Virtual Roundtable: The Future of Small Business Lending

Covid-19 has acted as an accelerant into a new age of funding immediacy in which speed and customer experience are paramount. Learn how agile lenders are setting new standards for small business funding.

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Snippet of Virtual Roundtable Transcript

Amias Gerety
Let me start with the biggest picture question here. What kind of recession are we in and what kind of recovery are we likely to have? 

Let me start by attacking that question from the perspective of, what have we learned or what can we learn in light of COVID? If I go back to the two big recessions that I’ve been living and working in, the.com bubble, I really learned that shipping, like e-commerce, low margin goods like Pets.com was trying to do, was a bad idea. That’s something we learned about the economy in the .com boom bust. I think in the Great Financial Crisis, we learned that house prices wouldn’t always rise, among other things.

With COVID, it’s not as clear what the business or economic lessons are going to be. Let me start at the 50,000 foot level and just ask each of our panelists. What you think we’re going to learn about our economy, in light of this kind of crazy recession we’re in? I’ll start with Ido. Ido, what do you think we’re learning?

Ido Lustig
I think that there are a few interesting things that we can learn about the economy in the COVID crisis, but before I go in, it’s really important to note that COVID is unlike anything we’ve ever seen. This pandemic is impacting basically everybody across the board, it’s shutting down economies completely, and it is going to take a very long time for things to recover. These are unprecedented factors for things that we are now seeing and it is very important to keep that in mind.

With that said, I think that the key learnings thus far, is if you are not agile, and if you don’t use data, and if you are not able to leverage that data to adapt quickly, you will not survive. The world is moving faster and faster with every day that goes by and with every new challenge that the world is facing, those businesses that are able to use data, and to use that data wisely to adapt quickly, are the ones that are surviving. Businesses that were able to change their business model quickly. Restaurants that were able to rely more and more on deliveries rather than foot traffic are the ones that are able to survive. The rest are not.

Same goes for companies like ourselves who work with businesses. If we are not able to use data that is available around foot traffic, around cash flow, around government initiatives around new regulations. If we’re not able to leverage new data sources, we will not survive. And if we are, we will be very successful. I’m happy to share that we are on the latter rather than first, which is great.

Amias Gerety
Jim, what do you think we’re learning about how the US economy works in this crisis?

Jim Granat
You know, this is an incredibly unique situation. Obviously, I mean that most forms of recession have a longer time period, as they deteriorate.  I think that this was more of a one in zero situation where you had states that came out and said, we’re done for now and everything is shutting down. Businesses went from theoretically 100% of revenue to zero percent overnight. Even the best laid plans for companies that were gearing up for an eventual slowdown,ended up with a situation where the best laid plans didn’t matter as much, and in that, everyone was instantly affected across the board on a much broader scale.

I think the learnings that we’re going to get out of this are going to be interesting. I think it’s going to be an interesting 20/20 hindsight situation as you go backwards and look at it. I do agree that in the future, using data is going to be more key. I think more people will gravitate to online – practices across the board and all facets of financial services. I think going back, to what I would like to say, as some of the old school of just unit economics, really having good unit economics and being able to ensure that you are working off of good ROEs and ROIs and that you’re in good shape, so you can withstand more of a downturn, is going to be really important. 

In what was the best economy – maybe ever for small businesses  – to if you had stronger UEs at that moment you were in better shape, you’re going to be in better shape now not that people won’t be immune or won’t have losses or won’t have taken real big bruises. But you, you can have an easier time if you were set up to take a bigger beating, as they would say. I think that some of the learning will be around how you operate and how you set up for the future and how you think about growth.

Amias Gerety
I think it’s so interesting. Jim that we had a lot of businesses, certainly in the venture backed ecosystem, that we’re betting on easy money continuing or venture investors funding non-performance at the unit economic level open for growth. As you come back, there’s going to be a class of lenders who say, “Well, I’m willing to lend into restart, but you’ve got to show me that you’re going to make money pretty soon thereafter.” And I think that’s a really interesting challenge for all sorts of small businesses going forward, and frankly, for a lot of lenders. 

Josh, let me turn over to you given your role with customer success. What do you think is going to change or accelerate at the very least, in terms of the way small businesses and customers throughout the economy, think about their needs? What are they going to see and expect on the other side of this, or will they just be grateful to be in a position where anyone or will be dealing with them?

Joshua Rogers
I think what’s interesting is, I don’t know if there’s been a time of need as quite exacerbated that it has been over the last sort of a month or so. I think one of the interesting things that we’re seeing, and for anybody who’s been involved with the PPP program, the fact is that it has been incredibly difficult for many small business owners to get the attention that they need, in what is inarguably, their biggest time of need. 

I think that has some very interesting dynamics that is going to present itself in terms of what are their expectations coming out of this, in regards to both the digital experience, but also just holistically. When you think about sort of an ongoing customer experience in their expectations and how they’re serviced, and what comes out of that. And so for me, I think inarguably there is going to be a continued drive toward increased reliance towards digital. It’s extremely hard to service customers in an environment where you can’t do business or can’t have your storefronts open.

On the financial services side of things,  we’re going to need to continue to drive toward that digital transformation, and so I think higher reliance on digital will be key. I also think there’s going to be this underpinning of the totality of the experience beyond just the origination, and particularly in lending, to also into servicing. I think that’s going to key, especially in an environment where we’re going to be figuring things out for a period of time coming out of this. I don’t know that there’s any historical precedent for any modeling to use directly off the bat. There’s going to be an adjustment period. How we migrate through that and how we leverage those key customer success indicators, is going to be a big thing from my perspective and from where I’m sitting in the world.

Amias Gerety
David, I think this is such an interesting tension. On the one hand, we’ve heard that companies that are not digital, not data-oriented, and can’t process with automation and scale are going to be out of luck in serving and that was a trend that was ongoing, but this certainly accelerates it.

And on the other hand, I think we saw in PPP, that community banks who were actually willing to just talk to the small business customers that were applying for loans, did much better than large banks who were trying to operate with scale on automation, but couldn’t even tell a small business where their loan was in the process. 

David, as you think about this automation and operating at scale, how do you think about this time of need question? How are you trying to analyze and help all of the Ocrolus customers that you work with think about how we assess need and how we assess potential for small businesses that have been rocked by this crisis? 

Amias Gerety
What are the analytical exercises that Ocrolus has on tap, or are working with clients to think through, when we analyze this time of need question?

David Snitkof
One thing that stands out is that this environment is not a typical recession. In a typical recession, you have some sort of asset bubble and it crashes and then there’s higher unemployment and people have less money, and so there’s less consumer spending and less business spending. There’s a little bit lower economic activity. But generally, a lot of things are still correlated with each other. 

If you’re a vendor responding to that, then maybe you stress your models by saying, you’re going to have 50% more losses, 100% more losses, 150% more losses, but that’s generally the bands of variability. Here there’s something incredibly different, which is that many of the small businesses are so vulnerable, they’re actually not allowed by the government to do business and to be able to take in money. It’s a very different stress exercise if you’re a lender to small businesses, and so I think there are two things that come to mind.

One, is that it’s the point about automation and automation at scale. Before you automate you kind of need to know what to automate. It’s hard to automate something always out of the gate. Having that combination of humans and computers working together is really important, and we’ve been doing that with a lot of clients. The other thing, and actually along the same line, is that in every business you could think of, and for everyone listening, even where you currently work, there is some set of processes that are overly manual and overly offline. Whether you work at a bank, a fintech company, whatever it is, these are processes that have worked well enough and so people haven’t wanted to touch them.

Now you have this unique opportunity to actually change them and take them away and automate them because everything is getting reset anyway. I think there will be a learning from this, but in assessing a small business, the thing that really is clear is that so many small businesses operate very close to the margin, pre-COVID even.

The average restaurant in the United States had 16 days worth of expenses in terms of cash that they had in their main operating account. That’s a very, very thin margin of stress. Especially on the smaller end of small business lending, if you’re a lender assessing that kind of risk, you can’t use typical credit metrics alone. You can’t just use whatever you get from a credit bureau. Especially when businesses are very stressed, as they are right now. Let’s say you have two companies and you have one restaurant. That restaurant owner has paid every bill for the last 10 years – never missed a payment. And you have another restaurant owner, that one has been very spotty, sometimes over extended, missed a few payments, they’re going to have very different credit bureau records. 

During a time when so many restaurants are shut down and not even able to operate, what do you actually care about? You care about who can do delivery versus who has dine-in. You care about what of their expenses are variable, what of their expenses are fixed, and how much do they need to spend the rent? How much did they spend on payroll? What ratio of expenses do they have cash in the bank for? And so all these cash-flow type metrics become much, much more relevant than the traditional credit metrics that people use to assess risk for small businesses.

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