It reads almost like a low-budget commercial playing on a local cable station during the breaks between “Everybody Loves Raymond.”
Marc Kaye needed cash, and he needed it fast. Real estate in New York City moves lightning quick, and he had to make a decision – and a deposit – within 48 hours, or the space he wanted to lease would be gone.
“I have three kids in college, so sometimes I’m a little cash poor,” he explained.
Kaye, an art collector and health care consultant, said he normally borrows money from banks, but because he needed the money fast, he chose to go a slightly different route.
He worked with a Manhattan-based lender called borro to secure a loan for $20,000 against a Picasso pencil sketch he owned. He got his cash within 24 hours, plunked down his deposit and repaid his loan within a couple months.
Borro is one of a myriad of non-banks lending investor’s dollars to people or businesses who can’t or don’t want to borrow from a bank.
The company makes collateral loans against high-end assets, like classic cars or art works, and its founder, Paul Aitken, posits borro as an alternative to simply selling that asset. Aitken said that since the diligence he does is on the asset, rather than the borrower, this option is especially attractive to people with lackluster credit history or who don’t want to disclose certain information to a bank. In the years since its inception, Aitken says borro has made about 15,000 loans to the tune of about $67 million.
On the other end of the spectrum is Fundation, an Internet-based start-up that has pumped considerable cash and effort into developing an expedited online credit check process, founder Sam Graziano said. It makes loans strictly to businesses in amounts between $25,000 and $250,000, at two-, three- or four-year terms.
“We kind of act like a fund manager that uses an Internet channel to source its assets instead of going out to the stock market and buying stock,” he said.
They operate radically different business models, but both companies highlight the speed and simplicity of their process, and both say they are filling a need that banks are cautious to meet.
Aitken asserts the type of lending he does is not risky. If the borrower defaults, he says, borro can sell the asset and recoup its losses.
Graziano, by contrast, acknowledges the risk in loaning to his target market.
“It absolutely is [riskier], and that’s why a lot of banks don’t do it. That’s why companies like ours, who can create sophisticated technological platforms, have to do it,” he said.
Businesses Holding Back
But banks can hardly be blamed for cautious underwriting, especially since the recent financial disaster, and small business advocates say the claim that banks aren’t lending, or aren’t lending enough, is simply not true – at least in the Bay State.
At the Massachusetts district office of the Small Business Administration (SBA), Assistant District Director For Lender Relations Anne Hunt said that SBA lending in January of this year showed loan approvals at their highest levels in the past five years.
The issue is not credit availability, but rather the reticence of businesses to borrow in times of economic uncertainty.
“I think a lot of businesses are just holding back a little based upon the economy, but in terms of a credit source, I think our banks are very flush with cash and would love to be lending their money. They are really out there searching for credible applicants that they can make a loan for,” Hunt said.
Data from the Massachusetts Bankers Association (MBA) showed that Bay State banks – community banks, specifically – actually increased their lending throughout the recession.
And while many borrowers may consider a non-bank for its speed or its willingness to lend to people who might not qualify for a loan at the bank, they could also wind up shelling out for that speed and convenience.
Interest rates at Fundation vary depending on the borrower’s credit profile, Graziano said. The riskier the client, the higher the interest rate. At the low end, rates could be in the high single digits. At the high end, they might be in the low-20s.
Borro charges 2.5 to 4 percent interest per month. Annualized, that can mean as much as 30 to 48 percent interest, but Aitken asserts that is not too relevant because his customers typically borrow for very short periods of time, generally six months or less.
Regulatory oversight of non-bank lenders can be ambiguous, too. Neither Fundation nor borro are licensed by the Massachusetts Division of Banks, the division said.
Fundation is regulated by the New York Department of Financial Services, and borro is regulated by the Department of Consumer Affairs, their respective founders say, but neither agency had returned requests to confirm this information by the time this story went to press.
In their characteristic careful fashion, bankers urged consumers to do their due diligence, as well. MBA spokesman Bruce Spitzer said small businesses should seek out information from their local community development corporation and cautioned: “If you are a small business that is undercapitalized or you have questionable credit, you need to be careful about doing business with these kind of high-rate non-bank lenders.”
Email: lalix@thewarrengroup.com
