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ForwardLine: CEO Craig Coleman Talks Small Business Loans

March 23, 2015
Small Business
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Founded in 2003, ForwardLine was launched as the first merchant lender in the United States. It provides small business owners with alternatives to traditional small business loans, with merchant loans and merchant cash advances ranging from $5,000 to $2 million, and repayment terms of six, nine, 12 and 15 months, according to the company. 

NerdWallet interviewed ForwardLine CEO Craig Coleman to get a better idea of how the business works, the difference in the loan products it offers, how the company makes its lending decisions and tips for business owners looking for financing.

NerdWallet: What is ForwardLine and why was it started?

Coleman: ForwardLine is a nonbank lender to Main Street businesses nationwide. Back in 2003, my partner and I had been providing short-term loans to larger businesses locally in Southern California when we realized there was a huge unmet need on Main Street for small business loans.

Banks often don’t lend to Main Street businesses because their credit needs are too small to profitably service and these businesses typically don’t have collateral — there are no accounts receivable, equipment is leased and the inventory isn’t very re-marketable, meaning it can’t be liquidated in a foreclosure.

However, many Main Street businesses are stable and successful, so we figured there must be a way to successfully lend to them. So we developed an underwriting analysis that measured the stability of a business, rather than the value of its assets, in part by analyzing the business’ historical credit card sales. Then, we leveraged technology so that we could be hyper-efficient in originating small dollar loans and we structured the repayment process so that we were repaid by directly withholding a fixed percentage of the business’ daily credit card sales. We called this credit product a “merchant loan” and originally named our business “Merchant Finance Company.”

Our first customer was a hair salon on the ground floor of our office building where I got my hair cut. The salon owner was looking to add two chairs to his salon and expand into the adjacent suite. We made a loan to the salon in December of 2003 and, to our knowledge, that was the first merchant loan ever made in the United States.

Since then, we’ve provided more than 10,000 loans to Main Street businesses across the country representing hundreds of millions of dollars.

What are the loan products offered?

ForwardLine offers merchant loans and merchant cash advances in all 50 states. In order to qualify for a loan through ForwardLine, a business must be operating for at least one year and have at least $150,000 in annual revenue.

How fast is the application to financing process?

We offer same day approval and next business day funding.

What is a merchant loan?

A merchant loan is a short-term loan to a small business, typically a retail business. It’s underwritten in part by the sales of that business, often focusing on the credit card sales, since they’re the most verifiable. And a merchant loan can be collected either as a percentage of the merchant’s credit card settlement, or as a fixed-dollar, daily Automated Clearing House (ACH) debit from the merchant’s bank account.

How does it differ from a merchant cash advance?

An advance is very similar, except it is a nonrecourse purchase of the merchant’s future sales. So what you are effectively saying is, I will pay you today, let’s say $10,000, for $13,000 of your future sales. And what I will do is put a holdback on your future credit card sales and start collecting my $13,000, out of your daily credit card settlements.

And the key difference is essentially legal, because it’s nonrecourse. If that small business were to go out of business, the finance company has no recourse against the business or the owner, because they are basically taking the bet that those future sales will materialize. If they do, great, and if they don’t, the finance company has to write it off.

What does recourse mean exactly?

It basically comes down to, with a merchant loan there’s an absolute obligation to repay, and with a merchant cash advance, there’s not an absolute obligation — the repayment comes out of those future sales, if and when those sales materialize. That’s another reason why a merchant cash advance doesn’t have a fixed term — because the sales could materialize on schedule, ahead of schedule or behind schedule.

And a merchant cash advance has to be repaid as a percentage of the credit card sales – it cannot be repaid as a fixed-dollar, ACH debit because without the percentage approach you’ve lost the connection between the repayment and the actual future sales.

If a business fails to repay a merchant loan we attempt to reach an alternative agreement. If that fails, we initiate a traditional collection process.

What type of business would be better suited for each product?

I really don’t think there is a difference from the customer’s perspective, with the exception of this nonrecourse. And you might look at that and say, well, if the customer’s feeling less confident in their business’ prospects, they should opt for an advance.

But the way a finance company underwrites, they are looking to determine whether or not this business has the likelihood of succeeding. They are looking at the prospects of the business. Chances are, if you are not feeling confident about the prospects of the business, you wouldn’t pass the underwriting. So there really isn’t a big distinction from the customer’s perspective.

How does ForwardLine differ from other online lenders?

As the very first company to provide these loans to small businesses, we’ve consistently led the way in terms of innovation. We were the first to offer 12- and 18-month terms on merchant loans, the first to offer early payoff discounts and the first to loan to online retail businesses. But most importantly, we’re widely known as offering the best pricing in the industry, with rates starting at 11.99%.

We’re able to do that primarily by following a direct strategy, rather than relying on brokers. We are doing a lot of advertising online and offline, directly to our end customer — the small business. Then those folks who respond to the ads are either going directly online to ForwardLine or they are calling in to ForwardLine where they speak to an employee. And so, what’s key there is we are controlling that customer experience. So that’s No. 1 — we employ the folks we train and monitor.

Does the 11.99% represent the annual percentage rate (APR) of the loan?

So that’s a fixed-fee payment. Let’s use our 12-month loan product as an example. On the 12-month loan, the fixed fee is going to be 12.99%, which means if that customer were to borrow $10,000, they are going to repay $11,299, or $1,299 in interest.

So the point is, they are going to pay in interest $1,299, that’s why we talk about the fixed fee. But if you APR that, what you look at is, this balance is being paid down over the course of those 12 months, so at about the sixth month mark, you’re at about half the balance. So roughly what you could do is take that 12.99% and double it to get the APR.

I will say they [the APR and the fixed fee] are both meaningful points of measurement. But I think small business owners might get confused thinking that a 26% APR means that on a $10,000 loan, they are going to repay $2,600 in interest. And that’s where we want them to understand, that $1,299 is what they’re going to have to pay here.

And the reason we are not going with strict APR is so many of our borrowers choose to repay with a percentage of their sales, so it isn’t a straight line repayment — there are some months where they pay more and some months where they pay less. So you can approximate the APR, but you can’t provide the exact figure because it’s not a straight-line repayment.

It’s important to recognize that smaller loans as well as shorter-term loans will tend to have higher APRs because there are minimum transaction costs in originating any loan that must be priced into the repayment, regardless of how big the loan is or how long it is outstanding.

[Note: ForwardLine loans also have an additional processing fee of between $275 and $550; there are no other fees, according to Coleman.]

What types of businesses most commonly use your financing (by industry, size, etc.)?

Our clients can be broken down into the following categories:

  • Classic Main Street businesses: restaurants, hair salons, auto repair shops, dry cleaners, etc.
  • Franchises (restaurants and other retailers)
  • Professionals: doctors, dentists, veterinarians, HVAC guys, electricians, etc.
  • Small online businesses (virtual Main Street)

Our borrowers have, on average, between six and 12 employees and generate around $1 million in annual sales. The average time in business is about 12 years, though we only require one year as a minimum time in business.

Are there any types of businesses that are not good fits for your products?

I would say most of the wholesale businesses are not a fit because their sales can essentially be more lumpy and concentrated. But I think my main answer to that is, if a business can get the money it needs, within the time frame that it needs it, and find it at a lower rate than ForwardLine, then by all means, they should pursue that route.

But I think most businesses can’t. Banks are not lending typically to Main Street, and even for those businesses that can, they probably can’t do it in a short enough time period to take advantage of their opportunity. So another great use of our loan and a common use of our loan is to be that bridge loan, where they borrow from us to get the money within two business days and capture that business opportunity, and then if and when they get approved for the bank loan, they can refinance with the bank loan.

Can you tell me how the company makes its lending decisions? How do businesses qualify for lending?

We’ve continuously applied data science to the empirical data we’ve collected over the past 10 years to drive our proprietary credit algorithm, which measures the stability of the business and delivers an instant credit decision by pulling and analyzing the available online credit data on the applicant’s business and the business owner, as well as public records data.

One of the reasons banks won’t lend to Main Street businesses, is these businesses typically don’t have collateral for a business loan. They don’t have accounts receivable; any equipment they have is leased, so there’s no collateral, which is very important for a bank. So when we looked at this issue of why traditional lenders can’t lend to Main Street, we decided for ourselves that there must be a way to successfully lend to Main Street. So we said, maybe they don’t have collateral or the assets, per se, but they’ve been around a long time, they’re stable businesses, they’re successful businesses.

So we said, there must be a way to measure the stability of that business, and we basically created a credit algorithm that does exactly that. And it’s gotten smarter every year by leveraging the empirical history that we’ve developed. What it does is, it’s going into the business credit data, the personal credit data and the public records data — so this is all online available data we can get when someone provides their Social Security number and the tax ID on the business. It’s going into that data and looking for signals that we’ve found to be predictive of stability, and signals we’ve found to be predictive of instability or stress. And all of that boils down into a score. And based on that score, we can approve or decline an applicant.

What factors are more important than others?

We’re looking deeply into credit histories, so way beyond credit scores. But take a person’s credit report for example — it doesn’t say anything about your income. But you have things like, how long accounts have been open, have they been current and so forth. So what we’re looking for in both the business and the business owner is signs that would indicate that there’s economic stress going on, and therefore potential instability in the business.

We’re not looking at their cash flow, and one of the reasons for that is it’s hard to verify. We will look at their overall sales to see how much they can qualify for in terms of a loan amount, but not whether or not they are creditworthy for the loan — that’s a different analysis, that’s our credit analysis and where our proprietary score comes in.

What advice would you give a small business owner looking for financing?

One tip is to really understand the cost of whatever loan you’re looking at, the costs and fees. Take the time to try to quantify how this loan will benefit this business. So now they’ve got a number on the benefit side to compare to the number on the cost side.

In terms of expediting the process, really it’s basically a short application and you provide the last few months of bank or credit card statements. So having that material ready to go expedites the process. But in our case, we can move as fast or as slow as they want to.

Keep in mind that a business loan should always leave your business in a better circumstance than before you took financing.

Is there anything else you’d like to add?

America’s 28 million small businesses are incredibly important to the U.S. economy, employing nearly half of the private workforce. When these businesses can’t get the financing they need, it has a massive cumulative effect of lost economic growth, lost jobs and lost tax revenue, so we’re very proud to be playing a continuing role in meeting this need.

Updated March 29, 2017: Forwardline’s terms have changed since publication and this article now reflects those terms. The company offers loans in all 50 U.S. states, requires a minimum $150,000 in annual revenue to qualify, and offers loans to businesses with low or no credit card sales. Its lowest interest rate is 11.99%, and the company can now get borrowers approved and funded within the same business day. 

Steve Nicastro is a staff writer at NerdWallet, a personal finance website. Email: [email protected]. Twitter: @StevenNicastro.