Improving Access to Capital, From Military Evacuees to SMBs

Shawn

Hello, this is Shawn Budde of Ensemblex and this is “The Ensemblex Exchange Podcast.” Today I'm talking with Alex McLeod, the founder of Parlay, which helps community banks and credit unions approve small businesses for loans.

Alex is a three-time tech founder focused on economic inclusion. She is currently the founder and CEO of Parlay, a software platform for community banks and credit unions. Previously, she was the product owner for one of Deloitte's first SaaS products that leveraged blockchain for disaster recovery. Alex also built a non-profit program, the Refugee Upskilling Program that received an impact award from Zendesk. Welcome, Alex.

Alex

Thank you for having me.

Shawn

So Alex, let's go back to Cambridge. You studied Russian, Spanish and Slavonic studies. Can you tell me what that is?

Alex

Slavonic.

Alex

Sure, so my background is not a traditional fintech background, I'd say. It started for me in languages. So I was raised in France after being born in Hong Kong as a British person. So I've always been really fascinated with languages and communication and how to explain something to one group and make it make sense to another group. So the initial version of that for me was languages. I went to Cambridge to study French and Spanish, but I was already a French speaker. And so I wanted to take on another language and I ended up taking on Russian, which was very difficult and which I really enjoyed.

Shawn

I was about to say. I had a roommate in college who was Russian, and this was at University of Illinois, and he was very excited because they had apparently a very good library and it was all his. He did not have a lot of competition for the Russian books. So you've moved between for-profit and non-profit, and what's the common thread there? What's gotten you excited to move between those two things?

Alex

Yeah, so I have always really, really cared about impact. Every project I've worked on for the last decade has related to enabling economic impact and social change in some form or another. The first version of that was two initiatives I helped write the business plan for, and subsequently was part of the founding team of  where we helped underserved community members upskill and become proficient in high tech manufacturing jobs. And then the next project, Re-Up, was a non-profit and helped recently arrived immigrants and refugees get connected with jobs in the US, which is very difficult. And that work actually on the non-profit side is what ended up reconnecting me into the financial inclusion project that is now Parlay, a for-profit, that helps underserved business owners and entrepreneurs get access to capital.

Shawn

Can you tie that together for me a little tighter? Like, what was the relationship between the upskilling and small business lending?

Alex

Yeah, so in 2021, the US evacuated 100,000 Afghans from Afghanistan following the withdrawal of US troops from the country. And I have the background of economic inclusion projects helping train people in jobs in the US. And I knew that as part of that effort, there would be several phases. One was just evacuating people and making sure they were safe. That was kind of phase one. And I knew that a lot of focus would be on that first phase, but there wouldn't be enough thought put into the next phase, which is, okay, great, people's lives are no longer in danger, but they now need to survive and thrive and integrate into US society. So as part of that, I flagged to several friends in the economic inclusion ecosystem that this problem is coming and they too were seeing it. My husband and co-founder of Parlay was helping to actually evacuate those folks as he was formerly in the military. And so we ended up becoming part of a consortium of organizations that joined forces to help these folks resettle, integrate all of that. And so while on the ground, we did a number of things. One, we worked with a number of US employers to put these folks in front of them and bridge that access to meaningful jobs challenge. And then notice that in that ecosystem of new arrivals, a subgroup really wanted to start their own businesses. And they really wanted to find ways to open shops and to start their own businesses and they had no idea where to start and they had no idea how to do it. And so we ended up doing a number of projects. One of them we teamed up with the Pentagon Federal Credit Union who were supporting a specific group of Afghan female tactical platoon leaders and those women wanted to start businesses and open shops and so we ended up connecting them to CDFIs and providing financial literacy programming for them so they could understand what it would take. And while we were doing that work, we noticed that there was a big educational gap because the US has a very specific debt-based society that is not replicated in other parts of the world. But also we noticed that as we were collaborating with the CDFIs to try and get these women access to capital, those CDFIs were flagging for us that what we were going through was a pain point that they actually felt across the US, which was it's really hard for us as a CDFI to do this work with each and every business owner that wants capital from us because there are inefficiencies and problems in that value stream that we don't have the resources to solve. And that's where we learned about the problems that relate to SMB capital access, and that's what informed what we then built at Parlay. Not linear.

Shawn

Got it. Yeah, well, reasonably linear. Can you talk a little bit about what a CDFI is? I think that's a term that's new to some folks.

Alex

Yes. So in the ecosystem in the US, there are different kinds of financial institutions, some really big, some really small. You have community banks and credit unions, about 10,000 of them in the US that are truly the pillar for community support and small business lending and all these things we're talking about. And within that group there is a small group called Community Development Financial Institutions. Sometimes they're non-profit, sometimes they're not, but their remit is to help the most underserved segment of business owners and consumers to get access to financial resources and financial literacy support and technical assistance to help those who need the most help to get what they need in an affordable and dignified and really, it's just a fantastic group of lenders. Sometimes they work together in coalitions across the US. The thing I would say about them is that traditionally I've observed they have incredible missions and incredible people, but they almost never have the resources they need to do what they were founded to do. And so this is where we get to help out and help them with some of those pain points.

Shawn

Yeah, so you mentioned inefficiencies. You know, I think traditionally, you know, over the last several decades, mass market has been very well served. It's, you know, for consumers, it's easy. It's all just driven off of the bureaus. And then banks kind of are happy to do loans over a million dollars or something like that, maybe even a little bigger is what they prefer, but it's a very judgmental process. You know, so it's that gap. It sounds like where these players are fitting in. How are you solving the inefficiencies in that kind of, you know, small dollar, relatively speaking, for small business loans?

Alex

Yeah, it's a great question, Shawn. There are about a hundred problems inherent in that. Truly, truly. You know, you're exactly right, community banks and credit unions favor larger loans when it comes to small business lending, because inherently it's very hard to do it in an automated way, like you said, for consumer lending. Every small business is a bit different to another small business. You can't compare two small businesses in the same way that you can compare two consumers because they are in different industries that have different rates of growth, capital intensity is different. The same amount of revenue for two companies might mean something completely different. There might be saturation that impacts whether a business is good or not. If I have a pizza shop, but I have, you know, I'm in a neighborhood where there are 300 other pizza shops that could be a lot riskier if a given bank is gonna look at me. So just to begin with, it's a much, much harder ecosystem. And because it's much harder to evaluate and because there's more subjectivity in that process, you do see lenders prefer to underwrite larger deals because it's expensive. It takes time.

Shawn and Alex have to look at every deal one by one, do all of the research, understand the risk, all of that. And so just by virtue of economics, it is harder for those lenders to do smaller dollar loans because they cost almost as much as they do to do those larger ones. And so where we fit in, we work with a specific kind of lender, small business lenders that are either community banks or credit unions. They can be a CDFI depending on their designation that do SBA 7A loans. And that's a type of small business loan that is government backed, which is really nice because it then allows that lender to take on extra risk because the government is backing that loan, which then allows them to do more work with more underserved business owners. So that was where we picked it.

Shawn

Is the government fully backing it or their first loss or how does that work?

Alex

Yeah, they guarantee a certain portion of the loan. Yeah, and that percentage can vary based on a few things, size of the loan, others. It's a great program. About 1500 lenders in the US participate in it, which is amazing. And some prefer those larger ones, like we said, they would still rather do the one million and above ones, but there's a group, a tranche that looks at those smaller ones too. And where we fit into the puzzle is we help those lenders do those smaller dollar SBA loans more efficiently, which then allows them to not spend as much to be more operationally efficient. And so they are then more open to doing those smaller dollar loans, which is our mission. We want to help more small businesses that are underserved get access to affordable counsel. And when you think about that in the lens of those lenders, they traditionally have three problems that they're trying to solve. One, small businesses traditionally don't know how to complete application documentation. A lot of the time a lender will struggle with the back and forth right in the beginning of that process because Alex McLeod and Alex's Pizza Shop either didn't complete the documentation and just churned altogether, or she completed it but inaccurately, or she...partially completed it and now Shawn is having to follow up with her to get the documentation she needs. So one, this causes tremendous inefficiencies in the process and a lot of applicants will just drop out of the funnel altogether because the process of getting that documentation and that information is hard for them. And that leads into the other problem that we solve which is applicant eligibility. Rarely do small businesses know whether they qualify for a loan or not, and it is very hard to help them understand that. So our platform helps small businesses understand their loan readiness. Can you qualify for this thing that you're applying for? And if they're not qualified, how do we help them improve their eligibility over time? So we have a nurturing tool that helps fill the funnel for the lenders we work with. And then finally, the goal is to make that entire end-to-end process more efficient and help lenders maximize the given customer lifetime value of a small business. Rarely does a business only need, they usually need a suite of financial products. And how can we surface those insights for the lender so that they can be the one to serve that small business instead of the small business having to go 10 different places to get the products that they need.

Shawn

Yeah, so, if I think about a mortgage, there's kind of two components. There's the underwriting component and there's the just documentation, perfecting the lean and all that. And how much, what I'm hearing from you is that most of the effort here is in getting people through the process and more like that perfecting the lean side, as opposed to the collecting the, well, I shouldn't say collecting the data, but what you need to do to underwrite or figuring out whether or not they should get a loan. Did that make sense?

Alex

I would say, so it does make sense. And I would say in that frame, the bit that surprised me the most when we started this was the act of gathering the information required to underwrite is the pain point. We were sitting with a huge lender, just this Friday, who told us that it takes them two hours to underwrite a deal, but that it could take them weeks, maybe months to get all the information they need to underwrite that deal. Which is crazy. And so where we fit is at the earliest bit of that funnel. How can we get you, lender, the data you need so that you can help said borrower, or if you can't refer them out to the appropriate organization that can?

Shawn

Yeah. And so let's talk a little bit about that data. I mean, it comes from so many different places. and I think this is what I always find interesting about small business lending, right? Is that you've got an unknown number of partners in the business. So you can't just always underwrite it the same way. I'm using some personal credit, probably. I might be using Angie's list or Yelp. I might, they may or may not have a DNB. They may not have a business checking account. So how do you...

Alex

It's chaos.

Shawn

It is chaos. Yeah. So how do you bring order to that chaos? How do you even know what data to ask for? And is it just standard or is there something different you want to get from, you know, as you said, a pizza shop versus a flower shop versus whatever, an auto body shop.

Alex

Yeah, it's a great question. So we picked SBA 7A because it has a generally finite number of documentation requests that they need to be able to determine whether a deal can be done or not. But there is nuance there. And so in our platform, what we had to do to accommodate for that nuance was build workflows that were conditional based on the type of business you are based on your NAICS code, which is your industry code, based on revenue thresholds and based on the number of business owners that as you said, have ownership in that business. And what surprised me the most was two things happen much more frequently than I realized. One, we initially when we built the platform, we thought, okay, well, we don't need to build anything for all of the business partners, that'll almost never happen. Incorrect, it almost always is the case that there is more than one business owner, and so we had to incorporate that into our workflows. Do you have a business partner? Yes, how much of the business do they own? And all of that is required as early as possible, because otherwise any assumption of our eligibility could be completely wrong. And so we had to solve for that. And then the other piece was, okay, we need to find a way to help these business owners convey lots of different types of information, financial data, use of funds data, personal financial statement data, all these things are opportunities for inaccuracies or missing information to prevail again. And so we had to really work through building a TurboTax style interface that helps the small business just answer questions in simple English to get where we need to go to help them get through that.

Shawn

So if I think about that flow, did that start as, you know, conceptually three nodes with a fourth other node and just every time someone lands in that other, you have to figure out how to build more to that tree? Is this just a very manual iterative process?

Alex

It can be manual. And what we've done is that we have removed that manual assessment and work. We have logic baked into the platform that can assess all of those things. And we have also integrated additional data sources from outside that can help validate some of that information. Because one challenge is gathering the information, and then the second is confirming that information that was gathered is true. And both have their own challenges when it comes to fixing that.

Shawn

Yes, okay, so a borrower gets through your process, they've got a completed package, and is that when you hand it over to the community banks?

Alex

Yeah, so we help, we have a system of, imagine a system of locks. You know, if you get past lock one, then the second set of things populates. If you get past that, then third. And, you know, first you have to qualify for the loan program itself. So that's where we first get the applicants to answer some questions about the business and what they're gonna use the money for, are they a pyramid scheme, stuff like that. That's SBA eligibility. So we have to get through that first. And then phase two, it's generally the preferences of the lender. So they will have their own underwriting standards and credit policy requirements that have to be layered on top of that. And our platform takes all of those rules and those requirements and then helps the small business submit, gather, generate the information required to help that lender then identify whether it is even worth sending them an application link because we're not even at the application yet. That's the bit that's the noisiest in the funnel and it's the bit that despite the proliferation of digital loan application programs out there isn't solved yet and that was a big surprise for me as we got into this.

Shawn

So, to get through that first lock, I mean, are 10% of the companies that come in the front door getting through that first stage or is it 90?

Alex

Yeah, it depends. I would say that from what we've seen and from conversations I've had with industry experts, it is not uncommon in the ecosystem to see 60% declinations across the country. That could be a mix of SBA eligibility, but also the requirements of the lender. That's a big number if you think about it. Of all the small businesses that are applying for capital, only 30% are even getting to the point where they're being evaluated, they're getting an offer, they've accepted that offer, and they're now agreeing and moving to servicing. And part of our mission is to not only get those yeses to a faster yes, but also get those, what would traditionally be a no, can we offer them a not yet? Are they truly ineligible, or could they be eligible in six months? Would they be a good customer for the bank, but maybe this is the wrong product? And so we're trying to unpack that big 60% that currently just gets a no and see whether they can be filtered, vehicled towards other products, whether they can be nurtured to meet those requirements. So we can give them either a not yet or a yes, but ideally we're getting all of them in time or as many as possible to a yes.

Shawn

And a not yet would mean you've got to hit a certain revenue threshold or just more time… What might that look like?

Alex

Yeah, so it depends on the lender, first of all, always, but it is a number of attributes that the applicant can impact. How many years have you been in business? It feels probably in the moment, like they can't impact that, but if you're one year old, then when you're two years old, actually you do qualify for this program. So this might be a come back in a year. That's not ideal, obviously, because the applicant generally needs the money right this second.

Shawn

Right.

Alex

But other examples of attributes are FICO credit score of the business owner, industry type. These are things where the probability of default or expected loss on that loan is impacted by a subset of attributes that ultimately the applicant can impact. There are things that they can't impact, but the ones that they can, if they can, and we believe that in a certain window; you know, six months from now, maximum 12 months from now they could actually get that, then we'll surface that information for them in the event that makes sense for them. Sometimes it's, they need it right now, the money is urgent. That's obviously the least optimal scenario, but if they can hold out a little bit longer, oftentimes that program is gonna be better for them than a predatory loan or a hard money loan, something that's gonna hurt their financial health much more over time than if they waited three months before resubmitting an application.

Shawn

Yeah, I always said the first rule of credit is that you never want to give credit to anybody who wants it. So obviously anybody for whom it's urgent is going to be riskier.

Alex

Yes. Yes, a bit like fintech, you know, when you're pitching for VCs, the best time to pitch is when you don't need it. I found that same thing happens on the small business side.

Shawn

Yeah. Well, why don't we talk about that then?

Alex

Sure!

Shawn

So where are you in terms of funding?

Alex

Yeah, so we, in 2023, we closed two rounds of capital. We did a first angel round with friends and family, and then we were accepted to an accelerator program called Techstars, which was fantastic for our growth. We really appreciated that. And then we ended up doing three or four more accelerator programs to continue building our network. And then at the end of the year, we closed our first institutional round of capital, which was led by Fenway Summer out of DC, who have one, just an incredible team, but two, an enormous rich background in the regulatory environment and the SBA loan program itself. So we were very, very lucky and honored to get to work with them on this.

Shawn

Where was your Techstars?

Alex

It was out of Boulder. It was the OG fintech program, yes.

Shawn

Yeah, we've talked to them recently. I hadn't realized this before. I always assumed you just went to the Techstars that was down the street.

Alex

No.

Shawn

But I guess they kind of orient around what you're trying to achieve and the location is different for that.

Alex

Yes, and…

Shawn

So how much time did you actually spend there? Oh, yes and.

Alex

We originally applied to the DC one, but we did not get in. And so part of it, we were earlier, we had less traction. We had a not yet, not a no is how I think about it. And when we ended up reapplying, we did get a yes. And I actually would not have applied again if a friend in the fintech community hadn't said, Alex, I know you've already applied and you're not interested, but I really endorse this program. You should do it. And I fully agree with her. It was a fantastic experience.

Shawn

That's great. And can you talk a little bit about, you know, you've started up several things. Like what is the commonality? What has inspired you to keep doing it over and over again?

Alex

I think impact. I often tell people that want to start a company, that if you're doing it because you want to get rich, it's a very bad idea. It's a low chance of success, but if you do succeed, it tends to be in an outsized way, but the work itself will be very long and very hard for 10 years, and so at least often times. And so I tell, I tell other people about this, you have to either really enjoy taking risk or you need to really enjoy building things. Luckily, one of my co-founders loves taking risk and I love building things, and so together we work that way. But for us, we know that small businesses account for 44% of the US's GDP and they are massively underserved. 35, 30 million small businesses, 25 or so I think are underserved and struggle with access to capital. And for a community that accounts for half of our GDP, I feel like we should be able to do something about that. And so for me, success is being able to move that needle and helping people get resources that they need. Access to resources is a driver for me. One of my co-founders, Jay, who's also my husband, his personal mission is unlocking trapped capacity. My personal mission is enabling access to resources. And those two things really get combined in this case. There are loads of banks and financial institutions and credit unions out there that want to lend and need more efficient ways to do it. And small businesses struggle with understanding what it takes to get access to that capital. And so we get to work on that personal mission together.

Shawn

On that note, what is it like to found a company with the person you live with?

Alex

It is good if you like building things and if you like spending time with each other. I think that a lot of people normally when we share this they're like, oh my God, I could never found something with my husband, or my wife, or my spouse that sounds awful. And it is, I personally find it incredibly fulfilling. Both of us are very mission oriented. For us, success is in doing the work.

Since we met, we have collaborated on every single professional and personal project. We have written articles and policy proposals for legislation. We have built startup programs and non-profits. To us, it feels like an extension of how we work together, but it does take discipline to learn how to turn things off. We went full-time on this last January and I kind of liken the first 18 months of a startup to feeding a baby bird. You don't get to take days off. You have to feed it all the time. Weekends are irrelevant. You will be doing the 300 hours of work you need to get done at any given week. And so we had to, this year, we're trying to be a bit more reasonable with not working every hour of every day. One, for our personal sanity and relationship, but two, because now we’re in a different phase. We're funded, we can bring on the team to help with this and that's been helpful. So yeah, my recommendation is if you really love and believe in your partner and the skills that they bring and you bring, you know, and you guys are both passionate about the mission, great plan. If you struggle to work with your partner, definitely do not start a business together because it will really test you as a teammate, as a spouse, in every way. So yeah, fair warning.

Shawn

Yeah, it's definitely a different experience. So I can see where it could work for some folks, and I've worked with some folks where it definitely did not work well.

Alex

It is. It is. Yeah.

Alex

Yes, and VCs have agreed with you, Shawn. Some of them were like, “well, what's going to happen when things get hard for you,” is a question we got a lot and we kind of laughed because our relationship started when Jay was in the military, my husband, and he got a one-year-long hardship tour to the demilitarized zone between North and South Korea. That was the first year of our relationship, and so everything since then has been a little easier in comparison to what people might imagine is a hard day starting business together.

Shawn

Yeah, so you gotta stress test it first maybe.

Alex

Yeah, we did. Yeah, exactly.

Shawn

Excellent. Well, thanks so much for joining us today. You can follow Ensemblex and Alex McLeod. That's M-C-L-E-O-D on LinkedIn. You can also visit us at Ensemblex.com and you can find The Ensemblex Exchange podcast on all major platforms. Thank you for joining me today, Alex. I really appreciate it.

Alex

Thanks so much.

Shawn

And thank you all for listening.