If you read any of my articles over the past 2 years, you would know that Bolstr has been one of my favorite crowdfunding sites. My IRR is averaging about 20% over 10 loans. However, recent events having giving me pause and I am having second thoughts over the underwriting at Bolstr. As a reminder, Bolstr has a unique loan payoff structure. The typical loan is not based on an interest rate, but a multiple return. Borrowers will pay back 3% of revenue for x months (typically 24 months or less) until they have returned 1.3X the amount borrowed. Every loan is different, but this is a typical structure.
Bolstr displays the borrower’s income statement from the past few years with three year projections. Most loans have a blanket lien against all company assets and a personal guarantee from the founder. Bolstr states they do extensive due diligence and approve less than 5% of the loan applications. For some reason they do not put the borrows balance sheet online, but they plan to in the future. The income statements have been very impressive for most of my borrowers. Many have been fast growing breweries.
This first event that gave me pause was a recent episode of The Profit on CNBC. The show highlighted a Food Truck company from Chicago, DaLobsta. You can see the episode on Hulu. The opening line from Marcus Lemonis was” If I can’t get this company to follow my plan, they will go under”. Marcus walks away from Dalobsta when the founder will not agree to his terms. According to the show, the founder has no skin in the game, uses company funds for personal expenses, and owes over $120k in sales tax that are past due. At one point in the show the owner says he has financials, but “I am not sure how accurate they are”. Bolstr gave Dalobsta a $150,000 loan in the summer of 2014. While they have paid the loan on time to date, I would be very worried if this firm owed me money. It concerns me that they passed the underwriting review process at Bolstr. Thankfully, this loan is not in my portfolio.
The second event was one of my loans with Bolstr has declared bankruptcy. The company is a fast growing brewery in San Francisco. Sales are beating expectations and they have paid back over 50% of the loan in only 8 months. The loan was earmarked to buy brewing and lab equipment for an expansion. The first position lender did allow for a carve out of $100,000 for the new assets to secure this loan. It turns out this fast growing company has secured debt that is almost twice that of the secured assets. They did not use the $150k loan to buy new equipment and they have now declared bankruptcy, even though they expect a $600,000 profit for the year. Since they did not buy any equipment with our loan, there are no assets that are securing the loan. It appears our only hope is the personal guarantee which usually does not work out either. Again, my question is how did this loan pass the underwriting process of Bolstr? Had it been disclosed that debts were almost double the assets, I hope I would have passed on this deal.
Personally, I will not make any more loans with Bolstr until they tighten their underwriting procedures and present accurate balance sheets from borrowers. Bolstr’s most recent borrower, which has not been funded as of this writing, shows a loss for 2015 on its posted income statement and a projected loss for 2016. Yet another reason to temper my excitement for this crowdfunding platform.
There has been some good news with one of my Bolstr loans. After only 4 months, one borrower is going to prepay his loan. That means I will get the full 30% interest in less than 6 months which will equate to an almost 100% IRR. That will help offset my projected 50% loss from the brewery loan. I do not fully understand why a borrower would prepay loan structured in this manner. If it boosts my returns, I guess I should not care.