Denise Thomas, CEO of ApplePie Capital, first met with Tradestreaming earlier this year. We sat down with Denise to catch up on the state of her business, drill down on what’s working for the marketplace lender to get a view on where she’s taking the business in 2016 and beyond.
What is ApplePie Capital?
ApplePie Capital is a marketplace lender that focuses exclusively on the franchise market. We follow in the footsteps of other marketplace lenders such as Lending Club, Prosper, and SoFi, who have transformed the way consumers access loans online. We are bringing this efficiency, speed, and flexibility to franchises businesses across the US. And for investors, we are opening up a new asset class of franchise debt, which has never really been accessible in a scalable way before.
What’s your background — why did you start Apple Pie?
Throughout my career, I have been passionate about increasing access to capital and creating new asset classes for investors, something I achieved as an executive at multiple companies prior to ApplePie. While researching needs in the small business loan market, I found out how difficult it can be for franchise owners to obtain the capital necessary to buy or improve a franchise unit — even though franchises are far more likely to be successful than your average small business.
There are nearly 800,000 franchises operating in the US, and it’s estimated that 1 in 20 working Americans–over 8 million people–are employed through the industry. I founded ApplePie Capital because I believe in the potential of the franchise industry, and I want to fundamentally democratize access to the capital markets so that individual entrepreneurs can gain access to the capital they need to be successful. And, I believe this is an excellent fixed income offering for investors.
How do franchisees normally get funding? Is there an inefficiency in the market?
Many people don’t realize just how big of a market franchises represent. There’s an annual capital demand of over $45B. To date, that financing has been mostly through traditional banks and SBA loans and 401k rollovers. Since 2008, the banks have moved upstream with their lending activities, and have been doing less and less originations of under $1M. For them, the cost of originating a loan of $200k is the same as $2M and their processes are slow and inefficient, so there is little incentive for them to focus on smaller loans.
And SBA loans, which are loans that banks issue that are backed by the government, entail a ton of red tape and overhead and require a borrower to pledge their personal real estate and other assets as collateral. For borrowers the SBA is a nightmare. We hear horror stories every day about the inefficiencies of the SBA process. We are providing an alternative for high-quality franchise brands and their franchisees that bypasses those headaches.
What’s the investment case on the investor side? Why is investing/lending to franchisees a good idea?
Well it’s really all about investing in the right franchise brands and the right borrowers. And that’s why our proprietary credit model and underwriting process are so important. We have spent the last two plus years immersed in the franchise industry, examining the data, and understanding these businesses inside and out. Franchising is all about systems and replication – the best brands have proven systems that make it easy for franchisees to achieve success. They also know what kind of people make successful franchisees in their system, and what types of locations work. The brands serve as a great initial filter for us on borrower and site quality.
We partner with established brands that have these systems in place, and that meet our rigorous requirements on historical success. We take the brands through an intake process where we get to know what a typical unit looks like, and how long it takes to get the business to cash flow positive, and how much capital it takes. This is a real differentiator for small business lending – with ordinary small businesses, you don’t have this depth and breadth of predictive data.
Once we partner with a brand, they direct franchisees looking for capital to us. Since we know so much about the business model, we can really accelerate the time to money, funding in 30 days or less. For borrowers, their credit profile and experience factor into the rate we offer. And our borrowers are very attractive on both of these factors. The average FICO of our borrowers is about 725, and the median net worth is $2M. We see a high percentage of multi-unit owners with deep franchising experience.
For investors, this means high quality loans with attractive yields. We’ve already raised about $45M in capital commitments, and continue to receive interest from institutions and family offices.
How does an investor size up potential investments? What should they be looking for in making an investment in a franchise?
It’s our belief that the brand is the most important element in sizing up a loan investment. We have 25 partner brands signed so far, seven of which have never experienced a closure in their system. This type of diligence on the brands is invaluable for investors looking to invest in franchise debt.
We list loans on our marketplace where investors can research the brand, the borrower, the use of funds, and the location. We also have a proprietary ApplePie rating system that considers these factors, and we place a rating on each offering that we display to investors.
As with any asset class, a good risk management strategy is to diversify. We just launched an Automated Investing program where accredited investors can easily create a diversified portfolio of loans for as little as $1,000 per loan.
Can you give us an example of a past deal? What was the franchise? How much did they borrow ApplePie? How many investors were in that deal?
Just last month we funded a $250,000 loan for a brand new Marco’s Pizza outside of Salt Lake City, Utah. The loan was funded through our marketplace, where ten investors invested in fractional shares of the offering.
Marco’s is the fastest-growing pizza delivery company in the U.S. with over over 570 units in 34 states. The borrower has a great credit profile and track record, having already opened and successfully operated two other locations. He considered financing the unit using his own cash flow but ultimately decided he could get more leverage by partnering with a financial institution.
However, not only did customer service at his local bank leave a lot to be desired, they took nearly two months to get back to him about a loan. He wasn’t impressed, and he didn’t have time to wait around, so when he heard about ApplePie from Marco’s corporate, he jumped at the opportunity to work with us.
What are the profiles of your investors? Who should find this type of investment interesting?
Our investors range from institutions who prefer to buy whole loans, to family offices and high-net worth investors who invest in fractional shares on our marketplace. We’re also receiving significant interest from investors who are looking to invest with self-directed retirement assets. Our projected yields are attractive compared to what you’re seeing in treasuries or high-quality corporate debt. Our offerings have been prequalified by PENSCO, the largest self-directed IRA provider, so investors with them can easily get started investing with us.
What are your future plans for the marketplace? Ramping the supply and demand? Will you move into different parts of the value chain?
With marketplaces, you are always balancing supply and demand. We have a strong advisory board who makes introductions to brands and now that we have been in the industry speaking on this alternative lending option, we receive a lot of inbound inquiry. We will continue to sign brands that exhibit good historical performance, and each brand we sign increases the pool of potential borrowers, many of whom are multi-unit operators who we have the opportunity to repeat business with.
On the capital markets front, it’s a multi-pronged approach and we are just scratching the surface. As our portfolio gets more seasoned over time, we will see a broader swath of institutions interested in participating, including the banks that we are starting to displace today. And the marketplace momentum can’t be underestimated either – we are actually seeing investors who are from the franchise industry. They know the brands and like our approach, so that has been very validating for us.
As for moving into different parts of the value chain, since we are building such strong relationships with our brands, we discover all kinds of new opportunities where we can add value. We are really at the beginning of what we think will be an amazing journey.