Small Business Spotlight: National Funding

Welcome back to our Small Business Spotlight series, where we profile innovative small businesses and startups across the country and identify lessons from their operations, strategies, and growth.

Our newest profile takes a look at National Funding, a San Diego-based alternative lending company for small and medium-sized businesses (SMBs) that offers working capital loans, equipment financing, merchant cash advances, and credit card processing. National Funding was founded in 1999, and has provided more than $1 billion in capital for over 20,000 businesses nationwide.

We spoke to National Funding's president and CEO, David Gilbert, about small business capital problems, loan consultants versus algorithms, and the benefits of working from San Diego. Gilbert has a deep knowledge of the alternative lending landscape, and provided us with very detailed responses about not only his company but the emerging financial technology industry.

How did National Funding get started?

We were one of the first companies in the alternative lending space. In 1999, banks were not deploying microloans (under $100K) to small businesses. I recognized the opportunity to provide easy access to money needed to help small businesses. Originally, we focused primarily on leasing equipment to small business owners, and we had a great deal of  success. By 2007, the company had over 200 employees and funded close to  $120 million. Then the recession hit, the leasing business started shrinking, and we had to make changes.

I had been looking at entering the small business loan market, so we switched our focus. There were very few others trying to address this type of funding, but the market was growing. After 2008, many business owners could no longer get cash out of their houses or from credit card advances. Moreover, the banks had largely exited from offering small business loans, but our company was able to be nimble and make a very big impact.

How has the lending landscape changed since you launched in 1999?  Why have banks moved away from small lines of credit and small business loans?

The days of walking into your local bank, making friends with the banker, and then receiving a small business loan had already begun winding down when we started, and when the economic problems hit in 2008, that kind of access to bank financing was pretty much over. The banks stopped lending to this segment altogether as they tightened their lending criteria and began to focus on loans of $1 million or more. As a result, more and more alternative lenders saw an opportunity and started using technology to easily and more efficiently deploy capital. For banks, the cost of deploying a $20K loan was equivalent to the cost of deploying a million dollar loan. It wasn’t worth it for them to make these loans, given their cost of infrastructure and the demands made on them to maintain higher reserves.

How does National Funding distinguish itself from other players in the alternative lending space? Why would SMB borrowers prefer you?

We offer a wider product selection than the others, and we combine high tech with high touch for a more personalized customer service experience. Some alternative lenders focus either on daily payment loans or pure working capital loans. We have a variety of other products such as equipment leasing and credit card processing. We want to match our customers to the best product for their situation. Like others, we use a lot of technology. But where the other players are more into algorithms and pure online lending with minimal person-to-person contact, we have experts on the phone – loan consultants who know how to guide small business owners through choosing the right product for their needs. It’s a critical difference, and our research shows that this relationship style approach is a key reason that customers choose to work with us.

How much are your interest rates for typical small business loans? What are the loan term lengths?

This very much depends upon the borrower’s financial history.  We don’t really deal in interest rates, but rather look at interest rate factors. But in the way a customer might think of it, the interest rate on a typical loan would vary from 7% to 35%, and they would pay on terms between 6 to 18 months, on deals between $5,000 and $500,000.

We also offer leases up to $150,000, but here the terms range from two to five years. A lot depends on personal borrower circumstances when we put these packages together, but we work very closely with borrowers to fit into a budget that makes sense for their situation.  

What kinds of businesses borrow from National Funding?

We typically work with Main Street businesses that have been in business for at least one year and have minimum gross sales of $100,000.

Industries we typically work with include: construction, all the trades, trucking, restaurants, retail, automotive repair, manufacturing, telecommunications, printing, packaging, waste management, and more.

How does National Funding determine creditworthiness? What steps can SMBs take to make themselves more creditworthy?

We start with the basics. Primarily this means the business cash flow, to make sure they are getting into a loan they can afford. In the course of this process, the owner’s credit score is a factor as well. But there are many other factors we look at to assess a company’s viability, including things like web presence, other public records reflecting potential liens or other commitments.  

Small businesses, just like consumers, need to spend within their means, paying on time, avoiding overdrafts, and addressing liens to get them removed once the payments have settled. These days, there are new indicators that a lot of lenders watch. For instance, to increase their funding options, small businesses should have a good social media presence across Facebook, Twitter, and others. It can be used to paint a picture of the business and to confirm a business address and gauge the size and type of business.

How have SMBs changed since 1999? Have you seen a shift in their spending and borrowing behavior? What does your data tell you about SMBs in 2016?

There are many new types of SMBs that have cropped up since 1999. There have been certain industries that have boomed and many SMBs launched out of this growth (i.e. healthcare and tech). Yes, we have seen a shift because in 1999 the economy was strong and SMBs were borrowing typically from their banks and spending on their business. The recession starting in 2008 really drove a change in behavior, with much more conservative spending, reduced budgets and payroll, etc.   

In 2016, we feel that most SMBs have recovered from the recession. They are investing more money into their business and – unlike the climate of 1999 – have plenty of online lending options to choose from. It’s easier now to get funding than ever before. Through technology, we can underwrite, approve and fund a small business in 24 hours. Speed and automation hasn’t only helped us but has helped our customers, especially in the way they apply for a loan. It’s helped remove the tedious, lengthy process of traditional bank loan applications. SMBs have begun to figure this out, and that is why our category is growing so strongly.  

Why are alternative lending-related startups having such a moment right now? And how will advances in technology disrupt financial services in the years ahead?

I think there are two reasons for this. First, business owners are dissatisfied with traditional banking practices, which are inefficient, slow, paper-intensive and outdated. What alternative lenders have done is apply technology to address these concerns. We’ve reduced paperwork to a bare minimum, to the point that the entire process can be done electronically. We’ve speeded up the application and credit processes, to the point that we can fund loans in as little as one day. I call this process ‘Uberization’ because it has really transformed the landscape for small businesses that need working capital.

Technology will continue to make financial services faster, easier and more transparent for consumers. I predict that not too far in the future almost all transactions will be via a mobile device. There won’t be a need for cards or cash. Machine learning has made platforms extremely intelligent and automated. For example, when an SMB takes out a loan, every aspect of that will be tracked and available at their fingertips.

Your company is based out of San Diego. What are the benefits to working from that part of California instead of Los Angeles or Silicon Valley?

San Diego has long been known as a strong financial community in California so we’ve been able to hire people that are great fit for us. San Diego is increasingly becoming a tech hub. It also doesn’t hurt that we have the beach. It’s a city where top talent want to live.