from Forbes, Jan 4, 2016
by Marc Prosser
I recently had a chance to interview Mark L. Rockefeller, the co-founder and CEO of small business social lending platform, StreetShares. Mark is an Air Force veteran who served in Iraq. He has a strong desire to help other vets, which in part inspired the creation of StreetShares.
Disclosure: I am the co-founder of FitBiz Loans, a small business loan broker. FitBiz Loans has recently started to refer business to StreetShares. We derive less than 1% of our revenues from the relationship.
StreetShares is a P2P crowdlending platform that funds American small businesses. StreetShares funds all kinds of business owners, but StreetShares has a particular focus on helping veteran-owned small businesses. StreetShares funds businesses using what Mark called “social affinity lending.” This means that loans to businesses are supported by investors who share a particular social group membership with the borrowers. Social groups may include: veterans, alumni of the same school, members of the same profession, residents of the same neighborhood, or members of the same organization. StreetShares is starting with veterans. Many of America’s 21.8 million veterans share a strong connection to their fellow vets. By tapping into this loyalty, Mark and his team may be able to produce a better lending platform with lower rates for borrowers and lower risk for investors.
Here are two basic premises:
- Veterans–and those who support them–want to back loans to veteran business owners. In an auction pricing model, this support can lower the cost of borrowing, ie. the interest rate, for veteran business owners.
- Veteran small business owners who know their loan is backed by a number of other veterans will be more likely to pay off the loan. This can lower the default rate on the loan, increasing returns for investors.
Veteran business owners represent a fairly large market. By some estimates, there are 2.4 million veteran-owned businesses in the United States. The large numbers of both potential veteran borrowers and veteran supporters provide the opportunity for StreetShares to become a robust marketplace.
The long-term question for StreetShares is this: what other groups have large enough numbers of both business owners and supporters and also share a strong sense of community? If StreetShares can harness multiple affinity groups, StreetShares could be the future of small business lending.
The following Q & A with Mark Rockefeller is reconstructed from my notes, and does not represent his exact responses.
Is the StreetShares platform open to both veteran and non-veteran borrowers?
Yes, StreetShares is open to both veteran and non-veteran small business borrowers. Around sixty percent of the loans listed on the platform are veteran-owned businesses. The investors on the Streetshares platform are very interested in supporting veterans. Many of the investors and backers on the Streetshares platform are themselves veterans or otherwise have expressed a preference for supporting veterans. As a service to investors, StreetShares confirms the service history of potential borrowers claiming to be veterans. However, many non-veteran small businesses have used StreetShares to borrow money as well.
Do veterans face unique borrowing challenges?
Yes, recent veterans may leave military service with low credit scores. Changing locations every few years, especially when deploying abroad, tends to prevent those in the military from engaging in credit building activities like home ownership. They often have don’t have as long a history of paying off a mortgage.
Even with these challenges, we believe veterans actually present lower credit risk. When service members return and join civilian life, their credit history improves as they are able to more easily engage in credit building activities. In the long run, veterans tend to have all the indicators of lower credit risk: professional stability, higher educational attainment, and strong loan repayment histories.
Are veteran business owners a better investment than non-veterans?
Yes, especially through the social affinity lending method on StreetShares. Our data indicates that social lending to veterans on StreetShares results in default rates that are over 50% lower than comparable loans without social backing. This is because of our unique social affinity lending model. Veteran small business owner know that at least some of the funds behind the loans are coming from other veterans. This is clearly very motivating for veteran small business borrowers to repay the loan, as the data illustrates. We call this social affinity lending. And it’s demonstrably lower risk.
Do veterans get preferential terms, like lower interest rates, on the StreetShares platform?
Yes. StreetShares is a P2P crowdlending platform where rates are set by a competitive bidding process. Veterans on StreetShares often end up with lower rates for several reasons. First, StreetShares itself co-invests in each loan alongside our investors. And StreetShares provides an interest rate discount to veterans. Second, investors on StreetShares are eager to invest in loans to veteran businesses. More support means lower rates. Finally, investors tend to bid a 2%-4% lower interest rate to veteran small business borrowers (when compared to non-veterans).
VLM Stone 1/9/2016