An ambitious business duo walks into a high street bank, clutching the much-thought through plans for their latest endeavour.
They pour their hearts into a pitch they’ve spent hours perfecting, hoping the lender will be inspired to extend some much-needed funding. The meeting closes with the pair feeling quietly confident.
And then nothing. The bank goes silent for months on end, while the pair are left anxiously wondering if they’ll ever get their plans off the ground. Until one day, they receive a call to let them know the bank’s not interested, with no explanation why.
That is not dissimilar to the situation Rishi Khosla and Joel Perlman found themselves in when they decided to go into business together, and it is a situation they are determined to change by setting up OakNorth, a challenger bank with an eye for business customers.
Khosla and Perlman, now 41 and 42 respectively, met while studying for their masters at the London School of Economics in the mid-1990s but spent some time apart as they built their careers.
Perlman started with a couple of years at consultancy giant McKinsey. From here, he went on to found two digital businesses – messaging service Fonbox and e-commerce offering DoUWantIt – but these collapsed when the dotcom bubble burst.
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“It was gruelling, it was hard, it made me more paranoid, it made me less idealistic,” he says.
Khosla, on the other hand, went into investment banking, but he quickly realised there must be a better way.
“You spend all these years working pretty damn hard at university and then you go and join these banks and you get treated like a slave, you work 18 hours a day, seven days a week,” he remarks.
Perlman and Khosla first went into business together founding Copal Partners, an outsourcing company for consultancy work, but ran into problems securing cash from the UK’s high street lenders. Although they eventually obtained funding from a US lender, the experience inspired the pair to launch OakNorth in September 2015.
The challenger describes itself as a bank for entrepreneurs by entrepreneurs and offers loans secured to assets other than property, such as working capital.
“If you go back 50 years, 80 years, 100 years, whatever, most businesses had some premises which they owned,” remarks Khosla. “Typically, today most businesses rent.”
OakNorth also offers an early yes-or-no policy on its loans. Customers approaching the challenger can expect a quick yes-or-no answer on their applications, along with a brief explanation as to why the decision was made.
“Wasting six months trying to do something has a lot of opportunity costs so what we try to do is give people an early yes or an early no,” Perlman explains.
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Something about the formula must be working. As well as securing upmarket food chain Leon and modern co-living firm Collective as clients, the lender revealed it had broken even last September, thanks to a boost from the Brexit vote.
“Early August, we started having companies coming to us and saying, ‘Look, we were in a process, we were having a discussion and things just haven’t moved and we’re getting very nervous on whether they’re actually going to ahead and deliver’,” Khosla explains. “So we had people switching and wanting us to step into the shoes of the other lender and conclude the deal very quickly, so that worked in our favour.”
Things haven’t slowed down for the bankers since the Brexit vote, as Khosla explains many customers have started to approach them for offers alongside the big lenders because they like the flexibility OakNorth can offer.
The lender’s loan book stands at roughly £450m today, and Khosla says he would like to grow that to around £700m by the end of this year and break the billion barrier the year after.
However, that’s not to say that running a challenger bank is plain sailing. Several smaller players have lamented the capital requirement rules they are tied to, which essentially mean they have to hold onto several times the cash to make the same loan a more established player would.
The Prudential Regulation Authority (PRA) recently launched a consultation examining this area and Khosla is confident that, once again, Brexit may deliver the goods.
“A lot of this stuff does get pushed down by the European Banking Authority and, given the movements around Brexit, I think the PRA has more ability to start looking at these things and hopefully shaping the outcome,” he says.
“So I wouldn’t necessarily be critical of the fact that the regulator hasn’t done anything earlier.”