Archive for 2019
Yalber Announces $20 Million Credit Facility
March 26, 2019
Yalber announced today that they have obtained a new $20 million credit facility from Park Cities Asset Management. Brean Capital served as exclusive financial advisor to Yalber on the transaction. This follows an earlier $20 million credit facility in December 2018 from a different investment fund.
“The small business funding space has drastically changed in the past two years,” said Yalber CEO Amir Landsman. “We see more and more sophisticated players in the space and to me, it’s a sign that the industry is on the right track to be the major funding source of businesses in America. Being able to close two facilities within 15 months is strong evidence that Yalber has a lot to offer.”
Yalber provides American small businesses with royalty-based investments. They can fund small businesses with up to $500,000. Founded in 2007, the company is an early player in the alternative lending space and is unique in that it generates 90 percent of its business in-house. Less than 10 percent of their leads come from ISOs, although they do look to build relationships with high quality ISOs, according to Yalber COO Amotz Segal.
Segal said that, aside from business with ISOs, all of their marketing efforts are internal and span from social media to local advertising on radio, TV and in newspapers. Yalber does not use direct mail and does not pay for leads.
“It makes the job for our salespeople a little easier because they’re not making cold calls,” Segal told deBanked. “We [mostly] get incoming calls.”
As of the beginning of last year, Yalber had funded more than 5,000 business with over $300 million, and Segal said that they had funded approximately $65 million in 2018. On the subject of regulation, Segal said that they remain very aware of regulatory changes and they don’t necessarily see regulations as a negative thing.
Headquartered in New York, Yalber employs about 25 people and has two very small offices in Dallas and Los Angeles.
Direct Lending Investments Charged With Fraud by the SEC
March 25, 2019
Update: DLI has agreed to the appointment of a receiver to marshal and preserve the assets of Direct Lending and the funds. The SEC has also published a press release on the matter.
One of the biggest online lending hedge funds has been accused of fraud by the SEC. On Friday, the SEC sued Direct Lending Investments (DLI) with perpetrating a multi-year fraud that misrepresented the value of loans in a segment of its portfolio.
A DLI employee told the SEC that CEO Brendan Ross helped engineer loans to be valued at par when they should’ve been valued at zero. Emails between Ross and the online loan platform suggest that this was intentional, the SEC argued. The effect of this was that between 2014 and 2017, DLI overstated the valuation of one of its loan portfolio positions by approximately $53 million and misrepresented the fund’s performance by about 2-3% annually.
The SEC seeks a preliminary injunction and appointment of a permanent receiver; permanent injunctions; disgorgement with prejudgment interest, and civil penalties.
You can download the full SEC complaint here.
Below: DLI’s stated monthly returns 2013-2016
A 2017 DLI investor presentation touted “double-digit returns with no down months since inception” and a portfolio that has “exhibited little volatility.”
Two Cultures Collided, Gently
March 25, 2019
Banks are heavily regulated. Factoring companies are not. The two don’t always mix. So it was interesting last July when Axiom Bank, a regional bank in Florida, acquired Allied Affiliated Funding, a factoring company based in Texas.
Fast forward nine months and the merger of the two companies has been surprisingly easy, according to Axiom CEO Daniel Davis.
“Banking and factoring are two different worlds, two different cultures,” Davis said. “[But] the challenges that we expected didn’t occur.”
Davis explained that the biggest challenge with a bank acquiring a factor is reconciling a bank’s credit risk with a factor’s, which are different because banks are more or less governed by regulatory standards while factors are not.
“Good factoring shops have guidelines too,” Davis said, “and we’re lucky to be involved with Allied which does share that high level of policies, procedures and internal controls.”
Regardless of how well a factor self-regulates, factoring companies have virtually no regulations compared to a bank, and this may give regulators a little pause to see a bank mixing with a factor.
“It is a challenge,” Davis said about merging a factoring company with a bank regarding regulations. “What the regulators want to see you do, whether you’re acquiring a factoring company or entering into a new product or service…what they’re most concerned with is that you’ve put the policies and procedures and risk management in place to actively manage and monitor that business.”
But so far, so good, according to Davis, who said that the factoring business has grown 30% in receivables since the July 2018 acquisition. Allied Affiliated Funding, which has retained its name, is now known as the factoring division of Axiom Bank. The bank has 24 branches throughout Florida, 22 of which are located inside Walmart stores. As far as marketing the relatively new factoring product, Davis said that while they do some brand marketing, the Allied factoring division gets most of its business from referrals, including attorneys and accountants.
He said that they also get referrals from banks. For instance, if a bank’s underwriting standards makes it such that it cannot keep a loan, the bank might send the loan to Axiom for it to be restructured as a factoring deal.
Undercover in the Underwriting Room
March 22, 2019
Think of the stereotype of a high energy, high testosterone sales floor of men practically shouting on the phone. And then scale it down to a level of about 2 out of 10. That was the environment I stepped into on a recent visit to a room of small business finance underwriters. They let me shadow one for a day so long as I didn’t reveal who they were.
In the glass room where almost 10 underwriters sat, some spoke on the phone, but the conversations were measured. No shouting. No arguing. Sometimes there was near silence. More than anything, there was an air of focus. After all, when you’re evaluating dozens of documents, just a single oversight can cost the company a lot of money.
“You don’t want to be the guy who loses the company money because you didn’t see a red flag,” said the underwriter.
He asked me to sit beside his desk and watch the funding decisions he was making based on what he saw in the file. He surely didn’t take the merchant’s monthly sales numbers at face value. For instance, in one file, in addition to subtracting a $2,000 transfer from the owner’s personal account into their business account, he also noticed a $4.18 refund from Walmart that was being counted as sales.
“That’s not sales,” he said, and he subtracted $4.18 from the monthly sales number. In one instance, $103,000 in reported sales became $75,000, according to the underwriter.
While you could certainly feel the concentration in the room, it wasn’t quite a library either.
“His FICO sucks,” one of the underwriters said to the others. “His FICO went down and he’s stacked. No.”
When an underwriter is uncertain about a decision, he’ll ask for everyone’s two cents. He said they call these impromptu discussions the “underwriters’ den.”
All the deals we looked at got declined, but I’m told that one underwriter can fund as many as five deals in a day, and then go a few days without funding any.
While the underwriting criteria is taken seriously, sometimes you can be a little more aggressive and push the boundaries a bit if it’s a deal you really like. That takes considerable thought and reasoning. But when the answer is going to be no, it can come at light speed. A few of them happened in under three minutes while I was there. And that was with him slowing down to narrate for me what he was thinking.
“I give a look at [most of] the documents in the file first,” he said, “so that if there’s an obvious red flag, I don’t want to spend time on it.”
In his cursory glance, he’ll look at the business owner’s FICO score, years in business, if the company has other financing, and if so, how they’ve been able to handle those payments. He’ll also count the number of negative days (when the company owes money and has none) and note how consistently the company makes sales.
“Consistency gives me comfort,” he said. “I can give them a stronger offer when they show consistent sales.”
Of course, funding a file takes a good bit longer because you have to continue to vet the business and the business owner, almost as if you suspect there’s something wrong. Has the owner ever been convicted of fraud? Have they owned any other businesses? Did the owner ever default on a loan? It can seem hard for small businesses to pass all these background checks. But the funder has to protect itself and the underwriter’s job is to do just that.
“We’re in the business of giving out money, but within limits.”
New Jersey Bill Seeks to Eliminate Quick Easy Access to Small Business Loans
March 21, 2019
The speed at which a small business owner can access capital to grow and create jobs in New Jersey is too dangerous and must be stopped. This is the takeaway from a bill (S3617) proposed by New Jersey State Senator Nellie Pou that calls for a minimum 3-day waiting period between when contract terms are disclosed to an applicant and when they can actually go through with getting a business loan or merchant cash advance. If the transaction does not fund within 10 days of the terms being disclosed, it implies that the waiting process must start over if the applicant wishes to still go forward.
The motivation behind the bill is to presumably force small business owners to think about the terms for awhile. It would apply where the payment frequency is greater than bi-weekly or the maturity is less than two years. There’s other little caveats too. If it passed, funding small businesses same-day or next-day would effectively become illegal.
In addition, the bill calls for detailed contract disclosures, proof that the funds will be used to economically benefit the small business applicant, lenders to set up their own complaint departments, licensing, bonding requirements for brokers & lenders, a minimum net worth for a broker of $100,000, background checks, written examinations, and ethics classes as part of continuing required education.
Pou’s bill, which at this point has not had the opportunity to get traction yet, is separate from another bill, S2262, which in addition to disclosures, calls for merchant cash advances to be defined as loans in the state. S2262 passed the Senate in February and is now under consideration in the Assembly.
WeWork, The Home Office of Small Business Finance Startups
March 20, 2019
Kunal Bhasin, owner of brokerage 1 West Finance, funded three A paper deals for companies that all happened to work out of the same Manhattan office building on the corner of 42nd Street and Third Avenue. It’s actually not as big a coincidence as it sounds because it’s the same building where 1 West Finance operated out of, along with likely hundreds of others at a midtown WeWork, the giant co-working company that has 59 offices in New York City alone.
What is remarkable is that the co-working concept (where companies work alongside each other for the benefit of all) actually works. At least it did for Bhasin. Because Bhasin’s company was expanding and needed to find space very quickly, he was unable to find a larger office at that same WeWork office. And because location was critical, he relocated to a Regus right nearby. Regus, which preceded WeWork, also rents space to companies, but focuses less on encouraging resident companies to get to know each other.
“I already miss it a lot,” Bhasin said of his old office at WeWork.
Bhasin said he met his former WeWork colleagues, who became clients, at the communal coffee stations and lunch events organized by WeWork.
Peter Graves, founder of Two Trees Funding, a one-man ISO shop, runs his business out of the WeWork office at 110 Wall Street. He said that he has gotten referrals from colleagues at other companies in his WeWork office. And he really appreciates the ability to to expand without having to change your lease.
The office culture is one of the main reasons why another company in the small business finance space loves WeWork. “Here, we engage with other people [and] we get a fresh perspective from other people, whether it’s a graphic designer or someone who works in cryptocurrencies,” a representative who asked to remain anonymous said. They also appreciate the flexibility, acknowledging that when they started with only four people, they rented month to month. Now, they have 12 people and a lease agreement for two years.
“We could have gotten a commercial space for 5 years,” they said. “But maybe we’d need a bigger space. This allows for flexibility.”
Direct Lending Fund CEO Resigns, Investigation
March 20, 2019
Direct Lending Fund CEO Brendan Ross, has resigned, according to Bloomberg News and numerous individuals identifying themselves as investors on an industry blog. The fund not only lost nearly 25% of its portfolio in a single sour investment, but it’s reported that they may have overvalued its investments in QuarterSpot’s small business loan platform.
The fund was reputed as one of the largest funds in the online lending industry and one that “historically earned investors unlevered double digit returns” by investing in online loan marketplaces.
Were there signs of problems?
In a tell-all book published by DealStruck founder Ethan Senturia in late 2017, Senturia describes how Ross’s fund had been overly dependent on his company’s success. “I am like, literally staring over the edge. My life is over,” Senturia quotes Ross as saying in Unwound when he became aware of DealStruck’s downward spiral*. Despite this characterization, Ross’s fund continued to grow relatively unscathed.
Meanwhile, James R. (“Jim”) Hedges, IV wrote an op-ed in Mid-2017 on Lend Academy of a mystery fund he refused to identify that had a Bernie Madoff-feel to it. In the comments, users point out that the monthly returns matched the ones on Direct Lending’s investor letters.
“When I first saw these returns, I instinctively thought of Madoff,” Hedges wrote. “The narrow band of returns is, in my experience, highly unusual and inconsistent with the returns of investments being marked-to-market. To be clear, I am not saying that this fund is a fraud. I am stating that the performance they’ve reported is, in my experience, unlikely indicative of a valuation methodology that accurately reflects the month-to-month performance of the underlying assets.”
*DealStruck announced a restructuring in December 2018
How to Turn Your Client List Into a Business Referral Network
March 19, 2019
Excel Capital CEO Chad Otar was so impressed by a marketing company he helped obtain funding for that he turned around and emailed his other clients about the potential benefits of their service. As a result Otar said that about five of his clients actually started working with the marketing company, including Lori Miller, the owner of LGC Interior Design in Melville, Long Island. Excel Capital, in effect, started creating its own business referral network.
“[The marketing company] helped me fix my website and get me out there,” Miller told deBanked. “It helped me significantly.”
For a year, Miller worked with the company, which helped to expand her company’s social media presence, get her work into a showhouse, and get one of her rooms published in Architectural Digest. And this was all thanks to a referral from Otar.
Kunal Bhasin, owner of 1 West Finance, said that he will sometimes introduce his clients to one another. These are usually clients he has funded, but they could include a prospective client, he said.
Jonathan Casillas, founder of Casillas Capital Partners, an ISO in North Carolina, said he will refer clients to specialists that can help them. “Our direct job is to get them money…but if I see a problem, I try to fix it,” Casillas said. “And if I can’t, I point them in the right direction. I’m here to help the entire business, not just get them money.” Casillas said that startups, in particular, need a lot more than money. They often need help with structural parts of their business and Casillas said he will refer them to a lawyer or an accountant, or whoever they need to get where they want to go.
