After helping grow Cold Stone Creamery from an unknown company to over 1400 stores in 9 years, Sheldon Harris left his position as company President in 2006. A unique kind of entrepreneur, Sheldon has taken his “there can’t be too much of a good thing” world view and focused it on creating a new way of looking at personal credit and lending. By changing the way banks look at lending and risk, he has helped to create Trust Funding. Throwing traditional concepts like credit scores out the window and achieving a startlingly low default rate, Sheldon’s new business, Smartway Advisors, may not look like ice cream, but it sure tastes like it.
Okay Sheldon, so what is “Trust Funding?”
We have all had those friends or family members who have gone through a rough patch in their life. It could be a divorce, a medical issue, or the illness of a child—something that’s happened that could happen to any of us. It wasn’t their fault, just part of life. Often, people’s financial foundation becomes shaken when they go through that, and so what happens is their credit score becomes damaged. What we have done is we’ve come up with a proprietary way to look at a person who is categorized as subprime and determine whether or not they will behave in a subprime manner when it comes to repaying their loan. After launching this business about three years ago here in Portland, the results have been absolutely phenomenal.
So, if you’re not looking at their credit score, what are you looking at?
Well, we certainly review their credit, but it’s about looking at their credit profile. What we are into is really old school lending. We are sitting down face to face, eye to eye, and saying, help me understand the story that your credit report tells me. Then we set that aside and say, now tell me the story behind the story.
How did you come up with the idea?
Well, I’ve had a long time friend and partner, Kurt Klinkhammer. He is a very innovative thinker. He really had the genesis of the idea in his head and now it has become Trust Funding.
When I first heard “Trust Funding,” I thought of either someone who comes from a lot of money, or a guy in a small town sitting down with his banker who knows him and everything about him. Did you think about it in terms of the meaning going both ways?
Absolutely. I think a lot of times folks in our target demographic are not always treated with respect and dignity. I think there’s an allure towards the idea of having been trust funded. ‘I would be a credible person if only I had a trust fund.’ Also, trust funding is really bringing that same sense of dignity to you in your borrowing, and at the same time, it’s the idea that lending was originally based on—trust.
Trust Funding reminds me of Muhammad Yunus, who won the Nobel Prize for his success with micro-lending in Bangladesh. With micro-lending, there is a criteria for lending people money without relying on the traditional means of paying it back.
That’s right, and you know, I had a chance to participate in launching in a micro-lending program in Nicaragua, and it was amazing to me the similarities between what we do with the trust funding program and with micro-lending. You are empowering people with dignity and respect. A handout doesn’t do that. A handout diminishes a person’s sense of self worth, but a hand up increases their sense of self-reliance and self respect.
Before all of this you were the President of Cold Stone Creamery?
I was. And, you know, it’s funny. Back in those days people would say to me, “You’re in the ice cream business.” But I believe our success as a company was that we didn’t see it that way. Instead of being in the ice cream business serving people, we always made it clear that we were in the people business serving ice cream.
How did you go from selling ice cream to helping people with bad credit?
With really with this idea, the one thing that’s the same no matter your industry’s image—you’re in the people business. Prior to Cold Stone Creamery, I was with Costco for 13 years as a warehouse manager. So, very different—big box retail, then quick service franchise ice cream and now financial services. They are extremely different industries, but the commonality in all them is if you first look at your business goals and ask yourself, how do we serve people? How are we creating value for people? Once you have that part right, everything else cascades right out of that.
Is that what drives you, servicing people?
Yes. I have passion for helping people. But I also have a passion for helping people through business. Let me identify what I see the difference to be. I want to help people in a sustainable and scalable way. In other words, I want to continue to enhance my ability to help more people.
Volunteering is amazing and I’m a big fan of it, but volunteering is not one to one exchange. You provide help, but that’s really as far as it goes. But if you can create a business that is predicated on helping improve the lives of other people, to me that’s really where it’s at because that will expand your ability to reach out and help even more people. That’s exactly what we are doing with Smartway Advisors.
Are there other programs like this around?
There is not anybody that I’m aware of that’s doing anything like this. Part of the credit goes to to our partner in this business, Unitus Community Credit Union. They are based here in Portland and have been a highly regarded lender for over 70 years. Together, we’ve crafted this program over the last three and a half years of operating. It takes a while for a financial lending program to build and really prove the results to show that it works.
At this point we have over 1,000 loans originated. That means we have helped 1,000 individual people in the community. And after all of that, only 26 loans have failed to pay, which in lending terms is unheard of.
How did Unitus become involved?
They have a very entrepreneurial executive team. Kurt and I shared our vision with them and they believed in it too. They are a forward-thinking institution.
You’re basically allowing people with bad credit to get credit at a time when a lot of people are having trouble getting any credit at all. How does that work?
This demographic literally has had no choices over these last few years, and very few choices even in good times. That’s why it’s so incredible that we have only had 26 loan failures out of a 1000, considering that those loans were originated during the most difficult economic period that we have seen in our lifetime.
How does that compare to the industry standard?
We are actually outperforming tier one loans—people who have a 760 credit score and above. So, it’s amazing that we are taking this pool of people most would say are absolutely high risk and proving that they can make their payments.
What are you trying to accomplish in the long term?
Well, our objective is first and foremost to help people here in the Northwest. With the support of Unitus, we are now actively seeking other credit union partners that are interested in this model. Two weeks ago, we launched with a large lender in Olympia, Washington and they are off to a fantastic start originating loans with this same business model. We are going to look for other credit unions in Oregon and Washington that we want to grow with, but I believe there are people in every community that need this help.
How does Smartway make money?
We make money on the interest like other lenders, but because our losses are so low there is actually a fair amount of profit on the lower interest. The other way that we make money is through partnering with reputable local auto dealerships. I will have somebody come in for a vehicle purchase that they can’t get funded anywhere else because of their credit situation. If we end up funding them, we also collect the fee from that dealer.
Can you explain a little about the cars you feature on your website?
We purchase those through dealer only auto auctions. We keep a representative sample of these cars in our display room so that we can show people in our face to face interview what types of makes and models of cars we will finance. There are many reasons for the success of our portfolio. One of these is we are very specific about what make and model and mileage of vehicle we will fund. We are not here to help get your dream car, but we are here to help you get a car that’s going to be reliable so that you are able to earn a living.
In an ideal world you would have every dealer in Portland know about you and use you as a resource?
Most of them do, and yes. But it’s really important that the dealerships that we choose to partner with are going to share our commitment to helping. Fortunately, there are a lot of good dealers out there that do that. Those that are focused less on the customer and more on ‘how do I make a sale right now’ are not a fit. We don’t really want to work with those dealers. We’ve got a group of about 25 dealers here in the Portland metro area that we partner with and work well with.
When you started the business, how much of it was about making money and how much of it was about being altruistic? How do you balance the two?
My passion in life outside of business is guest lecturing at colleges and universities for the graduating seniors with their business degrees. One of the things I’m very passionate about is to tell them first to choose a business for the purpose that it will help people and make the world better. Then use your creativity and figure out how to monetize it. It may sound silly but you actually end up making more money this way.
If your success continues to grow, other types of institutions will take notice. Perhaps other states and other countries as well. Do you think you could eventually have an impact on the way money is lent in the future?
That’s exactly what we envision. As I mentioned before, it’s a return to the way lending originally began—relationship lending. It’s face-to-face. We no longer have to rely as much on the historical third party reference, the credit report. We can say we know that this person is going to pay us back.
How do you feel about our current credit system?
It exists the way it does for a reason. I can understand how we got here because what it does is it ensures that we are going to able to cover our losses when we lend to people. It looks at a profile of the person and says, people who have matched this profile before tend to perform like this. If you match that profile we have to assume you’re going to perform like this. It’s very linear and judgmental in the way that it makes these decisions. I’m not saying that it’s wrong. I’m saying that there is a better way.
What I’m doing with my business model is seeking to understand you as a person and how you got into your situation. It’s fascinating to me that somebody didn’t figure this out 25 years ago. It just seems like we went on a run as a country where we got very corporate and rote in our thinking.
Almost to the point where we are doing bad business because of it?
Yes. And we are missing the opportunity to do good business, and to do good for people. I think a lot of times people look at our business model and they say well, how do you make money? I mean, you’re actually sitting down face to face and talking to all these people, are you nuts? To me it’s slowing down and saying, wait a minute, what we are actually doing is creating a whole new business by serving an under served, but very legitimate demographic.
So you believe that people should be able to buy a house this way? People that wouldn’t ordinarily qualify for a home loan are going to be able to get a low interest home loan?
Yes, I believe that with this model we are proving this can work for wide scale application.
What did you think when you were you were in the middle of all this, launching this new business, and then the credit crisis hit involving subprime mortgages that nearly destroyed the global economy?
If anything it has made us much stronger. Now we can show a lot of performance data that was assembled during an awful time, and if our borrowers did that well during the tough times, imagine how effective it’s going to be during the better times.
What is really striking is that institutions allowing people to borrow at rates they couldn’t pay back, based on subprime scores, created this crisis. It seems that if we were loaning to people with your type of system, then the subprime collapse might never have happened.
I agree. Of course, we had no idea that it was on the horizon. Times were good then. You could still find folks that were falling through the cracks and needed help but now, sadly, there is hundreds of thousands of more people that need this kind of help. People who I say have bad credit for a good reason.
We are really trying to set the individual person or family up for success. We are not going to put them into a loan they can’t afford. Part of what we do is sit down and actually build the household budget with them. We understand exactly where their money is going. We began a very educational process with these folks. It’s not just a transaction; it’s a relationship. Every 90 days after we have originated a loan, we are in touch with them. We talk to them about how they are doing and how they performing with their household finances. Our system is built on individual economic reality.
Do you think shame and embarrassment might potentially keep people from taking advantage of the services you are offering?
No not at all because it’s a very intimate setting. We begin just like any other bank except that we sit down and talk with them and establish a relationship of trust, instead of just having it happen online.
When you started at Cold Stone Creamery there were something like 8 stores. When you left, there were over 1400 stores. Does it feel different building something like this compared to building something like that?
Yes, but it’s still in the same vein of feeling like you’re helping improve the lives of other people. This is not just going in and launching a new business. This is helping somebody who has gone through a hardship. This is pulling somebody out of the quicksand, and there are not a lot of helping hands for these folks. There is something deeply powerful and rewarding about the help that we’re giving.
It must take a team of people to build a business like this.
The person who lives here all year around and drives this business is Dave Daniels. We would not be where we are today as a company without Dave’s work. He exudes the epitome of what I call the ‘people business.’ When you meet him he just pours forth this care for you as a human being and as an individual. He was an executive with McDonalds earlier in his career, and then at Cold Stone Creamery, he was our Vice President of People.
What does a Vice President of People do?
They oversee all of the things people do in relation to training and human resources. And you can see that “people magic” that he has applied in our business here at Smartway Advisors.
Where do you see yourself in the near future?
I believe that we will be helping people in hundreds of cities across the country.
If you were to offer advice to other entrepreneurs with a dream, what would that advice be?
My advice would be, think about how you can help people first. Too often we are focused on what we will sell or what service we want to provide instead of on the person we are actually serving. If you will first ask yourself to understand the person you’re serving, it will lead you to everything you need to know as a business owner. It’s, how do you answer the question of what customers need. Because if you can tap in to that, not only will there be demand, but it will be sustainable demand. It is good business.