David Haber is the co-founder of Bond Street, which provides growth financing to businesses. By creating a tool that makes sharing financial data with lenders seamless, Bond Street has simplified the underwriting process and worked with hundreds of companies across the country to support businesses and monitor financial health. With a background as a financial technology investor at Spark Capital and an interest in improving the loan process, Haber was at the perfect intersection to build out such a solution.
Plaid CEO and co-founder Zach Perret sat down with Haber to discuss the ins and outs of today’s lending ecosystem, the evolution and future of Bond Street, and what businesses can look forward to seeing as the fintech industry continues to change. The following interview has been edited for clarity and brevity.
ZP: What was the process you went through from day one of deciding to found the company to the first loan issue? What were the key barriers to getting there?
DH: Well, part of building a lending business is figuring out how to lend and evaluate credit—which neither I nor my partner, Peyton, had any background in. But we knew that we were going to live and die by the quality of loans that we made.
I had helped Spark invest in a business called Orchard, and two of their co-founders had spent their careers in risk. They connected me with Jerry Weiss, the head of risk at Citibank, who ran small business lending nationwide. Somehow, Peyton and I convinced Jerry, after 30 years of working at big banks, to come work with us in my apartment building; and this was before we even had payroll or any infrastructure set up—a pretty hilarious juxtaposition. I think that he saw the opportunity from within the bank, but also wanted to build something and in his words “have fun again.”
ZP: So you’ve got Peyton building things, you’ve got Jerry, and you have a credit model. So where did you get the capital to actually make the first loan? Was it off-balance sheet?
DH: Good question. We’d raised $1.5 million in seed financing initially, but we knew we didn’t want to lend our equity because we needed that to build our team. Initially, we set up a fund. I ran around to entrepreneurs and wealthy finance people, raising $100,000 checks to fund $500,000 loans. We had a number of early people who believed in us, and were able to scrape together a few million dollars to get started (however, it was clear that this was not going to scale). As our application volume continued to grow through word of mouth and referrals, we actually ran out of money at one point—which is a painful problem when capital is your product.
We ultimately connected with Jefferies, who had been one of the bigger, more active players in the space, and it changed the dynamic. They had a process and a diligence list, and really dug into our underwriting and technology. They decided to commit $100 million to our business and that deal essentially precipitated our Series A round of financing, which my former partners at Spark led.
ZP: That’s very neat. Do you have plans to raise additional lending capital?
DH: We actually just announced an additional $300M in lending capital from Jefferies. This milestone will really accelerate our growth and help thousands of small businesses across the country access fair and affordable financing. We’ve also broadened our term product to include loans ranging from $10,000 to $1 million—a pretty significant expansion from the original $50,000 to $500,000 range. Bond Street now offers the widest term loan range in the alternative lending industry, which is really exciting because it allows us to support entrepreneurs at every stage of their growth cycle.
ZP: So initially you settled on $50,000 to $500,000 loans. It’s a big range. Why did you choose it?
DH: At the time, there was a pretty big chasm between where the banks were comfortable lending and where a lot of the alternatives started; whether that was credit cards, factoring or merchant cash advances. There was also an early ecosystem of online small business lenders who were playing pretty far down-market, offering smaller dollar loans for short durations at very high rates—sometimes, 40-, 50-, 60-percent interest rates. There really wasn’t anybody offering larger loans for longer durations at lower rates. So it was this idea that I wanted to be able to put an APR on our front home page and be proud of it, and not feel like it was usurious.
Our rates for a term loan start at 6 percent and they go to 22 percent. We’re very competitive with banks on the low end, and then we’re typically cheaper than a credit card. So we see companies that are graduating from a business credit card or from a more expensive shorter-term loan, all the way up to incredibly bankable businesses who are doing $25+ million of revenue and borrowing $500,000 from us.
ZP: So how many of your businesses take multiple loans from Bond Street?
DH: It’s a meaningful portion. We’ve been fortunate to have attracted a very healthy portfolio of customers who have continued to grow their businesses, and are able to afford additional financing.
For example, one of our first customers is a business called Joe Coffee. When we first lent to them they had nine locations and they were doing well over $10 million in revenue. They had an existing line of credit with Chase, and they’d started applying for term loans to open a few more locations. The process had taken them two months— without a clear end in sight— and we were able to finance that 10th location in just a few days. We’ve since opened store number 11, and we’re about to open store number 12. Even though our product is probably a little bit more expensive than what they were historically getting from their bank, the difference in speed and customer experience really changed the way they’ve thought about financing. It’s been really fun and rewarding for us to continue to grow with them.
ZP: How does Bond Street acquire customers? What are your best channels?
DH: For us, it’s been a lot of partnerships. Most of the ways players in our space acquire customers are either through brokers, SEM or direct mail. In the broker ecosystem, there’s this large network of ISOs that A) charge incredibly high rates, but also B) aren’t totally transparent about what they’re offering to their customers. We made the decision early on that we didn’t want to work with people who would compromise the customer experience, so we’ve been fairly selective with new partners.
We’ve done deals with companies like WeWork, for example, who promote us in every building in America and on their homepage. We’ve created partnerships with SMB-focused software companies like Booker and Front Desk. We’ve created an accounting channel. It’s really a combination of multiple acquisition efforts happening simultaneously. That is the challenge in this business: there isn’t a silver bullet, and it really does require a number of tactics.
We also see a significant amount of new business coming through direct referrals and general word of mouth. One of the things that I’m really passionate about is building a brand in this space, and ultimately that brand is going to be built through the lens of our customers. We’ve written hundreds of editorial profiles of businesses that we’ve served all across the country, and that’s really helped us organically build a reputation within certain industry categories and geographies.
ZP: And are you servicing your own loans or using a third party?
DH: We use third-party loan servicer. When we first started the business, given Peyton’s background leading engineering at Venmo, I thought we would build our own loan servicing infrastructure. The reality is that it’s a fairly complicated world, and would have required a lot of tech build. We got started with a reasonably cost-effective third party so that we could focus on the core up-front customer experience.
ZP: We’ve heard that some lending companies are having issues where customers apply for two loans simultaneously and take two loans simultaneously, so there’s not a lot of indication that both loans are given. Is that an issue you’ve seen?
DH: We have. It’s not super common, but it can happen (typically through broker channels).
One of the ways that we’ve mitigated that problem is by requiring our customers to connect their bank accounts before funding. We’ve written software to automatically check their deposit data to ensure that no undisclosed debt is discovered.
That is a powerful thing about deposit data; it is ultimately the ground truth. There are a lot of lenders, especially in the short-term space, who don’t report to the credit bureaus. And so, as we evaluate the health of a business, we look at self-reported financials via QuickBooks, credit histories of the owner, credit histories of the business, tax filings from the IRS (which we receive via XML) and bank deposit accounts.
Occasionally a business won’t have reported debt in their P&L, and it won’t show up at the bureaus; so the only way to see it is in their deposit data. Our software allows us to identify keywords or trends from deposit data that we know signal existing (or new) debt. We then continue to monitor the financial health of that account programmatically on an ongoing basis throughout the life of the loan.
ZP: I want to finish by talking about the future and what you’re thinking about in terms of not just lending but building broader tools for small businesses. You talked about opening up some of the lending qualification tools that you’re using internally to businesses themselves. What are you guys thinking about building? Are these accounting tools or something else?
DH: Our larger vision for Bond Street has always been to be more than a lender, but instead, to be what I describe as every business owner’s financial advocate.
What we’ve identified over the years in helping hundreds of small businesses around the country access fair and affordable financing is that there is a common thread. Most entrepreneurs are incredibly passionate about their product, service or craft; however, they’re not (necessarily) finance people—not that they should be.
So the bigger opportunity that we see, is taking this thing—“Finance”—which is opaque and scary for most people—and distilling it down into something simple and actionable.
The beauty of our business is that we’re directly aligned with our customers. We are only going to be successful if they are successful. So all of the tools and technology that we build internally to identify risk and to see opportunity can—but I would argue should—be productized and surfaced back to our customers. Our new software product is something that I’m incredibly excited about launching in early 2017.
In my opinion, our business shouldn’t be simply about maximizing the number of transactions we can make, but instead focus on building a relationship (and providing value) to our customers beyond the loan. Ultimately, capital itself is a commodity (our dollars are just as green as everyone else’s) and the future is one where capital will be available online. We are building the foundation (and software), today, to be able to offer our customers the strategic insights that they need to build more successful businesses.
Ultimately, we should be creating a virtuous cycle where we can help entrepreneurs build more successful companies, to borrow more often, to decrease the chances of defaults—which will give our investors better returns—and to reduce our cost of capital. We, in turn, can pass these savings back to the customers we serve and continue to grow the lifetime value to our business.
In my opinion, that opportunity, to change the relationship between a customer and their lender, is the future for Bond Street and of lending as a whole.