Why You Should Want to Speak With an Underwriter? An Interview with Sam Hodges of Funding Circle

Funding Circle is different than many of its competitors that offer small business loans.  Many of its competitors have completely automated the process of loan approvals. They have a formula which, based on a number of numerical inputs, determines whether a small business can get approved for a loan, at what interest rate, how long, and for what amount. The small business owner has no opportunity to explain why the numbers might not be telling the entire story.  Funding Circle takes a different approach. After the numbers have been crunched, an underwriter will review them and talk with the small business owner.

Recently, I had the chance to have a phone call with Sam Hodges, who runs the US operation of Funding Circle. The following Q and A is reconstructed based on my notes and doesn’t represent his exact words.

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How much has Funding Circle lent? What is the typical loan amount and term?

Globally, Funding Circle has facilitated more than $1.2 billion in loans since 2010. Last quarter, Funding Circle originated $235 million in new loans, and a quarter were to US businesses. In the US, the average loan size is around $140,000. We offer terms of 1 to 5 years, with the average being around 3 years.

How does having an underwriter involved help more businesses get approved for loans?

We analyze small business borrowers using both our proprietary credit models and human judgment and review, which we believe is critical to our ability to really dig into understanding the nuances of each of the small businesses we lend to.

For example, many businesses are actually healthier than their tax returns might indicate. In order to lower their tax burdens, some business owners legally try to minimize their “on paper” profits. This happens frequently with companies that have lots of expensive equipment that can be depreciated on an accelerated basis. The expense is often taken in the year the equipment is bought, however, the business uses it for many years.  With the help of the small business owner, the underwriter can understand the true health of the business.

Also, many businesses have expenses that are not truly necessary. For example, some businesses may throw a big year-end party for their team or give their partner larger expense accounts. By eliminating some of these expenses, the profits of the business would increase. An underwriter can look at these expenses with the small business owner to get a better picture or what income would be if non-essential expenses were eliminated.

Will you loan to any industry? For example, many alternative lenders will not loan to service type companies like accountants or marketing agencies.

From restaurants and gas stations to medical clinics and IT consultancies, we lend to a vast range of industries. Traditional lenders such as banks — and even many of those in the alternative lending space — put a heavy emphasis on collateral and will not lend to many companies unless they have close to 100% the value of the loan in collateral. If you’re an accounting company, though, your business doesn’t have expensive equipment or inventory that can be used as collateral. The lack of collateral often disqualifies successful small businesses from receiving loans, particularly in the service industries. While all of our loans are secured, we put more emphasis on the consistency and growth of cash flow when making a loan. Also, we often find that many lenders put too much emphasis on the owner’s personal FICO score when making a loan to a business. While we believe credit history is an important gauge of financial and operational stability, so too are metrics like real-time cash flow and an owner’s passion about the market opportunity.

How good is your credit model in predicting loan defaults?

Our global annualized loss rate target is 2%, and the actual numbers are very close to our target.

Managing Director of Funding Circle

Sam Hodges is co-founder and U.S. managing director of Funding Circle, the world’s leading online marketplace for small business loans. He is responsible for overseeing the overall strategic direction and day-to-day operation of the company in the United States. For more information on small business loans, please visit www.fundingcircle.com/us

Need some money for your business? Click here to get our FREE Guide:
How to Get a Small Business Loan.