As founder W. Michael Short explained to WCBS 880’s Joe Connolly in this week’s Small Business Spotlight, SourceFunding.org took the framework from a dating app and repurposed it for small business funding. Connolly described the company as “a dating service for entrepreneurs looking for funding.”
Short and his team launched the national platform in order to provide a low-cost alternative to predatory lenders, which Short said “have just been growing and growing across the country in the last few years.”
He said the best lenders to work with across the country are low-cost community banks, which can lend at low rates and have the best interests of businesses in mind in a way that larger banks might not.
“There are about 14,000 of these community banks – the low-cost CDFIs; the credit unions, and what we’re able to do is for the first time, an entrepreneur can use our system. They’re able to log in and create their free profile; get organized; be able to see what information they need to have ready and prepared to be able to competitively pursue financing,” Short said.
The technology that SourceFunding.org has been developing allows it to be a matchmaking service between entrepreneurs and small banks.
“Inherent in this entire situation is a relationship – a relationship between the lender and the small business – and there’s really been a breakdown,” Short said. “And what we’ve been able to do is to integrate this really innovative technology to look at the needs and capacity and interests; the particular details of each business, and to be able to look at the lenders across the country, and to be able to find that match – which would be the great match – and sometimes it’s multiple matches.”
Short shared one example of a contractor who was looking for funding for a project and ended up getting taken advantage of. The contractor was a flooring company that has a multimillion-dollar contract for the flooring in an airport expansion and renovation project.
“She took on this loan from a predatory online lender. She thought to herself: ‘Great, wow, I can get this funding from this online lender. I’ll get the money the next day. It’ll go right into my account. Perfect – what could go wrong?’” he said. “Well what went wrong is that the interest rates are sky high, and it’s something between 60 and 70 percent. She didn’t expect that. The fees just were not transparent at all.”
Short said SourceFunding.org can rectify such a situation by refinancing the high-interest debt – finding lenders so she can get the debt off the books and bring the interest rate down to a reasonable level of more like 9 or 10 percent. And the bank matchmaking service can match entrepreneurs or contractors with banks located anywhere in the country – often in places one might not expect.
“How are you going to know that the small community bank in southern Kansas is, you know, rip-roaring and ready to go to expand; they want to do a project in New York and what have you – you’d never know to go talk to that bank, or that credit union, or what have you – all throughout the country,” Short said.
Short said very intelligent people often fall into toxic relationships with predatory lenders offering high-interest loans – even if they do all their due diligence and study up.
"I mean, you go on Google, you go online, and you’re searching for your loans or what have you. Most of these businesses, they go to one bank, they talk to them, they apply. It takes 33 hours for one application. On average, they go to three. That’s almost 100 hours wasted on this paperwork – and a lot of times, it’s the same paperwork over and over,” he said.
SourceFunding.org streamlines the process – offering a list of matches with details on each one to connect clients to the right lender.
“There’s more manual consulting process. But with the technology, the real long-term goal is to have this completely automated. So in the next week, we’re rolling out some new features whereby all that information that we’re talking about that would be helpful for the business to have, they are now going to be able to get it right within their profile – here are top lenders, here’s the information, here are the forms; auto-populating the forms – boom, ready to go,” he said.
Much of SourceFunding.org’s customer base so far is word-of-mouth, but the company also has a network of university and community college partners, Short said.
The company has multiple charging models to make money.
“One model would be if they’d like the complete service; if they need somebody to be helping them along the way or what have you, that’s 7 percent,” Short said. “Now, 7 percent sounds like a lot. But if you factor that in, an equivalent in interest rate – so say, you know, 60 to 70 percent in terms of this predatory online lender. Say we’re able to connect you with a community bank – it’s 8 percent. Well, an equivalent rate – it raises your rate to like 11 percent. Eleven percent – a lot better.”
But SourceFunding.org is transitioning away from percentage fees, and is moving toward an annual fee. Customers set up a profile for free and enter their information, and once they begin using the service and looking for the right bank among their matches, they pay an annual fee of less than $100, Short said.
SourceFunding.org can afford the low price because it is all about volume.
“There are a lot of small businesses in this country. They are the backbone of this country. Eight thousand small businesses are declined for credit every single day,” Short said. “About 3,000 of those businesses are credit-worthy, meaning they simply apply to the wrong place. They wasted their 100 hours to apply and fill out all these forms, and they’ve taken away from their business and they’re wasting all this time – no. No more.”
Short explained that he licensed the technology of a well-known dating company to create his matchmaking service for entrepreneurs and banks.
“We have an exclusive global license on the baseline technology, with a well-known dating company,” he said. “You know, we might not want to reveal it.” Short said the relationship benefits both SourceFunding.org and the dating company, which earns revenue and tests the use of its technology in different sectors.
The smaller community banks that SourceFunding.org matches up with entrepreneurs in need of funding also benefit tremendously. He noted that the small banks are often nonprofits without a huge marketing budget, while predatory lenders have large marketing budgets and advertise everywhere.
“(The community banks) love us. That’s how we’ve been able to develop this network,” Short said. “They’re not having to pay for this qualified, vetted pipeline of applicants. They love it. They’re high quality. They’re not having to waste time, and what have you, in terms of identifying, and they can do what they do best.”
Short explained that SourceFunding.org itself is not a nonprofit, but a “social enterprise.”
“Social enterprise is simply saying that we’re taking the ethos of philanthropy and the market-based approach of capitalism and merging those, so we’re able to have this market-based approach to solving this huge problem in this country,” he said.
