John San Filippo
Lending as a Service Makes Small Business Lending Easier
By John San Filippo
In recognition of May as National Small Business Month, Finopotamus spoke with Will Tumulty, CEO of Rapid Finance, a small business lender that recently started offering its in-house-developed systems and processes to community financial institutions under a model the company calls Lending as a Service (LaaS).
An Unusual COVID Pivot
Founded in 2005, Rapid Finance provides capital to small businesses across the United States. Its main products are term loans and lines of credit for small businesses. The company grew steadily during its first 15 years, but took a giant step forward during the pandemic. Early on, the company was approached by the Small Business Administration (SBA) to provide the backend systems for the SBA’s Economic Injury Disaster Loan (EIDL) program, a program that funded approximately $400 billion in loans and grants.
“We weren't involved when the SBA first declared the disaster,” Tumulty told Finopotamus. “Their website actually broke because too many people were applying. They were trying to fix it for like a week or two. We scrambled and ultimately helped them get the whole program working.”
The experience of supporting this massive SBA loan program forced Rapid Finance to reevaluate its business model. The company had no intention of abandoning its lending business, but realized it could do more.
“We asked ourselves how we could help more small businesses than we can just lending on our own balance sheet,” said Tumulty. “We have about a half-billion-dollar balance sheet, which is pretty small in the grand scheme of lending. We realized we were really able to scale and help the EIDL program, so we should be able to take some of our systems, retool them for the commercial software market and help others who want to bring capital to small businesses. We knew we could do it more scalably and more efficiently.”
Tumulty continued, “We have a couple of software products that we're taking to market. We’re continuing our lending business, but now we’re in the software business, too.
Lending as a Service
“There's a pretty simple value chain that I like to think about in lending,” explained Tumulty. “There is acquisition. That's where you're getting a lead or somebody who wants to apply for a loan. Then there's the origination process where you're getting a bunch of information to determine whether the business qualifies for this loan. At what price? At what term? At what dollar amount? That ultimately results in a loan decision.”
After the loan is funded, he said, it is sent to servicing.
“That's where you're servicing and getting repaid and doing collections or recoveries if those things become necessary. The very last piece is really the capital markets piece. How do I fund all these loans?”
Tumulty added that Rapid Finance built all of these capabilities in-house from both a business process standpoint and a technology standpoint, but intentionally did so in a modular fashion. “Each one of those systems that does one of these component parts talks to the others via an API (application programming interface),” he said. “We've disaggregated both the business portion and the technology portion, so that if we have a partner that wants to do parts of that value chain, but not all of that value chain, we can provide just the parts they need.”
Looking for Like-Minded Credit Unions
Tumulty admits that Rapid Finance does not have any credit unions among its client base, but seeks to change that. Finopotamus asked whether the company’s ideal credit union partner is new to small business lending or is already involved in that market.
“Both groups are candidates,” responded Tumulty. “For the ones that are already doing some business services or some small business lending, we have tools that can help make their process more scalable, more robust, and more efficient. But if you're a credit union that's not currently doing business lending and want to get into it, we're probably an even better choice as a partner because we do small business lending ourselves.”
Acknowledging that small business lending requires considerable expertise in addition to the right technology platform, Tumulty told Finopotamus that Rapid Finance provides more than just software.
“Strategically, that’s what Lending as a Service is all about for us,” said Tumulty. “If you're a credit union and you have small business members maybe on checking accounts but not loans, or maybe you want to go get more small business members by offering loans, we can provide the system, we can provide the services like collections and recoveries, those sorts of things, and if you need some knowledge, for example, about what you ought to be looking out for in terms of fraud mitigation, we can help. We do that all the time.”
Tumulty added that although Rapid Finance focuses only on term loans and lines of credit, the company has partners that can provide support for other forms of small business financing, such as invoice factoring or small-ticket leasing.
As for what size credit unions Rapid Finance is looking to partner with, Tumulty said the company’s program probably doesn’t make sense for a financial institution that expects to book less than $10 million annually in small business loans. However, he did note there’s a potential opportunity for smaller credit unions through the formation of a CUSO (credit union service organization).
“It's just a matter of how big your balance sheet is versus what the cost of having that kind of structure is,” said Tumulty. “If a group wanted to get together and form a CUSO or work through an existing CUSO, we'd love to talk to them about that.”