I've dedicated my career to helping ordinary people by connecting them to credit opportunities and consumer loans, even when their credit scores are below average.
So it's no wonder that the online lender Avant caught my attention when it launched in 2012.
Avant's CEO and co-founder, Al Goldstein, speaks my language when he describes the goal of his company:
Avant is meeting the need of the underbanked middle class.
A decade after the 2007–2008 subprime mortgage crisis, most big banks won't provide personal loans anymore—regardless of whether your credit is good or not!
Forget about getting a personal loan from Chase, Bank of America, or Capital One.
And the few banks still offering unsecured personal loans (like Wells Fargo and Citibank) mainly serve people with FICO credit scores of "Fair" (650) or better.
Until Avant showed up, if your credit score was less than "Fair," the only borrowing option you were left with was pretty much a payday loan that comes with a ridiculous interest rate that can go up to 500%.
That means there was a really big gap to fill for middle-class people whose credit scores were below average but who needed access to funds via loans.
These "near-prime" folks felt like they were between a rock and a hard place.
They would go down to a brick-and-mortar bank and go through a long-winded and complex application process, only to get turned down at the very end.
Goldstein's co-founder John Sun actually went through that exact experience and recognized there was real need for a company or service that prioritizes lending to people like him.
Their key was to focus on borrowers in the 580 ("Bad") to 700 ("Good") range and to make the application process more accessible and streamlined by taking it online.
They also invented their own method for calculating credit risk, which proved more useful to the company than traditional means.
For example, Avant's new formula turned out to be better at identifying loan-worthy customers than using FICO scores alone.
Avant disrupted the consumer credit market almost immediately after it first started lending.
Since 2012, it has grown to have more than 600,000 customers and $1.8 billion in funding (including an investment by PayPal co-founder Peter Thiel).
Its massive gains came from serving people who would otherwise be left behind when it came to getting credit.
Transforming the credit scoring system and simplifying the loan process are the two major things the company did to disrupt the consumer lending industry.
If you have less than stellar credit, Avant can still help you.
It's what the company is known for, and what its huge, rapid success is based upon.
Serving an Unmet Need
Creating credit opportunities for the "underbanked middle class"
Fresh from completing a program that taught entrepreneurs how to succeed in a start-up business, John Sun got in his car and went down to the bank for a personal loan.
Sun and his best friend Paul Zhang were building a digital debt management platform, and he needed some money to cover his personal expenses and so he hoped the bank would be able to help him.
The loan application process at the brick-and-mortar bank branch was complex, frustrating, long, and drawn-out.
After jumping through every hoop put in front of him, and waiting patiently for approval, he was unceremoniously turned down.
John Sun and Paul Zhang, who are both from China, had just completed the prestigious start-up training program known as Y-Combinator, so they knew they had a bright future ahead of them.
Although his credit score suggested Sun wasn't a good candidate for a loan, the truth was he was low on cash because he was launching a company called Debt Eye.
Debt Eye was a digital platform for people to manage their debts and make informed decisions based on their particular profile.
Sun and Zhang approached Al Goldstein, who they'd met when he was running another successful start-up where they had been interns.
Al Goldstein, who was born in Uzbekistan and came to the US with his family in 1988, had made a name for himself as the CEO of subprime lender Enova International.
Enova (previously known as CashNetUSA, which Goldstein had founded in 2004) sold for $250 million in 2006.
After telling Al Goldstein Sun's story of bank loan rejection, the three agreed there was a large sector of society that had long been neglected when it came to credit and consumer loans.
If it was difficult for someone like Sun to get a loan from a bank, it meant there were other people being similarly treated and excluded.
Banks didn't seem to want to even touch customers with "Bad" and "Fair" credit scores.
These near-prime borrowers could only get small, short-term loans from payday loan companies at outrageous interest rates.
The three entrepreneurs started AvantCredit (its name was shortened to Avant in 2015) in December 2012.
What's really interesting to me is how these three entrepreneurs, who wanted more people to be able to access more loans, raised their own start-up capital.
Over its short history, Avant has attracted no less than 14 investors, with 5 lead investors setting the pace.
The lead investors are General Atlantic, KKR & Co., Tiger Global Management, Jefferies, and August Capital.
The company has undergone 10 separate funding rounds, raising a total of $1.8 billion.
In 2013, AvantCredit issued its first loan, and was able to immediately get a $1 million investment as "seed money."
Two months later, the company had 28 employees and entered into its first round of big investments, which raised $8 million.
A company called Victory Park Capital got behind the enterprise, and offered a $25 million debt facility, which means it financed $25 million in Avant loans.
Only a few months later, in August, 2013, the company had 90 employees, and had raised more than $30 million
In the fall of 2013, Avant expanded to the UK, and by spring 2014, it had completed its third round of capital raising, providing another $75 million injection.
A little more than a year after getting behind $25 million in Avant loans, Victory Park Capital added another $200 million in debt financing.
The next month, a company called Jefferies matched it with another $200 million in loan financing.
The fourth round of investments was huge, with $225 million ponied-up by investment companies Tiger Global, August Capital, Kohlberg Kravis Roberts (KKR) Ventures, and a person named Peter Thiel.
A pal who helped to pay. Thiel is best known as a founder of PayPal, so his involvement provided an incredible vote of confidence in the eyes of investors and consumers.
$400 million in loan financing came through after Avant established its Institutional Marketplace in April 2015, which let companies like KKR invest in Avant loans.
A single strategic merger. On March 31, 2015, Avant made its one and only acquisition of another company.
ReadyForZero created online financial software helping people to manage their debt and credit.
Al Goldstein explained the acquisition as a natural fit, since, in addition to providing loans, the vision for Avant was to also support borrowers in managing their finances.
The early outcomes tell the story. By 2015 the company had raised over $1.4 billion in investments and provided $1 billion in unsecured personal loans to consumers through its website.
That same year it was ranked #6 on the Forbes list of America's Most Promising Companies and made the Forbes list of the Next Billion Dollar Start-ups.
Today, Avant has provided loans to over 600,000 near-prime customers, serving as both a direct lender and as a channel for loans from other investors.
Today the company has 680 employees.
Operating in 46 states as well as in the UK and Canada, the alternative lending company continues to grow and even has its sights set on offering its own credit card in the future.
Avant's launch in Canada on September 17, 2015, reflected Al Goldstein's vision to remove barriers for borrowing not just in the US, but around the entire world.
The company's stated plan at the time of expansion to Canada was to provide more consumers with more affordable loans on a global scale.
Avant is sprouting other top companies. In 2018, Avant was ranked 5th on Inc. Magazine's list of the most valuable fintech start-ups worth more than $1 billion.
The company's founders and board have created a new venture, called Spring Labs, with the goal of making financial data more secure in the wake of the Experian data hack.
Blockchain is the future of fintech. Spring Labs is using the new technology known as blockchain (the same platform on which the cryptocurrency Bitcoin is based) to further revolutionize online lending.
Blockchain "decentralizes" online financial platforms, with a whole network of computers constantly updating data to create a shared real-time database.
No more large-scale data hacks. Organizations using Spring Labs' technologies will be able to share information related to identity and credit in a more transparent, efficient, and secure way.
Familiar Avant investors are getting behind the company's latest offshoot, including August Capital and Victory Park Capital.
Serving the middle-class consumer. The average annual household income of people who get loans from Avant today is $40,000–$100,000.
The minimum annual income you need to get approved for an Avant loan is $20,000.
The loans the company approves are $2,000–$35,000, with monthly repayment plans of 2–5 years.
There are good reasons people need loans. Debt consolidation is the most common reason people apply for Avant personal loans.
Consolidating debt is when you take out one big loan and use it to pay off balances from other debts with higher interest rates, like those from credit cards and other lenders.
Home improvements and family vacations are some of the other common reasons for taking out these loans.
Transforming an Antiquated System
Using big data to evaluate loan applicants better
The main reason people like John Sun were getting declined for loans from the banks was their FICO credit scores were not high enough.
FICO credit scores are calculated based on the reports from three credit bureaus: Experian, Transunion, and Equifax.
Your credit behavior is monitored and reported to these three bureaus by your lenders (e.g. your bank, credit card company, or mortgage holder).
When you pay on time it's reported to the three bureaus, and when you are late with a payment it's also reported.
FICO scores are calculated by bringing all the information on your credit behaviors together and using that information to determine how risky it would be to lend to you.
The scores range from 300 at the very worst to 850 at the very best.
Paying on time is most important. In general, your payment histories are 35% of your FICO score.
If you have a lot of late payment penalties or have had an account go into collections, expect your score to take a hit, thanks to the weight given to payment histories when computing your score.
The amount of money you owe impacts your score. How much you owe, relative to how much credit you currently have available, is 30% of the FICO score.
It's good for your score to use some of your credit, but not most of it.
For example, if you have a $30,000 line of credit and you only owe $3,000, your score will look better than if you owed $29,000.
The longer you've had accounts the better. FICO also takes into consideration the length of time you've had credit cards and other loans to determine 15% of your score.
FICO likes it when you mix it up. The mix of credit types is 10% of the FICO score calculation, and how many new accounts you've opened is also 10% (more newly opened accounts means a lower score).
If you haven't done so in the past, taking out a small personal loan can affect your score positively because it's a different type of loan to credit cards, so having it included in your credit report can boost your score.
The problem is, FICO scores alone are not accurate predictions
I'm sure John Sun felt he wasn't a high risk for defaulting on his loan.
He was being treated unfairly by the bank.
Limited data means limited loans. It was probably because the bank was relying on nothing other than his FICO score to make the decision to approve or reject applications.
Paul Zhang (the co-founder, who is now Chief Technology Officer) knew the FICO method was old and antiquated, and could be improved with new alternative lending technology.
Avant is part of the "fintech" movement, which is short for "financial technology."
Zhang was the data scientist who led the team to develop the new fintech software for determining loan risks.
Big data innovation meets credit scoring. By applying machine learning techniques and other big data methods, Zhang's new scoring formula took into consideration more than 10,000 variables.
The new model included standard FICO data like repayment history.
Expanding the scope of risk evaluation. It also included data that was not traditionally looked at when a person applied for a loan.
Your apartment rental history, your cell phone bill records, and even things like what time of day you applied for the loan and how you typed your answers, were considered.
They discovered that a person with a 600 credit score acts a lot like a person with a 680 credit score.
Learning as it goes along. "Machine learning" means the program becomes better and better at prediction as it continues to analyze applications and the credit behaviors for each loan.
Therefore, the more loans Avant provides the better its software becomes at knowing the true risk for applicants.
With 600,000 loans distributed to date, the software must be learning a lot!
The programmers and data scientists working on Zhang's team use a coding language simply known as "R."
Much more than just FICO data. It lets them look at every dimension of a loan application, including data like how much time a person spent on each application question or looking at pricing.
When someone sends a file as part of the loan process (for example, bank records) the software also looks at "metadata" (like what computer they used).
The advanced analytical techniques Zhang developed are able to identify loan-worthy people who wouldn't have qualified based on their credit score alone.
Coding themselves out of the process. The ultimate goal is to automate the entire process, so no human is required for a loan application, which means the technology could be shared with banks.
Until then, the Avant team of data scientists and programmers continues to deploy software updates daily, and run daily trials of their code base using a test suite.
So far, the result has been the creation of a proprietary scoring model (which means only Avant can use it) with the ability to crunch huge sets of data.
After loan data gets analyzed, the Avant formula is able to determine a person's risk of defaulting on a loan more accurately than FICO scores can.
And because the machine is learning, it gets better all the time.
More accurate more than half the time. Its credit model has been proven to predict the probability for a person to default on a loan with 57% better accuracy than FICO scores alone.
Since Avant predicts so accurately, it can provide better terms for its customers and lend to people who would have been excluded if approval was based on FICO scores alone.
Higher APR interest rates. Since it lends to higher-risk consumers, the low end of Avant's interest rate bracket—9.99% APR—is above average compared to similar online lenders like Prosper.
Avant's highest interest rate (35.99% APR) is quite lofty by industry standards (even for a credit card), but is also perfectly understandable since they're accepting higher-risk borrowers.
Since Avant offers shorter terms than most loan issuers (2–5 years), the amount of overall interest paid over time can be less (even at the high APR).
Simplifying the Loan Application Process
Avant's online lending platform often approves by the next day
When John Sun was applying for a personal loan to cover his expenses while he worked on his start-up, he found the whole experience complicated, lengthy, and inconvenient.
Having to meet with a lending agent in person multiple times at a brick-and-mortar bank probably also interfered with the extremely important work he was doing at the time.
If his credit score was below average, he probably went through the wringer trying to prove he was worthy of getting a personal bank loan.
All that work for nothing. After going through the complicated and inconvenient process of applying for a personal loan at a bank branch, he was rejected.
There had to be a better way!
Internet-based lending platform. The solution Sun, Zhang, and Al Goldstein proposed was to bring the loan application experience completely online.
Less time to wait for approval and deposit. Streamlining application processing using Avant's new scoring model also meant approvals could be virtually instant.
Over half of the loan application approvals via the Avant website happen within six seconds.
The money often gets deposited into the successful applicant's bank account the next morning.
Less likelihood of rejection. The founders of Avant knew the banks were missing out on lending to many lower-credit people who—despite what their FICO scores say—would likely be willing and able to pay them back.
By developing a new model for credit scoring that's 1.5x more accurate than FICO, they proved it and put it to good use.
The hassle and humiliation of getting rejected for a loan are avoided for many people with near-prime credit ratings when they apply for a loan through the Avant website.
Savvy Marketing and Key Partnerships
Avant engaged borrowers through good old fashioned direct mail, digital marketing, and creating an Institutional Marketplace
Becoming a 2-billion-dollar company in just six years took more than just making the process frictionless and finding a gap in the market.
Avant's success can also be attributed to savvy marketing strategies and outreach to key partners.
The offer is in the mail. Many of Avant's borrowers apply after receiving targeted direct mailings indicating they are preapproved for a loan.
People follow up by visiting the Avant site and entering in the preapproval code they received and their social security number.
Then they're brought to a page with targeted loan offers and applications.
Funneling applications through the website. Digital marketing methods Avant uses for getting people to sign up for loans include using what's known as "funnel analytics" on their website.
By understanding the process and steps people go through when they apply for an online loan, Avant is able to channel website visitors towards the all-important application step.
Key partnerships increased lending capacity. One of the most successful ways Avant was able to build its client base so quickly was through partnerships with industry lenders.
On April 13, 2015, Avant launched what is known as its "Institutional Marketplace," which allowed other big lending companies to finance loans originating through Avant.
This development gave institutional investors access to the loans Avant was sourcing, and Avant was able to diversify the sources of funding backing the loans it provided.
Avant signs borrowers, KKR finances the loans. By joining forces with giant global loan financing companies like KKR, more loans could be approved and financed through the Avant platform.
Once the Avant Institutional Marketplace was established, KKR led a group of companies to sign a $400-million financing deal with Avant.
Unique business model. This business model is game-changing since it lets Avant determine who is worthy of credit using its algorithm, and lets other companies lend to the candidate it sources through the platform it created.
The business model focusing on near-prime rather than subprime or prime borrowers has caught the eye of big finance, and major banks are now interested in the technology.
There are also plans underway for Avant to use its software to approve people for its credit card, as well as secured auto and home loans.
Strength in data. Avant's strengths, and the factors setting it apart from the rest of the lending industry, are its reliance on big data rather than simple FICO scores.
Since the software can learn from its experience, investing in the company makes more and more sense after every loan Avant sources.
The snowball of Avant's startup investors parallels the increase in loans the company sourced.
The more investors and third-party loan financiers experience profit and success from the model, the more appealing it is when it comes to attracting new capital.
Now that Avant is letting other companies benefit from its software (with plans to license it to banks) the sky is the limit for its success.
As long as its competitors continue to rely on FICO scores for loan approvals, they will continue to miss out on the massive opportunity for lending to near-prime borrowers.
Key Lessons to Learn from Avant
Learn from Avant's success and apply these tips to your business
I love Avant's story and I think we can all learn a lot from the company's example.
Finding a gap in the market to fill, making the process as frictionless as possible, and profiting through partnerships are three main lessons I take away from the Avant story.
If you can identify a need that isn't being met, and an easier, more customer-friendly way to actually get it done, then you'll likely be on your way to success too.
Lesson #1: Make your process as frictionless as possible
When he needed a loan, John Sun had to get in his car and drive down to the bank branch (probably two or three times).
Then he had to talk to a lending agent, answer all sorts of questions, and fill out a ton of paperwork.
After that, he probably waited days, only to find out he didn't qualify.
A bad experience inspired a $2 billion idea. As a tech innovator, he knew information could flow more smoothly if the entire loan process was done over the internet.
The online application process Avant developed was painless, faster, and had a higher rate of approvals.
Streamlining worked wonders. The results of simplifying the lending process were almost immediate.
By 2015 Avant had loaned over $1 billion to near-prime borrowers.
Today it has over 600,000 loan customers with a loan portfolio worth $4.0 billion.
How to streamline your own business operations
Even if you're not in the lending business, you can still learn from Avant by working to make your own business operations as friction-free as possible.
Break down the customer experience piece by piece and ask how each phase could be made more streamlined, simple, convenient, and efficient.
Be ready to make some cuts. If an area of your business operations isn't adding value to the customer experience, eliminate it.
Simplify and streamline. If something is causing the customer to experience friction, like long wait times or complicated registration, do whatever you can to improve the process.
You'll see the sales process go much more smoothly, and see a lot more customers return, when you work to make their experience feel as seamless and smooth as can be.
For example, if there's something you can automate—like allowing people to pay for your products or services through PayPal—go for it.
It's no coincidence PayPal billionaire Peter Thiel invested millions into Avant!
Lesson #2: Find a gap in the market to differentiate yourself and outmatch competitors
When Avant came on to the credit scene in December 2012, the economy was slowly recovering from the subprime mortgage crisis, but lenders were still cautious.
Many banks were pulling out of the market for unsecured personal loans entirely.
The banks that did still lend had set very high minimum credit scores, excluding a big portion of the loan market.
After experiencing the indignity of getting turned down for a personal loan, Sun knew people like him could turn into a profitable customer base for a company who would be bold enough to fill the gap.
Avant differentiated itself from the rest of the lending economy by focusing on the customers that most of the industry didn't want to touch—near-prime borrowers.
Where do you see unmet demand? If you want to profit big, do a proper scan of your own industry and ask yourself, "which particular demographic is being left out and what would it take to bring them in?"
Look at your competitors (in the same way Avant did with the banks) and find out who they are neglecting.
Work out some ways you can meet their unmet need and generate a financial upside for your business.
For an idea, just look around
Let's just say, for example, you run a roofing company.
You look at all the roofs in your city and wonder why they aren't covered in solar panels.
All those homeowners could be reducing their electricity bill (and generating energy sustainably with no pollution).
Take the idea and run with it. Include solar panel installation into your roofing business' services.
When you get a call for a roof quote, give them a quote for solar panels too, and break down exactly how the investment will pay itself off and still continue to provide savings over time.
Lesson #3: Partnerships make profits
As the owner of proprietary software with the ability to accurately calculate loan risk, Avant had something other investment companies needed.
Other financing companies, like KKR, had piles of money to lend to qualified borrowers, which is what Avant needed.
The start of a beautiful relationship. Rather than considering other lending companies as competitors in the loan business, Avant embraced them.
When Avant built the Institutional Marketplace, it meant it didn't have to come up with all the money to finance the many, many loans it was sourcing.
It could still profit from a percentage of the loans other companies were financing through the platform.
All those other companies could now also profit from the technological, customer, and marketplace innovations Avant had made.
The ultimate sharing economy. Rather than guarding or hoarding its technology, today Avant is working on licensing it out to banks and other financial institutions to use in their own loan approvals.
The technology is spreading across the industry, and it's one of the major reasons Avant has seen such a rapid increase in attracting investments and sourcing loans.
Who needs what you have, and has what you need? The best tip to learn from Avant when it comes to partnerships is to assess your assets and gaps.
If you've done all the heavy lifting, like creating an algorithm to identify customers and sending out direct mails to attract them, you've got something valuable.
Perhaps in your case it's a mailing or client list, or a patent on an invention that could increase productivity across your whole industry.
Take your asset and shop it around. Rather than sealing off your valuable technology or information from the outside world, think of who else could benefit from it.
Consider licensing your asset to others and collecting dividends on their profits, or seek out investors with the capital you need to take it to the next level like Avant did.
Avant succeeded by filling a gap, streamlining the process, and leveraging both its partnerships and tech
I couldn't be more impressed as I've watched the growing success of Avant since it showed up on the loan scene in 2012.
By filling in a glaring hole in the credit market and seeking meaningful partnerships, the company was able to grow profitably and succeed in its mission.
But beyond simply turning a profit, Avant, as a company, has also helped a lot of middle-class people deal with crippling debt and fulfill their dreams.
Not to mention the many hours of headache and hassle Avant has helped its customers avoid through its simplified online approach to loan applications.
For people who have lower than average credit but still need to access loans, I regularly recommend they visit the Avant loan site for better odds of approval.
After all, serving and providing credit to folks who have been rejected by banks is what the company has been known for, and is the secret to its continued success.
Have you used Avant before?
Any great tips or stories you'd like to share with the rest of us?
Is there anything else you'd like to know?
Let us know in the comments below!