Building a $100M+ FinTech Venture from Michigan: Ryan Rosett, Founder and Co-CEO of Credibly (Part 6)

Sramana Mitra: Now, just explain the core business model.

Ryan Rosett: We have three channels: our renewal department, wholesale channel, and the direct sales channel. We have risk-based pricing with a lot of automation. We have prequalification models. A quick no is fine too. We’re very much about the customer experience. Obviously a customer doesn’t want to hear that they’re rejected, but I think they’d rather hear that they’re rejected in one second than, wait four hours, two days, or a month to hear that.

Our model uses different variables such as industry type, time in business, and geography. Then, we have what we call an affordability pricing. Every industry has a different margin associated with it. We use that to understand what they can afford to pay us back and how much of their gross revenue on a monthly basis can we take in order to service the working capital loan that we’re providing the customer.

For example, a restaurant could have an 18% margin because they take in cash and credit cards. Again, we’re not the IRS. We only look at your bank statements. So whatever’s deposited in your bank is the only thing that we can look at to assess how much money you take in, there’d be some businesses that say, “Hey, but I take in a thousand hours of cash, which I don’t deposit.” That your problem. There’s nothing we can do with that.

A grocery store, for example, and is going to have much lower margins but a lot higher revenue. They might do a hundred thousand, two hundred thousand, five hundred thousand a month, but their margins are going to be much skinnier. Their affordability is going to be lower. It’s also based on the term of the loan. How long they go out will depend on how much we can afford to lend to that customer prudently.

So there’s a bunch of guardrails that our data science team puts in, and it’s all automated. We can’t go over on a certain customer because they’ve only been in business one year. But that makes sense. You don’t want to go too long on that customer just because they’ve only been around for a year. They have to prove themselves also.

Sramana Mitra: So the business model is a combination of an interest and a combination of the principal being paid back over a certain term that is affordable for that business’s margin conditions. That’s what is the net of it. And you have guard rails on the term and the affordability to make sure that all this stays manageable.

Ryan Rosett: I think we’re a responsible lender in that we want the customers to succeed. Of course, we run a business and we want to be paid back; they know their business well, and we know our business well. What we can afford to give them and whether they can afford to pay us back is based on our historical knowledge.

Sramana Mitra: Your success is going to be dependent on their success. If they start failing, you’re going to be loaded with bad debt. And that’s no good.

Ryan Rosett: Correct. That’s exactly right.

Sramana Mitra: So how well does your heuristic system work? Are you a hundred percent accurate in predicting that the companies are going to be able to pay back within the model that you’re creating?

Ryan Rosett: Our models have a probability of default. We have six different bands: A1, A2, A3, B, C, and D bands. They all have different risk profiles and different parameters associated with them, but they’re all rank order with charge-offs. We have a probability default that is associated with each one of our bands. That’s the target, and it’s underwritten and priced for that. So we’re pretty certain barring a pandemic or major economic events.

We do have a unique feature to adapt easily to natural disasters like hurricanes or earthquakes or forest fires. If there’s a forest fire in California, we can shut down that region immediately. It’s not shutting down per se, because they actually need working capital; but we’ll do site inspections. Before any money goes out, we want to make sure their facility is intact and didn’t get affected by the fires. I think that’s a unique part of our business.

Sramana Mitra: What about competition? You said you’re in the top three or four lenders now. Who are in that? Who else do you consider to be your direct competitors? Talk a little about the market landscape.

Ryan Rosett: There’re a few companies like us. There’re some that are what I call more closed loop like Stripe, which is a credit card processing company. You have to be their customer in order to get the money. There’s PayPal that markets to their PayPal customers.

Sramana Mitra: Intuit has a financing product for small business lending, OnDeck …

Ryan Rosett: Yes, Intuit. OnDeck is a competitor on the closed loop side. Shopify also offers capital to their customers.

Sramana Mitra: There’s American Express.

Ryan Rosett: American Express, but it’s on American Express receivable. There’s OnDeck, which is publicly traded. They’re owned by Enova.

There’re a couple of others that are at our scale in the marketplace that do what we do. When you ask, “Is there competition?” Yes, there’s competition, but there’re over 4500 banks in the United States and just a handful of people who do what we do.

Sramana Mitra: The market is very large.

Ryan Rosett: We don’t love every deal. Our models don’t like certain things and other lenders are okay with that risk. Their models may be different or they’ve had different experiences, because our models are like a feedback loop of taking the data and incorporating what we’re seeing in the performance metrics.

This segment is part 6 in the series : Building a $100M+ FinTech Venture from Michigan: Ryan Rosett, Founder and Co-CEO of Credibly
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