A Fresno, Calif., community bank is betting big on equity crowdfunding.
Fresno First Bank isn't interested in investing. Rather, it hopes to get an early look at prospective small-business borrowers among the companies that use Breakaway Funding to raise capital.
The partnership was finalized just last week, so Fresno First cannot point to any completed deals yet, but it is hoping the assembly line will soon be up and humming. How enthusiastic is the $292 million-asset bank? It has allocated $10 million for lending to equity-crowdfunded businesses.
According to President and Chief Executive, Steve Miller, the partnership should allow Fresno First to evaluate potential clients about a year before it would otherwise.
"That's a huge advantage for us," Miller said.
Different types of lenders "play specific roles in the capital cycle," continued Miller. "Banks typically come in at the back end. … Our rule is 'show me three years of profit, and I'll think about lending you money.'"
In most cases, that leaves startup and later-stage companies clutching rejection slips.
Miller said Fresno First would apply the same credit standards to Breakaway clients that it does to conventional borrowers. "We'll make the credit decision like we normally would. The commitment we're making is that we're not afraid to look at growth companies or new companies."
Fresno First, the bank subsidiary of Communities First Financial Corp., is eyeing companies from the startup phase to $25 million in annual revenues. On their own, borrowers that fall into this category "often have difficulties in securing the financing they need to start or to expand their operations," Miller said. But equity crowdfunding, which carries with it significant financial reporting requirements, helps bridge the information gap that would otherwise force traditional financial institutions to shy away.
"We require each company to produce a private-placement memorandum which has all of the elements of a business plan and the financial projections and the bios and all of those things," Breakaway founder and CEO Kim Kaselionis said. Along with that, "depending on [how] the capital is raised…a lot of the securities laws have a mandate to produce either reviewed or audited financial statements -- which of course the banks love."
Sausalito, Calif.-based Breakaway then takes companies' information and "packages" it for review by banks.
As well as the financial reporting dimension, the level at which a borrower's family members, business associates and friends support a particular crowdfunding project can serve as important "soft information," for an interested bank, Christian Catalini, a crowdfunding expert at Massachusetts Institute of Technology in Cambridge, Mass., wrote Tuesday in an email to American Banker.
Catalini wrote also that the hybrid, bank-equity-crowdfunding-finance model First Fresno and Breakaway are pursuing is new to him but that "it makes sense" and has potential.
"If they can deliver on it, it should expand access to capital," Catalini wrote.
"Equity to me is really kind of the thread that brings everybody together," Kaselionis said.
She likens her model, which she calls a community capital marketplace, to an "ecosystem" where business borrowers receive financial support from investors and technical assistance from nonprofits, making them desirable clients for banks.
"In essence, all of the resources of the community working together, the individual investors, entrepreneurs and business owners, and community financial institutions to provide growth capital to support innovation, job creation and new opportunities," Kaselionis said.
Kaselionis, who was CEO of Novato, Calif.-based Circle Bank for 16 years before its sale to Umpqua Holdings in 2012, said she was motivated to enter the crowdfunding arena by the memory of scores of promising small businesses whose loan applications she felt forced to reject.
"It was painful to say no, because we wanted to be the go-to capital provider," she said. "We knew the characteristics about the founders, about their plan, about their progress and all of those were moving in the right direction. But there was this gap in the financial statements, as well as this thing we call regulation and underwriting criteria."
Kaselionis founded Breakaway in 2013. In big-picture terms, she sees it functioning as a type of bridge, linking startup and other companies with traditional financial services providers.
"We want to see local businesses have integrated financial services with their community lender that they can grow with and develop a relationship with…as opposed to this black hole of the internet where they have no idea what they are getting themselves into," Kaselionis said.
One thing Breakaway cannot do, Kaselionis acknowledges, is match the speed with which many nonbank financial service providers can act. "Speed for speed's sake is not necessarily good because it can come – as we've seen with the online lenders --- at a significant cost," she said. At the end of the day, we don't want to take any shortcuts. We want to make sure that there's thoughtful planning and underwriting. That takes time but we mitigate the possibility of making a big error."
Equity-crowdfunding programs like Breakaway's, predicated on investments by small-scale, nonaccredited investors with a close connection to the borrower, only became possible in May, when the Securities and Exchange Commission did away with net worth and income requirements.
Now, individuals can invest up to $2,000 in a crowdfunded company, or 5% of their annual income or net worth, whichever of the two amounts is lower. All investments must be made through an SEC-registered broker-dealer or crowdfunding portal such as Breakaway.
Companies can tap the equity-crowdfunding markets for up to $1 million in a 12-month period.
Breakaway has brokered a handful of financing deals between lenders and its more mature clients, including a restaurant in San Francisco and a horticulture firm in Santa Rosa, Calif. Those were one-off transactions, though. First Fresno represents its first big partnership with a bank.
Fresno First Bank is the first to come out and say, 'Yep, we're in 110%," Kaselionis said. "Somebody has to have the will to be first. They had that conviction to put a stake in the ground and say, 'It's going to be us. We will take a leadership position in the industry because it just makes sense.'"