2014 Annual Convention Presentation Alternative Financing

Alternative Financing & The
Future of Equipment Finance
53rd Annual Convention
Monday October 20, 2014
2:30 pm – 4:30 pm
San Diego, CA

Alternative Financing & The Future of
Equipment Finance
Presenters:
Martin Klotzman
Analyst
Ivory Consulting Corporation
Mukul Mittal
EVP Product Development
Cloud Lending Inc.
Gina Mackenzie
Strategic Partnership Manager
RapidAdvance®
Michael Rabil
Director, Partnerships
Funding Circle USA
Charles Wendel
President
FIC Advisors, Inc.
2
Moderator:
Scott Thacker
CEO

Alternative Finance and
the Future of Equipment Finance
Agenda
• ELFF Study Overview
• Alternative Finance Overview
• Alternative Finance Businesses
– Typical Business Models
– Deep Dive – Rapid Advance
– Deep Dive – Funding Circle USA
– Growth Rate and Expected Trends
– Regulation
• Technology
• Opportunities and Threats – ELFA Companies
• Q & A
• Closing Thoughts
3

Agenda
– Regulation
• Technology
• Q & A
4

Coming Soon!
Look for the final study report
November 2014.
www.leasefoundation.org

Agenda
– Regulation
• Technology
• Q & A
6

Alternative Finance Overview
7
Redefining an industry

8

9
Is banking next…?

10
Category
Number of
businesses
(Millions)
Potential Dollar
Loan Value
(Billions)
Pct of
Businesses
Pct of
Value
Qualifying 3.7 $544 10.2% 23.8%
Not Qualifying 32.4 $1,745 89.8% 76.2%
Total 36.1 $2,289 100.0% 100.0%
Bank Qualified and Non-Qualified Business

11
Why won’t banks make small business loans?
 Reputation risk of high yielding loans
 Loans are low margin
 Increased regulatory scrutiny
 Increased capital requirements
 Operate within narrowed “credit box”
Banks can’t justify the cost
 Loans must be in excess of $100,000 to cover costs;
some analysts estimate $250,000.

12
What is Alternative Finance?
 An array of financial services offered outside of federally insured banks
How long has alternative financing been around?
 Alternative financing activities have existed as long as borrowers needed lenders
Who typically pursues alternative financing?
 Micro and small businesses, including companies with revenue up to $10-20 million
What is the loan range?
 Loans can be as low as $1,000 and over $1 million on the high end

Why are investors attracted to alternative lending?
 Access a new asset class
 Attractive returns
 Rigorous underwriting
13
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
Funding Circle USA Dow Jones Corporate
Bond Index
Vanguard Total Bond
Market ETF
Vanguard Corporate
Short Term Bond ETF
Vanguard Short Term
Bond ETF
3 Year
5 Year
1 Representative alternative investment rates (as of September 2014) shown here are illustrative, and many of these investments
have different characteristics or risk profiles than investments in Funding Circle.
2 Expected rates of return across all current risk bands for loans by FC USA, and net of servicing fees
2
5yr
N/A

14
What are the key drivers?

15
We are always connected

16

17
Technology makes it easy

18

19

Agenda
– Regulation
• Technology
• Q & A
20

Typical Business Models
21
• Reward-based
• Donation-based
• Lending-based
• Equity-based

Reward-based
22
Characteristics
 Creative-based projects
 Funded in 30-60 days
 5% fee for successful projects
 Easy application and screening
 Merits – no financial return

Donation-based
23
Characteristics
 Less restrictive guidelines
 Fund charities, trips, anything
 Easy application and screening
 Merits – no financial return

Debt-based
24
Characteristics
 Provides access to debt financing
for small business owners
 Provides alternative structured
investment product for investors
 Creates innovate way to
underwrite and evaluate small
business loans

Equity-based
25
Characteristics
 JOBS Act could have significant impact
 Investors receiving stake in company
 Can raise up to $1 million
 Investors must be accredited (pending)
 Build an ownership portfolio

Classifications of Borrowers
26

 Almost but not quite “bankable”
 Banks want a government guarantee
 I.E. – SmartBiz profiles SBAs for banks
Borrower: Near-prime SBA Lending
27

 Heading towards bankability
 Usually don’t have sufficient collateral or history
Borrower: Mid-prime: Crowdfunding
28

 Fully dependent on risk-taking lenders
 MCA typically focuses on only sub-prime
 Invoice financing firms primarily participate in this space
Borrower: Sub-prime: Merchant Advance Lending
29

Agenda
– Regulation
• Technology
• Q & A
30

31
A Supplement to Traditional
Financing
Flexible funding for your small business clients.

Founded in 2005 - headquarters Bethesda, MD
Acquired in 2013 by Rockbridge Growth Equity
– Private equity firm of Dan Gilbert with holdings such as Cleveland Cavaliers
basketball team, Quicken Loans, Rock Ventures, Rock Connections, etc.
– Unique access to best practices and resources
BBB accredited and A+ rating
Heavy focus on lower middle market and small business owners – direct and
through partners
Over $700 million in funding to tens of thousands of business owners
32

RapidAdvance
33

RapidAdvance
34

35
Challenging Credit Environment

36
New Programs
“Fill in the Financing Gap”
Business Owner
• Unexpected opportunity
• Short-term cash flow
• Expansion
• Inventory and payroll
• More options for your clients
• Easy: streamlined underwriting
• Fast: funding within 7 days
• Subordinated: no impact on
financial institution collateral
Traditional Lender
• Customer unable to
meet credit
guidelines now
• Strong future
revenue potential
Credit Card Advance / Daily
Payment Loan

37

38
No personal guarantees for repayment on credit card advance
No security interest taken
No points or upfront fees
No fixed monthly payments
No coupons or checks to write
No impact on ability to qualify for other financing
No business use restrictions on the funding
No hassles - quick application & fast funding
Benefits to Business Owners

39
Benefits to Lenders or Leasing
Professionals
• Add depth to client
relationships.
• Provide additional
piece of
transactions.
• Additional revenue.

40
Flexible terms.
Small Business Loan
• Perfect for businesses looking for a traditional
loan – and need it now
• Short-term payback – up to 12 months
• Automatic daily payments and easy to renew
Up to $500,000. Decisions within 48 hours.
Subordinated to financial institution.
Credit Card Advance
• Innovative, unsecured financing for businesses
that accept credit cards
• Repayment from future credit card receipts
• Stand alone or with merchant services
SBA Bridge Loan
• Meet short-term funding needs during financial
institution & SBA approval processes
• Eliminate obstacles to expedite SBA approval
• Pay tax and other past-due obligations
Line of Credit
• Offers flexibility in funding amount and
duration
• Draw funds only when needed
• Flexible repayment terms

41
Credit Card Advance Vs. Loan
Advance
• Up to 200% of credit card
receivables
• Payments vary with cash
flow
• No UCC filed
• No Personal Guarantee
Loan
• 50% to 70% of bank
deposits
• Fixed Payments
• UCC-1 Filed
• Personal guarantee

42
When Is a Credit Card Advance/Daily Payment
Loan a Great Fit?
• Smaller deals
– transactions under $500,000
• Insufficient collateral
– aged accounts receivable
– bonded
– inventory
– mobilization or manufacturing process
• Challenging industries
– restaurants
– retail
– construction
– healthcare
• Obstacles
– liens
– unsubordinated debt
Industry Thoughts
“Community banks bear a
disproportionate cost of
regulatory compliance. As a
result, loans for less than
$100,000 have all but
evaporated.”
— Community Bank CEO
ICBA Convention

43
How It Works - Example
Daily Payment Loan
• $140,000 advance ($200k @ 70%) paying back
$161,000 (1.15 factor)
• 10 month transaction
• $732 daily payments, 22 days per month
Business owner has $200,000 per month in bank deposits.

44
Sample Transactions
$100,000 to a trucking company to purchase a new hauler
$25,000 to a restaurant to update decor
$100,000 line of credit to medical office bring in new equipment

Agenda
– Regulation
• Technology
• Q & A
45

46

47
We understand small businesses.
Because we are small business owners.

• Funding Circle is the world’s leading online small business loan
marketplace.
• We originate and evaluate small business borrowers to match them with
institutional and accredited investors in a private marketplace.
• To date, we have funded over $600 million in loans to over 5,500 small
businesses globally. This year alone, we plan to lend $570 million to small
businesses in the US and UK.
• Backed with $123 million in venture financing from Accel, Index, Union
Square Ventures and Ribbit Capital.
What is Funding Circle?

49
What is marketplace lending?
Business Loan
Interest and
Principal
1% servicing
fee on total
loans
2.99%
origination fee
Investors looking for
good returns
Businesses looking for
simple and fast finance
• Marketplace lenders aggregate capital from investors to lend out to
individuals or businesses
• The industry is expected to grow to $1 trillion in annual loan volume by
2025 (1)
• Funding Circle is the leading global small business loan marketplace
(1) Moldow, Charles “A Trillion Dollar Market, By the People, For the People” (2014)

50
• Fast: capital in under 14 days
• Simple: pre-qual in seconds, 10 min online
application
• White glove service: account manager and
underwriter for every borrower
• Fair & competitive rates: starting from 8.99%
• Transparent: no hidden fees, loan calculator
Why do small businesses choose Funding Circle?

51
Speaking of transparency, how do we stack up?

52
How do businesses use our loans?

53
Say goodbye to 10 lbs of paperwork

54
Snapshot of our pre-qual

55
[Partner Logo]
We’re building a better financial world… come join us!
• We offer attractive fees for referrals: 1% to 1.5% of the loan
• Just like our loan application process, becoming a FC referral
partner is a simple process
• We make your job easier with your own online portal so you
can submit, sort and track applications. You also get your
own dedicated account manager and underwriter who
specialize in referral loans

Agenda
– Regulation
• Technology
• Q & A
56

Growth Rate and Expected Trends
57
Yes, today alternative lending is relatively small in size, but…

58

59
Recap
 Currently 1.4% of loans outstanding
 Growing in size 100% annually
 Traditional lenders lend to 10% of borrowers or 25% market opportunity
 Alternative lenders focus on the other 90% and 75% of market
 Analysts estimate it could dominate US small business lending within 10
years

The Rise of the Branded Competitor
60

 Increased competition
 Lower margins
 “Dumb” money
 Entry of traditional players
 Credit downturn
 Consumer Financial Protection Bureau
Future Challenges
61

Agenda
– Regulation
• Technology
• Q & A
62

Regulation
63
Open Discussion

Agenda
– Regulation
• Technology
• Q & A
64

Traditional model Innovations
As expected, innovation is happening outside of Banks

Banks, as intermediaries,
adds to the cost of borrowing and lending

Marketplace Lending is Disintermediating

Technology is an Enabler
Computers
Internet Access
Security
Authentication
Online Payments
Smartphones
Tablets
Cloud
Scalability
Cost of Deployment
Online View of
Financial Data
Online Banking
Mobile Banking
???

Cloud Lending
Open Lending Technology Platform – Cloud Lending!
FlexibleExtendable
Multi-tenant cloud

Origination Servicing Collections
Back office core Lending Technology
Cloud Lending helps you automate Lending

Front end
website
Marketplace Origination Servicing CollectionsUnderwriting
Back office Infrastructure Accounting CRM
API
HarMoney.com - P2P Marketplace
in New Zealand and Australia

Brick and
Mortar
CRM Origination Collections RecoveryUnderwriting
Accounting MobileBack office Infrastructure
Go Capital - Truck Leasing

Foundation Capital predicts Marketplace Lending
to be a trillion dollar industry by 2025

So, what’s stopping the Leasing
Industry from taking advantage
of this phenomenon?

Agenda
– Regulation
• Technology
• Q & A
75

Opportunities
 Enter alternative finance industry directly
 Provide referrals or join syndications
 Lend to or invest in alternative finance companies
 Join loan market places
 Use as a resource pool for talent
Opportunities and Threats - ELFA Companies
76

Threats
 Dominant small business lender
 Movement into middle market
 Visibility – viable and attractive alternative
 The technological curve
 Social Media
Opportunities and Threats - ELFA Companies
77

Final Thoughts
78

Agenda
– Regulation
• Technology
• Q & A
79

Agenda
– Regulation
• Technology
• Q & A
81

Thank you for Participating
Martin Klotzman
Martin.klotzman@ivorycc.com
Gina Mackenzie
Rapid Advance
gmackenzie@rapidadvance.com
Mukul Mittal
Cloud Lending Inc.
mukul@cloudlendinginc.com
Michael Rabil
Funding Circle USA
mike.rabil@fundingcircle.com
Scott Thacker
Scott.thacker@ivorycc.com
Charles Wendel
FIC Advisors, Inc.
cwendel@ficinc.com
82

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