IOU FinancialBusiness Lending. Simplified.

cchoquart@ioufinancial.comioufinancial.com

Office : 678.264.8584Fax : 866.404.5117

VP Business Development & Strategic Partnerships

The Role of Alternative

Lenders AND THE RELEVANCE TO

SMALL BUSINESSES TODAY

Christophe Choquart

WHAT IS HAPPENING IN THE INDUSTRY

Small Businesses Accessing Capital

Access to capital is a critical concern for small businesses*, as a large portion are challenged to find adequate financing to sustain or grow their businesses. Prior to the credit crisis of 2008, many small business owners leveraged home equity loans, large credit card limits and personal lines of credit to sustain and grow their busi-nesses. The financial meltdown, shrunk or eliminated many of the capital sources small businesses had, and the credit window at banks was closed to most businesses. To this day, banks have never found micro-loans (<$150,000) profitable.

This dynamic was the genesis for market entrants to provide small businesses access to capital. Small Business loans originating with either direct or peer-to-peer lenders are generally a much higher cost than their previ-ous counterparts (lines of credit or home equity lines). However, this new access to capital is much easier for small business owners to obtain, with less paperwork and faster funding (hours and days vs. weeks or months).

Over the past few years, online lenders have made their mark in the industry by:

Focusing on Innovative Technology

Speeding up the Underwriting Process

Lessening Documentation Requirements

*For the purposes of this paper, we are defining small businesses as typically having less than 20 employees and an annual revenue less than $10 Million.

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THE ROLE OF ALTERNATIVE LENDERS

Alternative Lenders

1These companies originate loans funded with their own capital. Cost of capital for these lenders runs from a lowest reported of 8% to the mid teens. Direct lenders may sell some or all of the loan portfolio to third-party investors, while others portfolio and balance sheet their loans. IOU Financial does a blend, keeping 80% of loan production on its balance sheet, selling the other 20% to hedge funds.

DIRECT LENDERS

Because of the gap left by the banks and the ease by which merchants can receive capital, the alternative lending industry will continue to grow quickly, with a projected market of $206 billion by 2025, according to Growth Praxis. Alternative lenders offer three advantages over bank loans. First, the process to apply is simple and requires little to no paper work. Second, they provide loans quickly, usually within one to three days, versus the weeks and months it takes to secure a bank loan. Third, banks seldom make business loans for less than $1 million because they aren’t “profitable” enough for these large institutions. IOU Financial makes loans from $5,000 to $150,000 in as little as 24 hours.

As mentioned, the alternative/on-line lending market is composed primarily of two lender types:

1

2

2These marketplace lenders match loan requests with investor’s return/risk tolerances. P2P platforms may partially fund these loans, or may act only as intermediaries to bring borrowers and investors together. P2P lending traditionally has been associated with personal loans, but recently some have been offering small business loans.

PEER-TO-PEER (P2P) LENDERSIn either guise, alternative lenders provide speedy access to capital to small businesses across the spectrum of credit profiles, access that is typically not available from banks. Alternative lenders provide businesses to quickly access the capital they need to grow.

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The Cost of Alternative Lenders

A LOOK AT PRICING

Traditional bank practices lend to only the most credit-worthy

businesses, with collateral almost always being tied to a loan.

The application and underwriting process at a bank is structured to mitigate nearly all loss risk and in-turn takes weeks and months to finalize. This freezes many good, viable companies out of the running for bank loans, and delays opportunity for those who are ‘bankable’. As a result of bank’s inherent low cost of capital and conservative underwriting, borrowing costs are low.

UNDERWRITING

Alternative lenders, allow business owners to apply using on-line platforms with data-driven insights and advanced algorithms based on hundreds of data points including cash flow, personal and business credit, and even social media and consumer reviews. Because of this technology, alternative lenders can pre-qualify loans in seconds and approve them as quickly as a few hours.

DEFAULTS

There is little argument that the underwriting and vetting process traditional banks take is far more robust and mitigates risk to a greater degree, but the process is slow compared to the speed at which alternative funds can be available. This speed can increase the risk of default because, loans are not collateralized, and separate unscrupulous lenders may stack multiple loans on one small business. Those lenders that take 3rd and 4th position typically care about their profits, not the health of the businesses accepting funding.

COST OF CAPITAL

Traditional banks are able to get their capi-tal for a very low cost, currently targeted by the federal reserve at 0.40 percent. Com-pare that to the cost of capital for alterna-tive lenders, whose cost of capital ranges between 8 percent and 15 percent, and can have heavy restrictions and covenants by the issuing fund or credit facility.

RESULTING COST

In order for alternative lenders to ensure they generate an appropriate yield, they must factor in: their cost of capital, risk score of the merchant, loan term and cost to serve (operations, commissions, etc). These variables drive pricing of the loan. Unlike collateralized loans, the lender can not build in the asset value of the collateral to reduce pricing. Alternative lending is done on a promissory note basis, lending without collateral increasing the cost to cover defaults across the portfolio.

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THE ROLE OF ALTERNATIVE LENDERS

A merchant can qualify instantly on-line by meeting some typical requirements.

QUALIFYING FOR FUNDING

As mentioned, small businesses turn to alternative lenders when they lack the credit ratings or business history neces-sary to obtain a bank loan. It is therefore critical for potential borrowers to under-stand how to qualify for a commercial loan funded in as little as 24 hours.

For example, IOU Financial sets these very reasonable requirements:

OWN OR CO-

OWN

80%at least

BEEN IN

BUSINESS

1 yearat least

MAKE DAILY

DEPOSITS

10/moat least

Borrowers and co-borrowers must own at least 80 percent of their business.

The merchant’s busi-ness must have been in existence for at least one year. On average, IOU clients have been in business 11 years.

A retail business must make at least 10 deposits a month into a business bank account.

ANNUAL

REVENUE

$120KThe business must have an annual revenue of at least $120,000. IOU clients generate on av-erage $1.3 million in an-nual revenue.

at least

LOCAL SHOP

LOCAL SHOP

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APRs incorporate both interest rates and one-time fees so interest

rates are lower than the APR, but APR is not the measured by

which an alternative small business loan should be measured.

APRs are often misleadingly high. For exam-ple, if you take $100 out of a checking ac-count at a non-bank ATM that charges a $3 fee, you’re paying the equivalent of a 1095% APR.

Owners must consider commercial loan APRs in the context of their business’ op-portunity costs and profit margins. Even if a non-collateralized loan has a stated APR of 60 percent, businesses may be able to quickly recover their costs if they invest the money in high-ROI activities that grow the business and/or eliminate other struc-tural costs. The key is for small business

owners to understand that APR is their total cost of capital, which they should optimize for their targeted return on investment. Good lenders make this assessment as part of the loan advisory process. IOU Financial is one example of the responsible lenders who understand this dynamic.

Businesses that borrow money for lower-ROI needs (i.e. hiring, general working capi-tal, etc.) must be very diligent in how they borrow. The following chart shows how cus-tomers at IOU Financial put their loans to work. As you can see, the bulk of loan money goes to high-ROI/growth activities (equip-

ment purchase and business expansion).

The cost of lost oppor-tunity is also something businesses need to look at when evaluat-ing their financing op-tions. Waiting weeks or months for lower cost funds can make sense, but it can also mean businesses just delay their growth curve or miss oppor-tunities which could far outweigh the differ-ence in total costs.

CONSIDER THE CALCULATIONS

High APRs Are Not All They Seem

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THE ROLE OF ALTERNATIVE LENDERS

CONSIDERATIONS

Businesses need to understand the way alternative lend-ers determine loan amounts. For example, IOU Financial takes into consideration a combination of credit history and cash flows to ensure the business does not over-extend its debt. These key limits of total debt a busi-ness should take on without putting the enterprise at risk have been determined and refined for years. IOU Finan-cial considers stacking as an event of default, and warns merchants about the dangers of too much debt.

Another important consideration applies to repayment cash flows. Some lenders enforce a monthly payment date, other cash advance companies take a percentage of daily credit card receipts. For merchants with uneven cash flows, the monthly repayment amount can look like a mountain of cash. IOU Financial’s policy of collecting small automatic payments directly from customer check-ing accounts converts that monthly mountain into small molehills, a much less painful way to pay back a loan.

No matter the considerations, loans from alternative lenders should always be reviewed carefully so that a merchant understands the costs and terms completely.

CONCLUSION

Commercial loans from alternative lenders fill a critical need for businesses in the lending industry. Banks, CPAs, Insurers and other financial advisers need to understand how the alternative lending market provides a credible opportunity for their small business clients to grow.

Do your customers have trouble accessing capital to grow?

Do you work with seasonal businesses that cannot complete projects in their off season?

YOUR CUSTOMERS CAN BENEFIT

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First Choice in the Industry

BORROWERS

IOU Financial Loan Officers understand small business, and have knowledge of specific verticals, such as, restaurants, medical practices, specially retail, etc. They are trained to advise merchants on the best financing solutions for their respective business and needs. Transparency is an important aspect of our lending, and IOU always explains the product and process to each merchant thoroughly.

See what our platform has to offer merchants!

Why is IOU Financial regularly chosen

by merchants, investors, partners, and

resellers? Because our product, service

and support is superior! See how

everyone benefits working with us.

WHY IOU FINANCIAL IS THE

PARTNERS

Working with IOU Financial allows partners to help keep their clients’ balance sheets safe, while encour-aging them to continue using their product/service. A customized approach, allows partners to stay as hands, on or off as needed during the lending pro-cess. Timely payments for referral business allow your business to profit through supporting your clients’ business growth.

RESULTS

By providing exceptional service to partners, while helping small business owners access the timely and responsible capital they need - IOU Financial is able to grow communities across the US and Canada.

Montreal, QCHEADQUARTERS

Atlanta, GAOPERATIONS

Loans from $5,000 to $150,000 - and re-newals available when the loan is 40% paid down.

An easy online application that offers pre-approval in just 3 minutes.

Risk Free - the merchant’s credit score is not affected during the application. No pre-payment penalty upon completion.

Proprietary cash flow analysis model estimates the maximum debt repay-ment capacity, so owners are never overextended.

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THE ROLE OF ALTERNATIVE LENDERS

IOU Financial has dedicated staff members in sales, processing, underwriting, client services, and finance motivated to offer the best customer service daily. Our team understands how critical the success of a small business is to the community it serves. When we can help one small business succeed, the ripple effect of economic impact is immeasurable. We are looking to continue creating this positive affect across the US and Canada. With your help, we believe we can reach more businesses than ever before.

See some of our staff members below that are dedicated to your success!

Our staff is ready to welcome you and your clients into the IOU Family. We treat

every customer like a business in our very own community, by offering assistance

towards individual’s success in a responsible manner.

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Let’s work together!IOU Financial is dedicated to fuelling the growth of small businesses so those businesses can stimulate economic growth in their community. Bring this positive impact to your small business network by partnering with IOU Financial. We are here to support you and your clients throughout the lending process. cchoquart@ioufinancial.com

P: 678.264.8584 F: 866.404.5117

CHRISTOPHE CHOQUARTVP of Business Development & Strategic Partnerships