Evan Baehr and Will Davis got a second chance from their investors.
After the entrepreneur's doomed digital mail app Outbox was shut down in 2014 thanks to spiraling marketing costs and the opposition of the U.S. Postal Service, the two Austin-based, Harvard Business School-educated founders went back to their investors and offered to give back the money they still had left over. Their response: "Just keep building," Davis told BuzzFeed News.
Baehr's and Davis' new product, called Able, has nothing to do with Outbox (a short-lived service that digitized users' snail mail and emailed it to them), and starting Tuesday it will be available in most of the country.
Able is a collaborative business loan service in which the borrowers' friends, family, and other associates contribute up to 25% of the loan amount, and the remaining 75% is paid by Able, which sells off its portion of the loan to investors. Both the lender and Able collect interest. The loans in total can be as large as $500,000 with terms of up to five years.
Able's portion of the loan gets paid off faster than the other backers', and Able handles servicing the loan for everyone who participates in it.
Starting Tuesday, Able, spurred on by a $6 million funding round led by Blumberg Capital and RPM Ventures, will be lending in 40 states and the District of Columbia. Able has been operating for about a year in Austin only.
There's a fast-growing industry of small-business lending done by companies that aren't banks, fueled by venture capital investors pouring money into the companies and investors who then buy up the loans. OnDeck, a small-business lender that went public late last year, has originated over $2 billion in loans, while Funding Circle, a U.K.-based startup, has raised over $270 million in venture capital and made more than $1 billion in loans.
While there are mechanisms for individuals to buy equity in a company, there are not many tried-and-true ways for them to lend money to a small business. "Think of it as an AngelList for debt," Davis said. "We have built a new structure of a loan that lets us make lower interest loans to fund growing small businesses," Baehr said.
Unlike lenders that evaluate borrowers largely using algorithms and then make loans with high rates, Able's founders say the formal participation of the business owners' associates can help keep rates down — business owners are more likely to pay back their friends. Able also tries to connect borrowers and lenders with each other through what they call the Able Network.
Average annual rates run between 8% and 12%, Davis said. Compared to other startups, loans from Funding Circle can have percent rates in the low twenties (the average annual rate is between 14% and 16%), while the annual rate on OnDeck loans can get up to around 50%.
"We're filling a void in the marketplace and the only reason we can do that
is because of the model," Davis said.
Able loans, however, do not come as fast as some of the faster growing online lenders. While Able's founders say they can underwrite loans in two days, they say the fastest they've gotten a loan out with backer participation is 10 days. Funding Circle, in contrast, says they can get loans to customers in five business days. With some online lenders, Davis said, "you get funding in two days but you pay 50% APR."
One of Able's Austin-area customers is Hops & Grain, a brewery that opened in 2011, selling canned craft beer. At the end of 2014, founder Josh Hare decided he needed newer equipment — until then, he had been investing in the business with its available cash.
"I had this really romantic vision of just walking into a bank and saying, 'Hey we need this very expensive stainless steal equipment,'" Hare said. "All of those dreams were completely crushed when I met with a commercial bank."
Hare learned about Able from one of his initial investors. "It's a neat concept of nontraditional lending," Hare said. "I liked the concept of the borrower bringing a portion of funds through backers. It was a little more real than just going to the bank; there's more responsibility on my end."
Hare approached Able toward the end of 2014 and was able to recruit backers for the loan in a week. He got $250,000 with a 10% interest rate on Feb. 1 to fund expanding the brewery's hospitality room, including new furniture and a new bar. "We made that space comfortable so it feels like you're in a brewery but not in the middle of a hot warehouse," Hare said. They also bought new fermentation tanks to increase the brewing capacity by 40% and use less water.
Hare's problem seeking a traditional small-business loan was similar to one faced by many other small-business owners, especially as banks cut back on riskier activities. "Our revenue is growing, still, not at a place where we can submit financials to a bank and they say it will look good," Hare said.