One of the biggest disruptions that smartphones brought about was shopping for and applying for business loans. Explosive innovation in this space gave birth to a new category of financial service companies called Fintechs. Rohit Arora is one of the country’s leading experts in small business finance. His company, Biz2Credit, uses technology to streamline the business funding process for small businesses. Rohit also oversees the Biz2Credit Small Business Lending Index, a widely reported monthly snapshot of small business loan approvals. And we wanted to ask him all about that and how business credit helps solve this small business matter of getting funded.
Watch Our Interview
What follows is a lightly edited transcript of our interview.
[Gary Stockton]: So could you give us a little bit of a background on how Biz2Credit got started and really what inspired you back in the old days of 2007?
[Rohit Arora]: Yeah. So Biz2Credit as a company, you know, me and my brother, we started it in late 2007, early 2008 time period in New York with the mission to help small businesses, you know, at that point of time to get access to credit. So those were the days when the mortgage boom was at its fullest, and it was very easy to get a mortgage, but very difficult to get a business loan. And we thought like, whatever, we’ll build out a platform. These were pre-FinTech days, pre-API days. And we thought we can build out a platform that can help businesses to, you know, get access to credit the right way. So our mission and aim always were not to sell any leads to anyone. Our mission was to reach the right business customer and give them the right tools to go in and look at what their various options are at the same time, they should be able to give us access to their data, and financial data, so that we can run all the data analytics, do this scorecard, and then go back to the lenders and give them a complete picture of the credit profile of these borrowers and then help both sides to get what they want.
[Rohit Arora]: So for business owners, it was trying to get a loan in a time-bound fashion, because for them, timing is everything. You know, they have a big opportunity cost. And for a lot of lenders, if I ever do a hundred thousand dollar loan or $150,000 loan, it’s very tough for me to do manual processing. You know, it’s very expensive and I don’t know how to do it because small business loans or consumer loans are not just predicated on their personal credit scores. So what do I do to streamline this process? And since small businesses are very asynchronous in nature, you know, it was a big opportunity as well as the challenge that, how do you standardize a lot of these underwriting norms so that you can get them the best possible outcome.
[Gary Stockton]: Yeah. So, so why do you think that small businesses are turning to Fintechs? Was there anything that happened there that opened up that opportunity for the new FinTech companies?
[Rohit Arora]: So I think two or three things. So the first wake-up call was during the 2008, and 2009 crisis when, you know, small businesses suffered disproportionately. Most of the challenges happened in the mortgage space. I still remember looking at data that the highest delinquency rate during that time period in small business loans, even in the DSB portfolio, was only 4%. The SBA was the only federal agency during the 2008 crisis that did not need a federal bailout, unlike Fannie Mae or Freddie Mac, and so many banks, you know, that everybody needed a bailout because of what they were doing in deep market space.
[Rohit Arora]: But in spite of that deal, they saw the biggest contraction in the supply of credit actually after the crisis started and that persisted for years and years. And that was also a time when smartphones were just coming out. So 2007, 2008 was the time period when finally small business owners had internet in their hands and they could do whatever they wanted to do. So I think that was an interesting point because smartphones led to building application programming APIs, and doing things in a very different way, which was not possible prior to the advent of smartphones. So a combination of a huge financial crisis, disruption of a lot of existing relationships, a lot of banks going under or mergers and acquisitions happening. A lot of large banks, like Bank of America, and Wells Fargo, totally withdrew from this market; the small business lending markets were not very active. And then, you know, people just started to go online, like for everything else. And that was the first breakthrough for fintech on digital lending platforms like ours. And then I think over time, it started getting better ecosystem plays. So as I remember, you know, more people started shifting to cloud accounting, more people went to making payments online; the advent of companies like the Squares of the world and everything, you know, that led one thing to the other. And then I think there was another mini-crisis in 2016, 2017, when, again, the credit got tighter. So that was the second piece. And then obviously COVID. COVID was a game changer because everything shut down, and you couldn’t go to a bank branch even if you wanted. You know, it was the first time in the history of America that the US Government said, okay, I’m going to give more money to small businesses than to anybody else, consumers or anybody else. And they gave $1.3, $1.4 trillion to small businesses. And that’s where, you know, the whole thing changed because everything was digital. Everything was online and even banks that never had any digital channels were scampering overnight to build something online and do something around it. And I think the behavior of the customers and small businesses now is ok with change.
[Gary Stockton]: Yes. Wow. So it’s been quite, quite a journey for your organization. And I remember in the early days of this space, the banks were partnering with many FinTech companies because they had older systems, but the fintech were more nimble and could put together solutions quite quickly. Is that still happening, Rohit?
[Rohit Arora]: So I think there has been a lot of evolution in fintech itself. You know, a lot of fintech have come and gone. Banks have tried various models. Initially, it was like, give me leads and I will handle it; to saying that fintech are going to compete against us. So we need to bring something our own. To a point in the post-COVID world, we have a platform or an offering on this that we license our platform to banks and other lending institutions. And we are seeing extremely strong demand in that space. So in the last six, seven months we have signed up at least 30, 40 banks. You know, we’ll close this year, the signing a hundred plus banks on that platform. And we’re seeing the overall appetite among banks to do the whole nine yards of small business lending from origination to underwriting, to closing and even account opening, for funding these loans. And also I think what is starting to happen is that there is a clear divide between banks that are more forward-looking now, and want to do something more aggressively, and banks which are still, thinking about it. Or, or they’re just looking for an ability to get acquired. So we see a tremendous amount of consolidation coming in the banking industry over the next three years because the branch networks are mostly useless, and the cost of maintaining and operating a branch network is increasing every day. And within high inflation, the cost of minimum wage going up, just staffing a lot of these branches is a big challenge for a lot of banks. And most of the customers don’t want to go to a branch anymore. They want the full digital experience. So I think those things are really leading to more consolidation in the banking industry that also leads to more partnerships. But at the same time, we also foresee that players who are digital in nature, whether it’s a bank or a non-bank, it doesn’t matter anymore, we’ll gain more and more markets.
[Gary Stockton]: Yes. So you produce the Biz2Credit Small Business Lending Index. Could you tell us a little bit about that? What does that do and who’s the audience for that?
[Rohit Arora]: So we really started Small Business Lending Index in early 2011, because that was a time when there was a lot of credit crunch that things were just starting to come back. And a lot of business owners and even policymakers wanted to know what is happening in the industry in terms of access to credit, what’s happening in terms of who’s giving what kind of loans or credit facilities? As a business owner, I want to know who’s going to be the best option for me. So, we have a marketplace where we have multiple kinds of lenders and we have all of this data because we process a large number of loan applications every month. And then we came up with the idea to start a lending index based on that data that we already had and see how it compares, and how we benchmark different kinds of lending institutions or different kinds of channels or financing. So it could be banks, non-banks, other institutional investors also. And that has become a very good flagship indicator about access to credit, what needs to be done, and how it needs to happen. And over time we have seen some very clear results, like pre-COVID. It was rising for two, three years, COVID came, it just stalled or dropped very significantly. It’s coming back again, but very slow. So I think that that clearly captures what’s happening in the market, what the trends are. And then it’s also great to predict when the next recession comes because a lot of people are predicting there’ll be the next recession. You know, what could happen during that kind of a recession for small business credit?
[Gary Stockton]: So what if I’m a small business and I come to Biz2Credit, are there tools that you offer them to determine whether they qualify for financing?
[Rohit Arora]: So that’s a very good question. One is our platform for business owners is free of cost. Second thing is that we provide them with what we call the Virtual CFO platform where they can come in, they can fill out their application, they can benchmark their businesses with other businesses in their geography, industry, sub-industry, age, revenue kind of stuff. They can see what are the things that they’re doing better, where they can do better. So simple things like, if they have a lot of bounced payments in their accounts, that leads to more overdraft fees because overdraft fees are still very persistent in the business space while they’re going away in the consumer space. So how much money they’re spending on that, how that impacts their business credit. That’s on the negative side. On the positive side is like, they are balancing their books well, they are able to pay the bills on time. They’re able to collect money on time. They have been consistently growing their business, they’re improving their margins. So that also shows up. So they call it the Virtual CFO tool, because what that does is it helps them to understand their business better, benchmark it, and also understand that if they go to a lender, what they’re really looking for is that business to lend them money.
[Rohit Arora]: So we’ve had a record number of small businesses started during the pandemic, I think in 2021, it was like 5.4 million new business. And many of these are going to be unscored for a period of time here. Are you able to use credit scores or are you looking at cashflow info? How are you making decisions on some of the newer businesses that are starting up? Yeah. So that’s a good question and a hard problem to solve because when the business is very young, you know, how do you score them? Because an easy way is to just look at the FICO score of the business owner. And we have seen that historically most of the lenders have still usede the FICO score of a business owner trying to judge a business. And we have found that is not a very good indicator. It’s a leading indicator, but not really a good indicator in terms of how the business will do. So I think what we have done is we have put our own proprietary scores where we take into account their business cashflow industry; the age of business, what kind of margins they’re making compared to what other businesses in their industry or subgroup are making, you know, how good is their AR? How strong is their online presence? So while you don’t put that online presence in our scorecard, that’s stuff that you’re looking at. But I think a lot of our scorecard really goes into cashflow. A lot of it goes into knowing things like, whether they are able to maintain minimum cash balances in their accounts? Are they able to pay their bills on time? Are they able to collect money on time? Are they able to improve their margins over time? You know, I’ll be able to, you know, keep consistently growing their business, you know, and also during the downturn when, when it has happened and we have a lot of data during downturns, you know, how bad, how much much the business dropped by, whether it’s more than 10%, 15, 20%, or was it like 60, 70% kind of stuff. But that’s also a very good indicator to see that in case when a recession comes or something happens to their business, then how resilient their businesses are to those crises
[Gary Stockton]: Yes. Business owners right now, they’re really under,quite a bit of pressure on two fronts. I mean, we’ve got a labor shortage and then we’ve had a degree of supply chain issues that’s causing now inflation. Are you seeing greater demand for financing, additional financing to assuage some of that? Or what are the business owners taking out loans for?
[Rohit Arora]: I think the top two or three worries have been, how do I recover my growth in the post COVID world? Because most of these small business owners, except the ones in the digital industries, have suffered a lot, their revenues have dropped a lot. Haven’t really gone back to pre-pandemic levels. They are getting closer to it, but still a long way. And then the pandemic was not kind to them. I think the good thing in the pandemic that happened was that they got a lot of money from the government. A lot of it got converted into grant money. So that really became almost like an equity infusion. So that’s a good thing that the debt burden on them is significantly lower than what it was even pre COVID. Having said that, I think the worry is how good they get the growth back now. Now in order to get the growth back, how do they get people back to work? You know, because today minimum wages have gone up massively. It’s like $20 plus. So while state governments can say that, okay, I can pay people $10, $12, $15 an hour, today in any business, if you want a good worker to work for you, it’s $20 plus, plus healthcare. So, one, it’s hard to find workers, you know to find people, even if you are willing to pay more money. Then the other thing is cost of significant economy. So how do you, you know, balance your own business when you have to increase the prices, but you cannot increase it so much that your customers go away, or they revolt against that and it’s impacting your margins.
[Rohit Arora]: Has that led to higher credit demand over the last three months? Yes, absolutely. And I think now the bigger worry also would be with hiring, with higher inflation, higher interest rates, because most of these small business loans in this country are floating rate loans. They are linked to prime. So it’s unlike a mortgage where you can get a fixed rate and you can be locked in for 5, 10, 15 years. Every time the Fed raises the interest rate, most of the business loans or lines of credit cost just go up. So there’s no way you can hedge. So that’s going to be an added problem because they’ll have to pay more on those. And then if recession comes in, then obviously it looks like more asset price recession, and it means street economy recession. But if a recession comes in and consumer spending drops, and that’s going to impact small businesses.
[Gary Stockton]: Excellent. Well, Rohit, this has been very insightful. Where can our audience learn more about Biz2Credit and everything you’ve got going on there?
[Rohit Arora]: So we have our website Biz2Credit.com. We have a knowledge center out there. We publish our index. We publish our report on woman entrepreneurs. we publish a report on thetop 25 cities for small businesses in May, which is National Small Business Month. We do a Latino business study, so we do a lot of research work. We do a lot of pro bono work. We do a lot of webinars, a lot of town halls with Bankers, with the Senior Policymakers, US Senators, Congressmen, and Congresspeople. So absolutely you can come on Biz2Credit.com. You can subscribe to our newsletter. You can go to our knowledge center, and then we have a very good social media presence.
[Gary Stockton]: Excellent. Thanks so much for coming on the show today.