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Industry Watch

Upward trend: Since its founding in 2009, Channel Partners has funded an ever-increasing amount in loans

A working model

Providing short-term loans and prompt service to small businesses, Channel Partners has found its niche

By Dan Emerson
Saturday, July 26, 2014

If Brad Peterson and Jill Corson could have picked the optimum time to start their new business, small-business lender Channel Partners, they would not have chosen 2009. 

When they launched their Maple Grove–based firm early that year, the U.S. was in the throes of the worst financial system meltdown in decades. A few months earlier their former employer Predictafund (a financial services business unit of New York–based Capital Access Network) had been suspended due to the crisis.

But in retrospect, while it was an unusually difficult environment for most startups, it wasn’t all bad if you were “in the finance business with a product that can help businesspeople in a little bit of trouble,” says Peterson.

He used his expertise and contacts in finance, acquired over 20-plus years in the field, to develop a business model that could expedite the flow of operating capital to credit-worthy small businesses in need of short-term loans (six to 24 months). 

Clients of Channel Partners are typically under $10 million in annual revenue, and usually under $5 million. The company provides loans of $10,000 to $250,000, with most being between $25,000 to $150,000. The loans are unrestricted (meaning borrowers can spend loan proceeds on any business-related purpose) and unsecured (no collateral required). 

Channel often partners with equipment-leasing brokers who work with small companies. The firm is a revenue-based lender, basing its loan decisions on the consistency and diversity of a client’s revenue stream, rather than on its credit, collateral, and cash flow as a bank would.

Channel’s business model has produced steady growth. In its first full year (2010), the firm funded $6.5 million in loans, followed by $10 million in 2011, $21 million in 2012, and $35 million last year. It made about 200 loans the first year, growing to fund more than 1,200 loans. 

Last year Inc. listed Channel Partners 390th on its Inc. 5000 list of the fastest-growing private companies, citing three-year revenue growth of 1,137 percent between 2009 ($178,470) and 2012 ($2.2 million). Channel’s revenue grew to $3.6 million last year, and Peterson expects it to reach $4.5 million to $5 million this year.

Prompt service is one of Channel’s primary selling points. It typically generates offers within 24 to 48 hours and wires money to the client’s account within two to four business days after approval. 

For repayment, each day it deducts a fixed dollar amount from the client’s bank account. Once the client has successfully repaid 50 percent of the loan, it’s eligible to apply for another.

“About 60 percent of our customers renew, which we take as a good sign that the product works for them,” Peterson says.

Channel Partners has a network of about 400 “referral partners” that are involved in equipment leasing and the related financing. “They’re focused on helping a business acquire equipment. But that business might also need $50,000 for renovation or some other purpose. So, we’re giving them another tool to help small businesses.”

How does Channel Partners finance its loans? Its affiliate Channel Partners Capital utilizes an equity base contributed by Channel Partners and some business associates, mezzanine funding provided by Willmar-based Central Minnesota Growth Fund, and senior debt from St. Paul–based Anchor Bank. 

“Transactions that don’t meet our internal funding guidelines we syndicate to one of several funding partners,” Peterson explains. “In the case of a syndicated deal, our role is to find the best source available based on the needs of the borrower.” 

Channel Partners typically funds 15 to 20 percent of loans internally and syndicates the rest to other funding sources. Interest rates are higher than those charged by banks; the loan amount will be from 75 to 85 percent of the total payback amount. A business that borrows $10,000 will pay back $12,000 to $14,000, depending on the terms.

“Because of the short-term nature of our loans, interest rates are not very relevant to the business decision,” Peterson notes. “Most of our borrowers make their decision to move ahead with the loan based on the ROI of use of funds. We offer financing options and help the businesses evaluate the ROI of their project … if they can borrow funds more cheaply [elsewhere], we encourage them to do so.” 

One customer is Illinois-based IRH capital, which specializes in franchise financing. President Keith Rabin says that when Peterson started Channel Partners, “he studied the existing business model with the goal of adding value to the process. He dissected the most challenging parts of the process and found ways to make them more efficient and easy to navigate.”

Looking ahead, Peterson plans to continue growing by working with more equipment-finance companies and other referral sources who work with small businesses, including community banks.

Rick Nelson, a senior lecturer at the University of Minnesota’s Carlson School of Management, says Channel Partners is part of a national trend: the emergence of non-bank financing entities. “There will always be a niche the banks don’t service well,” he says. “And there will always be borrowers on the margin who are too small and find it difficult to get loans.”   

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