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Lawyers Weigh in on Champion Auto Sales, LLC v. Pearl Beta Funding, LLC

March 22, 2018
Article by:

In light of the recent Champion Auto Sales, LLC et al. v Pearl Beta Funding, LLC decision, which decided that the particular MCA contract at issue “was not a usurious transaction,” deBanked spoke to a handful of lawyers, including the plaintiff’s lawyer, Amos Weinberg, to get their thoughts on the decision.  

 

Amos Weinberg

“The contract at issue in Champion Auto v. Pearl Beta Funding was really no different than the contracts reviewed over a hundred years ago by the United States Supreme Court, in Home Bond Co. v. McChesney, 239 U.S. 568 [1916], where our nation’s highest court agreed that “the transactions were really loans, with the accounts receivable transferred as collateral security,” and “[i]n so far as the contracts in question here use words fit for a contract of purchase they are mere shams and devices to cover loans of money at usurious rates of interest.” Like most patrons of funding providers, Champion Auto was a one-person company that needed immediate, overnight cash. Presiding Justice Rolando T. Acosta of the Appellate Division remarked, at the argument, that Champion was a “sophisticated” party that “knew what they were getting into.” It is therefore painfully obvious that even though the NYS Legislature criminalized and voided loans to corporations exceeding 25% interest, and even though all victims of loan sharking knew what they were getting into, the courts are loathe to be used as escape hatches for companies trying to get out of paying back loans.”

 

Nick Giuliano

Giuliano, McDonnell & Perrone, LLP

“It’s an appellate ruling a lot of people have been waiting for. It handles the usury issue in passing, almost as if it goes without saying.”

 

Kate Fisher

Hudson Cook, LLP     

“The court confirmed that under New York law, a properly structured MCA transaction is not a loan. But I want folks to focus on the ‘properly structured’ piece of that…The court’s decision did not indicate much. But it did say that based on the documentary evidence, which is the contract, that the transaction was not a loan. So it’s important for folks to understand that for [an MCA contract] not to be a loan, it needs to be properly described…this case really shows us how important the contract is.

This case does not mean that all MCA companies are all in the clear. What it means is that MCA companies with properly drafted contracts, and good practices and procedures, are not making loans.”

 

Ross Hofherr

Harris Beach, PLLC

“First of all, it was a unanimous decision by the three justices in the first department. That doesn’t always happen, so that’s a good thing. I personally would have liked to have seen more discussion out of the appellate department, but the language that’s there happens to be great for the industry. The one thing that I would caution, though, is not to interpret that all merchant cash advances are outside of transactions that would be subject to usury because it really is dependent on the language of the agreement.

[The decision] is a great tool in the arsenal, but I don’t see it as the tool that is going to prevent challenges.”       

 

Catherine Brennan

Hudson Cook, LLP  

“This is a very important decision because New York State has a high volume of merchant cash advance companies…so having favorable case law in New York is great for the industry.”  

 

Jamie Polon

Mavrides, Moyal, Packman, Sadkin

“I am very pleased with the outcome. There are more cases [to be decided], but this is very beneficial. It’s a win for the industry and I hope to see other decisions go in the favor of the advance industry.”

 

Richard Lafont

Platzer, Swergold, Levine, Goldberg, Katz & Jaslow, LLP

“The impact of the Champion decision was direct. We represent several MCA clients and we have a number of cases where Amos Weinberg is representing the merchant. And in one of our cases where a motion to open up a default judgment is at issue, the judge’s law clerk directly emailed us and wants to conference the case based on the Champion Auto Sales decision.”

[Lafont also pointed out that even though it was a short decision, one of its two citations was to Feld v Apple Bank for Sav., which deals with overdraft protection and has interesting parallels to MCA.]

 

Morgan Grossman

Platzer, Swergold, Levine, Goldberg, Katz & Jaslow, LLP

“Based on the email we just received from the court clerk today, this decision could expedite [future] litigation, and it could decrease certain attorney’s fees for a lot of MCA companies involved in this litigation.”

 

The ‘Loan’ Star State – Texas is an alternative finance nexus

June 15, 2017
Article by:

Austin, TX

This story appeared in deBanked’s May/June 2017 magazine issue. To receive copies in print, SUBSCRIBE FREE

We’re at Able Lending in Austin, Texas, a financial technology company occupying three floors deep in the heart of the Seaholm power plant overlooking Lady Bird Lake. The fortress-like building anchors an inner-city complex of offices and residences, chic restaurants, boutique shops, and a Trader Joe’s.

Once the main source of electricity for Texas’s capital city, the natural gas-fired boilers have given way to a warren of glassed-in offices and meeting rooms connected by angular metallic stairways and a carpeted mezzanine.

It is here, in a tiny conference room, that Will Davis, a slim man of 35 and an alumnus of Harvard Business School, is drawing a bell curve on a whiteboard. Dressed for the balmy Texas weather in tan Bermuda shorts, a black tee-shirt and Nike running shoes, the company’s chief executive and co-founder is explaining how Able’s friends-and-family lending formula “widens” the risk curve.

“We all compete here in this box on price,” Davis says, drawing a square at the topmost point of the bell curve, indicating where the near-prime borrowers abide and where lenders are crowded in pursuit. But when loans from friends and family form 10%-15% of the total loan, he says, drawing squiggly lines just to the left of the box, a cohort with less-than-stellar credits now becomes credit-worthy.

Because of the “peer pressure” and “behavioral change” exerted by the involvement of family and friends, the formula produces a “positive-selection effect on the loan portfolio” Davis says, declaring: “We can serve more of the market.”

It all sounds very business-schoolish. But here’s the bottom line: Able’s lending model sharply reduces both risk and borrowing costs, allowing it to go head-to-head with national rivals like Funding Circle, Bond Street, OnDeck and StreetShares. Thanks in large part to its reduced risk, asserts Able’s director of development, 30-year-old Matt Irving, the Austin fintech can lend twice as much money as its competitors at half the interest rate.

Since opening its doors and firing up its computers in the fourth quarter of 2014, Able’s average loan size has climbed to $231,200 from $100,000. Of that, an average of 3.2 “backers” have accounted for $40,691, or 17.6% of the average total loan amount. The average “blended” annual percentage rate is 16.41%.

Able Lending in Austin, TX
Able’s office in Austin, TX

Meanwhile, Able, which has made some $48 million in loans to entrepreneurs through the end of April, 2017, reports CEO Davis, is itself on sound financial footing. According to the data-services firm Crunchbase, Able has raised $12.5 million in three rounds of venture capital financing from 21 investors. Principal equity financiers are Peter Thiel’s Founders Fund, Peterson Ventures, RPM Ventures, and Blumberg Capital. On Sept. 27, 2016, moreover, Able added another $100 million to its arsenal in debt financing from Community Investment Management, a San Francisco investment firm. Borrowers include owners of food trucks and apparel shops; professionals including doctors, dentists, veterinarians, and accountants; “creatives” like public relations and advertising firms; and construction companies. Since its inception, Davis says, just one borrower has defaulted, resulting in an $85,000 charge-off.

So far in 2017, the company has lent out nearly $15 million in the first quarter, but it’s on track to make $80 million this year. “We’re ramping up,” Davis declares.

Welcome to fintech in the Lone Star State. While everything may be bigger in Texas, as the saying goes, that’s not quite true of financial technology. The geographic contours of fintech operations are roughly 60% in California (especially Silicon Valley/San Francisco), 30% New York, and 10% scattered about the rest of the country, says 40-year-old Mihir Korke, the San Francisco-based chief marketing officer at Able.

Nonetheless, Texas offers fertile ground for the burgeoning fintech industry. The vaunted Texas business climate promises a relaxed regulatory regime, the absence of either a personal or corporate income tax, and a lower cost of living. All of which were cited by Able Lending, as well as an additional pair of fintech companies that specialize in factoring and merchant cash advances: Jet Capital, located in North Richland Hills in the Dallas-Fort Worth “metroplex”; and Ironwood Finance in Corpus Christi, a port city on the Gulf of Mexico.

“What’s interesting about fintech companies is that they can choose to locate where they want to do business,” says Erin Fonte, an attorney at Dykema Cox Smith in Austin whose legal practice includes mobile payments, mobile wallets and financial technology. “They don’t necessarily get a regulatory advantage because much of what they do is based on their customers’ location,” says Fonte, who is currently serving as a member of the Federal Reserve’s Faster Payments Taskforce. “That said,” she adds, “some companies have chosen to locate in Texas because of the labor and talent pool, because it’s a good source of venture capital, and it’s more affordable.”

Fort Worth Stockyards
The Stockyards in Fort Worth, TX

Jet Capital’s 42-year-old chief executive, Kenneth Wardle, confirms many of Fonte’s observations. “So far, Texas has been friendly to MCA companies,” he says, using the initials for “merchant cash advance.” Especially favorable to his industry is the fact that “Texas regulators do not define an MCA as a loan,” he adds.

Prior to co-founding Jet Capital with chief operating officer Allan Thompson, 49, Wardle served as a portfolio manager at Exeter Finance Corp, a $3 billion company in nearby Irving which specializes in subprime auto financing. Wardle has also held leadership positions at AmeriCredit Corp., now GM Financial, and Drive Financial, now Santander Consumer USA.

His 20-year background has included the gritty work of repossessing cars when owners fell into arrears on their auto loans. “Most of my career in auto finance was in risk management and I’ve driven a repo truck,” he says. “You take off with the car right away and then chain it down after you’ve gone a couple of blocks so you don’t lose it out on the highway.”

Backed by more than $5 million in equity financing from a family office in Puerto Rico, Jet Capital makes cash advances of $25,000-$30,000, on average, for working capital.

The sweet spot for Jet’s financings are retail establishments, trucking companies, hair-and-nail spas, and medical doctors. Doctors in particular are prime candidates for a Jet cash advance. “They have a pretty good gap between when they perform services and when they get paid by insurance companies” during which they have to cover payroll expenses and overhead, Wardle notes. Prospecting for customers is done largely through independent sales offices, direct mail, and pay-per-click services offered by Google, among additional online channels.

“Our defaults are relatively in line with expectations” and were largely confined to the first year of business, Wardle says. “We made some underwriting and verification changes last September and October,” he adds, “and we changed our minimum credit scores. Since then we’ve seen defaults migrate in the right direction.”

Forth Worth, TXSince Wardle and Thompson took occupancy of an empty office outside Fort Worth in October, 2015, Jet has grown to 12 employees who today have “a variety of roles” says Thompson, citing sales, underwriting, customer service, collections, analytics, and information technology. “They wear a lot of hats and there’s a lot of cross pollination,” he says.

Looking ahead, Wardle foresees Jet expanding its product line beyond merchant cash advances to offer lines of credit and installment loans. “Our goal is to be a one-stop, nonbank financing solution,” Wardle says.

Kevin Donahue, 37, owner of Ironwood bootstrapped the South Texas company, which opened in 2013 using personal savings of $1.5 million remaining from the sale of mobile home parks in South Dakota and Texas. He also plowed earnings into Ironwood from a subsequent job as a commercial loan broker.

Donahue, who grew up in a family of fishermen on the Oregon and California coasts and is a 2006 graduate of California Polytechnic State University at San Luis Obispo, says that he turn up in Corpus Christi somewhat by accident. While operating the mobile home park in nearby Kingsville, he got married, started a family, and put down roots.

With 20 employees, Ironwood focuses on providing merchants cash advances in the $5,000 – $50,000 range, Donahue says, “but we can go up to $1 million.” The average cash advance – usually $10,000-$15,000 – is put to use as working capital by what he dubs “Main Street” businesses: restaurants, boutiques, trucking and transportation companies, professionals, and contractors. Ironwood charges clients factoring fees that are collected via ACH.

“Many times (these businesses) don’t qualify for bank loans,” Donahue says. And even when they do qualify, he notes, “banks take forever – up to three months – while we’re using our own money and can do it in three days. We’re very low on requiring a lot of documents.”

For his part, Donahue wants to see a customer’s bank statements, a photo I.D., voided checks, and a financial report. But, he says: “Cash flow is much more important than financials.”

Clients typically find their way to Ironwood through the website, although they often arrive through referrals from brokers and real estate agents, attorneys, accountants and “anyone doing commercial lending,” he says. Donahue says he closed down a call center. “The way to get leads is more through relationships than marketing,” he says.

Trucking companies are important customers. “They work on thinner margins, the barriers to entry are lower, sometimes their customers don’t pay their bills,” Donahue says of the industry’s economics. “They have huge expenses for fuel, payroll, insurance – and they might not get paid (by their customers) for 30 days or more.”

Ironwood’s advance for a million dollars, cited earlier, was made to a trucking company in Midland, Texas, which hauled both general freight and oilfield equipment. The money was put to use both to smooth out cash flow and as growth capital. The trucking concern “used part of that for expansion, making down-payments with Volvo or Peterbilt,” Donahue recalls.

Corpus Christi, TX
Corpus Christi, TX

Backstopped by the titles for 18 trucks valued at roughly $1.5 million, the deal was structured as a three-year, sale-leaseback agreement with “no interest” but rather a fee, Donahue says. Payments were $32,000 monthly, he says, amounting to $152,000 above the advance.

Donahue has no trouble justifying the steep fee schedules. Not only does he release money quickly but in many instances Ironwood has stepped in to bail out businesses that could have gone belly-up. He cites a trucker in the Midwest who had a “very lucrative” business hauling Boeing jet engines worth $30 million to Seattle where they could be worked on and returned to the planes for installment. In order to fulfill the contracts – which earned the hauler $25,000 monthly — the trucking company’s owner needed to purchase pricey insurance.

The owner, however, “had horrible credit,” Donahue says, largely the result of cash flow problems after investing in a special trailer for the jet engines, compounded by a messy divorce. To secure the $10,000 for the special insurance, the trucker sold Ironwood $14,000 of their future receivables. “For his investment of $4,000 he’s making $25,000-a-month forever,” Donahue explains.

Back in Austin, Able is gearing up for another round of capital-raising to bulk up staff and, according to Korke, win licensing to do business in California. At the same time, its friends-and-family credit structure is winning kudos for reaching what researcher David O’Connell calls “the unloaned.”

Congress Avenue, Austin, TXA senior analyst at Aite Group, a Boston-based consulting firm, O’Connell recently completed a study disclosing that 35% of small and medium-sized businesses in the U.S were unable to obtain credit over a recent two-year period. Able’s lending model is “a good example of using covenants to structure a deal that brings down borrowing risk,” the Bostonian says. “It’s terrific.”

Able’s staff doesn’t have to travel far to witness the fruits of their efforts. On Congress Avenue, in the heart of downtown Austin, is Jae Kim’s food truck offering Korean barbecue thanks to a $100,000-plus loan from the fintech lender. Kim, the founder and chief executive at food vendor Chi’lantro, enlisted his mother to pitch in $10,000. All told, family and friends ponied up 30% of the total loan.

In the three years since he hooked up with Able, Kim has gone on to bigger things, including a television appearance last November on Shark Tank that netted him $600,000 from celebrity investor Barbara Corcoran.

Chi’lantro is now operating five restaurants and four food trucks and as Kim disclosed on Shark Tank, annual sales topped $4.7 million last year.

Able Funds Chi'Lantro from Able Lending on Vimeo.

In an interview, he told deBanked that he counts himself fortunate to have gotten the Able “micro-loan.” It played a key role in generating the cash flow that qualified his company for a $200,000 bank loan backed by the Small Business Administration. “It was one of many opportunities, and now we have good relationships with banks,” he says.

And then, a little farther south, there’s Stephanie Beard’s “esby apparel,” a women’s clothing boutique named for her initials. Beard, 35, came to Austin in 2013 after a decade in New York designing men’s clothing at Tommy Hilfiger and Converse. Originally from North Carolina and a graduate of Appalachian State University, she had zero connections in Texas and only a little money.

But she had a big vision: She would open a store and design and sell top-quality, flattering clothes for women that had “a menswear mentality.” Men, she had discovered, buy fewer clothes than women. But men tend to buy clothes that are durable, clothes that they can wear again-and-again over many years. After she sold $65,000 worth of her casual clothing line on the website Kickstarter, Beard developed a fan base and was put in touch with Able. “Actually, they contacted me,” she says.

To qualify as an Able borrower, Beard assembled $20,000 from friends and family, she reports, including $2,500 from her future mother-in-law, another $2,500 from the proprietor of a dress shop that “wholesaled” her collection, and the rest from aficionados of her wares. Once that money was gathered, Able lent her $100,000 at a 10% APR in October, 2014, which enabled her to open her shop. The combined interest rate was 9.8%. Monthly payments have automatically been withdrawn from her business’s checking account.

She’s scheduled to repay both Able and her backers in full by this October. Total sales for the shop have cleared $1 million and Beard expects annual revenues for 2017 to hit $900,000. “A lawyer friend who helped me out with the paperwork pro bono told me that Able was practically giving money away,” she says. “I definitely was lucky.”

Square Swaps Out Merchant Cash Advances for Business Loans

March 25, 2016
Article by:

Square SwapSquare’s merchant cash advance program is already among the biggest in the world, but they’ve got even bigger plans, or maybe just different ones.

The company announced on Thursday that they will now be offering true business loans as well through a partnership with Celtic Bank, an industrial bank chartered by the State of Utah. The WSJ reports that loan payments will also be made via a split of future credit card sale activity but with the caveat of there ultimately being a fixed term. This is coincidentally how PayPal’s loan product works.

The WSJ makes it seem as if both products will run alongside each other, but a Square merchant revealed to deBanked that all of the language on Square Capital’s application portal has changed from advances to loans. Even the promotional materials have changed to reflect that it may take more than just an automated review of historical credit card sales activity to get approved and funded. Also, all Square loans are subject to credit approval, whereas no credit check was required for merchant cash advances. Applicants may be required to produce a photo ID and other documents for further verification. North Dakota businesses are prohibited from borrowing altogether.

Square Capital Page

Square’s loans require that merchants process at least $10,000 or more a year. Borrowers must pay at least 1/18th of their initial loan balance every 60 days. PayPal by comparison requires that their borrowers pay down 10% of their loan amount every 90 days.

A Square merchant was not able to locate any mention of the merchant cash advance program. It’s all loans now.

Did Square really just add business loans to their arsenal or have they traded MCAs for the bank charter lending model?

Square Capital Terms and Conditions

Update: 3/25 2:54 PM Square confirmed that they have indeed replaced their merchant cash advance program with the loan program.

Do Borrowers of a Feather Flock Together?

August 6, 2015
Article by:

Facebook believes that you might be the company you keep, at least according to a patent it has.

“When an individual applies for a loan, the lender examines the credit ratings of members of the individual’s social network who are connected to the individual through authorized nodes,” reads an explanation of the technology. “If the average credit rating of these members is at least a minimum credit score, the lender continues to process the loan application. Otherwise, the loan application is rejected.”

Diagram below:
exhibit

This is one of those concepts that if ever used, is likely to end up prohibited under an amendment to the Equal Credit Opportunity Act or similar.

What are your thoughts on this?

And also, you might want to check out similar patents that Kabbage has in its arsenal.

Confessions of a Bitcoin Miner

December 18, 2014
Article by:

If you’re even vaguely familiar with Bitcoin, you’ve probably heard that you can mine them. It’s one of Bitcoin’s most unfortunate pieces of jargon because it sounds like a scam. We can’t mine U.S. Dollars so there’s no frame of reference for what enthusiasts are talking about. We can mine gold and silver of course, but how the heck can one mine a digital currency? It’s clear there’s more to Bitcoin than just being a form of money and that frightens people. It certainly frightened me.

matrix sentinelThe first time I imagined bitcoin mining, I pictured sentinels from The Matrix drilling down with unrelenting intensity towards the last human city of Zion. Perhaps the humans were hoarding a vast trove of valuable bitcoins and a war was being waged to achieve digital hegemony. Like Ray in Ghostbusters, I couldn’t help it. The thought just popped in there.

The next thought was that I better stay away from Bitcoin. It was easier to take the blue pill where “the [Bitcoin] story ends, you wake up in your bed and believe whatever you want to believe.” That’s what many consumers have done in the past. And who could blame them? I liked my life without Bitcoin in it, so why mess it up?

But the maniac I am, I took the red pill and explored just how the deep the rabbit hole goes.

I mined some bitcoins and the machines didn’t kill me, at least so far. I’m mining them right now as I type this. If you’re getting excited that I’m about to tell you that I’m getting rich while you fools sit on the sidelines, you’re going to be disappointed. There is no actual mining. It’s just slang for facilitating bitcoin transactions over the Internet. Womp womp. If people weren’t sending bitcoins back and forth, then there would be nothing to facilitate and therefore nothing to mine.

bitcoin mineTo illustrate simply, I’ll start off by reminding you that Bitcoin has no central authority. There is no Visa, no banks, and no Federal Reserve to sign off on a transaction. Instead Bitcoin transactions are validated by computers connected to the Internet running free Bitcoin software.

If I have 5 bitcoins and I send 3 to you, computers all over the world running this software are processing algorithms to validate this and make them permanent in a global ledger. The computers make sure you really have those bitcoins to send and then transfers them. You can’t create a fake bitcoin or spend one you’ve already spent because the Bitcoin system will know about it.

On just a single day there are nearly one hundred thousand bitcoin transactions. That’s too much for just a few computers to handle, not to mention that the processing power required to validate them is intense. Validating transactions requires lots of processing power and utilizing processing power has a cost in electricity.

So it pays

The Bitcoin system has a built in reward system to incentivize people around the world to keep the system in order. If your computer achieves a specific milestone while facilitating transactions, you are rewarded with bitcoins. Again, don’t get excited. These milestones are extremely rare to reach and totally random (for the record it’s called solving a block). You could facilitate transactions for 200 years and never get any bitcoins back as a reward.

But while random, it’s a probability game. The faster your processing power, the better your odds of being the lucky computer to receive the reward. That’s a necessary but unfortunate component to Bitcoin because there’s a built-in arbitrage opportunity. Why be a passive facilitator when you could arm your computer with a faster processor and rig the odds in your favor? If your computer was significantly faster than the other ones on the network, you could potentially get rewarded bitcoins often enough and with enough consistency to cover both the cost of your upgraded computer and the electricity to keep it cranked up.

And with that understanding, an international arms race began for increased processing power. Up until early 2013 you could quite easily profit from being a facilitator. Those folks didn’t see themselves as facilitators anymore but as miners. It wasn’t a passive activity. It was a business, like hauling ore out of a silver mine.

Today, so many people have tricked out their processors that it’s nearly impossible to get an edge. In fact, mining often results in losses. I have experienced a net loss in actual U.S. dollars through mining even though I’ve acquired fractions of bitcoins. Net loss? whuh?!

Forget about using your desktop or laptop to mine bitcoins. That’s so 2011. Engineers went on to build special hardware chips much better than household computers that do nothing other than process calculations for bitcoin transactions. Then came small boxes of chips, then large ones…

And when everyone started buying large bitcoin processing boxes, they began to buy two or three of them…

Then a stack of them…

Then a room full…

Then a warehouse full…

And of course a lot of additional money had to be spent on cooling, ventilation, and protecting against fires.

This is where a little problem started. Once everybody was using a million dollars worth of specialized hardware for speed and was spending tens of thousands of dollars per month on electricity, the edge was constantly being neutralized. Worse, the frequency that bitcoins are awarded per day does not increase. There will only be 21 million bitcoins ever placed in circulation. They’re awarded through mining at a fixed frequency. You can try to be the recipient of each reward but the frequency of which they’re awarded doesn’t increase.

Bummer for those that have amassed nuclear arsenal sized mining operations.

But also bummer for me. This is the extent of my mining equipment.

my bitcoin mine

I have three small mining chips all connected via a USB strip. The outer pieces are ASICMiner Block Erupters and between them is a Bitmain Antminer U2. They run 24/7 connected to my home laptop. I can monitor their activity through this little window on my screen:

bfgminer

Combined they are crunching out an average of 2.2 Giga hashes (GH/s) per second, a speed so insignificant compared to the network’s competition that I will probably die without ever receiving a reward of bitcoins.

Unless…

Join forces

There’s a trick to mining to ensure you don’t die rewardless. You can combine your processing power with other miners and leverage your chances. Then if the group’s effort yields a reward, it’ll be distributed on a prorated basis. Someone got this idea a long time ago and in today’s ultra competitive environment, it’s practically a must.

They’re called mining pools. Pools aren’t just a couple of friends, they’re nearly small cities of miners working together collaboratively. The pool I mine in (BTC Guild) has 14,000 to 16,000 users mining together at any one moment and a single user could have an entire warehouse full of mining equipment. In the last hour, the fastest user provided 1,047,666.38 GH/s worth of power to our pool. That’s 476,211x more than what I contributed and he is just 1 of 15,000 users in our pool. woah!

What’s even more wild is that BTC Guild only makes up 5% of the world’s Bitcoin mining power. And yet because I am part of that pool I am paid a prorated amount for every reward the team earns. Surprisingly, that number is not zero. Running 24/7, I am earning an average of 60,000 satoshis a month.

1 satoshi is .00000001 of 1 Bitcoin

The exchange rate of Bitcoin is extremely volatile but at this moment 60,000 satoshis is equivalent to 19 cents. Yes, 19 cents per month!

And don’t forget that the mining chips cost money to buy and running them 24/7 runs up more than 19 cents worth of electricity used. This means Bitcoin mining isn’t about getting rich. I’m losing money mining. It’s a hobby or benefit conferred upon the digital currency system to keep it running smoothly and accurately. Well at least for me…

Remember that miner that’s out-processing me on a scale of 476,211 to 1? He’s earning about $90,000 per month. I don’t know what his expenses are to run an operation like that but I’m sure it’s not cheap. His biggest enemy is that the value of Bitcoin to the dollar has fallen pretty heavily this year. $90,000 a month in revenue could become $45,000 a month just through exchange rate risk. Those are pretty high stakes to gamble with. But it could also become $180,000!

And whether the big players like that mine or don’t is irrelevant. Whether he makes money or not doesn’t matter. Arbitrage opportunities in the facilitation of transactions is for ultra geeks with big bucks. Mining as a hobby is for regular geeks. It’ll cost some money to do but you get to contribute to a system you believe in.

As for you, the potential average currency user, mining is not really of any consequence. The facilitation of digital transactions already happens with dollars, euros, and pounds. In My Journey to Bitcoin, I explained that buying a cup of coffee with a credit card requires 8 people to get paid for the transaction. Sure the process is completely different for Bitcoin but so what? Bitcoin is unique.

The problem is the mining terminology. It should be called facilitation but that doesn’t sound sexy especially if you are trying to convince an investor to give you $1 million to take advantage of potential arbitrage opportunities on the network.

And that’s about it. The real story behind mining isn’t so scary and you won’t necessarily be at any disadvantage if you still have no idea what the hell mining is. Bitcoin is full of technical nonsense best left to geeks, but you as an actual currency user do not have to worry about a lot of it.

If you’re at all like me though, obsessively curious about how things work and excited to try them out, I’m happy to clue you into the mechanics of mining and even get into the finer details behind it.

An ASIC Block Erupter costs about $10 on Amazon or eBay. I run Ubuntu Linux as my native desktop OS at home (geeky I know) but you should be able to do it with Mac or Windows. The mining software I use is BFG Miner 3.10 and I use BTC Guild as my pool. Admittedly, I am waiting for a delivery of two more Antminer U2s (5x faster than the Erupters but just as cheap) and a delivery of two Antminer U3s (210x faster than the Erupters). I will in all likelihood not achieve a profit even with the additional equipment. And that’s okay, it’s enjoyable just messing with the gizmos.

The best way to learn about Bitcoin is to try it yourself. Hey maybe you’ll hate it, but at least it’ll be based off experience. You can buy fractions of a Bitcoin, even just a few dollars worth from Coinbase. From there you can shop online, convert them back to cash, or send them all to me. 😉

I’m not afraid to say that I mine bitcoins, even if it’s infinitesimally small amounts. What else did you expect from a guy running the deBanked website?

I put my bitcoins where my mouth is. If you’re into alternative finance too, it’s finally time you gave in and tried it.

The Fork in the Merchant Cash Advance Road

August 23, 2011
Article by:

Originally Posted on April 25, 2011 at 10:48 PM
The Merchant Cash Advance (MCA) industry is growing, albeit slower than some may have you believe. But it’s moving in two opposing directions, a condition that’s making it tougher to describe the financial product itself in general terms. MCAs are becoming more expensive and a lot cheaper at the same time. HUH? You read that right.

Originally aimed at business owners with poor credit, the risk of default or delinquency was overcome by withholding a percentage of sales revenue directly. As the credit crisis and Great Recession took hold, it attracted businesses of all credit backgrounds and today it’s widely accepted as a lending alternative, rather than a solution to poor credit.fork in the road

As MCAs pushed forward to compete for customers normally accustomed to bank credit lines, the cost was stiffly resisted. These businesses had a tough time envisioning their financing terms to be anything outside of some percentage over the Prime Rate. Since a MCA is supposed to be structured as a sale, there is no APR equivalent, no timeframe, no amortization, nor any real familiarities of a loan. As the past couple years have passed, the product is more publicly understood, but for it to actually catch on, the costs had to come down. Many funding providers now refer to such high credit, low cost accounts as premium, platinum, preferred, gold, etc.

While the margins earned on high credit accounts shrank, funding providers were dealing with another challenge simultaneously, defaults. Whether the business owner intentionally interfered with their credit card processing or the store went out of business altogether, bad debt in the MCA world was mounting…FAST!

No matter which company ran the figures or how secret these portfolio statistics were, every funding provider came to the same realization. The lower the credit score of the business owner, the greater the chance of a problem. Why this came as any surprise, is a surprise in that of itself. The Fair Isaac Corporation (FICO) will have you know that any individual with a score below 499 has an 87 percent chance of being delinquent on a credit payment within the next 2 years. Delinquent, is defined as a payment of 90 days or more past due.

Chart Source

But wait… if a MCA is not a loan, nor does it depend on the business owner to make payments, then how can there be a risk of delinquency? Intentional manipulation of the revenue flow back to the funding provider can be relatively easy to do. A business owner could use spare POS equipment to accept card payments for which the funding provider is not aware of and therefore prevent the collection of funds. That’s a method known as splitting, and serious consequences can result when discovered. (Read more on what happens in the case of default or deliquency on a MCA in a previous article)

But outside the scope of malice, there’s the traditional reason, the inability to make payments. If the suppliers and wholesales aren’t being paid, then the business isn’t going to have inventory on hand to sell. If the rent isn’t being paid, then there’s not going to be any location to generate these sales. Essentially, the funding provider has a mutual interest in the business being able to satisfy ALL of their obligations, not just the MCA itself.

If there is an 87% chance that suppliers, landlords, or other essential creditors will not be paid on time in the next 2 years, then there’s an excellent probability that the business will be unable to operate at the same level. With no collateral as protection, the MCA industry has adapted to the challenge by raising the cost. Business owners with poor credit can expect funds to be expensive and the terms to be more restrictive. Lower funding amounts, higher withholding percentages, and the sacrifice of any negotiation is the price the MCA industry has set to make funding to the maximum risk group possible. These programs, which are now often referred to as starter advances, don’t work for everyone so the pros and cons should be weighed prior to executing a contract.

Both the premium advances and starter advances have experienced extraordinary growth to the point where they have become niches of their own. There are now starter advance companies and premium advance companies. Funding providers like Strategic Funding Source have taken the product a step further and reportedly did a MCA for an exhibit at the Tropicana Hotel in Las Vegas for $4 Million. Contrast that with deals that are struck for as little as $750. And we can’t fail to mention that some have taken it back to the basics, a loan. ForwardLine in Woodland Hills, CA lends money to businesses which are then repaid in accordance with a predetermined, fixed pace through the card sales. They have reintroduced concepts like APR back to the finance world.

If we continue at the current pace, MCAs will become less expensive, more costly, a lot bigger, and markedly smaller. We’ve come to the fork in the road for what the Merchant Cash Advance industry seeks to brand itself as. Loan alternative? First choice? Backup plan? Is it for smaller businesses or larger ones? Should it go the way of lending or continue to remain a structured purchase of future card sales? Is industry cohesion really necessary or will increased decentralization lead to greater acceptance of this financial product a whole? Will there come a time when America’s big banks swallow the industry up, buy out the existing portfolios, and add this product to their financing arsenals?

These are tough questions. Merchant Cash Advance is evolving, growing, and no longer moving in one direction. While we contemplate our next step, one thing is for certain, there’s no turning back.

– deBanked
www.merchantprocessingresource.com

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