Building a $100M+ FinTech Venture from Michigan: Ryan Rosett, Founder and Co-CEO of Credibly (Part 3)

Sramana Mitra: At that point in the year of 2010, what was going on in the market? Why did you choose to do this business? There are several other companies that are doing this business. What was the landscape then? Why Credibly in 2010?

Ryan Rosett: Going back, this was the great recession. There’re always conversations about a double-dip recession. 2010 was a very contrarian time to start a lending business, but I had experience on the small business side with the coffee shop and the beer business. Getting access to working capital is a challenge. Even in the beer business, you had to manage your cashflow throughout the year due to seasonality. It’s a challenge.

Sramana Mitra: As a small business owner, you knew the problem of working capital shortage.

Ryan Rosett: Yes. Typically, when banks contract or pull back from a certain lending practice, it takes them a long time to get back into it. They’re not the first in. So during the recession, when the banks were all experiencing pain from the residential and commercial real estate fallout, they weren’t lending to small businesses.

It created a unique opportunity for us to start lending to what we deem to be viable, small businesses, but just didn’t have access to credit. The impetus of starting it was really pure in that we were just trying to help the small businesses gain access to working capital, and we wanted to be the lender. You could have a model where you’re a broker to a certain channel, but we want it to be “bank” and provide the capital. So that was the business premise of what we did.

At the time there were maybe a hundred companies and through the process and through the discipline that we deployed since 2010, I’d say we’re among the top four small business lenders in the space.–>

Sramana Mitra: And where did the capital come from?

Ryan Rosett: It was somewhat fortuitous. There was a local bank called Crestmark Bank. They had a national footprint and they were a factoring bank. They would buy future receivables at a discount. We were introduced to them and they really liked our business and wanted to do a joint venture with us. It worked out to be a really interesting structure for us. It allowed us to grow because we had a bank partner that was essentially providing 98% of the loan and we provided 2% of the capital.

It started as 70% of the sort of the profit splits. What we would do is we’d originate the loan, we would then transfer it to a special purpose vehicle (SPV) that was majority owned by the bank. But we would get 85% of the profits coming off of that SPV and the bank would have 15% of it. It proved to be a very successful model for the bank. It was a very successful model for us because it was a highly profitable SPV. It had no burden, it had no employees. It would just take the paper and we would service it and there would be profits that would be distributed. Then it would come back to our company.

Sramana Mitra: And what was your company operations situation? Did you bootstrap your company? Did you fund your company? How did they get your company off the ground?

Ryan Rosett: My partner and I funded it. That’s how we started the business. There were times when it became quite stressful. We didn’t have the luxury of going to a bank to get financing. We would continue to fund it.

Sramana Mitra: It was a lean, bootstrapped company, and the bank SPV structure provided the capital.

Ryan Rosett: It provided the capital that we would effectively lend out, but not for our operations.

Sramana Mitra: Now, in terms of positioning, where did you position the company in terms of what kind of small businesses were you going after? I’m going to caveat that question with some of the competitive landscape. Already, at this point, OnDeck Capital is one of the players. They have this particular structure of using the data on eBay and Amazon transactions, and then lend against the transaction volume to small businesses. That was one model that was already gaining some ground. And there were other players who were doing small business lending in a FinTech format with some of these nuances, where they were collecting the data to qualify the loans.

What was your positioning in that landscape?

Ryan Rosett: When we started the business, there was something called a split funding. Basically, we would lend on their credit card value. So if they took in a thousand dollars of credit card receipts a day, we may take 20% or 15% of that or whatever was agreed to contractually to pay us back on the loan.

We were the second company that had a relationship with Fiserve, which was First Data at the time. We were able to have the ability to split fund off of all First Data’s customers. That gave us a little bit of an edge at the time. Each day that we funded a new customer, it would divert 20% into our bank account and 80% would go into their bank account.

We didn’t have to rely on the customers to pay us, which was attractive because if a customer had to write a check or had to transfer money each time, the defaults would soar. That was the edge that we had at the time. We did we did very well with that model.

However, it changed because of the timing. You wouldn’t ever fund the customer until you saw a deposit hit your bank account to ensure that the credit cards were accepting money. So, there was a delay. So we moved towards an ACH product where we’re debiting their bank account, that same amount every single day. Then we would do a monthly reconciliation if it was a factoring product. We wouldn’t do that on a loan product. Almost a 100% of what we do is still ACHs and it’s either daily or weekly.

This segment is part 3 in the series : Building a $100M+ FinTech Venture from Michigan: Ryan Rosett, Founder and Co-CEO of Credibly
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