Give Customers Credit

Patrick O’Shaughnessy recently had several of the partners from CoVenture Credit on his podcast to talk about modern lending. Towards the end, they get into the question of “what they wish they understood earlier in their business.” Their answer was insightful on multiple levels – and especially relevant to conversations we have every single day. 

Usually, in markets, we’re taught that some sort of informational advantage is necessary to win/profit. With their earliest loans, they looked at how deeply the borrower understood all of the various covenants and rules relative to the way their team understood those same features and thought (paraphrasing) “this is our advantage. We know this better than anyone in the world, so we’ll win over time just by a sheer information advantage.” And that was true in aggregate – they had done their homework and knew exactly what interest rates they’d need to charge in order to achieve their desired returns given a set of default and loss assumptions. But, it was dead wrong in how they would actually run and succeed in their business.

The only thing better than getting your assumptions right is getting them better than right. When a borrower didn’t truly understand all of the rules associated with their loan, they could (and would occasionally) accidentally default. Once in a while a borrower would express that if they had only understood those details better, they could have avoided the situation by some reason. The CoVenture team heard them. By educating their borrowers more extensively, they’d have the opportunity to discuss what they might try to do prior to a default. If corrective actions could be taken, their assumptions could be improved, and continuing loan payments would increase their returns. The information advantage over the borrower wasn’t the edge, it was the flattening of that advantage so that the lender and the borrower were on the same page that enabled them to thrive.

As an added benefit, their intensive education process means when they say “no” to a potential deal, the prospective borrowers leave knowing exactly why they were rejected. They approach these loan-rejections as a prospecting tool. When those business owners return to their venture and startup communities, they can easily articulate exactly what CoVenture would not do, and what they would need to do/change to have access to their funding resources. As O’Shaughnessy pointed out, “goodwill compounds.” How true a statement. Former defaults and rejections are now a primary source of their introductions.

We all have to constantly remind ourselves, and our clients, about what we actually are doing and why so that they can understand. Unless we provide them with clear and articulate explanations in their own language, they will not know how to tell someone else about what we’re doing for them. In the face of recent volatility, consider the difference between, “they told me to stay the course,” and “they told me my plan is intact, that I don’t have to change my budget, and that they’re doing stuff tactically to make sure we’re being opportunistic while stuff is ugly – they said everybody should be making adjustments like this with regard to their plan. If your person is telling you to just stay the course, maybe you should talk to them.” See the difference?

Words matter. Taking care of people in a way they can share matters. The information advantage is not just in being the expert, it’s in educating the consumer so that they can be on their best behavior in the environment we are an expert on curating. Goodwill compounds, but we still have to make the initial investment.

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