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Are We in a $300 Billion Market?

August 7, 2014
By: Sean Murray
Earlier today on a large group conference call with Tom Green and Mozelle
Romero of LendingClub, I learned a few more details about their business loan
program. In the Q&A segment, one attendee came right out and asked if they
believed their competition was merchant cash advance companies and online
business lenders.
According to Green, its not so much other companies that they feel they are
up against but more of the broad challenge of market awareness. Their
struggle is about getting people to know that there are non-bank options
available and to make people aware of their existence.
Its the same challenge merchant cash advance (MCA) companies have been
dealing with for more than a decade. Notably though, there are many in the
MCA industry that feel the market is saturated and thus a lot of the industrys
growth has been fostered through a turf war for the same merchants.
Stacking (the practice of funding merchants multiple advances or loans
simultaneously) is partially spurred by a belief that there are no more
untapped businesses left to fund. The acquisition costs of a brand new
untouched business that is both interested and qualified is so high, that it is not a pursuit some funders and brokers can
afford to take on.

Market Size
At present, daily funders, which are a combination of both MCA companies
and lenders that require daily payments, are funding somewhere between $3$5 billion a year. On the call Green said he believed the potential market was
far larger than that, though he discredited the $200 billion figure that some
independent research had predicted. That was only because LendingClub
believes the potential market is substantially higher, more like $300 billion.
$300 billion?! Thats about 100x larger than the current daily funder market
combined and starkly contradicts any belief that theres no merchants out
there who havent already gotten funded.
LendingClubs minimum gross sales requirement is $6,250 a month and they
have an upper monthly gross threshold on applicants at $830,000 a month,
though theyve had businesses apply who do even more than that. Their
sweet spot as Green put it, is the segment doing $16,000 to $416,000 gross
per month.
I cant help but notice thats the same sweet spot that daily funders have. And
we mustnt forget, LendingClubs target business owner has at least 660
FICO. If its a $300 billion market for good credit applicants, then its got to be
even bigger for the ultra FICO-lenient companies in MCA.
Whats a business?
LendingClub only needs someone with at least 20% ownership to both apply
for and guarantee the loan, an unheard of stipulation in the rest of alternative
business lending. One cardinal rule in MCA has been that there needs to be at
least 51% or 80% ownership signing the contract. Thats had a lot to do with the fact that most MCA agreements are
not personally guaranteed and the signatory is required to have absolute authority to sell the businesss future
proceeds.
Summer of Fraud
In 2013 the MCA industry experienced what many insiders dubbed the summer of
fraud. Spurred by advances in technology, small businesses were applying for
financing en masse while armed with pristinely produced fraudulent bank
statements. Fake documents overwhelmed the industry so hard that today it is
commonplace for underwriters to verify their legitimacy with the banks. This is done
manually or with the help of tools such as Decision Logic or Yodlee.
Knowing this firsthand, I asked LendingClub if they also take the care to verify bank
statements. In the majority of cases they do not. They rely greatly on an algorithm
that detects fraudulent answers on the application but the statements themselves
are not scrutinized except in very high risk situations. Considering theyre wildly less
expensive than MCAs, I find it odd that they are exposed to this type of risk.
Fraudulent documents are the norm and in these underwriting conditions, I would
expect them to charge as much or more than MCA companies, not less.
At the same time its important to mention that at present, business loans on their
platform are only funded by institutional investors. Retail investors can only invest in consumer loans. LendingClub has
been very transparent about excluding retail investors here for the very purpose of shielding them from unevaluated
and unforeseen risk. My guess is that as time goes on, they will do more to validate the bank statements which is the
bread and butter of assessing the risk and health of a business.
Check out: LendingClub doesnt require bank statements for personal loans. Are they missing pieces of the puzzle?
$300 billion
In a FICO flexible environment, its possible the potential for daily funders is at least $300 billion. If true, that would
mean that for the 16 years that MCA players have been around, they barely reached even 1% of their target audience.
Ive been saying it since Ive started this blog 4 years ago, every business owner Ive spoken to has never heard of a
merchant cash advance which means saturation is a myth.
Tom Green was right, the real competition is public awareness. 99% of the potential market is untapped. If youre
fighting with 5 other companies over the same merchant, you gotta:
Keep on looking now