Credit Ratings and Alternative Lending with Cato Pastoll | E011
Understanding business credit.
Summary:
In this episode of Financial Planning for Canadian Business Owners, Jason Pereira, award-winning financial planner, university lecturer, writer, and host interviews Cato Pastoll, CEO at Lending Loop, an alternative lender to small businesses. Cato Pastoll talks about personal and business credit ratings as well as his work at Lending Loop.
Episode Highlights:
● 00:39 – Jason Pereira introduces Cato Pastoll.
● 01:00 – Cato Pastoll describes who he is and what he does.
● 01:50 – What are personal credit scores, how do you get them, and what impacts them?
● 05:50 – What is a healthy credit utilization amount?
● 08:48 – Payday loans can hurt your credit more than loan-term bank loans.
● 09:38 – What are the differences between a soft hit and a hard hit to your credit score?
● 11:31 – The length of your borrowing history also affects your credit score?
● 13:18 – What advice does Cato have for people to maintain a good credit score?
● 15:53 – Check for errors on your credit report.
● 16:30 – Have accounts and credit cards with different banks and lenders.
● 18:23 – What goes into a corporate credit score and how does it differ from personal credit scores?
● 21:20 – What is firmographic data?
● 22:32 – Businesses that have liens against them represent risk to lenders.
● 26:15 – Collections and judgements do come into play on corporate credit scores.
● 28:43 – Lending Loop is the first of its kind in Canada.
● 31:22 – Lending Loop helps businesses establish credit and sources of financing.
● 32:27 – How do they onboard people and provide them with information on quotes?
● 34:50 – Lending Loop is handling loans from anywhere between $5000-$500,000.
● 35:14 – Their interest rates range from 5.9%-26.5%.
● 36:33 – How much can lenders offer a business and what is the process?
● 38:38 – Cato Pastoll discusses Lender Loop’s proprietary risk score.
3 Key Points
1. The 5 factors that impact your personal credit score are payment history, utilization amount, credit history, inquiries, and the length of your borrowing history.
2. Set up pre-scheduled credit card payments to prevent being late.
3. Keep credit utilization under 35%.
Tweetable Quotes:
● “Lending Loop is an online marketplace lending platform. What we do is connect small businesses that are looking for an affordable source of financing with investors that want to lend money to their businesses.” – Cato Pastoll
● “Being diligent with your payments, it’s not just going to help your credit score, it is actually going to help when lenders or other people look at your credit report. Is this someone who is reliable?” – Cato Pastoll
● “A lot of business owners when they get started will either borrow against their personal home equity or they will borrow on personal credit cards, and that actually doesn’t necessarily benefit their business credit.” – Cato Pastoll
Resources Mentioned:
● Facebook – Jason Pereira’s Facebook
● LinkedIn – Jason Pereira’s LinkedIn
● FintechImpact.co – Website for Fintech Impact
● jasonpereira.ca – Website
● Linkedin – Cato Pastoll’s Linkedin
● lendingloop.ca – Website for Lending Loop
● getloop.ca – Free Personal and Business Credit Scores from LendingLoop
Full Trancript:
Speaker 1: Welcome to the Financial Planning For Canadian Business Owners Podcast. You will hear about industry insights with award winning financial planner and entrepreneur Jason Pereira. Through the interviews with different experts, with their stories and advice, you will learn how you can navigate the challenges of being an entrepreneur, plan for success and make the most of your business and life. And now your host, Jason Pereira.
Jason Pereira: Hello and welcome to the Financial Planning For Canadian Business Owners Podcast. I'm your host Jason Pereira. Tonight's show, I have Cato Pastoll, CEO of Lending Loop. Cato came in for a conversation today about personal and business credit ratings, as well as talk about what he does at Lending Loop, which is an alternative lender to small businesses. And with that, here's my interview with Cato. Hello Cato.
Cato Pastoll: Hi Jason. How you doing?
Jason Pereira: Good. Thanks for coming in.
Cato Pastoll: Thanks for having me.
Jason Pereira: So Cato Pastoll, CEO of Lending Loop. Tell us about Lending Loop.
Cato Pastoll: Yeah. So Lending Loop, is an online marketplace lending platform. What we do is connect small businesses that are looking for an affordable source of financing, with investors who want to lend money to their businesses.
Jason Pereira: Yeah. So, I realize I brought you in for one thing, which is specifically talking about credit ratings, but we're going to spend some time at the end talking about your platform for raising money. Because that is equally important to small business owners. So stick around for that. That's my incentive to sit around for the entire podcast. Because the first reason I brought you in, was to understand credit scores. Not specifically just personal, but the business credit scores. Which a lot of people don't even realize they have or even if they do, they don't know where to find it. And they really just... Or have no idea what goes into it. So, let's start off by talking about personal credit scores. What goes into that and how do people basically best behave in order to make that happen? Make that number go up that is.
Cato Pastoll: Absolutely. So, personal credit scores are now becoming more and more available, especially in Canada. I'd say over kind of the last 10, 15 years. There's definitely been a lot more awareness brought to the market around, what is a personal credit score, what does it mean and why should I care about [crosstalk 00:02:05].
Jason Pereira: You get tons of free ones sent to you. I get three different emails a month now, telling me what my credit score is.
Cato Pastoll: Yeah. That is the case. And I think with all of that, comes more complexity too. I think sometimes people pay too much attention to what their credit score is. But at the end of the day it is an important factor because if you're looking for credit or you're looking to build a relationship with a supplier, credit scores do come into play and so people should be aware of them. It's very helpful to have at least some awareness [crosstalk 00:02:29].
Jason Pereira: [Some say 00:02:29] a form of insurance. You don't need it until you need it. When you need it, you really need it.
Cato Pastoll: Yeah. [crosstalk 00:02:33] .
Jason Pereira: And it can cost you for not having it.
Cato Pastoll: Absolutely.
Jason Pereira: Yeah. So, let's talk about the sources for credit scores. Before we get into the free sources. We'll get to that. And I'm going to plug a couple other companies, not just yours. So, basically the big two players, Equifax and TransUnion, right?
Cato Pastoll: Yeah. In Canada those are the big two. Yeah.
Jason Pereira: And there's a number of free credit score reports you can get. So yours first we're going to talk about. So the website for that?
Cato Pastoll: So, we have a website that we built recently. It's called getloop.ca. And that offers both consumer and business credits scores for free.
Jason Pereira: Excellent. And then there's other ones, Borrowell, Credit Karma is the big one of the US, also [Credit Canada 00:03:07]. But, as far as I know, you're the only ones who offer business one that I've seen.
Cato Pastoll: Correct. Yeah. So in the market today, we're the only provider offering business credit I suppose. And our focus was really on business. But, for a business owner, it's also important for them to understand their personal credit score. Because that also impacts [crosstalk].
Jason Pereira: Exactly. Especially given every small business owner knows that, at the end of the day, you got to take out a loan. You're going to be asked for a personal guarantee and most of these stuff anyway. Right? So overall, again, three different places and it's a benevolent little service you have there. Because people can sign up for free to get monthly notices, to go check their updates. So, that's great. So you're using Equifax on the backend to the score this. So let's talk about credit scores, what goes into them? Personal side, how do people improve them? Tell me the story.
Cato Pastoll: Yeah, absolutely. So, I guess to start off with, there's kind of five main factors that impact your credit score. So, if you're an individual looking at your credit score and you want understand why it is what it is. The five things are, firstly and most importantly, your payment history. So, are you making your payments on time? Do you have credit facilities where you've demonstrated an ability hopefully over a long period of time to actually make your monthly payments and monthly obligations.
Jason Pereira: And we're talking about scheduled or minimum, right?
Cato Pastoll: Correct. Yeah.
Jason Pereira: Yeah. So, every now and then I see people getting into this habit where [take 00:04:17] cash strapped of one than the other, because they trying to pay out the entire balance. Not a smart move. Minimums at all times.
Cato Pastoll: Exactly. Yeah. So the most important thing is that you're never behind on your payments.
Jason Pereira: Yes.
Cato Pastoll: If you are behind on a payment, you miss a payment even by a week, that's actually going to really impact your score. Obviously the longer the time that you miss it by, the worse it impacts your score. But the most important thing is that you're basically never late on a payment. And that's going to demonstrate good credit behavior to others.
Jason Pereira: And to be fair, not all creditors report if you're 31 days late, right?
Cato Pastoll: Yeah.
Jason Pereira: I find that, generally the bigger credit cards, people miss a day or miss a payment by couple of days. That doesn't show up on my credit rating. I have that [inaudible 00:04:53] go on vacation and whoops. And they're like, "Yeah. We don't want to report until 60 days." Right?
Cato Pastoll: Yeah.
Jason Pereira: But it's some of the smaller lenders I've seen to do that. So, if it's one day, don't panic, maybe call them and just make sure. But otherwise, just make sure you pay on schedule whenever possible.
Cato Pastoll: For sure. Yeah. I think definitely there is leniency applied by different lenders. But at the end of the day, if you don't need to take a chance, don't take a chance [crosstalk 00:05:17] people. Right?
Jason Pereira: Absolutely not.
Cato Pastoll: So, when you think about what your payment dates are, have them in your calendar or have preauthorized payments coming out of your account. Just to make sure that you're always going to be on time. Because-
Jason Pereira: Exactly.
Cato Pastoll: ... why take a chance if you don't [crosstalk 00:05:29].
Jason Pereira: I mean if you're not super diligent with your paperwork and payments, do something to basically automate that. Because otherwise... Or it's just going to hurt you. So what's next? What's the next big factor?
Cato Pastoll: Next big thing is what we call utilization. So utilization is essentially, all of your available credit, what percentage of that are you using? So, let's just say you have credit card limit's of $50,000. The important thing from a utilization perspective, is not that every month your balance is $50,000. That means that you're fully maxing out all of your available credit. Usually, lenders and the credit bureaus like to see utilization around 35% or less. That's kind of a magic number where they say, "That's a healthy amount of utilization."
Jason Pereira: So, and that's... Correct me if I'm wrong, that's usually done per credit facility. So if you've got like a student loan, a line of credit and a credit card... And this is one thing that I think that credit scores are just dead wrong on. I mean, the smart thing to do from a financial standpoint is if, God forbid you're [carrying 00:06:22] credit card debt and you're carrying some other loan, the smart thing to do as we always coach people, is to try to basically pay off the credit card as fast as possible. [Let 00:06:30] the other one stay, even if it's maxed out, right. That's the smart monetary thing to do because you're minimizing interest payments. However, you're actually penalized for that from a credit standpoint.
Cato Pastoll: I know it is interesting. The foundation of credit reports and credit scores is borrowing history. Right. And it's kind of funny that some people get penalized for not having a credit history and not having any borrowing history.
Jason Pereira: I've seen that. Yeah.
Cato Pastoll: I know that there's a lot of irony in that. As a company, we do our best to try to reward people for that. But absolutely in the market historically, that is how people have looked at this. If you don't borrow money, are going to be able to repay your debt.
Jason Pereira: But it's true. I mean, it's a behavior, right?
Cato Pastoll: Yeah.
Jason Pereira: JP Morgan himself, the big man of banking for so long, when he was testifying in front of a certain of subcommittee hearing during the great depression, they asked him like, "What is the most important factor in lending money?" And he said, "Character." Right? And that's the old four Cs, Credit, Character, Collateral, and what's the last one? Capacity?
Cato Pastoll: Capacity. Yeah.
Jason Pereira: Capacity. Right. And the Senator was like, "Surely, what are you talking about character. Surely it must be like their the cash flows are... How much they're putting up for collateral." And he said, "No, I rather lend money to someone who went bankrupt but did everything they could to pay everybody along the way for as long as possible than someone who basically has all the money in the world and blows it, paying everyone. But the people they should." It's a kind of [common 00:07:43] on Trump there. Anyways, so yeah. So, that's something to consider. So even if you will have higher credit rated facilities on some [inaudible 00:07:54] one loan than the other, know that unfortunately if you keep the cheap one maxed out, you're actually going to hurt yourself a little bit. So, it's a trade off. It's a trade off between credit rating and interest payments, unfortunately.
Cato Pastoll: Yeah, it is. And at the end of the day, I think that lenders will also look at your overall utilization. Right?
Jason Pereira: Yeah.
Cato Pastoll: So while it's on a per facility basis, it's also just as important to say, "If my total available credit from all my different sources is $50,000, I'm only using 35% of that number. So I'm only using $17,500 out of that $50,000. I'm not now borrowing $40,000 on a regular basis. If you want to borrow $40,000, try to get your credit limit actually increased beyond $50,000.
Jason Pereira: Yeah. Sadly, you're better off with a higher credit limit and less use. And it's funny, because i had to explain this to my wife, and she was like, "Oh, we have too much every month." I'm like, "We pay it off." She said, "[inaudible 00:08:40] I just want to cut it." Right. And I'm just like, "You cut it, you're going to hurt us. Stop doing that." [inaudible 00:08:44] Anyway. So what's the next one that comes up?
Cato Pastoll: Yeah, the next one is credit history. So things that come into a credit history. It's just around your behaviors of using credit. So, when you think about borrowing from your different types of credit cards, are you actually utilizing more expensive ones or cheaper ones? We were just speaking about that from a utilization perspective. But from a credit history perspective, they also look at, what are the different types of credit that you might have? So for example, if you have a payday loan, that will penalize you more than having a long time term loan from a bank.
Jason Pereira: Yeah, I mean it's just those types of loans. Yeah. In long time term loans, you're structuring them, right? You're basically committing to a schedule. Payday loans are highly punitive and typically are unfortunately indicative of short term cash crunches. Right.
Cato Pastoll: Yeah.
Jason Pereira: So, okay. So what's the next factor to take into consideration?
Cato Pastoll: Next one is increase. So this is one that I think we've been trying to get more awareness to in the market. I know a few other people that have too. But if you shop around... So if you're going to look for credit in lots of different places, those who actually you have a negative impact on your credit score. So-
Jason Pereira: So, I applied for 12 different credit cards because I want to see what I can possibly get. That's what's known as, I believe a hard [hit 00:09:59] to your credit score, is that right?
Cato Pastoll: That's correct, yeah. So, if you're ever looking for credit, one thing that we always advise people to check out is, is it going to be a hard hit or a soft hit? So, just a little bit of a plug here. For us when we do an offer for a business, we actually just do a soft hit. So we have no impact your credit score in order to offer you a loan. There's a lot of lenders, probably the majority of lenders who actually do a hard hit in order to offer you a loan. So that will actually impact your score just to know what type of rate you could get.
Jason Pereira: Yeah. So what's the difference from your standpoint between the hard and soft hits?
Cato Pastoll: Yeah, so for us, we actually don't see soft hits. When we look at a credit profile, if somebody else has softed that business, we actually would never know. The only person that would know is the business owner themselves. So when they look at their own [crosstalk 00:10:42].
Jason Pereira: So at the end of the day, the lenders who lend you money have no idea if there's a soft hit done. And I mean more often than not... Legislation's changed where we live. But preauthorized credit card, like pre-authorizations where they're like, "Hey, you've been appraised for pre-approvals." Where they send you, "Hey, you've been approved for this much." It's not because they're just randomly throwing one out there. It's because they hit your credit score, on this soft hit criteria. Saw the bare minimum information that comes with that, I think which is just a score to my understanding. And then issued that. But when they call you and say, "You're eligible for a credit increase." Now we have to authorize that in Ontario. But previously, it used to be like, "Here you go. We just increased your credit lend rate." "Oh. Well. Thank you." Okay. So, anything else that they factor in or is that basically, yeah?
Cato Pastoll: So these kind of last three are all grouped into one bucket. But, the last one is basically the length of your borrowing history. So, unfortunately, if you just graduated from high school, you just got a credit card today and you've got three months of history, you're not going to be able to start out with a good credit score. So, the way credit scores work, just to be clear on that is, you start low and you build up to high credit score. You don't start with a perfect credit score and then go the other way around. Right. So the length of your borrowing history is [crosstalk 00:11:53].
Jason Pereira: It's not trust but verify. It's like, no, prove it. So, and this is an important tip. I've been told before is, if whatever your oldest credit card is, is the one that sets the timeline for your length, right?
Cato Pastoll: Correct.
Jason Pereira: For example, we have a credit card now that's a free credit card and we barely ever used a thing, right? My wife specifically. I'm not saying she does understand how the stuff works, but specifically said she wanted to cancel. I said , "Absolutely not." We've had that card for 12 years and if we get rid of that... The newer credit cards have been around for two, right? So we don't show it [inaudible 00:12:24] as much as established pattern. Yeah. You know what, in 10 years... I think it's about seven years to look back. Right? Seven years time, great. We'll cancel it then. But if it's costing us nothing, I'm not getting rid of it.
Cato Pastoll: Yeah, that's exactly correct. So, if you have a longstanding credit facility, if you don't have other ones, advice in terms of not damaging your credit would be don't close those longstanding facilities because that will impact you.
Jason Pereira: And you see that happen when especially maybe in business dealings or whatever it is, someone gets angry with their bank and says, "You know what, I'm moving all my business to this location." Great. And they take their credit cards with them. And suddenly the line of credit for the business, the credit facilities, credit cards, they're all fresh and brand new. Right.
Cato Pastoll: Yeah.
Jason Pereira: And that is actually everything else drops off and suddenly it's like, "Well, you actually did a disservice to your credit rating unfortunately." So, if we're going to sum up kind of the key... What are the key tips you would give an individual to make sure they have a good credit rating? What are the big ones for you?
Cato Pastoll: Yeah. I think the first thing is being aware. So, know what is on your credit report. Know the things that are impacting your credit score. I think that's probably the first and most important thing. I think the second thing is, goes to the very fast thing we discussed. Because that is the most important. Make sure that you're making your payments on time, right. That is just being diligent with your payments. It's not just going to help your credit score. It's actually going to help when lenders or other people look at your credit report. Is this someone who's reliable that I can trust? You mentioned character before.
Jason Pereira: That's true.
Cato Pastoll: So I think like really demonstrating that positive character in many different ways ultimately it's going to benefit your credit score. And then I think the third thing is, also checking for errors on your credit file. So, we all like to think that our credit reports are perfect and that they're-
Jason Pereira: Oh God! They're not.
Cato Pastoll: ... always represented properly. We see so many times where someone says, "What do you mean? I've been making all my payments." And there's a line there that says they haven't behaved for 90 days. So, it's really helpful to check your credit report and credit file just to know is it actually reflecting what my [inaudible 00:14:17] history [crosstalk 00:14:17].
Jason Pereira: And even more simpler things like... Because when you go to do any of these services, even the ones that are directly from there, they always ask you to verify certain information. Number of times I've seen things like, "Oh how did you manage to flip my home address with the company I used to work for 10 years ago. How is this possible?" Right. So they will screw up everything from the addresses to facilities to a number of things. So yeah, I think it makes a lot of sense for you to check... I would say with actually both facilities. I do this once a year.
Jason Pereira: I actually have it on my calendar. Check with both of them and it unfortunately costs a bit of money. But whatever it is. But I also think that the great thing about these services like yours is, this monthly update I get. I know it's just go in and check and see what the change was month to month. And if someone stole my identity and made all these credit applications, there's going to be notice of that. Right. So this is also a way to prevent personal identity theft. And I've had people ask like, "Should I be paying for credit monitoring services?" I'm like, "Look, you can do that, but this is free. And if you just check every 30 days, really it's about catching it as fast as possible." Right. So you're more likely to catch it if you just check every 30 days.
Cato Pastoll: Absolutely. Yeah.
Jason Pereira: Hey [inaudible 00:15:22], other tips. So before... I keep on stealing your [thunder 00:15:25] here.
Cato Pastoll: Yeah. Well I think we covered a lot of them as we were kind of speaking through the different things. But the one for small business owners specifically... You already brought this up, but when you're thinking about changing financial institutions... This is something that we see really often with small businesses is, I've got all my accounts with one and I'm switching everything over to the other. There's a lot of benefits in diversification. So [inaudible 00:15:47] find who are your different credit sources are. So, a lot of people think like, "I'm with this one bank. I'm going to have my lines of credit, my credit cards. Like absolutely everything [crosstalk 00:15:55].
Jason Pereira: [crosstalk 00:15:55] want to say, but... And you know what, the thing is the banks punish you for that too because you want to go start with another bank. They're like, "Well we don't have a relationship with you." And you're like, "I'm trying to start one. You seem uninterested." Right. So let's just go over that. Let's just say someone you're sitting across from, is currently in the process of changing their corporate bank including a credit card there. I mean, I still have a separate card at [Amex 00:16:14], right? So, that's got a longer credit history. So I'm not hurting myself as much as someone who say had all of their stuff through say a bank with the green logo, moving to a blank with like blue logo. [inaudible 00:16:25] cancels everything. That's not as bad. Right?
Cato Pastoll: Correct. That's right.
Jason Pereira: Exactly.
Cato Pastoll: Our devices have different accounts potentially with different banks. So maybe have a credit card with a couple of different bank providers. And then there's also a lot of alternative lenders now. Building relationships with alternative lenders, actually again, is a way to build your credit score.
Jason Pereira: Way to plug your company [crosstalk 00:16:44]. I will give you an endorsement later. So good. Couple of last tips before we move on to the corporate one. Anything else?
Cato Pastoll: I think that the other thing that I like to make sure we address to people is, don't get too fixated on, "I have a 680 vs a 720 verses a-
Jason Pereira: I'm so guilty of this.
Cato Pastoll: ... 705." That's ultimately not the thing that you should be focusing on as a small business owner. Thinking about your credit score. Rather focus on the macro picture of things. So focus on those big things and types of borrowing history, credit history, the types of loans. If you don't need to get payday loans, don't apply for payday loans. All of those types of borrowing behaviors are ultimately the things that we always stress to people to watch out for as opposed to the [inaudible 00:17:28] of, "Why did my score go up or down seven points?" Because the reality is that suddenly [crosstalk 00:17:33].
Jason Pereira: That drives me nuts every time. I'm bad at this. I've [gamified 00:17:39] the entire thing and I showed you my score and I'm damn near perfect. And I feel like trying to get the 900 Zeno's Paradox. You try to move halfway to the wall. You never really get to the wall. So, yeah. Every time I see the thing take a dip, I'm like, "What happened?" And I go over the report and I can't tell. And maybe it's just I spent more on the credit card throughout the month. So therefore I was closer to the limit or whatever it might be. Right? So it's not worth driving yourself nuts. So let's move on to corporate credit scores. So first of all, most people have maybe an idea that they have a corporate credit score but not necessarily know where to find it or how to look for it. So you've done a great job of providing that for free. So thank you for that. Tell me about what goes into the corporate credit score. How does that differ from the personal one?
Cato Pastoll: Yeah. So there's a few main things that go into the small business or [call-brokers 00:18:27] as the different bureaus, give them different names.
Jason Pereira: Exactly.
Cato Pastoll: But the first is kind of your banking trade lines. So banking, trade lines would be things like credit cards, loans and lines of credit. So those are the first things. And that's very similar to the consumer side of things. [crosstalk 00:18:40].
Jason Pereira: So I just think diversification of credit you utilize or types of facilities.
Cato Pastoll: And all the details on that. So how big the facility is, how old it is, how much you've used of that facility? So again, a lot of the similar things that they'll be looking at on the consumer side. The second thing, which is different about business, and you don't get on the consumer side is, Industry Trade Credit. So, a lot of providers, suppliers of goods and services actually reporting to the bureaus as well. And all a lot of small business owners actually know that. So, if you're buying lumber from lumber company XYZ, and you're paying them later than you're supposed to be paying them. So if you [crosstalk 00:19:17].
Jason Pereira: [crosstalk 00:19:17] terms and you pay 95th day, whatever it might be. Yeah.
Cato Pastoll: That actually goes on your business kind of profile. So, oftentimes even for a small business, they may only have one or two bank trades, but we'll actually see your [10,15 00:19:28] supplier traits depending on the industry that they're in.
Jason Pereira: And then it's smart business to basically stretch out those credit terms. Right. It's basically, if you have 90 days to pay, pay the 90th day, I mean let that money sit... Reduce your working capital need. One of the pieces of advice I've seen, given to many companies is, I've given it myself. It's like, what are your payment terms? Your payment terms are... Or your payment terms are 30. How much business are you doing with these people? Call them up and say, "Look, I think 30 is not enough and extend it because, every business owner knows that there's a certain amount of money that they keep in the company. And part of that... That's reduced if you don't have to pay XYZ for 45 days versus 30 or 60 versus that. We've seen a couple of clients who were able to pull six figure amounts out of their business or redirect that six figure amount to something else because of the extension of those credit terms.
Cato Pastoll: Yeah, absolutely. I think from a financial and cashflow perspective, we are a business that is focused on cashflow and helping businesses improve their cashflow. So absolutely.
Jason Pereira: That's the lifeblood of any business, right?
Cato Pastoll: Yeah. Absolutely. That is one of the best ways as a business that you can help to manage your cashflow is, stretching out this payables and terms as much as you can. But on the flip side of that, don't go beyond what your agreed upon relationship is. So if they've said, "I'm going to give you 60 day terms, don't pay them at 120 days, because that's ultimately going to impact your credit. And so, why that's important is, if you then want to go borrow money from somebody, they're going to say, "Well this is the character of somebody who said that they would pay in 60 but he's actually paying in 120.
Jason Pereira: [crosstalk 00:20:56]. Yeah. I said 95 vs 90, but let's be realistic. Most people aren't going to necessarily do that. Right. I'm going to [crosstalk 00:21:02] report you on for five days. If they are, looking at the report, it would be helpful to see who you're dealing with and why they're being so harsh. I mean because everybody can miss by a week. But yeah, the example of 90 [inaudible 00:21:12] me to stretch, I'm going to choose to stretch this to 120. Yeah, that's a negotiation. You have to make sure you're not violating terms first. Right. So that's, okay. So that's a difference. What else do we have?
Cato Pastoll: The next factor is [firmographic 00:21:21] data. So this is actually an interesting one. This is one that a business can control.
Jason Pereira: I have no idea what this says. Continue.
Cato Pastoll: So firmographic data is industry that you're in. Used in business. So how long have you been around for? The province that you're in potentially. So, there is actually a lot of risk factors in a business that's associated with that firmographic details. In other words, if you're a restaurant, you're just frankly a different risk profile.
Jason Pereira: Good luck to you.
Cato Pastoll: You're just a different risk profile than someone in the financial services industry. And that's just based on historical data. So, there's certain realities there that you [can't 00:21:53] change. But, I think being aware of that is important because then that's maybe a case where you need to pay even more closer attention to your credit if you're in a high risk industry.
Jason Pereira: Interesting. So it's like a demographic, but I don't know where the term firmographic came from. But sure. Maybe it was because it was used from firms for [inaudible 00:22:09]. So, that makes a lot of sense, right? Different businesses, different structures have different risk profiles, especially within the same region. They're going to be affected by the same underlying factors. Good luck to the restaurants out there and good luck to the cannabis producers. Let's just move on. So, any other differences?
Cato Pastoll: Yeah, so then the last one is... That's different than the consumer side, is [liens]. So liens would be, if a business has a lien registered against it, that means that they've borrowed. And that borrowing could not necessarily be like a line of credit from a bank. It could even just be like, I borrowed money to buy a car. So I'm financing a car. What usually happens when you finance a car is that the automotive financing company will register what's called a lien, which is a security interest on your business. The more liens you have, again, represents higher risks. So if you've got 25 liens because you've got 15 trucks and eight cars and you've got two credit cards and then you've got a line of credit, obviously on the one side that's a lot of credit. On the other side it's also saying that, "If I'm going to lend money to you, I'm now behind all of those 25 people."
Jason Pereira: All these other people. Yeah. So everybody is in line based on when they came in. Right. And really it's almost like a list of personal guarantees for a person but corporately done, right?Yeah. So it's a lot of most the corporate guarantees and none of these guys are going to have senior position, right? They just have senior position on each other based on when they came into it. Right?
Cato Pastoll: Exactly.
Jason Pereira: So, okay.
Cato Pastoll: And I'd tell you one thing to look out for there is a lot of errors. A lot of times if like someone will have borrowed money five years ago, paid it back, but that company may not have taken their lien off. They are supposed to. And actually the law says that they're supposed to, but these things happen, right?
Jason Pereira: Administration and companies don't necessarily want to play with it. It also may not be their core business in lending. Right. So is there any advantage to trying to pool the number of your different facilities or liens that you have into maybe one larger lien? I think a term structured loan, it might make more sense, but how does that work?
Cato Pastoll: Yeah. I think, when you're looking at the lien profile of your business, [say 00:24:08] who has security registered, I think it's more important to again be aware of that. So who is my primary lender? Who has that kind of the first security position on my business. And then anyone who else is lending money to my business, make sure that that security is actually specific to what they lending money to you for. So for example, if you're borrowing for a car, really that company should only be registering security against the car. There's no real need for that company to also have security against your business' assets.
Jason Pereira: Yeah. As someone who went through a loan facility application where they literally tried to, I think almost, put a lien on my children. Yeah. Sometimes there's overreach. I think everybody tries to... They're going to lend you an egg and they want a chicken in security. Right. It's that much.
Cato Pastoll: I think best example of that in the business space is, a home equity. So a lot of times we'll see people disguise business loans as... It's a business loan, but really I'm giving you a home equity line. So what they're basically doing is just taking security on your personal residence. And oftentimes you could probably get better terms on that. And I know one business [crosstalk 00:25:12].
Jason Pereira: Yeah. I've seen that before where ... I remember someone was like, Yeah. They wanted like six points or something like that on this line and for the business. Yet meanwhile they were using the house as collateral. I'm just like, "No. Just take it from the house's home equity line of credit of prime plus 0.5%. Lend it to your business at the same rate and it just flows through. And sure enough that saved them over two points.
Cato Pastoll: Yeah, absolutely. So I mean again, you're just being aware of those things and if you're borrowing for a business, borrow for the business. If you're borrowing for home improvements, borrow against your house. Try to keep that separation-
Jason Pereira: Keep that separate. Yeah.
Cato Pastoll: ... to the extent possible
Jason Pereira: Yeah. Because, make your accountant's life easy. The thing about audits is that when you can prove what you did with paperwork, they tend to go away. When you're don't, they tend to look for more stuff. So yeah. And I think the thing is is that most of the banks are pretty good about being able to set up sub-accounts on lines of credit now. So you can literally say, "Oh this $200,000 I borrowed to put in the business, [carve 00:26:12] that out as a separate sub-account. And then you still have the rest of the credit available through a main account.
Cato Pastoll: And then I guess the last area for business owners to be aware of, is an area that's also on your personal credit score. But often people overlook that because, collections and judgments as in legal items are not necessarily too often seen on a possible credit profile. So, on a personal credit profile, collections and judgements do come into play. So if somebody is suing you or if somebody has sent your file to a collections agency, for example, you haven't been paying your telephone bill, eventually they send it to the collection agents [crosstalk 00:26:44].
Jason Pereira: Is that a common one. Sorry i [crosstalk 00:26:46]. Yeah.
Cato Pastoll: That is probably the most common one that we ever see [crosstalk 00:26:50].
Jason Pereira: It's interesting. So I had a conflict with a telephone carrier that shall not be named, but basically it's the biggest one in the country. And they tried to stick me with this fee on, when I left them... Luckily I know enough people at that company that this thing disappeared. But, before that happened, they had passed along the file to a credit to... They syndicated the credit, right. Every couple of years, someone else will buy that list and call me up saying I owe them money. I'm like, "You show me all the evidence and that'll happen. But I tell you right now, if I contact [bell 00:27:17], they wrote that off. So you bought a useless line on a spreadsheet, my friend." The conversation ends right there.
Cato Pastoll: Pretty sure. So, on a personal side... Again, things to watch out for, but there are a lot more common from a business perspective. Judgments happen a lot more often in the business side of things. If somebody slips and falls on your premises-
Jason Pereira: Oh God!
Cato Pastoll: ... they file a law suit against you. Oftentimes your insurance hopefully will cover that. But it's still showing up on your business [crosstalk 00:27:44].
Jason Pereira: Yes. This is not you deciding to stick it to a supplier because you're in a conflict. This is just someone who's basically going after your business for whatever reason. Right? And again, it could be a slip and fall. It could be a disgruntled employee, could be any number of things. Right? And this is... Welcome to the risk of business, right? If you wanted an easy life, you'd... I'm not going to make a comment about government [crosstalk 00:28:03] continue on. So yeah. And no one listening to this podcast believe for one second that they picked the easy option.
Cato Pastoll: Definitely not exactly.
Jason Pereira: No. Exactly. So. Okay. Anything else they should know in the space?
Cato Pastoll: No, I think that those are probably the last two-
Jason Pereira: Excellent.
Cato Pastoll: ... when it comes to business credit [crosstalk 00:28:17].
Jason Pereira: So let's just [reaffirm 00:28:18]. So the website to get this is getloop.ca right? So free credit score, your personal and your business, you can track that over time. There's some recommendations and then we'll talk about your core business now because that is also that's something that would be of massive value to small business owners. And I can say I've personally used your products. So I can literally endorse it. Well I'm going to let you talk about it first. And I can talk about some of the nice things in my experience.
Cato Pastoll: Yeah, absolutely. So, our core business is Lending Loop. So Lending Loop like you mentioned, is an online lending platform. It's actually the first of its kind in Canada. We are a regulated entity that's essentially allowed to match businesses looking for capital with individuals who want to lend money to businesses. So individuals being people like yourself and myself who has some extra capital that they want to deploy and they put it into small businesses. So a small business owner could in theory be either a lender or a borrower on the platform. Now the real benefit for businesses is, we wanted to create a loan product that looks quite similar to a traditional loan product that you would look to get from a bank. But the real difference with that loan product is that, it is tied specifically to your business. So we're not the provider that's got all of your accounts and your credit cards. We are truly a separate and stand alone product.
Jason Pereira: You're just kind of facilitating the transaction.
Cato Pastoll: Yeah.And what that allows businesses to do, is actually start to build their business credit profile. Because, a lot of people, a lot of business owners when they get started, will either borrow against their personal home equity or they'll borrow on personal credit cards. And that actually doesn't necessarily benefit their business credit.
Jason Pereira: No.
Cato Pastoll: Believe it or not, that just benefits their personal credit.
Jason Pereira: And the banks can be pretty ridiculous on this. I mean they literally... Personal experience, myself and other clients... They do not take any risk on this sort of thing. Right? I mean, the honest truth is they give you multiples of your down payment for your home is because there's collateral and it's insured. But when it comes to your business... People have asked me, "If I give them like $100,000 what will I get back?" I'm like, "$100,000? Your $100,000 will be lent back to you." And they're like, "That doesn't make any sense." It's like, "No you don't understand. This is where collateral matters more than anything is in business." Right.
Jason Pereira: And I'm sure many people listening in, this is no surprise. But I mean, only banks in Canada would come up with a concept of, "Here's an idea. Give us $200,000 and put it in a [GIC 00:30:23] and then we'll give you a line of credit for $200,000." So [inaudible 00:30:26] remember when I was told that like, "Let me get this straight. You want to lend me $200,000 at 6% guaranteed by my $200,000 earning 1.5%. Do you think I suffered a massive head injury that I can't do that kind of math?" They're like, "Yeah, but that helps us start [inaudible 00:30:40] a credit pattern." I said, "That helps me lose money. So I'm basically paying you for the privilege for abusing my own money. I think not." Right? So frankly, the difficulty in establishing a small business credit history from lending from major facilities is pretty difficult, quite honestly.
Cato Pastoll: Right.
Jason Pereira: Right. So you're providing a facility for that.
Cato Pastoll: Yeah. Again, going back to that, as a business owner, we're giving you an opportunity to basically act as an affordable source of capital to help your business grow. To do what it needs to do, whether it's working capital, expansion, renovation, all of those types. We basically fund businesses for almost any use case. And then what that's also helping, tying that into credit, is starting to establish business credit for a business. And that's why we built the getloop platform or getloop.ca is, we wanted to kind of create that close alignment between understanding credit and business loans, right? There's a very close alignment. Especially for a business owner who may not have ever borrowed from a large financial institution in the past. We're really giving that opportunity to establish your first sources of financing. So, we're giving you that educational information. Helping you understand what your scores are, the things that you can do to impact your scores or change those scores. And then with that, then offering financial products that can actually help you at the end of the day.
Jason Pereira: Absolutely.
Cato Pastoll: So, great. I know what my credit score is, but really at the end of the day, how we can help a business owner is by saying, "Your credit score is this. This is how you can improve it. And also if you're looking for capital, this is how you can get capital."
Jason Pereira: So I mean, you provide two things. You provide an avenue for investment of their money that maybe they can tie up for a while. But more importantly to them, you provide access to capital. So talk to me about the process. Because this is one of the things that I thought was the best part of what you guys did. Because anyone who's ever tried to get a loan from a bank or from any other private facility, you know how painful that can be. Tell me about how you basically onboard people or just provide them with the information on quotes.
Cato Pastoll: Yeah, it's a very simple process. So, to start off, if there's an online loan application at lendingloop.ca. You go in and you can basically complete a full on application in about 5-10 minutes. From there, you provide us with some basic information. So that information is typically just your bank data and your financial data. And then what we're able to do with that, is essentially within two business days, turnaround a loan offer for you. So as a business owner from about two business days, from when you come to us, you can actually have an offer for financing. Which is an incredibly quick, easy and efficient process for a business owner. And that's really what we're all about. It's saving business owners time and money. We know that's the most important thing for a small business owner that's building a business. So what we want to do is, make the process of applying really easy, make the process of getting an offer really easy, And ultimately if you want the funding, getting the funding really easy as well.
Jason Pereira: Yeah. And you contrast that to the owner of the bank where in two days, you give them the information that could get back to you for God knows how long. It's not you're not being diligent, right? So you've used leveraged technology in order to basically be able to turn around that quote. So what are you doing in order to understand the client, so that you can offer them that kind of loan.
Cato Pastoll: We've built our own kind of proprietary risk models. And what those allow us to do is very quickly and efficiently adjudicate the risk of a business, right? So we look at things like the credit scores that we spoke about earlier, but then we also look at hundreds of different data sources on the business to basically understand for business, what is the risk associated with this company? And using all of these data sources. So these are online data sources, offline data sources.
Jason Pereira: You link to their bank account and pull their transaction history, you can link to their accounting software, right?
Cato Pastoll: Yeah.
Jason Pereira: So the same kind of things that the bank is asking you for, but you're pulling it with a couple of logins.
Cato Pastoll: Yeah. So, for a business there's no rummaging around, going to an accountant asking them for information and getting it on paper, bringing it into a branch. The process of providing that data to us, is literally two clicks. It's literally two clicks. And from there, we have the data. And then we can then give you an [open 00:34:25] financing based off that data. So, it makes the process efficient both for the business owner and for us too.
Jason Pereira: Absolutely. And that's one of the things I appreciate the most. I mean, before the bank could even tell me if they were looking, you had told me that, "Here's what it is and here's the rate." Right? I mean it is like great. Then I'm shopping [inaudible 00:34:40], but I'll get back to you and let you know what comes back. And sure enough, five days later the other people get back to me even though they had a five day head start. Right. So it is what it is. So what size loans are you doing right now?
Cato Pastoll: Yeah, so we do loans anywhere from $5,000 up to half a million dollars. So that's the loan ranges that we're currently doing. And then in terms of what the loan product looks like, it's a term loan. So that means that you're repaying both the principal and interest on a monthly basis. And then that loan term can range anywhere from three months all the way up to five years. And that kind of depends on the business owner's preferences.
Jason Pereira: Excellent. And talk to me about the rates. How do they compare to what a bank would offer?
Cato Pastoll: Yeah. We're very transparent with all of our rates. That's really kind of one of the key ways that we like to do business, is through transparency. Our interest rates range from 5.9%-26.5% on the high end. The only other fee that a business will ever pay is an origination fee. So that origination fee ranges from 3- 6.5%. Now, that fee of 3-6.5%, may sound high. But I think the really interesting thing that we like to educate people on is, if you go and get a facility from a commercial bank, typically the fee that you're going to pay is a review fee, a setup fee, a monthly review fee, and then an annual underwriting fee. So when you add all those fees up, it looks like it's cheaper, but at the end of the day you're actually paying a lot more than the flat 5% fee.
Jason Pereira: Yeah. [inaudible 00:36:02] Someone was like, "Wow, we're paying this much up front." I'm like, "Yeah versus death by a thousand cuts." Right. I much prefer that kind of transparency. So, I mean, and at the end of the day, what you're doing, once this is approved, it goes on your marketplace, right? Essentially this is a crowdsourced play, right?
Cato Pastoll: Right.
Jason Pereira: So, investors from all over the place can go on, look at the different loans and choose to lend this client's business money.
Cato Pastoll: Yeah.
Jason Pereira: So, basically tell me about how much or how little an Individual can lend. I see company ABC, I want to lend money to it. What kind of information am I seeing? How much or how little can I put in?
Cato Pastoll: Yeah. So increasingly kind of the way that investors are investing through our platform is through a tool that we built called Auto-Lend, which essentially is Automated Lending. So what we're really trying to make sure that investors do when they invest in businesses is diversify their portfolio. So that means instead of investing $10,000 in one business, invest $100 in a hundred different businesses.
Jason Pereira: Diversification [inaudible 00:36:55].
Cato Pastoll: So that that's how the vast majority of investors do it. And so they just come into our platform, they kind of set their risk preferences. So they say, high risk, medium risk, low risk. And based on that, our software basically builds a loan portfolio for that investor. So what that does for our business is also makes the process of raising capital very efficient. Because, you don't have to wait for investors to come, look at the different opportunities that are available and see your business, decide whether or not they like your business and decide whether or not to invest. So that's the predominant way today that people are investing money through Lending Loop is-
Jason Pereira: Turn that on by the way. I didn't have that on.
Cato Pastoll: If a business or an investor wants to invest in a specific business, they can actually go on to our platform and look at specific companies that are looking for capital and invest that way as well. So they can go and look at who the business is, what they do. The business owner can write a couple of sentences as a brief description of that loan. And then let's say you're a yoga studio and I'm a yoga fanatic, I can go and invest in your yoga. So yeah.
Jason Pereira: You can actually lend money to businesses you know. And more often than not, I mean, when I did this in the past, I was like, "I'm in Financial Advice. So I can't actually let clients know." It's a conflict, right? But there were friends within the industry who were also Financial Advisors like, "You're borrowing money at what rate? I'll totally lend you money." Right? So they were informed investors that was not an issue. But for the average consumer, average user of this, they can tell their friends and family, "Hey. I'm raising money to fund the business, blah, blah, blah. You can participate." I think we'd all rather pay interest to people we know than people we don't. Right.
Jason Pereira: With that being said, people we don't want the money, then so be it. Right. So, frankly, , I think you put together a very lovely service. Because I've used it in the past. I've recommended it to clients in the past and they've been very exceedingly happy with it. And one of the other things I wanted to touch upon before we finish this up is your Proprietary Risk Score. And I think this is a story that that needs some attention. So you put together a picture of a risk score of the client base versus what a conventional lender would look at. Which is, basically your credit rating. How does that compare? Are you lending to people that otherwise would be passed up by other lenders because you have a better view of them or how's that working?
Cato Pastoll: Yes, absolutely. So you know, when you think about... I think this is the classic example to help put this into perspective is, the most common thing we see is, a business owner who has bad personal credit because they've been borrowing on their personal credit cards since they started their business. Right. And that's understandable. That was the easiest and most available source of credit to a business. And so as a result, the utilization has been-
Jason Pereira: Zero.
Cato Pastoll: ... 100% [crosstalk 00:39:25]
Jason Pereira: On the credit card. Yes, that's for sure. Yeah,
Cato Pastoll: So they've been maxing out all of their credit facilities and they have a bad credit score. So a traditional lender would usually look at that person and say a bad credit score, high utilization, rejected. Well what we do is we take all of the different factors into consideration and kind of build one consolidated picture. So, okay sure. You've got high credit utilization. However, your business is generating strong cash flow. You've been growing every single year. You're a business that looks like I would want to lend to you. I'm going to actually give you more credit for the fact you have a good business than the fact that you've been borrowing a lot on your credit cards.
Cato Pastoll: And I think that is really the philosophy that we've approached. How we evaluate business risk is, it's not about just the business or just the consumer. Because when you're starting a business, it's kind of one thing. So we really try to evaluate the overall picture by first bring into play, what is your consumer risk? What is your consumer credit behavior? What's your business risk and business credit behavior. And using that combined factor, we can then go and say, "Okay, you know what? Despite the fact that their personal credit profile says one thing, we actually believe that they're a good credit risk and we can lend money to them." And I think that's really how we're trying to change the way that people look at small businesses [crosstalk 00:40:37].
Jason Pereira: And this is a bigger and bigger issue because, I mean anyone who's been through this knows that, essentially small business banking is something different than the next level versus commercial banking, right?
Cato Pastoll: Yeah.
Jason Pereira: Commercial banking at a certain level, they will take their time to fully understand your business inside and out. [Sum out 00:40:50] what you're talking about. You can sit down across and explain, "This is an exceptional item. This is what happened to me this year." They typically understand that sort of thing because they've seen complexity like that before. And they make a more informed decision. The problem is, the thresholds for getting the commercial banking, they just keep on going up and up and up. Right. And the rest of us and myself included, struggle sometimes because, whereas the commercial... I've talked to commercial bankers like, "Oh yeah. We'll take your deal in a heartbeat. But you're too small. We have to send you to the small business banking." And the next thing you know, you've got small business banking and they're working off a checklist, right? And that checklist, guess what? You don't hit that checkbox, "Sorry. Nothing I can do for you."
Jason Pereira: So, having alternatives such as yourselves, which are basically frankly moving into a space that the banks are not as interested as moving in, are moving out of frankly or making it harder for because they're trying squeeze whatever margin they can out of it, is useful. So thank you for that. Because again, personally used [inaudible 00:41:37], personally endorsed and I've had clients do the same thing and utilize your services and too much of [clamp 00:41:43]. So, Cato, this was great. I hope everybody learned a lot about credit scores today and a lot and about an alternative lender In addition to that. So let's just talk about, we talked about Get Loop. So what is your main business? Where can they find you?
Cato Pastoll: Yeah, so I would say if you're a business owner looking to understand more information about your credit score, I would go to getloop.ca because that's really where you're going to get that education on what your credit scores look like. And through that platform, you can then understand what are the things that you can do to improve your credit. So we've got the resources and tools like webinars or email courses on steps that you can take to improve your credit. And sometimes that's actually personalized to your business. So, I'd say if you're looking to understand that information, go to getloop.ca. Completely free and sign up there. Through Get Loop, if you're then interested in borrowing, if you're qualified for a loan from us, you'll see a recommendation to get a loan from Lending Loop. And what we do there is, we actually look through your credit profile and then we only recommend Lending Loop if you're actually qualified to borrow from us. So that really creates a more seamless experience for business owners. So if you focus on credit scores, focusing on understanding your financial information, go to getloop.ca, check out your information and then if you're interested in borrowing, get to lendingloop.ca as well.
Jason Pereira: Fantastic. Cato, thank you for your time.
Cato Pastoll: I appreciate it. Thanks for having me.
Jason Pereira: So that was my interview with Cato Pastoll of Lending Loop. I hope you enjoy that. I hope you take the time to sign up for his website. Specifically Get Loop, so that you receive your monthly free credit reports both personally and corporately. And just be aware of what they are and hopefully, like me, obsess about them just a little bit and try to make them better. I would also encourage you that if you're looking for lending, please check out his site. I'm not just doing as an advertisement and most certainly, this is not a paid advertisement. I take no compensation, but I have used this service and it was much better than my conventional experiences. So as always, this has been Jason Pereira and this is the Financial Planning For Canadian Business Owners Podcast. And if you enjoyed this podcast, please leave a review on Apple Podcast, Stitcher, Google play, or wherever it is you get your podcasts. Until next time, take care.
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