you very much, I will catch you next time. Bye.[/expand]
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