IOU Financial is an Internet-based lending platform for owner-operated businesses, mostly mom-and-pop storefront retail, restaurants and hotels, medical and dental practices, and eCommerce companies.
One of the company’s more attractive features, said StableView president and portfolio manager Colin Fisher during his introduction, is that although IOU plays mainly in the small-business loan space, it is “a pure tech play”.
As Fisher also points out, while IOU has been pursuing a path of non-profitability for several years, the company is about to break into profitability in a serious way, owing to the fact that its cost of access to capital is now substantially reduced and is likely to become more so.
When IOU sells its loans on to third parties, it takes a spread, further lowering cost to capital to the point now where legitimate and large banks are now talking to IOU, which further reduces the cost of borrowing.
To illustrate his point, Fisher points out that IOU has come from a position of -38 return-on-equity to a point where they are nearly ROE positive with an upward trend in its future.
IOU was named the #1 fastest growing Financial Services Firm by Canadian Business and PROFIT.
As you’ll notice on their home page, IOU Financial has a partnership with Kevin O’Leary, which is mainly a celebrity endorsement for IOU marketing purposes.
IOU’s lending and approval process is automated, with an accurate real-time assessment system that prioritizes day-to-day cash flow trends.
The company has developed its own proprietary credit rating system to facilitate the approval process.
“Every time someone applies for a loan,” says Marleau, “we download thousands of data points and develop a customized credit score that allows us to approve or disapprove the loan in real time.”
Companies can apply for six, nine or twelve month loans, which are personally guaranteed by the applicants through a guaranteed security agreement (GSA) and are paid back on a daily basis over the course of the loan directly from the borrower’s bank account.
Average size of the loans is $40,000-$50,000, fully liquidating, fully amortized, risk-based calculated and mainly employed as working capital.
Approximately one third of customers renew and take out an another loan.
IOU Financial primarily sees itself as an alternative to the banks.
“Since 2004, banks have effectively retrenched from small-business lending. Meanwhile, the SME space has bloomed, leaving an enormous funding gap, where banks are increasingly reluctant to serve any loan under $250,000.”
How big is the market? Marleau claims that the observable market is $160 billion, with unmet or hidden demand representing an additional $80 to $100 billion.
IOU’s run rate is about $200 million per year, or about $45 million per quarter.
They generated $45 million US during Q3 2015, representing a year-over-year 108% increase. Loans originated in the first three quarters totaled $110.1 million.
The company is divided into two segments: Lending and Servicing. Their retail channel launched nine months ago.
The Lending segment is responsible for the loans receivable portfolio, which originates and retains loans.
The Servicing segment services loans that have been sold to third-party purchasers on a non-recourse basis in exchange for a servicing fee.
It has offices in Montreal and Atlanta, Georgia, with staff spread two-thirds in Georgia and one-third in Montreal.
The Montreal office is more tech and analytics focused while company operations are primarily in Georgia.
For customers logging in to their dashboard, the back end infrastructure is fully integrated, showing statistics relating to their loan and status.
For IOU Retail, the platform displays various details, such as an individual borrowing company’s cash flow, a Google Street View picture of the storefront, and general metrics related to the health of the business.
Larry Summers met with IOU at a conference in Atlanta and told them, “Small businesses have an opportunity to capture 70% of overall market share.”