Al Goldstein, a Chicago entrepreneur who
put payday lending on the Internet with Enova International Inc., has launched a new company making larger online loans to consumers whose credit is dented but not totaled.
Mr. Goldstein, 32, who
made a fortune with two Chicago-based startups catering to low-income consumers, has raised $10 million from a Silicon Valley venture-capital firm to start
AvantCredit Corp., based in Chicago's River North neighborhood. AvantCredit began making loans online of up to $10,000 in January.
Mr. Goldstein also has secured $2.5 million in equity and $25 million in debt financing from Chicago-based alternative investment firm Victory Park Capital. AvantCredit, which hopes to generate $50 million of loans this year, so far has lent $3 million. It employs 23 and could have as many as 100 employees in Chicago by year-end, he says.
In the next five years, the firm hopes to build a loan portfolio between $1 billion and $2 billion.
Mr. Goldstein and his team of 20-something execs at AvantCredit, recruited mainly from Chicago-based Enova, see untold demand for credit among middle-class households with credit ratings just below prime. That population, aggressively served in the past by credit card companies and brick-and-mortar lenders like Prospect Heights-based Household Finance Corp., today is lacking as many loan sources.
“In the subprime space, there's been a lot of innovation,” Mr. Goldstein says. “There really hasn't been in the near-prime space.”
Analysts who follow companies offering unsecured installment loans to consumers say Mr. Goldstein is right to think that demand for those loans is outstripping supply. “At the end of the day, the credit card companies aren't serving customers in that segment,” says John Hecht, an analyst at investment banking firm Stephens Inc. in San Francisco. “The large installment loans—there's been tremendous demand for them.”
YOUNG ENTREPRENEUR
Mr. Goldstein's track record was key to securing $10 million from Menlo Park, Calif.-based August Capital to launch AvantCredit. Born in Uzbekistan, Mr. Goldstein
started his first business, an online payday loan outfit then called CashNetUSA, at age 23. He invested part of the $70 million he cleared after selling it into
creating Pangea Properties, a real estate investment trust that's grown to more than 8,000 apartments in low-income neighborhoods of Chicago, Indianapolis and Baltimore.
Co-founder John Sun, whom Mr. Goldstein lured from Enova to run AvantCredit day to day along with co-founder Paul Zhang, says the company is targeting middle-income households with credit scores between 620 and 720—just below prime. Circumstances that cause consumers to register below-prime credit scores include not paying bills or making late payments, selling a home at a price below its mortgage or having a limited credit history.
Interest rates range from 35 percent to 95 percent a year depending on where borrowers fall on that credit spectrum. Loans are payable over one to three years.
Still, AvantCredit is no sure thing. There are significant risks in making large loans over the Web. One is the need to give consumers a quick and easy way to apply for loans while determining whether they will repay them. Another is getting repaid. Unlike payday lenders that automatically withdraw payments from customers' bank accounts, borrowers using AvantCredit make monthly payments, online or via the U.S. mail if they wish, just as they would with a bank.
AvantCredit is putting its faith in its ability to quickly access all kinds of public information about an applicant and crunch numbers to get a reliable gauge on how likely a person will be to pay back the money.
“Fraud is a huge risk,” Mr. Goldstein acknowledges. “You're not seeing a customer face to face.”
A potentially bigger risk is one that ultimately
forced Household in 2003 to sell for cheap to London-based banking giant HSBC Holdings PLC: loss of financing. (Six years later,
HSBC exited Household's branch-based lending business after suffering punishing losses.) Once non-bank lenders like AvantCredit are established, they depend on loans from big banks or the public debt markets to finance their loans. Loss of confidence in a lender, for whatever reason, quickly can jeopardize future funding.
“It's going to depend on performance,” says W. Eric Carlborg, general partner at August Capital. “If the business continues to grow, we're going to continue to be substantial investors.”
