2014 annual convention presentation alternative financing

Alternative Financing & The Future of Equipment Finance

53rd Annual Convention Monday October 20, 2014

2:30 pm – 4:30 pm San Diego, CA

Alternative Financing & The Future of Equipment Finance

Presenters:

Martin Klotzman

Analyst

Ivory Consulting Corporation

Mukul Mittal

EVP Product Development

Cloud Lending Inc.

Gina Mackenzie

Strategic Partnership Manager

RapidAdvance®

Michael Rabil

Director, Partnerships

Funding Circle USA

Charles Wendel

President

FIC Advisors, Inc.

Moderator:

Scott Thacker

Alternative Finance and the Future of Equipment Finance

Agenda • ELFF Study Overview

• Alternative Finance Overview

• Alternative Finance Businesses – Typical Business Models

– Deep Dive – Rapid Advance

– Deep Dive – Funding Circle USA

– Growth Rate and Expected Trends

– Regulation

• Technology

• Opportunities and Threats – ELFA Companies

• Q & A

• Closing Thoughts

– Regulation

• Technology

• Q & A

Coming Soon!

Look for the final study report November 2014.

www.leasefoundation.org

– Regulation

• Technology

• Q & A

Alternative Finance Overview

Redefining an industry

Is banking next…?

Category

Number of

businesses

(Millions)

Potential Dollar

Loan Value

(Billions)

Pct of

Businesses

Pct of

Qualifying 3.7 $544 10.2% 23.8%

Not Qualifying 32.4 $1,745 89.8% 76.2%

Total 36.1 $2,289 100.0% 100.0%

Bank Qualified and Non-Qualified Business

Why won’t banks make small business loans? Reputation risk of high yielding loans Loans are low margin Increased regulatory scrutiny Increased capital requirements Operate within narrowed “credit box” Banks can’t justify the cost Loans must be in excess of $100,000 to cover costs; some analysts estimate $250,000.

What is Alternative Finance? An array of financial services offered outside of federally insured banks

How long has alternative financing been around? Alternative financing activities have existed as long as borrowers needed lenders

Who typically pursues alternative financing? Micro and small businesses, including companies with revenue up to $10-20 million

What is the loan range? Loans can be as low as $1,000 and over $1 million on the high end

Why are investors attracted to alternative lending?

Access a new asset class

Attractive returns

Rigorous underwriting

10.00%

12.00%

14.00%

16.00%

Funding Circle USA Dow Jones Corporate Bond Index

Vanguard Total Bond Market ETF

Vanguard Corporate Short Term Bond ETF

Vanguard Short Term Bond ETF

3 Year

5 Year

1 Representative alternative investment rates (as of September 2014) shown here are illustrative, and many of these investments

have different characteristics or risk profiles than investments in Funding Circle. 2 Expected rates of return across all current risk bands for loans by FC USA, and net of servicing fees

5yr N/A

What are the key drivers?

We are always connected

Technology makes it easy

– Regulation

• Technology

• Q & A

Typical Business Models

• Reward-based • Donation-based • Lending-based • Equity-based

Reward-based

Characteristics Creative-based projects Funded in 30-60 days 5% fee for successful projects Easy application and screening Merits – no financial return

Donation-based

Characteristics Less restrictive guidelines Fund charities, trips, anything Easy application and screening Merits – no financial return

Debt-based

Characteristics Provides access to debt financing for small business owners Provides alternative structured investment product for investors Creates innovate way to underwrite and evaluate small business loans

Equity-based

Characteristics JOBS Act could have significant impact Investors receiving stake in company Can raise up to $1 million Investors must be accredited (pending) Build an ownership portfolio

Classifications of Borrowers

Almost but not quite “bankable”

Banks want a government guarantee

I.E. – SmartBiz profiles SBAs for banks

Borrower: Near-prime SBA Lending

Heading towards bankability

Usually don’t have sufficient collateral or history

Borrower: Mid-prime: Crowdfunding

Fully dependent on risk-taking lenders

MCA typically focuses on only sub-prime

Invoice financing firms primarily participate in this space

Borrower: Sub-prime: Merchant Advance Lending

– Regulation

• Technology

• Q & A

A Supplement to Traditional

Financing Flexible funding for your small business clients.

Founded in 2005 - headquarters Bethesda, MD

Acquired in 2013 by Rockbridge Growth Equity

– Private equity firm of Dan Gilbert with holdings such as Cleveland Cavaliers basketball team, Quicken Loans, Rock Ventures, Rock Connections, etc.

– Unique access to best practices and resources

BBB accredited and A+ rating

Heavy focus on lower middle market and small business owners – direct and through partners

Over $700 million in funding to tens of thousands of business owners

RapidAdvance

Challenging Credit Environment

New Programs

“Fill in the Financing Gap”

Business Owner

• Unexpected opportunity

• Short-term cash flow

• Expansion

• Inventory and payroll

• More options for your clients

• Easy: streamlined underwriting

• Fast: funding within 7 days

• Subordinated: no impact on financial institution collateral

Traditional Lender

• Customer unable to meet credit guidelines now

• Strong future revenue potential

Credit Card Advance / Daily Payment Loan

No personal guarantees for repayment on credit card advance No security interest taken No points or upfront fees No fixed monthly payments No coupons or checks to write No impact on ability to qualify for other financing No business use restrictions on the funding No hassles - quick application & fast funding

Benefits to Business Owners

Benefits to Lenders or Leasing Professionals

• Add depth to client relationships.

• Provide additional piece of transactions.

• Additional revenue.

Flexible terms.

Small Business Loan

• Perfect for businesses looking for a traditional loan – and need it now

• Short-term payback – up to 12 months

• Automatic daily payments and easy to renew

Up to $500,000. Decisions within 48 hours.

Subordinated to financial institution.

Credit Card Advance

• Innovative, unsecured financing for businesses that accept credit cards

• Repayment from future credit card receipts

• Stand alone or with merchant services

SBA Bridge Loan

• Meet short-term funding needs during financial institution & SBA approval processes

• Eliminate obstacles to expedite SBA approval

• Pay tax and other past-due obligations

Line of Credit

• Offers flexibility in funding amount and

duration

• Draw funds only when needed

• Flexible repayment terms

Credit Card Advance Vs. Loan Advance • Up to 200% of credit card

receivables

• Payments vary with cash flow

• No UCC filed

• No Personal Guarantee

• 50% to 70% of bank deposits

• Fixed Payments

• UCC-1 Filed

• Personal guarantee

When Is a Credit Card Advance/Daily Payment Loan a Great Fit?

• Smaller deals – transactions under $500,000

• Insufficient collateral – aged accounts receivable – bonded – inventory – mobilization or manufacturing process

• Challenging industries – restaurants – retail – construction – healthcare

• Obstacles – liens – unsubordinated debt

Industry Thoughts

“Community banks bear a disproportionate cost of regulatory compliance. As a result, loans for less than $100,000 have all but evaporated.”

— Community Bank CEO

ICBA Convention

How It Works - Example

Daily Payment Loan • $140,000 advance ($200k @ 70%) paying back

$161,000 (1.15 factor)

• 10 month transaction

• $732 daily payments, 22 days per month

Business owner has $200,000 per month in bank deposits.

Sample Transactions

$100,000 to a trucking company to purchase a new hauler

$25,000 to a restaurant to update decor

$100,000 line of credit to medical office bring in new equipment

– Regulation

• Technology

• Q & A

We understand small businesses. Because we are small business owners.

• Funding Circle is the world’s leading online small business loan marketplace.

• We originate and evaluate small business borrowers to match them with institutional and accredited investors in a private marketplace.

• To date, we have funded over $600 million in loans to over 5,500 small businesses globally. This year alone, we plan to lend $570 million to small businesses in the US and UK.

• Backed with $123 million in venture financing from Accel, Index, Union Square Ventures and Ribbit Capital.

What is Funding Circle?

What is marketplace lending?

Business Loan

Interest and

Principal

1% servicing

fee on total

origination fee

Investors looking for

good returns Businesses looking for

simple and fast finance

• Marketplace lenders aggregate capital from investors to lend out to individuals or businesses

• The industry is expected to grow to $1 trillion in annual loan volume by 2025 (1)

• Funding Circle is the leading global small business loan marketplace

(1) Moldow, Charles “A Trillion Dollar Market, By the People, For the People” (2014)

• Fast: capital in under 14 days

• Simple: pre-qual in seconds, 10 min online application

• White glove service: account manager and underwriter for every borrower

• Fair & competitive rates: starting from 8.99%

• Transparent: no hidden fees, loan calculator

Why do small businesses choose Funding Circle?

Speaking of transparency, how do we stack up?

How do businesses use our loans?

Say goodbye to 10 lbs of paperwork

Snapshot of our pre-qual

[Partner Logo]

We’re building a better financial world… come join us!

• We offer attractive fees for referrals: 1% to 1.5% of the loan

• Just like our loan application process, becoming a FC referral partner is a simple process

• We make your job easier with your own online portal so you can submit, sort and track applications. You also get your own dedicated account manager and underwriter who specialize in referral loans

– Regulation

• Technology

• Q & A

Growth Rate and Expected Trends

Yes, today alternative lending is relatively small in size, but…

Recap Currently 1.4% of loans outstanding Growing in size 100% annually Traditional lenders lend to 10% of borrowers or 25% market opportunity Alternative lenders focus on the other 90% and 75% of market Analysts estimate it could dominate US small business lending within 10 years

The Rise of the Branded Competitor

Increased competition

Lower margins

“Dumb” money

Entry of traditional players

Credit downturn

Consumer Financial Protection Bureau

Future Challenges

– Regulation

• Technology

• Q & A

Regulation

Open Discussion

– Regulation

• Technology

• Q & A

Traditional model Innovations

As expected, innovation is happening outside of Banks

Banks, as intermediaries, adds to the cost of borrowing and lending

Marketplace Lending is Disintermediating

Technology is an Enabler

Computers Internet Access

Security Authentication

Online Payments

Smartphones Tablets

Cloud Scalability

Cost of Deployment

Online View of Financial Data

Online Banking

Mobile Banking

Cloud Lending

Open Lending Technology Platform – Cloud Lending!

Flexible Extendable

Multi-tenant cloud

Origination Servicing Collections

Back office core Lending Technology

Cloud Lending helps you automate Lending

Front end website

Marketplace Origination Servicing Collections Underwriting

Back office Infrastructure

Accounting CRM

HarMoney.com - P2P Marketplace in New Zealand and Australia

Brick and Mortar

CRM Origination Collections Recovery Underwriting

Accounting Mobile Back office Infrastructure

Go Capital - Truck Leasing

Foundation Capital predicts Marketplace Lending to be a trillion dollar industry by 2025

So, what’s stopping the Leasing Industry from taking advantage

of this phenomenon?

– Regulation

• Technology

• Q & A

Opportunities

Enter alternative finance industry directly

Provide referrals or join syndications

Lend to or invest in alternative finance companies

Join loan market places

Use as a resource pool for talent

Opportunities and Threats - ELFA Companies

Threats

Dominant small business lender

Movement into middle market

Visibility – viable and attractive alternative

The technological curve

Social Media

Opportunities and Threats - ELFA Companies

Final Thoughts

– Regulation

• Technology

• Q & A

Session Title

– Regulation

• Technology

• Q & A

Thank you for Participating

Martin Klotzman

Martin.klotzman@ivorycc.com

Gina Mackenzie

Rapid Advance

gmackenzie@rapidadvance.com

Mukul Mittal

Cloud Lending Inc.

mukul@cloudlendinginc.com

Michael Rabil

Funding Circle USA

mike.rabil@fundingcircle.com

Scott Thacker

Scott.thacker@ivorycc.com

Charles Wendel

FIC Advisors, Inc.

cwendel@ficinc.com

2014 annual convention presentation alternative financing

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