More facilitator than disruptor: digital lender

David Gens of Merchant Advance Capital explains how his firm has thrived filling a void for small business lending

While it’s true that the vast majority of wealth in Canada still largely remains in Boomer and Gen-X hands, the rise of disruptive industries means millennials are now carving out a niche for themselves too. Vancouver native David Gens is one such example. The CEO of Merchant Advance Capital founded the company in 2010 having heard opportunity knock while working for private equity firm CAI Capital Management.

 “Through CAI, I learned a lot about the merchant advance industry, which was growing rapidly in the US at the time but was only a three-year-old industry in Canada,” he says.  “Awareness levels were very low – small business owners did not know there were ways of borrowing outside of banks. To me it screamed out opportunity.”

The firm had very few rivals in the space at the time, but plenty of potential customers. In this case, getting in at the beginning has proven a shrewd move.

“We started a limited partnership that was essentially a fund structure where private investors put their money in, then we made advances to businesses,” says Gens.  “That’s the same structure we use today. Looking back, our timing was really good because nobody was talking about fintech or non-bank lending, but it became a lot more mainstream since then.”

While disruptors may have been considered an irritation to the status quo in the previous decade, their rise since then means they can no longer be ignored. In fact, the incumbents are now looking for partnership in many cases, the banks and independent fintech firms a case in point. For Gens, he believes Merchant Advance isn’t so much competition for the banks, given the fact it serves a market mostly neglected by the large financial institutions.

“Primarily what we do is write business the banks won’t,” he says.  “Our two largest categories are food service and retail. There’s a ton of those small businesses and they also tend to lack the physical collateral the banks want to see. They tend to be businesses that have been around a while, 7–8 years, with an average annual revenue of $600,000.”

How then does the firm’s lending criteria differ from the banks, and how are safeguards put into place against bad loans? “The banks will look at credit score and physical assets at the small business level,” says Gens. “In our case we look at the thousands of loans we have had that have went full cycle and we can judge whether they were good or bad. We let the data speak to us on what is a predictable variable for credit performance.”

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