[HN Gopher] Launch HN: Level (YC S21) - Flexible financing for e...
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Launch HN: Level (YC S21) - Flexible financing for early-stage
lending startups
Hey Hacker News, We're Vlad, Molly, and Asa from Level
(https://trylevel.app/). We allow lending companies to trade their
loan receivables into upfront working capital that gets them off
the ground and grows with them as they scale. Building a lending
company is challenging because it requires a lot of capital to get
started. You need lending history to access capital, but you can't
access capital until you have a history of lending. To get around
this, founders traditionally raise a large dilutive equity round
and then lend off their balance sheet, or they find a family office
or credit fund willing to offer a loan, which usually comes with
high interest rates, warrants, and covenants. Even once your
company succeeds in reaching the scale necessary to secure a
traditional loan, the process takes at least 3 to 6 months and
costs >$100k in legal fees to set up. We didn't think to work on
this problem until it came to us. During a process of pivoting from
a different business, a lot of fintechs were asking for help with
raising debt from our CEO Vlad, who was a venture debt banker at
Silicon Valley Bank (SVB). Vlad provided connections to traditional
debt providers, but these startups were turned down because
traditional debt providers don't work with pre-seed or seed stage
startups--the deals are just too small. Since a lot of these
startups were showing solid progress, and were being turned down
for reasons having nothing to do with how good their business was,
we decided that this was a good problem to tackle. Also, companies
like Pipe and Capchase turn MRR receivables into upfront capital
for companies with recurring revenue. It seemed to us that the same
principle could be applied to the loan receivables of lending
companies, where the problem is even more painful. Our solution is
to purchase loans that lending startups have originated at a
discounted rate, then forward the customer's loan payments to Level
as they come in. If you are familiar with financial arrangements,
it's similar to a forward flow agreement
(https://www.finleycms.com/what-is-forward-flow). It's different,
though, in that we calculate the discount of purchasing loans by
integrating directly into a company's ongoing bank balance and loan
performance. This enables companies to get a lower cost of capital
as they become a stronger lender and more stable business. We
integrate with a startup's banks via integrations similar to Plaid,
making it possible to track the company's cash position and burn
rate. In addition, we integrate with their loan management system
to watch loan performance over time. In the event of default or
prepayment, the company can buy back the non-performing loan or
substitute in a new one. We allow a startup to sell more loans as
its loan book grows and becomes more predictable, providing a
flexible alternative to costly warehouse facilities. We make money
by buying loan receivables at a discount from the total value of
the receivables we collect. If lending startups get better access
to capital at the earliest stages, more companies will enter the
market and drive competition based on the merits of the financial
services they provide. This is good for existing borrowers and
opens up new finance options for the underbanked and unbanked.
We're building Level so that innovative founders can responsibly
scale up a lending business without traditional constraints. We'd
love to hear the community's ideas, experiences, and feedback so we
can do our best on this problem. Thanks!
Author : jetblowfish
Score : 34 points
Date : 2021-08-24 17:26 UTC (5 hours ago)
| stevesimmons wrote:
| Does this imply you expect to fund 100% of the loan book? Or
| dynamically assign individual loans between Level and other debt
| funders?
|
| (I spent a period as CRO of a fintech lender... As our loan book
| grew, much of our energy went on managing the various debt
| covenants. They made sense for a steady-state portfolio, but were
| a real impediment to profitable growth... Please do reach out if
| you'd like to talk further; my email is in my profile).
| designium wrote:
| It's great to see more startups in this space. I created a
| factoring product and now focusing on Buy Now Pay Later.
| mritchie712 wrote:
| Cool, but who's lending to you?
| jetblowfish wrote:
| Good question. Right now we are building customer empathy
| feeling the challenge of starting a new lending business.
|
| The choices for us are similar to the customers we serve.
| Either we: 1) lend off of our balance sheet 2) sell equity of
| the company to power more lending 3) prove a longer track
| record for traditional debt providers to do a larger debt deal
| 4) open up a marketplace so that debt providers can use Level
| to invest in alternative assets that they might not otherwise
| have access to
|
| We're going to be exploring a collection of these techniques to
| see what can be a scalable source of capital for both Level and
| the customers we serve.
| nkmnz wrote:
| Is there a way to short such a business model? Don't get me
| wrong: I wish you every success in this world, I want neither
| yourself, nor your business partners to go bust. Still, I think
| lending to lenders is a high risk business and susceptible to
| even the tiniest liquidity shortages in the money markets. We did
| not see any liquidity problems for more than 10 years, so
| shorting this would be a good hedge. Good luck, though!
| likecarter wrote:
| You can't really short private companies...
|
| But in a liquidity crisis, everything will get hurt. Banks will
| be hurting the most.
|
| Buy puts on banks or even SP500 if you want a hedge.
| manishsharan wrote:
| "The stock market can remain irrational longer than you can
| remain solvent." -- Keynes
| foreigner wrote:
| I need this but for using prepaid debit cards. Anybody have any
| recommendations?
| vkorshin wrote:
| We've had a few companies reach out for support with short
| duration loans for various card products. We're running a pilot
| currently to see if it works. I don't think there is a great
| early stage solution for this problem yet but please let me
| know if you find something.
|
| Would you mind emailing me at vladimir@trylevel.app?
| moritonal wrote:
| Out of curiosity, why Level? You're the second up-front cash-flow
| company called Level I've heard of. Is it a market term?
| jetblowfish wrote:
| Coincidence, most likely. We joined as a team and decided on
| the company name Level when we were working on an entirely
| different business.
|
| We liked the name because it seemed very versatile, which has
| proved to be the case as we've refined our business.
| lquist wrote:
| How does this become big? As soon as your customers hit ~$10M in
| annual lending volume, it makes much more sense for them to go
| direct and cut you (and your fees) out.
| jetblowfish wrote:
| Good question. We've so far noticed that going direct can still
| be a painful process, where deals can take a long time to close
| (3-6 months) or take a lot of legal fees ($100k+). We've also
| seen that companies lending at a larger scale are still trying
| to diversify their source of capital.
|
| This is definitely a challenge we will face as we continue to
| try and serve larger customers and are hopeful that by focusing
| on having integrations into financials and streamlining the
| process, we can make Level the first choice of capital even as
| customers hit larger lending volumes.
| MattGaiser wrote:
| Is there reason to be a lending company for other lending
| companies rather than just lending directly and using the
| innovative founder types as franchisees of a sort?
| jetblowfish wrote:
| When lending to an end borrower, a lender is often focused on
| their ability to underwrite the borrower to understand the risk
| of the loan.
|
| We think it's very unlikely that Level could become the best
| underwriters of all the different types of borrowers in the
| world by lending directly.
|
| Instead, the most innovative founder types in the lending space
| are often finding creative ways of using non-traditional
| sources of data or underwriting techniques to be able to lend
| to borrowers that otherwise may be left underbanked or
| unbanked.
|
| So hopefully, by lending to lending companies, Level opens the
| door to new ways of thinking that we ourselves may have missed.
|
| But you make an excellent point that there could be different
| flavors of the Level platform that could enable the same end
| result of allowing innovative founders to explore new ideas.
| gsibble wrote:
| Why not just sell default swaps to smaller lenders? That
| would probably open up that market significantly.
|
| The solution you are presenting is overly complex.
| temuze wrote:
| Cool idea! I wish you guys existed a few years ago.
|
| What loan management systems do you integrate with? They can all
| be so wildly different that normalizing over all of them is a
| great accomplishment.
|
| Being a marketplace for lenders to credit warehouses could be
| neat. You can get data from the LMS, normalize it, show a bunch
| of credit warehouses at the same time, and see who offers the
| best deal. That's a cool vision because it means you could scale
| with your companies.
|
| It's also WILDLY different from Pipe because lending is so damn
| specialized.
|
| That said, I would be afraid of getting cut out at scale. Not
| sure how to protect against that. You can't really anonymize what
| company it came from because high performing companies would get
| punished and bail out.
|
| Hope you kick ass! Great idea.
| vkorshin wrote:
| You know the space well and it seems like you get the vision.
|
| We've found little overlap between customers in terms of LMS.
| Most use spreadsheets or build something in house. I imagine
| this will change in the coming year or two.
|
| BTW, if anyone wants to build a universal LMS or a Plaid for
| LMS I think it's the right moment.
|
| We've had investors ask why Pipe doesn't just do this and we
| respond with, because it's a just a different beast. We
| currently have a fairly broad funnel but we'll be specializing
| more during this next growth stage.
|
| Retaining companies as they scale will be an issue,
| particularly at first. Once the software and marketplace are
| robust, we'll be able to go much further with our customers.
|
| We're trying to avoid lock-in mechanisms like ROFRs and
| warrants. The product is either efficient and founder friendly,
| or it is not.
| temuze wrote:
| For LMS, we use LoanPro: https://loanpro.simnang.com/
|
| Canopy is a recent new entrant: https://canopyservicing.com/
|
| Using a vendor for LMS added some complexity (integration is
| a pain, idempotency is a concern, etc), but it helped us
| focus on things that differentiate our business. We certainly
| wouldn't have launched five months after founding without
| one.
|
| I've talked to some startups that built an in-house LMS. The
| moment a payment reverses or someone backdates a payment or
| they backdate a loan change or modify a due date... they have
| big problems.
|
| > We've had investors ask why Pipe doesn't just do this and
| we respond with, because it's a just a different beast.
|
| Next time they ask, ask them why Google's VC branch doesn't
| just take their deals :)
|
| It's astonishing to see how some investors don't realize how
| deep of a field lending is.
|
| > We're trying to avoid lock-in mechanisms like ROFRs and
| warrants. The product is either efficient and founder
| friendly, or it is not.
|
| Nice. Godspeed!
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(page generated 2021-08-24 23:01 UTC)