Archive for 2020
“From inception through 2019, [Par Funding] incurred a cash loss from operations of $136.2 million.”
That’s the conclusion reached by Bradley D. Sharp, CEO of Development Specialists Inc (DSI), the financial advisor to the Receiver appointed in the Par SEC case.
Par has scoffed at the Receiver’s analysis of its business. “We do not necessarily begrudge attorneys, whose skill sets are often in other areas, a potential inability to understand the math that often makes for a strong and profitable financial model,” Par’s lawyers wrote in an October court filing. “There is a reason that smart, mathematically inclined people are typically hired by banks, hedge funds and financial services firms. But the Receiver and his counsel’s inability to understand Par’s business has led to all manner of baseless accusations that are easily answered in the very documents they possess but do not understand…”
Par says it was profitable and walks the Court throught its mathematical process. Sharp says Par’s assessment “is misleading and does not reflect actual operations at the company.”
Sharp alludes to Ponzi-like characteristics but refrains from using that term. “From inception through 2019, [Par] paid $231 million to investors, consisting of principal repayments totaling $135.6 million and interest payments totaling $95.4 million. [Par] could not have made these principal and interest payments to the investors without additional funds from the investors.”
Par explained that the key to its business is in the compounding:
“The merchant funding model is profitable because merchant funding returns are reinvested, either in a new or different merchant, or in an existing merchant with adequate receivables as a consolidation, or as a refinance of a merchant which may already have MCA funding from another provider. And the reinvestment begins on the merchant funding returns which commence immediately and occur daily. In very simple form, the math works as follows. Assuming $10,000 is funded to a merchant pursuant to a funding agreement providing for a funding return of $13,000 over the course of 100 daily ACH withdrawals, the agreement would provide for repayment to begin immediately with daily payments of $130. As those monies are returned, portions are used to pay operating expenses, but most of the monies are re-invested to fund other merchants. Mathematically, this means that the original $10,000 is being used to fund more than one merchant. Over the life of a single $10,000 funding, that same $10,000 can be used to fund multiple merchants, all of whom are paying funding fees in excess of the principal amount received. Thus, the original $10,000, at a 1.30 factor rate, generates $13,000 on the first merchant cash advance (MCA). Those funds are reinvested and generate $16,900 on the second MCA, and $21,970 by the third MCA – an increase of $11,970 over and above the initial $10,000. And that can happen within a year. This is the powerful compounding effect of the financial model.
That is the simplest version of the model. In practice, the model is far more sophisticated than that because the leveraging to new merchants of the MCA returns begins as soon as the MCA payments come in.”
Par additionally said:
“At the conference on October 8, 2020, the Receiver’s counsel told this Court, and many investors, that out of $1.5 million received per day from merchants prior to July 28, 2020, $1.2 million was used for new MCA funding. Thus, according to the Receiver’s counsel, only $300,000 constituted net collections, about 20%. The Receiver’s counsel appears to be suggesting that the company is not holding on to receivables but, instead, is refunding the same merchants 80% of receipts. This proposition is wrong and its assertion shows that the Receiver and his counsel do not understand the MCA business.”
One could assess that a large element of this case consists of the Receiver being like, ha! well look at this! and Par responding, well, yes, that is actually how our business works.
In fact, that is precisely the angle Par took in defending its use of funding new deals with money collected from deals previously funded.
“First, the numbers show that collections are used to fund new MCA deals,” Par’s attorneys wrote. “This may come as a total surprise to the Receiver and his counsel, but funding merchants is the business of Par. That is like criticizing Ford Motor Corp. for using its car sales income to build and sell more cars.”
Both sides agree that Par advanced over $1 billion to small businesses but Sharp says that “reloads” distorted the numbers.
“Use of reloads escalates the obligations of the merchant as each reload adds an additional ‘factor’ along with any new funds advanced,” Sharp wrote. “In [one example the reloaded funds are] subject to the factor twice; once when the funds were originally sent and again when they are included in the reload advance. The use of reloads also significantly distorts the calculation of loss rates as the advances are simply refinanced without becoming a loss.”
Sharp concludes that the true end result for Par is a much higher default rate than it lets on to.
And then there’s this
Sharp has repeatedly brought attention to a list of merchants with unusual payment and funding activity. Par countered by saying there are good explanations for each.
Amongst all of this is that company insiders are alleged to have received tens of millions in payments from Par and the Receiver is confident, in part due to DSI’s report, that Par was majorly unprofitable.
“Based on our review to date, it is apparent that [Par] would not have been able to continue to provide payments to investors, or to continue to operate, without additional funds from investors,” Sharp wrote in a December 13th report.
This case is not the first rodeo for Sharp and DSI in the merchant cash advance business. They were also assigned to manage the 1 Global Capital case.
The case is ongoing. The Court recently approved a motion to expand the Receivership estate.
After ten years of debate over when and how to roll out the CFPB’s mandate to collect data from small business lenders, the Bureau has initially proposed to exclude merchant cash advance providers, factors, and equipment leasing companies from the requirement, according to a recently published report.
The decision is not final. A panel of Small Entity Representatives (SERS) that consulted with the CFPB on the proposed rollout recommended that the “Bureau continue to explore the extent to which covering MCAs or other products, such as factoring, would further the statutory purposes of Section 1071, along with the benefits and costs of covering such products.”
The SERS included individuals from:
- AP Equipment Financing
- Artisans’ Bank
- Bippus State Bank
- CDC Small Business Finance
- City First Bank
- Floorplan Xpress LLC
- Fundation Group LLC
- Funding Circle
- Greenbox Capital
- Hope Credit Union
- InRoads Credit Union
- Kore Capital Corporation
- Lakota Funds
- MariSol Federal Credit Union
- Opportunity Fund
- Reading Co-Operative bank
- River City Federal Credit Union
- Security First Bank of North Dakota
- UT Federal Credit Union
- Virginia Community Capital
The panel discussed many issues including how elements of Section 1071 could inadvertently embarrass or deter borrowers from applying for business loans. That would run counter to the spirit of the law which aims to measure if there are disparities in the small business loan market for both women-owned and minority-owned businesses.
One potential snag that could complicate this endeavor is that the concept of gender has evolved since Dodd-Frank was passed in 2010. “One SER stated that the Bureau should consider revisiting the use of male and female as categories for sex because gender is not binary,” the CFPB report says.
But in any case, there was broad support for the applicants to self-report their own sex, race, and ethnicity, rather than to force loan underwriters to try and make those determinations on their own. The ironic twist, however, according to one SER, is that when applicants are asked to self-report this information on a business loan application, a high percentage refuse to answer the questions at all.
The CFPB will eventually roll the law out in some final fashion regardless. The full report can be viewed here.
It may all depend on the definition of may.
Another New York Supreme Court judge has expressed his dislike of the word “may” in a reconciliation provision of a merchant cash advance agreement, as in “buyer [of the receivables] may adjust the weekly amount on a going-forward basis to more closely reflect the Seller’s actual Future Receipts times the Specified Percentage.”
In American Resources Corporation et al v C6 Capital, LLC et al, Supreme Court Judge Leon Ruchelsman held that such a provision is illusory because the language reserved C6 the right to reject a reconciliation request.
Ruchelsman cited a similar decision involving a similarly named company that found that “whether [the funder] was willing to reconcile is not relevant, however; the language of the agreement is controlling, and the agreement does not require [the funder] to agree to reconcile.” (italics added for emphasis). That defendant is appealing the decision.
The difference matters, the judge says, so much so that this interpretation creates likelihood that the plaintiffs will succeed on the merits that the underlying MCA agreement may be void because it is usurious.
The contract is distinguishable from Champion Auto Sales v Pearl Beta Funding LLC, a landmark decision in the Appellate Division that created a strong legal footing for MCA funding in New York State. Notably, the judge said the Pearl contract in that case was worded better because it did not give Pearl discretion to decide whether or not to grant a reconciliation if the merchant met the specified conditions.
Here, in American Resources Corporation, the outcome is that the plaintiffs successfully secured a preliminary injunction restraining enforcement of the judgment entered against them. The defendants simultaneously lost on their motion to dismiss the complaint.
The case will now move to the discovery phase. The case # is 518051/2020 in the New York Supreme Court. The decision can be viewed here.
The Canadian Lenders Association released its 2021 Leaders in Lending awards. The association is the voice of Canada’s lending ecosystem and represents more than 100 companies in commercial and consumer lending.
All CLA members are vetted and accredited based on their corporate standards
and values. Their role is to support the highest level of lending in Canada,
servicing a wide spectrum of business and consumer borrowers’ growth requirements.
2021 Award Winners:
Lending Woman of the Year
|Tiffany Kaminsky | Co-Founder of Symend
Tiffany Kaminsky is the co-founder of Symend, a fintech that uses analytics and behavioural science to create individualized debt recovery programs. The startup, which has offices in Calgary, Toronto and Denver, received USD $52 million in funding earlier this year and plans to hire up to 200 more roles in 2021.
|Nicole Benson | CEO of Valeyo
Nicole Benson is the President & CEO of Valeyo, a business solutions provider to financial institutions in Canada. Nicole drives every facet of business forward, with a focus on growing, evolving, and innovating Valeyo’s suite of solutions to meet the changing needs of its clients and the financial services industry.
|Andrea Fiederer | CMO of goeasy
Andrea Fiederer is EVP & CMO of goeasy, a leader in non-prime financial services with over 2000 employees. Andrea is responsible for goeasy’s overall marketing and brand strategy for both the easyhome and easyfinancial business units.
|Elena Ionenko | Co-Founder of Turnkey Lender
Elena Ionenko is the Co-Founder of Turnkey Lender, a loan origination platform. Under Elena’s leadership, the company has entered 50+ local markets, raised over $3.5 million in venture capital and launched regional offices all over the globe.
|Minal Shankar | CEO of Easly
Minal is the CEO of Easly, a SR&ED financing firm. This year Minal has doubled Easly’s capital under management & customer base. Prior to leading Easly, Minal was an investment manager for the VC firm Northgate Capital and an associate in the Technology Investment Banking group at J.P. Morgan Chase. Minal holds an MBA from the NYU Stern School of Business.
Fintech Innovator the Year
Flinks is a data company that empowers businesses to connect their users with the financial services they want.
REPAY is a leading provider of vertically-integrated payment solutions.
VoPay seamlessly connects you to the banking ecosystem enabling anyone to offer efficient and simple bank account payment processing.
FundMore.ai is an automated underwriting system that uses machine learning to streamline the Pre-Funding process for loans.
Provenir offers a suite of risk analytics tools for lenders to make adjudication faster and simpler.
Executive of the Year
|Jason Mullins | CEO of goeasy
Jason Mullins is the President & CEO of goeasy, a leader in non-prime financial services with over 2000 employees. Since joining goeasy in 2010, Jason has helped the company scale to $1 billion in market capitalization with compound earnings growth of 28%. Jason is a recipient of Canada’s Top 40 Under 40 Award.
|Wayne Pommen | CEO of PayBright
Wayne Pommen is the CEO and Founder of PayBright, a Canadian leader in the BNPL space. His firm has partnered with 7,000 domestic and international retailers, and has approved over $1 billion in consumer credit. This year PayBright was acquired by Affirm in a $340 million transaction.
|Lawrence Krimker | CEO of Simply Group
At just 33 years of age, Lawrence Krimker has built Simply Group into a category leader in home equipment financing. This year his firm acquired competitors Dealnet & SNAP Financial in transactions that totalled over $750 million and brought his firm to $1.45 billion in assets under management.
|Andrew Graham | CEO of Borrowell
Andrew Graham is the CEO and Co-Founder of Borrowell, Canada’s first fintech to provide free credit monitoring. This year Andrew launched Borrowell Boost to help the 53% of Canadians living paycheck to paycheck meet their bill payments.
|Maria Soklis | President of Cox Automotive
In the 6 years that Maria Soklis has led Cox Automotive Canada, the company has become a category leader in software and financing solutions for consumers and dealers across the country. Maria has also left her mark with initiatives that promote diverse and inclusive workplaces, and this year signed the BlackNorth Initiative CEO Pledge.
Emerging Lending Platform of the Year
Moselle is a digital platform that simplifies the importing workflow for small medium business owners.
Moves is a financial services platform for independent “gig” workers.
VendorLender is Canada’s first POS lender for dealers in the equipment finance space.
Lendle is Canada’s first interest free credit provider.
goPeer helps everyday Canadians to achieve financial freedom through Peer-to-Peer Lending
Small Business Lending Platform of the Year
Merchant Growth is a leading Canadian financial technology company that specializes in small business financing. Over the past decade, Merchant Growth has supported Canadian businesses with hundreds of millions of dollars in growth financing.
Launched this year, Loop builds credit & payment products specifically for online merchants. The company is operated by the LendingLoop team that popularized P2P lending in Canada.
Thinking Capital is one of Canada’s best known fintech lenders to the small business sector. This year the firm has forged relationships with multiple Credit Unions and hit $1 billion in loans deployed.
Since its launch in 2015, OnDeck Canada has
Canadian based Clearbanc is the world’s largest e-commerce funder. Their data-driven approach takes the bias out of decision making. Clearbanc has funded 8x more female founders than traditional VC.
Consumer Lending Platform of the Year
Flexiti is a leader in point of sale financing for retailers and has been named one of Canada’s fastest growing companies two years straight.
CHICC is one of the country’s leading rental & homeimprovement financing companies.
Marble uses fintech to empower Canadians to improve their credit score, manage debt, and budget to achieve financial goals.
PayBright is one of Canada’s leading buy now, pay later providers. This year the firm was acquired by BNPL giant, Affirm for $340 million.
Canada’s leading alternative financial services provider servicing non-prime Canadians through its easyhome and easyfinancial divisions.
Auto Lending Platform of the Year
GoTo Loans is a fintech lender focused on helping consumers access the equity from their vehicle and the leading provider in Canada for automotive repair loans.
|Auto Capital Canada
AutoCapital Canada is a national auto finance company that works with dealer partners to help clients finance the purchase of new and used vehicles. This year the firm acquired competitor Rifco.
The Western Canada based lender is a leader in non-prime lending to the auto sector.
Canada Drives is a leader in fintech auto lending. This year the firm hit over 400 employees and 1 million transactions, servicing consumers across Canada, the US, and the UK.
Clutch aims to bring speed and convenience to used car sales by taking the experience completely online. The fintech raised a $7 million round this year from Real Ventures.
Technology Lending Platform of the Year
Launched only five years ago, BDC’s Tech Group has become a leader in lending to Canadian technology entrepreneurs.
TIMIA is a specialty finance company that provides growth capital to technology companies in exchange for payments based on monthly revenue.
Flow Capital Corp. is a diversified alternative asset investor, specializing in providing minimally dilutive capital to high-growth businesses.
Venbridge is a Canadian finance company offering non-dilutive venture debt, SR&ED financing, and tax credit consulting services.
SVB has lead the technology lending movement for 35 years. The firm opened their first Canadian office last year.
“Work hard, don’t ask questions, and good things will happen to you,” Frank Ebanks described his keys to success in the MCA world. “Being Positive, working hard, and keeping my eyes open: If I hadn’t been looking for opportunities at 2 am in the morning on Craigslist, I would have never known about this industry, but it’s huge, it’s such a big industry.”
Ebanks started what would become Spartan Capital shortly after seeing an ad calling for startup investors in an industry Ebanks had never heard of, called Merchant Cash Advance.
It was around 2016. Ebanks was up late in the NYU university library, putting himself through an MBA while working as a reactor operator at the Indian Point nuclear power plant in Westchester.
Despite the job security Ebanks enjoyed, he said he wasn’t happy with his career, wasn’t getting the satisfaction he wanted. He had already made it a long way— starting before the millennium as a Cuban immigrant, immigrating to the Dominican Republic in 1998 and then Florida in 2002 with empty pockets. Shortly after arriving, Ebanks enlisted.
“I spent some time in the army; I wanted to put in some time,” Ebanks said. “I said: ‘I’m a new immigrant, what’s the best thing that I could do to reward these opportunities?’ To serve in the army, give the country a couple years, and payback in advance for this opportunity that I knew I was going to have.”
Ebanks said he learned early on to take every opportunity seriously. He served for two years and then became an engineer and contractor for the army, working on the Patriot Missile defense system. He went through college at NJIT, graduating in 2009, and following in his father’s footsteps to become an electrical engineer.
After working with South Jerseys PSE&G, Ebanks took the opportunity to work full time shifts at the the nuclear power plant, and by 2016 he was pursuing an MBA and looking for ways to grow what he called “my empire.” Used to investing in small businesses already, discovering MCA fit right within his world.
“I’ve always been active, throughout my professional career I had businesses in real estate, I owned several businesses such as laundromats, a lot of retail cell phone stores and things like that,” Ebanks said. “So at one or two am in the morning, I’m working on how to build my empire. I was on Craigslist looking for opportunities, seeing what’s out there, and somebody wanted an investment, to partner up and start a company in a new industry.”
He took a meeting and learned a ton. Although he did not end up going into business with that person, he was hooked on the concept.
“I looked at that ad, and $10,000 later, we had a company,” Ebanks said.
He learned what he needed and ended up opening his own MCA business shortly after in New Jersey, finding he loved setting up syndicated MCA deals.
“I did some research, opened an office in New Jersey, secured a manager to run the operation, and we started brokering deals and learning about syndication.”
He worked with SFS Capital, now called Kapitus. He fell in love with the immediate gratification feedback of making deals, seeing returns on account receivables, and watching renewals come in. The business grew, but things were not always a straight climb to success.
“There was a point where things were not going well and I had to start a new company, find new parters and investors with a funding direct-only focus, and moved into my basement- my wife was unhappy with that. I started hiring people, processors, underwriters, and ISO managers in my basement,” Ebanks said. “At one point, she said, ‘Okay, this is enough. Ten strangers are coming into my house every day, you’ve got to get an office,’ so we secured an office in New York. And that’s when things took off in 2017.”
At that point, Ebanks had shifted his business model from securing deals to funding them all his own, using capital he raised. Ebanks said that being a broker partnered with Kapitus was great, but he wanted to grow and run his business entirely. The best way to do that was through ISO management, Ebanks said. Ebanks let the direct sales team phase out and he hired ISO managers, learning the ISO business as he went.
“So fast forward now: We have over five ISO managers, and we’re funding about $12 million a month,” Ebanks said. “It’s been a phenomenal journey and the most rewarding thing I’ve ever done in my life; I’m not shy to share how exciting every day is to me, and how other than my family and my kids and God, this is the most important thing my life.”
For brokers looking to get started in the industry, Ebanks has this advice to share: Don’t settle.
“Don’t settle, look for growth, and invest your money,” Ebanks said. “I always invested everything I could, 95%, every penny on the business. It matters especially at the beginning, the more you invest, don’t let it sit.”
That investment should go toward your business, your staff, and hiring. Ebanks said the more you invest, the bigger the bag, the more your firm would grow, and your employees will grow with you. Helping employees will mean they will eventually leave, but in Ebanks’ experience treating employees right creates partners.
“Some of them now are partners, and the employee-employer relationship is always more partnership,” Ebanks said. “Some of them own their own companies now, and we help each other out. If they have a big deal, they say: ‘Frank do you want to take $50,000 out of this deal?’ I say yea I trust you. I’ve known you for years.”
Now that he’s on track to grow with recurring customers, seeing some merchants come back to renew twenty times since 2016, Ebanks sees a possible bright future for Spartan Capital: becoming a chartered online bank.
“It is an alternative lending space but to offer the best products to people,” Ebanks said. “I think at the end of the day, and we need all the resources we can get, the next chapter is to apply and secure an online bank charter, it’s the future of the fintech industry.
“Why do people like doing business with us versus a bank? Some of them can do business with banks, but they choose to use us because they have direct access to us after 6 pm, they could call us Saturday, they can call us on a Sunday,” Ebanks said. “A great relationship that they can never get from a bank. I want to bring what we do in MCA to the banking industry to serve people that want banking products, but I want to give them that MCA experience.”
Shopify released a treasure trove of data from customer surveys collected in the past three years. The firm reached a milestone of 1 million businesses using their platforms this year. The data Shopify gathered paints an accurate portrait of a dramatically going-digital world.
“2020 has accelerated the industry by a decade, permanently altering the way entrepreneurs start, run, and grow businesses, as well as how consumers choose to shop and pay,” President of Shopify, Harley Finkelstein, said in an introduction. “Consider this report your crystal ball into the future of this industry.”
Finkelstein put forth five key predictions based on the trends Shopify found in the data. Be prepared, Finkelstein warns, for a new generation of retailers and consumers to forever change the world of commerce.
Key prediction one: Young consumers will change the business landscape as eCommerce charges ahead. Shopify predicts that younger shoppers changing their habits due to the pandemic will likely shop this way from now on. 67% of shoppers under 35 shifted to shopping online, compared to 57% of the 35-55 bracket.
Overall, 84% shopped online this year, compared to 65% in person. 53% of those that shopped online did so because they wanted to avoid crowds, 46% of consumers felt uncomfortable shopping in person.
Key two: Physical retail is transforming, giving local businesses new advantages. Consumer reports showed 62% of people prefer contactless purchases for in-store purchasing in 2020, an increase of 122% during the pandemic. Go figure. 94% of the point-of-sale retail lost in the first six weeks of shutdowns was replaced with online sales.
Key three: Consumers want to shop independently but are not. Businesses will adapt to make it easier to buy from a small business. Half of the consumers look for independent business owners, while 65% say they support small businesses. It turns out that only 29% of consumers shopped at a small business during the pandemic, giving ground to findings that small business is having trouble adapting to online-only commerce compared to larger chains.
Independent retailers need to make customers put their money where their mouth is. Shopify said that fast and free shipping could help. 59% of online shoppers say free delivery would improve their online shopping. 75% of merchants who generated sales in March through September did so with free shipping options on their site.
Key Four: Consumers will vote with their wallets. 53% prefer environmentally sustainable products, and 49% want the retailer to donate proceeds to charity when they make a purchase. The fourth of consumers that did buy local this year did so to support their community and local economy and create jobs.
Finally, our favorite, Key Five: Modern financial solutions will disrupt business and consumer banking finance and lending. Shopify found evidence for growth in their merchant financial platforms. 24% that applied for financing agreed with the 36% that faced problems from COVID-19 by stating: “My bank or financial institution does understand the needs of my business.”
The quality of user experience plays a massive factor for merchants; accordingly, 48% say “a good online bank or mobile app experience” is a top-three feature, while 62% of marketplace sellers say the same.
The findings conclude that explaining the trends was shared to encourage businesses to use the info to adapt and change, as they have been the past year.
Three individuals were arrested last week in New York for their alleged participation in a scheme to fraudulently obtain $13 million in PPP funds.
The trio: Dat Ho, Victoria Ho, and Ngoc Nguyen are reportedly members of a family that own a chain of over 15 nail salons in the NYC metro area called “Victoria Nails & Spa,” as well as other businesses.
According to the Department of Justice, “the defendants falsely and grossly overstated the number of employees at the Victoria Companies and wages paid to those employees in order to obtain” up to $13 million in PPP loans. “In order to support the false representations in the loan applications about the number of employees at, and the wages paid by, the Victoria Companies, the defendants submitted fraudulent and doctored payroll and tax records. In addition, the defendants falsely listed the same employees in applications for different nail salons to support the loan amounts applied for, and some purported employees were listed as employees of as many as seven different nail salons during the same time period.”
Unique to this PPP malfeasance story is that the underlying businesses existed and were operational.
All defendants are innocent until proven guilty.
After Yardline Capital burst into the growth capital space for e-commerce sellers, two fintech vets have recently announced a move to the company.
Seth Broman, formerly Senior Vice President of Business Development at Kapitus, announced he had become Chief Revenue Officer of Yardline Capital.
Dennis Chin, formerly in capital markets for OnDeck, announced on LinkedIn that he had become Head of Strategic Initiatives for Yardline Capital.
On LinkedIn, Broman wrote, “Over the last 14 years, I have seen SMB lending and alternative financing grow and adapt time and time again. Innovation and technology have transformed the industry and continue to do so daily. I have seen firsthand billions and billions of dollars propel SMBs and along with the growth of those companies, the industry itself continues to evolve. With that, I’m very excited to share with my friends, family, colleagues and network that I have joined Tomo Matsuo and Ari Horowitz to build Yardline – providing value-added capital solutions for ecommerce sellers to work smarter & grow faster.”