It’s becoming an increasingly popular alternative lending story: a graduate from a top business school wants to start a business but is so deep in student debt they can’t. Recent stories in the Financial Times and CNN.com point out the trending solution: alternative lending products like Pave and Upstart offer people funding now in exchange for a percentage of their future income. The same principles used by these high profile companies are also creating opportunity for working Americans who did not attend business school. Cumulus Funding, LLC, a leader in Future Income Exchange loans, has recently completed its Series B capital raise, with plans to expand into 7 new States in 2014. The funds are being deployed to increase sales and marketing efforts, as well as customer service efforts that provide expert guidance to applicants.
Jeff Jones, Managing Director, Investment Banking, Sandler O’Neill + Partners, L.P., said, “Most of the discussion out in the marketplace focuses on the student and entrepreneur segments of the market. We need to continue to think about how best to increase the unique opportunity of alternative lending to a massive market segment – the under-banked consumer”. Mr. Jones is also a Board Member of Cumulus Funding, LLC.
A USA Today article last November pointed out that some lending companies are headed in that direction. This story reported, “Upstart, founded by former Google executive Dave Girouard and Thiel fellow Paul Gu, lets investors give money to entrepreneurs in return for a percentage of their future annual income, usually over five to 10 years. Other firms, including Pave and Cumulus Funding, are also doing this through what’s known as personal income contracts or income share agreements.”
For those unfamiliar with the alternative lending landscape, Upstart was set up in 2012, and is based on a closed crowd-funding model where investors review the business proposals of recent biz school grads and offer to pay off their loans in exchange for an agreed percentage of their salary for a required period, usually 10 years.
Upstart was established by former Google employees, and rival Pave was set up in 2012 in New York by two ex-Goldman Sachs veterans. In 2002 Miguel Palacios, an assistant professor at Vanderbilt University, co-founded Lumni to use human capital investing to help young people from low-income families in Latin America attend college. “Loans are a bad tool for financing education,” says Prof Palacios, who is a specialist in asset pricing. “This is particularly true for students from families with low resources. It has a big impact if you have someone who cannot go to university because it is too risky.” Since 2002 Lumni has grown from four students to more than 5,000.
Cumulus Funding, founded in 2011 by former Investment Banker Nathan Popkins, frames alternative lending in terms of a Future Income Exchange created to help working men and women. Popkins commented, “Though companies like Fantex, Pave, Upstart and Cumulus are all using this product to address very different markets — ranging from highly paid professional athletes to the everyday consumer who needs access to funds — this form of investing in individuals fundamentally aligns the economic interests of those seeking funding with those providing the funds. We think, for that reason, this structure is a marked improvement over a loan.”
“One significant difference between traditional bank loans and new lending products such as Cumulus is that if you don’t have income, you don’t owe anything,” said Chad Meyer, Managing Partner, HedgeAct and Board Member, Cumulus Funding.
Pave, Upstart, Lumni and Cumulus are all excellent companies with social entrepreneur/founders and a promising future based on growing businesses. Rob Topping, Managing Partner, Topping Capital and Cumulus investor added, “The big differentiator is the market segment that Cumulus serves–American Workers. There’s giant opportunity out there to be captured for American workers which Cumulus has shown can be realized today”.