Archive for 2023

Prosper Originates $595.6M in Q2

Prosper Marketplace’s Q2 loan originations of $595.6M was down 33% from the same period last year and down more than 5% from Q1 2023. The company attributed the decline to “reduced investor demand given the current uncertain economic environment.”

Investor demand is a major driver for Prosper which sells whole loans to institutional investors and notes to retail investors. The 33% YoY decrease is even more significant considering that it actually represents a 50% drop in the raw number of loans made.

Prosper generated a $52.7M net loss in Q2 on just $31.5M in net revenue.$32M worth of expenses, however, were attributed to “Change in Fair Value of Convertible Preferred Stock Warrants.”

“There was also a $8.1 million decrease in Total Net Revenues from Change in Fair Value of Financial Instruments, Net, due primarily to higher delinquencies and charge-offs for loans held in consolidated warehouse trusts and the Credit Card portfolio underlying the Credit Card Derivative, both of which have increased in size from the prior year,” the company wrote. “Additionally, higher interest rates have led to negative fair value adjustments on Loans Held for Sale.”

New York’s Fourth Department: Revenue Purchase Agreements Are Not Loans

A lawsuit brought by Samson MCA LLC against Joseph A. Russo M.D. P.C./IV Therapeutics PLLC, DBA Aspire Med Spa & Joseph Russo & Marco V Beatrice has brought revenue purchase agreements back in to the legal spotlight in New York State. Once again its been affirmed that they’re not loans.

In May 2021, plaintiff Samson MCA sued defendants for breach of contract and won on summary judgment despite defendants’ contentions that the revenue purchase agreements at issue were actually “criminally usurious loans.” Defendant Marco V Beatrice appealed. After a very careful analysis of the agreements, a final decision was issued by the Appellate Division, Fourth Department on August 11, 2023.

“On appeal, [defendant] contends that the agreements are void because they are criminally usurious loans and that the court therefore erred in granting plaintiff’s motion and denying defendants’ cross-motion with respect to him,” the Court stated. “Thus, the central question before us is whether the two agreements were, in fact, revenue purchase agreements or whether they were, instead, loans.”

The Court said that when determining whether a transaction constitutes a loan, courts must determine whether the amount is repayable absolutely or under all circumstances:

“Usually, courts weigh three factors when determining whether repayment is absolute or contingent:
(1) whether there is a reconciliation provision in the agreement;
(2) whether the agreement has a finite term; and
(3) whether there is any recourse should the merchant declare bankruptcy”

Final decision:

Contrary to [defendant’s] contention, plaintiff established as a matter of law that the agreements were revenue purchase agreements rather than loans, and [defendant] failed to raise a triable issue of fact with respect thereto (see Principis Capital, LLC, 201 AD3d at 754). Here, the agreements submitted by plaintiff contained reconciliation provisions requiring the adjustment of the remittance amount upon request based on changes to the entity defendants’ revenues, and had no finite term and no payment schedule. Additionally, as noted, each agreement contained an acknowledgment “that [plaintiff] may never receive the purchased amount in the event that [the entity defendants’ business] does not generate sufficient revenue” and, for the most part, plaintiff did not have recourse in the event that the entity defendants declared bankruptcy (see Streamlined Consultants, Inc. v EBF Holdings LLC, 2022 WL 4368114, *5 [SD NY, Sept. 20, 2022, No. 21-CV-9528 (KMK)]).

We have reviewed [defendant’s] remaining contention and conclude that it does not warrant reversal or modification of the judgment.

The original lawsuit can be found under Index No. 129401/2021 in the New York Supreme Court.

Full decision by the Appellate Division, Fourth Judicial Department can be found here.

Loan Volumes Strong, Approvals Cautious in Small Business Finance Space

In this current environment, small business finance companies are proceeding cautiously.

“In 2022, the company’s turndown rate stood at 8%, but it has surged to 12% this year,” said David Miles, VP and Director of Credit for Eastern Funding. Eastern Funding primarily serves coin laundromats, grocery stores, and car washes but also operates two subsidiaries that focus on assets like commercial vehicles & tow trucks and fitness & wellness equipment. While Miles said that loan volume has remained strong, the percentage of transactions being turned down has increased.

“…I think that’s fairly indicative of the market or the environment that we’re currently in, which is high interest rates,” said Miles. “You have consumers that are carrying a lot of debt and it’s somewhat of a precursor to a potential downturn or recession.”

The circumstances are being felt all across the lending spectrum. According to a recent consumer lending study from the Federal Reserve, the overall rejection rate for credit applicants was 21.8% in June, the highest level in five years. That study looked primarily at mortgages, credit cards, and auto loans.

But in the commercial universe where Eastern Funding operates, the sentiment seems to be matching the shift in the numbers. On a recent quarterly earnings call, for example, Lightspeed CFO Asha Bakshani said of their MCA program, “There’s tons of demand. We’re just taking our time intentionally given the macro.” On unsecured business loans, Enova CEO David Fisher recently said that “we’re just not convinced the risk/reward is there right now, again, given the uncertainty in the economy, an extra few percentages of origination growth for us this year is pretty inconsequential.” Both Lightspeed and Enova are also still experiencing strong volume despite the conservative approach.

“We’ve definitely seen credit quality go down compared to prior years but that’s the main challenge,” said Miles of Eastern Funding. “And we want to make sure that especially in this environment, that we continue to make good loans, we make loans that don’t go to collections, that don’t go to work-out, and we don’t experience any losses across any of the three divisions.”

One challenge of being cautious, however, is communicating the situation to potential customers who may still be stuck in the mindset of 1-2 years ago.

“Our focus is on making sure that the people that do have credit authority, that they’re well aware of the environment that we’re currently in, and that there is enhanced risk just to do with the macroeconomic environment that we’re operating in,” Miles said.

Should Lightspeed Ramp Up its Merchant Cash Advance Business?

Analysts are wondering if Lightspeed should be doing even more merchant cash advances than the company’s currently doing. The company generated just $8.1M in revenue from them over the last fiscal year, a number that amounted to just 1% of total revenue.

“Under normal circumstances, we would likely be pushing [Lightspeed] Capital even harder,” said Lightspeed CFO Asha Bakshani during the Q1 2024 FY earnings call this month, “however, given the current macro environment, we’re being conservative on the ramp. There’s no lack of demand from our customers, and we believe our high GTV customer base is an ideal demographic to use this financial service, especially in the long term. Risk of business failure is much lower with high GTV customers, but the need for capital is still substantial.”

When Lightspeed touted that it had increased its total merchant cash advance receivable balance by $11M for the quarter, an analyst from Bank of America Merrill Lynch wondered if they were being too conservative. “You mentioned that you would be pushing harder, but given the macro, you’re being conservative on the ramp,” the analyst said, “But then, you also mentioned that there is demand for it, so if there is demand, why not push a little bit harder for capital?”

“Yeah, you’re absolutely right,” Bakshani replied. “Capital is a very promising business for us, but what we have to keep in mind is that it still represents today a low single-digit millions in terms of revenue. And so when our sales teams are fully focused on unified payments, there was some distraction in the quarter on capital. And in addition, we want to make sure that in today’s macro that we’re not rushing anything. We want to make sure that we ensure that we stick with the very high rated credit-rated customers for eligibility. But you’re absolutely right, there’s tons of demand. We’re just taking our time intentionally given the macro. Our default rates still remain extremely low, but we definitely should see that pick back up in the back half of the year when unified payments is behind us.”

Lightspeed’s merchant cash advance program was repeatedly raised during the call in very positive terms.

“Once you’re on Lightspeed payments, we underwrite you for capital so you can have access to capital,” said Jean Paul Chauvet, CEO of Lightspeed. “That is a big win for them and our customers.”