A Canadian Way to Access US Small Business Lending

We live in the era of the large, multinational corporation. If you were to ask any politician or economist, they would tell you, “Small businesses are the growth engine of every economy.” But while these talking heads still mouth these words, one wonders if they actually believe them.

Economic policies preached by economists and legislated by politicians cater almost exclusively to Big Business. In many regards, small businesses have been left to fend for themselves. One result of this, in particular, is very tight financial constraints on small businesses.

Small business’ margins can be squeezed on one hand by competition from Big Business, and on the other hand squeezed by lack of access to capital to take advantage of growth opportunities. In these instances, the need for efficient, reliable access to capital has never been more important.

Many small businesses do not currently have or know how to access this type of capital. Conventional banking has failed these companies, in part from being unwilling to change its own lending model to meet the particular needs of small businesses. In particular, large banks are unable or unwilling to change their lending model to adapt to the needs of small businesses.

Enter IOU Financial. As “online lending” has become a 21st century reality, a financial niche has sprung up with online lending institutions that are prepared to cater to small businesses and provide badly needed capital, efficiently and affordably.


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Previously, financial options for small businesses were both limited and unappetizing. As the industry has evolved, two of the more well-known types of products have become revolving credit lines and merchant cash advances.

Most readers will be familiar with revolving lines of credit. However, attempting to qualify for such credit can be a frustrating labyrinth of paperwork, and what many merchants end up doing is simply taking out a personal line of credit from a bank, which is not what they wanted to do in the first place.

What is a merchant cash advance? While this product does have its niche and is oftentimes easier to qualify for, terms can be relatively expensive as typically, a lump sum of capital is advanced in exchange for a percentage of daily credit card receivables.

Compared to the above, IOU Financial provides easily manageable, working capital term loans for small business, and does so:

• Quickly
• Efficiently
• Affordably

As an established “fintech” lender, the key to IOU’s business model is leveraging its unique, proprietary technology platform to rapidly and efficiently serve its customers. Fintech is a rapidly emerging software niche which is becoming increasingly important in facilitating commerce – in a multitude of ways. For IOU, technology is the answer to addressing the financial needs of small businesses.

The speed of IOU’s loan application process is a big draw for small business owners. IOU’s application generally takes roughly three to five minutes to complete.

The Company’s lending software is as efficient as it is fast. Small businesses often obtain same-day approval for their loans and can have funds in their bank account in as little as 24 hours. With conventional banking taking days (or weeks) to provide the same service, IOU takes the pain out of borrowing.

IOU’s technology platform is award-winning. Last year, on March 27, 2017; IOU Financial received a “Gold Stevie Award” for best use of technology in customer service. That’s not the best customer service in banking. It’s the best customer service – period.


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The combination of speed, service, efficiency, and costs are what draw many small businesses to IOU. IOU’s loans are structured in a much more flexible manner vs. a similarly-sized loan from a conventional bank, and are generally much less expensive compared to merchant cash advances.

There are other online lenders in this space. What sets IOU apart?

Experience and expertise. The two go hand-in-hand in online lending.


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Since the Company made its first loan in December 2009; it has originated over US$500 million of loans, and have processed roughly $5 billion in loan applications. Greater lending activity translates into collecting larger volumes of data. Ask any software programmer, and they will tell you that more and better data leads to a faster progression in optimizing software.

Precisely what is the “small business market” which IOU currently services? These are generally the owner-operated businesses which form the backbone of our economies: corner stores, dentist offices, restaurants, boutiques, etc.

These companies do something that Big Business can’t (won’t?) do: create jobs. Small businesses are labour-intensive. We need small business. Many small businesses need companies like IOU Financial. How great is that need?

According to American Banker, online lending (also called “marketplace lending”) is “growing by leaps and bounds”.

Thirteen of the online lending sector’s largest firms made $15.91 billion in U.S. loans in 2014, up 700% from 2010, according to a report published Friday by the California Office of Business Oversight.

Growth of 700% in four years is enough to catch the eye of any investor. Of equal importance, however, is that this spectacular growth rate is only the beginning.

As already noted, conventional banking has been unable to meet the credit needs of these smaller enterprises. In the United States, the Company’s largest market, management estimates unmet demand for small business lending amounts to roughly $80 billion.

The financial niche in which IOU has positioned itself is a large market, which is already rapidly growing, but still offers enormous upside potential.



What remains for the Company is to take this market opportunity and translate that into bottom-line profits – for its own shareholders. Transitioning to full profitably is a function of several factors, including loan originations and revenue mix, its cost of capital, the credit performance of its loan portfolio, and its operating efficiency.

With any new loan which IOU makes to a small business, the Company has a choice. IOU can either retain the loan on its balance sheet, or, it can sell the loan to another third-party financial institution, generating servicing revenues. The upside for moving these loans off of the Company’s balance sheet is that it allows a significantly greater volume of lending activity.

When loans are off-loaded to third parties, IOU’s capital is no longer committed and can be used to finance additional loans. On the other hand, retaining these loans on the Company’s balance sheet makes each loan much more profitable.

The biggest piece of the revenue pie in online lending comes not from generating servicing fees, but rather collecting interest income on loans kept on its balance sheet.

Throughout 2017, IOU has made improvements to its credit model, incorporating better risk evaluation, which should lead to greater lending certainty and thus lower credit losses going forward. As IOU has honed its lending model, management now has the confidence to retain a much higher percentage of these loans – and the streams of high-yielding interest revenue they represent.

In the early days of the Company’s operations, roughly 80% of business was done on the originate-and-sell lending model. Today, that ratio has flipped, with more than half of IOU’s loans now retained on its own balance sheet. Revenues have increased both by retaining more loans and by increasing loan pricing.


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In addition to increasing gross revenues, management is equally focused on both lowering its costs of capital in addition to minimizing operating costs.

One way that the Company has been able to improve on margins is through a superior financial arrangement for its own credit needs.


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In Q2 2016, IOU successfully negotiated a US$25M (expandable to $50M) facility with MidCap Financial, a company owned and managed by Apollo Global Management. This facilitated a shift to a balance sheet-funded business model, an increasing net interest margin, and greater control over growth.

Regarding operating expenses, in Q3 2016, IOU publicly announced a significant cost reduction effort to set the table for sustainable growth, pledging to reduce operating expenses. This goal was met in Q3 2017 and the Company has also announced that they will be reducing opex further throughout 2018.


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IOU has generated a much stronger revenue profile. The Company has lowered its operating costs. It has continued to refine its credit models and has lowered its cost of borrowing.

What is a frustration for management is the Company’s current valuation. While a handful of IOU’s online lending competitors are larger with greater revenues, none of their competitors have positive earnings, while IOU is on the brink of profitability.


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There is also a significant price-to-sales valuation gap between IOU and other online lenders.

Online lending is not merely here to stay. Industry experts expect this niche to continue to claim more market share from traditional banking – as these companies service the huge-and-growing small business loan market.

As one of the pioneers in this space, IOU Financial is setting the pace, leveraging its technology platform for borrowers and providing investors with a unique opportunity to participate in the rapidly growing US small business lending market. For shareholders, it is an evolution that is likely to continue to separate it from its peers as the Company leads the way in making online lending profitable.

ioufinancial.com

FULL DISCLOSURE: IOU Financial Inc. is a paid client of Stockhouse Publishing.