Part 2: The Creator Economy and The Traditional Underwriting Model

Creators may be unfinanceable for commercial banks for a variety of reasons. These include varying cash flows and lack of credit history, but also because the assets they create (blog posts, videos, newsletters etc.) likely are not recognized or understood as assets by commercial banks.

Would a commercial bank consider revenue from a blog in your debt/ income ratio? Probably not for the following reasons:

1) The banks have to predict your income through the life of the loan in order to assess your ability to repay. Because banks do not have a long history of data sets on Substack revenue or other creator based content, both across borrowers and through time, they probably can’t predict your income with the same level of certainty as they can for those with more traditional backgrounds. In fact, most bankers may not even know that you can generate revenue from blog posts!

2) There is not a robust primary let alone a secondary market for loans repaid by blog posts and other creator content. Therefore, loans to these borrowers would likely need to be held on the bank’s balance sheet. Balance sheet financing ties up capital, which means lower returns on equity. This is why banks prefer to originate mortgages, securitize them and sell them to investors for a fee, rather than hold them fully on their balance sheet for 30+ years a piece.

3) Regulators would also view loans backed by Substack content as a risky asset, tying up additional regulatory reserves against potential losses. In short, lending to Substackers is expensive for commercial banks and seems risky for them due to the lack of data.

Instead, banks would rather see borrowers have hard assets (e.g. cash or property) or a job description (i.e lawyer, accountant, etc.) that matches a set of borrowers they’ve underwritten before and whose loans governments and investors would happily buy. Creators don’t fit this mold.

However, when you look inside at the actual cashflows of the creator’s business, the business may be more financeable than when viewed from the outside with blunt metrics and heuristics. The potential to deliver these cashflow level insights and unlock a creator’s capital stack is possible with platform integration. Here’s what I mean:

A Tech-Enabled Solution would:

● Provide credit today in exchange for creator’s future subscription revenue.

● De-risk the payback through direct integration into the subscription platform. Rather than chasing repayments, payment from the subscription revenue is sent directly to the lender.

This would lower administration and monitoring costs and would allow lenders to understand the cash flows of their borrowers with a higher degree of certainty. Together this model creates an opportunity for lenders to provide attractive financing to borrowers previously viewed as poor credits.

Predictability is one thing, but there’s another critical piece to the equation. We’ll explore this in Part 3: The Challenges Ahead in Financing the Passion Economy.