- Christine Chang is the CEO of 6th Avenue Capital, a lender that specializes in short-term bridge financing in amounts up to $500,000 for small and medium sized businesses.
- Spring Hollis is founder and managing partner at Star Strong Capital, a venture debt investor that emphasizes companies led by people from diverse backgrounds.
- Last month, the firms announced the closing of a convertible note from Star Strong to expand the capacity of 6th Avenue's lending business.
- Chang and Hollis spoke with Business Insider about the principles that guide their business partnership, and how small businesses can use those principles to ally with funders that are right for them.
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When hurricanes start brewing in the Gulf of Mexico, the underwriters at 6th Avenue Capital get on the phone with their borrowers.
6th Avenue has clients across the US, including several in Texas and Florida that face significant risk during hurricane season.
"We proactively called all of our small businesses and rearranged their payments," 6th Avenue CEO Christine Chang told Business Insider. "A traditional loan wouldn't have fulfilled their needs. They would have defaulted for sure."
In order to make more of these loans, 6th Avenue needed more cash itself, so last month it secured new financing from venture debt firm Star Strong Capital.
Chang and Star Strong founder Spring Hollis spoke with Business Insider about the deal, and the principles that guide their business partnership.
Their collaborative and transparent approach is both emblematic of 6th Avenue's lending strategy and an example of the importance of partnering with a funder that understands your business.
Bridges to opportunity
Chang's firm specializes in merchant cash advances, which is short-term credit (or bridge financing) for small and medium-sized businesses.
Loans range from $5,000 to $500,000 for periods up to one year, and are typically wired to borrowers accounts within 24 to 48 hours.
From natural disasters to major commercial orders, small businesses face a dizzying variety of potential scenarios that can squeeze their cash flows.
"Every small business has its own story and it doesn't mean they're not a good credit risk," Chang said.
There's no minimum credit score, but borrowers must provide three prior months of bank statements and other financial information.
Hollis agrees with Chang's approach, so they worked to draw up a venture debt investment in 6th Ave.
Most venture firms specialize in equity financing, but Star Strong's specialty is convertible debt, which can be far more complicated. A convertible note is a loan that can be converted into equity shares at a later date.
Convertible debt is sort of like a really massive cash advance, and the complexities of these deals make it especially important to work with a partner you trust.
The importance of trust and a shared vision
Cash advances and convertible debt can each be expensive, and risky, ways to fund a business. Neither is fully regulated, but both can serve as important sources of operating cash for short-term needs.
"It's expensive," Chang says, "but if you think about it, it's less expensive than giving up equity in perpetuity."
"It's really meant to be a bridge to other financing. That's when it makes sense," she added.
Chang met Hollis long before either of them had a deal in mind. The two bonded over a mutual interest in expanding capital access to traditionally underserved small-business owners.
"We're big believers in the story of alternative credit," Chang said. "Something like 52% of small businesses that require financing can't get it… particularly with women and minority-owned businesses."
When 6th Avenue needed new funds to continue growing, Hollis was Chang's first phone call. Hollis sees a lot of pitches from potential borrowers, but she says 6th Avenue's stood out.
"I felt that 6th Avenue brought a level of professionalism and institutional controls to a lending environment that had been lacking them. That's really what drove my decision," Hollis said.
Transparency and candor over hierarchy
Most traditional large banks can't devote the time and attention to crafting bespoke underwriting terms for small sectors of the economy.
Specific details can disqualify some otherwise creditworthy borrowers, and Chang says this leaves a lot of money and business opportunities on the table - for lenders and borrowers alike.
"Our underwriting criteria is different for every industry," she said. "Even something as simple as increasing requirements for trucking from three trucks to five actually makes a difference in the defaults on the other side."
6th Avenue uses highly granular data and artificial-intelligence tools to support all lending decisions, which are ultimately determined by a human underwriter.
"The most risk-effective way to underwrite is with transparency," Hollis said. "You need to know that the person that you're dealing with is going to be open, honest and transparent with you about the ups and the downs."
The "radical transparency" that defines 6th Avenue's underwriting also guides its relationship with Star Strong.
"Transparency builds trust," Chang said. "I'm not going to pretend my originations are X when they're actually Y. Spring will find out eventually, and that would not be good for us."
Growing the pie
Hollis and Chang say their collaborative mentality applies also to their approach to other firms.
"The people that I'm closest in the industry think they compete with us, and I'm like, 'No, the pie can be bigger.'" Chang said. "The story of alternative credit is to be able to offer choice for people."
Indeed, the overwhelming demand for small business financing is fueling a boom in specialty finance firms like BlueVine and Kabbage.
In addition, tech companies like Amazon and Uber are increasingly offering some form of small business credit.
As financing options proliferate more quickly than regulatory protections, it's especially important to delve into the fine-print of lending agreements to make sure they make economic sense for your business.
Even more importantly, Hollis and Chang demonstrate the value of building strong relationships with trustworthy partners.
"It's not zero-sum," Hollis said. "We can all win."