Dollars and Sense: inside the weird (and sometimes wonderful) world of private lenders
Why private lenders have more in common with bankers than bookies, and why the economy needs them
by Cailynn Klingbeil
Dave Chen wants you to understand something: He’s not a loan shark.
Photograph Colin Way
Yes, he charges his clients – usually people who do not qualify for traditional bank loans– around 20 per cent interest on payday and term loans. But he’s not the morally-challenged salesman you might associate with that kind of business, one who happily profits from the misfortune of others.
And after you talk to the customers he has helped – “helped” is their word, not his – you begin to understand the niche that the 41-year-old Chen has carved out for himself through his private lending company, Blue Copper Capital Corporation.
Blue Copper, which is governed by Alberta’s Fair Trading Act, specializes in loans (secured and unsecured) that average around $5,000. His business, in other words, depends on volume, and Chen and his three employees stationed in offices in Calgary, Edmonton and Vancouver signed more than 1,491 loans last year. That demand speaks to the fact that, while big banks are more than happy to advertise low-interest loans, they are reluctant to actually issue them. That’s why, Chen says, his clients turn to him. “For Joe Schmoe who wants to buy a $3,000 vehicle at six or seven per cent, it isn’t available to him,” he says. “It’s just not there. That’s where a business like ours fits.”
There are a number of different operators in what you could call Canada’s sub-prime lending market. There are the large payday loan companies like Cash Store Financial and EasyFinancial, which charge fees rather than interest to clients in order to comply with this country’s usury laws. Then there are lenders like Zoltan Padar, the owner of Calgary-based Private Lender Inc., which provides mortgages and loans for a variety of purposes but requires a real estate asset as collateral. Blue Copper, on the other hand, doesn’t touch mortgages. Instead, Chen says, it’s more like the micro-financing businesses found in developing countries. Loans ranging from $1,500 to $5,000 are always needed, he says, because life has a way of creating needs that can’t always get covered out of a monthly paycheque. “People get divorced, they’re coming out of school and just starting out, they move, they get sick, they want to start a new business on the side,” Chen says. “All kinds of things happen to people.”
A quick look on Kijiji supports Chen’s view. “NEED LOAN SHARK OR PRIVATE LENDER” shouts one ad, asking for a $2,000 loan for bills that the poster is looking to pay back. “You can come up with the interest,” it states. Another, from a poster named “Glen,” says “Wanted: Private lender/funds needed. Seeking lender for short-term small loan ($5k to $10k) secured against upcoming spinal injury accident insurance settlement.” Others are looking for cash to start businesses, pay bills, or buy new toys. “The dealership could not get bank financing because of my credit which was impacted by the recession in 2008,” writes a poster named “Dan,” who is seeking lending for an RV trailer.
For “Marc,” who asked that his last name not be used, a $6,600 loan from Blue Copper was the capital he needed to start his own property maintenance business three years ago. “If it wasn’t for them I wouldn’t be where I am today,” he says. He declared bankruptcy after a failed marriage and had trouble borrowing money from a bank. “Stuff happens in people’s lives, so if the only way I could establish my credit was to pay higher interest with one person, then that is the way it’s going to be,” he says.
For people like Marc, a bank looks only at his credit rating when deciding whether or not to lend him money. Blue Copper takes a different approach. “We’re not ‘no credit, no problem’ guys,” Chen says. “A bank needs good credit, a good stable residence, and a good job. We need two and a bit out of three. If someone has a good job and a really stable residence but their credit may be sketchy, then we’ll do business with them.” As a result of those comparatively relaxed standards, Blue Copper approves 40 per cent of applicants looking for a loan.
But not everyone who comes to Blue Copper is in a position where they can’t get it elsewhere. Chen describes one high-earning client who has done over a dozen loans with Blue Copper and who continues to choose the company – despite the fact that he could get cheaper financing elsewhere – because of the convenience. Other clients have steady jobs and are looking to start their own businesses, which are usually part-time, home-based operations. “They just need a little bit of cash to start their dream,” Chen says. Repeat customers are also common, and Chen says he occasionally has to tell them to consider applying for a bank loan. “People are creatures of habit,” he says, noting that they’ll keep returning to Blue Copper even when they can get cheaper money elsewhere.
It helps that Blue Copper meets with clients when it’s convenient for them, often at coffee shops or a client’s house in the evening, and processes loans quickly. “People don’t like borrowing money,” Chen says, “so we meet someone in their environment, where they’re a lot more comfortable.” Chen also credits meeting people and building a personal relationship with them for keeping the company’s default rate at around three per cent.
Blue Copper’s approach seems to be working. Chen started the company in 2008 in Calgary with an initial investment of $390,000. As of September 2012 (the most recent year end) Blue Copper’s annual interest revenue was $278,000, with about $1.6 million in loan receivables. Investors (all friends and family) receive a 10 to 12 per cent return on their investment.
Chen became a private lender in a roundabout way. After completing one year at university he took a job selling air compressors for Thermo King Calgary. In five years he advanced from sales manager to general manager to minority-owner, eventually selling his piece of the company in April 2008. Shortly after, over the course of just a few days, he spoke with a friend in lending in the U.S., another friend in Mexico who saw people borrowing money at 200 per cent, and read a book about interest rates. “Everyone wants to find something that makes them money even while they’re sleeping, and interest is one of the few things that does that,” Chen says.
The only world Chen really knew, though, was manufacturing. He called up a few friends in the industry who told him what he already knew: Many apprentices, who require a certain number of classroom hours and on-the-job experience to become certified tradespeople, were struggling to pay their bills. These were often young people with no savings or credit history. Some needed money for tools, some needed to maintain an income while they were in school and some needed a vehicle to get to and from work. Employers were lending apprentices small amounts of money because they didn’t want them to quit or be forced to find other work, but Chen wondered what would happen if he started doing the lending. “I figured that was a niche, if only because it was the only thing I really knew,” Chen says. A few days later Chen wrote his first loan.
Chen stuck to what he knew at the beginning, entering manufacturing floors at lunchtime and telling employees how they could get a loan from Blue Copper. “We just started chipping away, doing little loans,” he says. He found that once clients paid back one loan, they’d return for another. “In that world those guys love their quads and snowmobiles, and we started financing that stuff and our business grew.” Blue Copper continues to grow by focusing on the small stuff. The company issued 150 loans in 2010, 480 in 2011 and more than 1,470 in 2012.
While business is strong, it’s not a get rich quick scheme. “It’s not glamorous,” Chen says. “If I had $20 million, would I be doing this business? Probably not. There are simpler ways to make money.” In a sense he’s discovered what his clients already knew from dealing with him in the first place: There’s no such thing as easy money. “Everyone wants that magic pill or silver bullet,” Chen says, “and in the world of money, it isn’t that way unless you win the lottery.”