Here's a novel idea that as far as we know, no other financial firm has borrowed: to better analyze and monitor business loan risk, keep an eye on the borrower's customer relationship management data.
Lighter Capital, one of Bank Technology News' Top Ten Tech Companies to Watch for 2012 and a Big Data-driven online lending firm (its business model is similar to Kabbage and OnDeck) is adding CRM data to the store of data it analyzes to evaluate and monitor its borrowers, through an integration with Salesforce.
The company, which lends mostly to software startups, already brings bank account data aggregated by Yodlee and accounting transactions pulled in through with QuickBooks into its loan underwriting platform (about 40% of Lighter Capital's loan applicants use the web-delivered QuickBooks accounting software). By crunching numbers from those two sources, Lighter Capital already creates for itself a substantive view of a company's financial health — the cash is coming in and flowing out on a monthly basis.
With the Salesforce integration Lighter Capital is announcing at Finovate Tuesday, the company will let its underwriters estimate the future revenue the borrower could generate, by seeing potential deals the salespeople have in the pipeline along with their sense of how likely they are to land them. The Salesforce analysis tool can map out the average sales cycle for the company and can analyze churn. "We're monitoring how a company performs over time; for instance, is their sales cycle getting longer," says Molly Otter, vice president.
"Lending has relied on a rear-view mirror view of the business," says CEO BJ Lackland. "FICO scores, financial statements, tax filings all tell the past, then hopefully the past predicts the future. CRM data is the best way to look into the future, it's what the company is looking at to predict its own future and see the sales pipeline." Salesforce has about 14% of the CRM market, he notes.
Lighter Capital makes "revenue-based loans," meaning it gets back the money it lends out as a percentage of the borrowing company's revenue, a method Lackland calls "debtquity." The better the company performs, the quicker its loan is paid off. The average loan is for $200,000 and has a two-year term. It's an alternative to venture capital. (Lighter Capital itself is backed by venture capital.) The company has low write-offs and high-performing loans, Lackland says. "We're more expensive than a bank, but cheaper than equity," he says. Its biggest competitor is angel investors.
In its data analysis of loans and borrowers, Lighter Capital also draws in social media data elements such as Facebook likes and LinkedIn profiles and recommendations. However, Lackland has come to the conclusion that such data is not that useful in determining creditworthiness, although LinkedIn is interesting, he says. "You can see somebody's network, and see recommendations from people you know," he says. If a business-to-consumer company has few Facebook likes, that could be a negative identifier, but it doesn't mean nearly as much as knowing that the company has been losing money month over month.
All data in the platform is visualized as bar charts, line graphs and other charts with drill-down capability. The multiple data sets can be used to cross-check and verify financial numbers. "You have to work hard to defraud us," Lackland says. Some data entries are time stamped by QuickBooks and Salesforce, so users can't enter fake data or fudge the timing. These programs also let Lighter Capital see when the number of users at the borrower's company has dropped, meaning people have been laid off.
Longer term, Lighter Capital hopes to analyze borrowers' educational background, although the company's leaders joke that they might deduct points for the added risk of having a Harvard MBA on staff.
While for now the company focuses on online businesses, which tend to keep all their information in the cloud and not mind prodding, Lackland believes more companies will behave this way in the future.
"We're skating to where the puck is going to be," he says. Eventually, it will offer its small business lending platform to other lenders.