Excerpt from "Community Banks Seek Alternatives to Aid Small Business Clients"
By Jackie Stewart, American Banker
Jan. 8, 2014--Most community banks want to lend to small businesses, but many of those potential clients are unable to qualify for traditional financing.
In an effort to keep such customers happy, some community banks are working with alternative lenders that provide small-dollar loans to businesses. But bankers must be mindful of the potential regulatory and reputational risk tied to referring clients to outside firms.
Default rates should be reasonable, says Brendan Ross, who runs a hedge fund, Direct Lending Investments, that buys loans from firms such as IOU Central and QuarterSpot. Ross generally buys loans that mature in a year or less with interest rates ranging from 15% to 40%. Default rates usually run from 6% to 8%.
"Banks should find a company that does business like they would if they were in the business of making semi-collateralized small loans," Ross says. "The lender should feel sort of like a bank in the most respectful sense."