A small California firm is betting that it can help create a market for securitized small business loans.
Exxe Data Corp., Palo Alto, has developed an information service to collect and report standardized information on small business lending.
Now the company needs a market. It is looking to forge links with lenders such as banks and finance companies to provide them with the data necessary to securitize the credits.
"Certain parties have grasped the concept of securitization of small business credits," said Reid Rutherford, the founder and president of Exxe. "Conventional wisdom maintains that such assets are too heterogeneous for the process. We're trying to bring [that thinking] around."
In addition his position with Exxe, Mr. Rutherford is president of Concord Growth Corp., an investment management firm that provides data maintenance and management services to banks in Silicon Valley.
Potentially Hage Market
The market for the securitization of small business lending is potentially huge. The pool of small business loans is pegged at $2.6 trillion, with $80 billion in new credits added annually. Mr. Rutherford and others estimate that as much as $50 billion could be securitized each year.
Legislation currently in Congress could also lower the barriers to securitizing small business loans.
The largest such transaction to date to took place earlier this year. Fremont Financial Corp., Santa Monica, Calif., a finance firm that specializes in lending to small to medium-sized businesses, sold $200 million in variable rate certificates backed by a pool of its loans.
"In a $2.6 trillion market, it would be quite a feat to get even 10% of the market," Mr. Rutherford said. "However, it's quite another thing to provide the tools to assist in the process."
Those services include proprietary systems to monitor accounts receivables of small businesses and rate their creditworthiness.
In addition, Exxe will provide a dial-up network that accesses its credit data and other data bases from credit reporting and bond rating agencies.
He added that the information services Exxe provides can be accessed using off-the-shelf hardware, such as personal computers.
Fees Based on Points
Mr. Rutherford said the fees that Exxe charges for its services will take the form of points, determined by the size and creditworthiness of the portfolios it maintains. For example, the company will demand a larger fee for monitoring a higher-risk portfolio.
"I think Reid may be on to something," said Ken Brenner, executive vice president of $184 million-asset Cupertino National Bank. The bank has originated a number of joint loans with Concord Growth and handles operating accounts for the firm.
"Being just a commercial bank isn't going to create the kinds of returns we want for our shareholders," said Mr. Brenner. "That's why we got involved in securitizing our mortgages and Small Business Administration loans."