Archive for 2023
Idea Financial Upsizes its Credit Facility to $112M
February 23, 2023
In just eighteen months since Idea Financial closed on an $84M warehouse facility with the Specialty Finance Division of Synovus Bank and Hudson Cove Capital Management, the company has gotten it upsized to $112M and the term extended by another 3 years. Idea Financial provides small businesses with lines of credit while its sister company LevelEsq finances the cost of lawsuits mostly undertaken by lawyers that work on contingency.
Co-founders Larry Bassuk and Justin Leto say that the upsizing news is “a testament to our discipline and our focus on risk management.”
The company has around 50 employees, less than what might be expected, but Bassuk and Leto say that technology has helped make tremendous efficiency possible while emphasizing that they have a human underwriting team that reviews every single loan before it goes out.
Jayan Krishnan, Managing Director of Synovus Bank, said that they were “very happy to provide them with the growth capital they need.” Synovus is the senior debt in the arrangement. Krishnan said that they love to work with companies that are thoughtful, mindful, and conservative and that Idea fit that criteria.
Fred Wang, a Co-Founder and Partner at Hudson Cove, said his firm is pretty selective on mezzanine within the small business lending asset class but that Idea’s performance has been very strong and consistent. “We’ve gotten a very good feel for them as a management team,” Wang said.
Both Synovus and Hudson Cove are well-versed in the commercial finance space.
“We’re obviously growing and they’re happing to be growing with us,” said the two founders of Idea Financial. “We run our company risk management first and sales second.”
LendingClub Ceases Equipment Financing Biz
February 22, 2023
Similar to Upstart, LendingClub is hitting the pause button on a segment of its lending business. In particular the company announced that it has ceased originations in equipment finance and commercial real estate.
“…commercial real estate and equipment finance, in this environment just not as attractive returns for the bank or for shareholders,” said LendingClub CEO Scott Sanborn in the Q4 earnings call. “So, we aren’t originating new loans there.”
What will remain on the commercial side, however, is its SBA Government Guaranteed Lending business.
“Lender” Sued for $10 Million
February 21, 2023
King Family Lending says that it offers loans from $10,000 to $2M with 1-4 month terms that can be funded within 24 hours. There’s a collateral requirement, however, which could be anything from inventory, to real estate, to equipment, to sports contracts, to POs, to crypto. Founded in 2020, the lender was a borrower itself, allegedly borrowing more than $10 million from a law firm in order for it to make 97 loans to third parties.
According to a lawsuit filed on February 11, however, its alleged that King Family Lending and its owner never made any such loans and that the owner simply committed fraud and swindled the money.
The story behind King Family Lending, which includes all types of twists and turns, is best told by the Daily Mail. Enjoy.
Think you know APR? Think Again.
February 16, 2023It has been just over two months since the California financing disclosure law was enacted. With New York on the heels of California, getting APR disclosure correct is a legal requirement, let alone a competitive one.
At Austin LLP, we developed a simple and versatile APR calculator as part of our California disclosure law guide. However, while training and using this calculator with our clients, we learned just how tricky an APR calculation could be. Having an accurate APR calculation method or software tool is just the beginning. Below we discuss one pitfall we have observed when calculating an APR for an MCA funding deal. In future articles, we will highlight other scenarios where calculations may not be as straightforward as one may think.
MCA Funding APRs Change Depending on the Day of Disbursement
When disclosing a daily (Monday-Friday) MCA financing offer in California or New York, it is essential to understand that the “APR,” which funders are required to disclose, will change depending on the day of the week the funding is disbursed. For example, the APR you calculate with a Monday disbursement will have a different APR if that same deal is funded on a Tuesday. This difference in APR is because MCA funders take payments only Monday through Friday, resulting in a different payment schedule as the week progresses, because later disbursement equals fewer payments before the weekend.
We’ve seen APRs for the exact same financing deal change as much as 8-10%, based solely on the day of the week the funding is disbursed. Therefore, funders, underwriters, and brokers must be aware of how an APR calculation changes based on the day of the week.
APRs Decrease as the Week Progresses
Using our MCA-APR calculator, we found that as the week progressed, the APR of the deal decreases. For example, the APR calculated using a Monday disbursement and a Tuesday first payment will be higher than the same deal disbursed on a Tuesday with a first payment on a Wednesday. This trend continues for the entire week, with a Friday disbursement and a Monday first payment having the lowest APR.
California and New York disclosure laws allow for the disclosure of a higher APR. Therefore, as long as the funds are disbursed in the same week as the disclosure, the actual APR will be lower than the APR that was disclosed to the merchant. However, a disclosure made on a Thursday or Friday of one week that does not disburse until the following week will have a higher actual APR than was disclosed.
Should it always be Monday?
For these reasons, no matter which APR calculator you use, ensure you input the expected disbursement day and first payment day. And for any disclosure offer made that is not disbursed by Friday, remember to re-calculate the APR and re-disclose on the following Monday.
Some of our clients are adopting an “every day is Monday” approach to avoid an accidental under-disclosure of an APR. The APR disclosure regulations are tricky and have many pitfalls. With a regulatory tolerance of less than one eighth of one percent, accuracy matters, specifically when considering the potential for regulatory oversight and downstream litigation.
This article has been provided as general guidance and should not be considered legal advice. Feel free to reach out to us at mca@austinllp.com for any specific questions you may have. We are happy to be of service.
Shopify Capital Seeing “Incredibly Strong Renewals From Previous Borrowers”
February 16, 2023Shopify Capital originated $393.2M in MCAs and business loans in Q4, an increase of 21% YoY, the company revealed. The company also began funding small businesses in Australia last year, bringing the total countries it does business in to four.
“[Shopify] Capital has acted as a lifeline for merchants, especially through the pandemic and this tough macro environment, allowing them to conveniently access capital when they need it most,” said Shopify President Harley Finkelstein. “Capital is now available in four countries, and our machine-learning algorithms to underwrite merchants keeps getting better.”
Finkelstein also noted that the company is “seeing incredibly strong renewals from previous borrowers.”
The graphic below, illustrating the cumulative growth of Shopify Capital’s originations, was shown in the company’s Q4 earnings presentation:
Upstart Halts Small Business Lending Division
February 14, 2023
Upstart, the embattled online lender that recently announced a 20% reduction in headcount, revealed on Tuesday that it had also suspended its small business lending operations. The sudden about-face is notable given that the company just entered that market in mid-2022.
“With th[at] reduction in staffing, we also decided to pause development of our small business lending product,” said Upstart CEO David Girouard during the quarterly earnings call. “This was a necessary step to ensure we can adequately resource the rest of the roadmap. We look forward to the day when we can resume our pursuit of the world’s best AI-powered business loan.”
In the previous quarter, talk of small business lending had sounded more celebratory, which had just crossed $10 million originated since inception at the time.
“In many ways, last year was the perfect storm for our business model,” Girouard said. “The withdrawal of federal stimulus disproportionately harmed our borrowers, akin to a simulated recession for millions of mainstream Americans suddenly lost what had become their primary source of income. The Fed’s interest rate hikes, the fastest in several decades, left both lenders and capital markets cautious and concerned about what might come next in our economy.”
NYC’s Small Business Loan Program Stops Accepting Applications After Just 3 Weeks
February 13, 2023
The opening of NYC’s $75M Small Business Opportunity Fund backed by a combined partnership of Goldman Sachs, Mastercard, Community Reinvestment Fund, and CDFIs was heralded as historic. Cheered as the largest public-private loan fund ever directed at small businesses, which stood to offer 5-6 year loans up to $250,000 at a rate of 4% interest to help them recover from the pandemic, the program kicked off on January 23. Just three weeks later, however, the acceptance of new applications has been halted.
“Due to the high level of interest, the NYC Small Business Opportunity Fund has temporarily paused intake of new applications while our lending partners assess completed applications,” the official website states. News reports claim the that fund was swarmed with 10,000 applications.
Indeed, that is already more than 6x the maximum number of loans that the fund was set up to support. The Fund envisioned a maximum of 1,500 total loans originated before the capital was exhausted. The approval criteria itself is lenient as the fund boasts that there is no minimum credit score requirement. Documentation supporting an ability to repay the loan is required, however.
Businesses that didn’t apply early are told that they can fill out an inquiry form to be notified if the fund reopens.
Examining the Charge Off Rates on PayPal’s Business Loans
February 13, 2023Wondering how a competing small business lender with more than $17 billion in originations since inception has been doing lately with? Check out some of PayPal’s business loan and MCA stats:
| Period | % of Merchants Within Expected Timeframe | % of Merchants > 90 Days Past Expected | Net Charge-offs |
| 2017 | 87.4% | 5.5% | |
| 2018 | 91% | 3.7% | |
| 2019 | 89.6% | 4.2% | 7.4% |
| 2020 | 75.4% | 12.5% | 18.9% |
| 2021 | 91.8% | 3.1% | 4.7% |
| 2022 | 90.7% | 3.7% | 4.5% |
