Stories
Federal Judge: Legal Challenge to California’s Commercial Financing Disclosure Law Has Merit, Orders SBFA Case to Proceed
April 3, 2023
A federal judge has ordered the Small Business Finance Association’s (SBFA) case against Clothilde Hewlett in her capacity as Commissioner of the California Department of Financial Protection & Innovation (DFPI) to proceed. On March 30, The Honorable R. Gary Klausner denied defendant’s motion to dismiss the claims that the State’s commercial financing disclosure law is both unconstitutional and preempted by the federal Truth in Lending Act (TILA).
The case, originally filed on December 2, 2022, argued, broadly speaking:
- That the regulations violate the First Amendment on the premise that they compel the group’s members to make inaccurate disclosures to customers while at the same time prohibiting members from engaging in communications that could be used to clarify or correct the required false or misleading information to customers.
- That APR is defined and governed at the federal level by TILA and that California’s own customized spin on it would only serve to confuse customers.
The Court has now ruled that these claims have been sufficiently alleged, allowing the SBFA the opportunity to prove its case.
Steve Denis, the Executive Director of the SBFA, told deBanked that the win at this juncture was validation for what the organization has been saying for the past few years.
“I think [this victory] is really good news. It’s a lawsuit that the entire industry should be behind,” he said.
The outcome of the case could have far reaching effects. New York, for example, has enacted similarly misleading APR rules that are soon slated to go into effect while other states have contemplated following in its footsteps.
“I think if we win this lawsuit the APR argument is over,” Denis said.
To that end, anyone in the industry that would like further information about what’s taking place can contact Denis at sdenis@sbfassociation.org.
Small Business Group Advocates For Community Anchor Loan Program (CAP) In Wake Of PPP Wind Down and Possible Refresh
April 17, 2020
At last tally, more than 800,000 small business PPP applications have gone unfunded since the program reached its limit, many of which are genuine mom-and-pop shops that employ less than 25 people.
Congress is considering another round of additional PPP funding but Americans may be worrying that such funds will once again go into the hands of some of America’s largest chains. (44.5% of the $349B PPP funds went toward loans over $1 million)
Outspoken successful businessman Mark Cuban has proposed a solution, a lottery system next time around to improve the chances that smaller businesses get their share of the pie. While the public debates the merits of such an approach, one organization (the SBFA) is calling for something much more direct, a targeted fix via a Community Anchor Loan Program (CAP) that would appropriate $10 billion for businesses that were PPP-eligible for loans under $75,000 but did not receive funds.
Deployment of this capital under CAP can and should be administered by non-bank alternative lenders with proven success with this particular small business market, they say.
The proposal also calls for 25% of the funds to specifically be allocated for minority, women, and veteran-owned and agricultural businesses.
In a letter the SBFA submitted to Congress earlier this week, the organization said:
“Women and minority-owned businesses are historically smaller and employ fewer people and, in some communities, are under-banked without the established relationships required to secure a PPP loan. Small farms and agricultural businesses are important to communities and often have trouble qualifying for traditional financing.”
The Small Business Finance Association is a non-profit advocacy organization whose mission “is to take a leadership role in ensuring that small businesses have access to the capital they need to grow and thrive.”
GOING NATIONAL: How David Gilbert Built One of the Largest Small Business Lenders in the Country
October 17, 2018
When Ty Austin, who owns a florist shop in West Palm Beach, secured a $5,000 loan from National Funding last year, he was happy to have working capital and could build inventory for mini-gardens and landscaping,
The experience, moreover, was surprisingly pleasant. “The guy I worked with was really cool,” Austin says, referring to the sales representative at the San Diego-based financial technology firm. “It turned out that he was getting married and I ended up giving him and his fiancé advice on floral arrangements.”
The borrowing worked out so well that the Floridian, who is 46 and the sole proprietor of Austintatious Designs, re-upped for a second loan of $12,000 to help purchase a commercial van. The van will be used to transport flowers, plants and tools while doubling as a billboard-on-wheels. “It gives me more ‘street cred,’” he jokes.
To register his approval with National Funding, Austin went online to TrustPilot and posted a rave review of the sales rep: “James Johnson Rocks!”
Pam, a Texas wellness coach who provides clients with an array of holistic health therapies, needed extra money to buy an infrared sauna to add to her portfolio of services. But her credit rating was “poor,” she told deBanked in an e-mail interview, “from when I changed careers and lost my health and struggled to make my credit card and student loan payments on time.”
Like Austin, Pam — who asks to be identified by her first name —found National Funding through an online search. And she too secured $5,000, although her transaction was structured as a merchant cash advance, rather than a loan. The terms of the MCA require a daily debit from her bank account. She reckons that the total cost of the MCA to be roughly $1,500.
Pam pronounces herself satisfied with the deal and mightily impressed with the way National Funding treated her. The process took about three days — and would have gone even quicker if she’d located her professional licenses sooner. Best of all, she says, the agent at the company tailored the financing to suit her circumstances. “They were great as far as getting my questions answered, even listening to my past situation, which others may not have cared about,” she says.
“They really wanted to get me an option that they knew I’d be able to repay,” Pam adds. “They said they were in the business of helping small businesses grow rather than putting them in a hard financial situation.”
The positive experiences that Austin and Pam had with National Funding are not isolated instances. Rather, they are representative of clients’ dealings with the company. Witness its online reviews from business borrowers at TrustPilot which go back three years, run for 36 pages, and merit National Funding a 9.4 rating on a scale of 10. That’s a straight-A grade on any report card. Although there’s the occasional naysayer — four percent assert that their experience was “poor” or “bad” (and some negative comments can be blistering) — the weight of the reviews is almost embarrassingly positive.
Typical postings find that National Funding and its agents win kudos for, among other things, being “prompt and professional,” providing service that is “hassle free and about as friendly as you can be,” and even being “accommodating and gracious.” A man named Al McCullough spoke for many when he declared: “My experience was great. Professional and on time. Couldn’t ask for more.”
All of which helps account for why National Funding — its 230 employees working out of a sleek suburban office building guarded by a tall stand of palm trees in San Diego — is a rising star in the world of alternative business lending and financial technology. In 2017, the company raked in $94.5 million in revenues, a 24.8 percent bounce over the $75.7 million recorded a year earlier and nearly fourfold the $26.7 million posted in 2013.
In recognition of the company’s three-year growth rate of 142%, Inc. magazine included National Funding in its current list of the country’s 5,000 fastest-growing companies, the lender’s sixth straight appearance on the coveted roster. Since its inception in 1999, National Funding reports that it has originated more than $2 billion in loans to some 35,000 borrowers.
The company’s impressive performance has similarly merited accolades for David Gilbert, the 43-year-old chief executive who started the company on little more than a shoestring and whom employees regularly describe as “visionary.” Among Gilbert’s trophies: Accounting firm Ernst & Young recently presented him with its “Entrepreneur of the Year 2017 Award” for San Diego finance.
At first glance, the San Diego financier doesn’t look too much different from its cohorts. The company proffers unsecured loans of $5,000 to $500,000 to a mélange of small businesses in all 50 states and across multiple industries, including retail stores, auto repair shops, truckers, construction companies, heating-and plumbing contractors, spas and beauty salons, cafes and restaurants, waste management, medical and dental clinics, and insurance agencies.
To qualify for financing, a prospective borrower should have been in business for a year, have at least $100,000 in revenues, and boast a personal credit score of at least 500. While there’s no collateral required for loans, National Funding insists on a personal guarantee. The website reviewer NerdWallet cautions borrowers that this “puts your personal assets and credit at risk if you fail to repay the loan.”
Along with unsecured loans, National Funding offers equipment leasing – usually for heavy trucks and construction equipment – as well as merchant cash advances. The equipment lease is secured by the machinery. As in the case of Pam, the wellness coach cited above, MCAs are debited daily, the money automatically withdrawn from bank accounts.
There are a number of businesses that National Funding disdains, no matter how stellar their credit. “We won’t finance casinos, strip bars, tobacco, or firearms,” Gilbert says. “We’re not going to support industries like that.”
For CEO Gilbert, doing business ethically is a signature feature of the company. Among other things, National Funding presses its salespeople to steer clear of putting people into dodgy loans that are likely to default. “We’re lending capital,” Gilbert says, “and one of our core values is the way we support our customers. Are we placing people with the right product to meet their needs or are we being selfish? The best way to be customer oriented is to get a better understanding of what capital will do for them.”
That corporate ethos, coupled with the company’s remarkable performance, has raised its profile while earning it a measure of esteem among industry peers. “What I do know about National Funding,” says Douglas Rovello, senior managing partner at Fund Simple, a lender and broker in the Tampa area, “is that they have five or six different programs and set their rates high but competitively. They’re known for fitting their products to a client’s needs,” he adds. “And in a business that has its share of bad actors, they have a reputation as a company with a conscience.”
A company with a conscience. Customers come first. And yet National Funding turns heads with its sales production of roughly 1,000 financings a month and triple-digit growth rate. So how do they it? A good place to start is with Gilbert, whose leadership skills, business acumen, and second-to-none work ethic “set the tone,” says Kevin Bryla, the company’s 52-year-old chief marketing officer.
For his part, Gilbert credits his family background and an upbringing in which education and academic achievement were strongly encouraged. The fifth of six children, he’s the only one who opted for a business career. “There are three doctors, two lawyers – and me,” Gilbert says.
The son of a prominent physician, his mother a homemaker and volunteer docent at the nearby Nixon Library for the past 25 years, Gilbert grew up in Yorba Linda. He attributes his keen interest in business to observing how his father, a pathologist, operated his own laboratory, which employed 60 people. “It was the business side of medicine that fascinated me,” he asserts.
Even so, his two closest friends at the University of Southern California — fraternity brothers Marc Newburger and Sean Swerdlow– tell a somewhat different story. They remember Gilbert as someone who found his true calling, his métier, during his college years. Enrolled initially in pre-med courses, he was a diligent student but, his friends assert, manifestly unsuited for a career in medicine.
“Formative,” says Swerdlow, the older of the two fraternity brothers and now a management consultant based in Southern California, “would be a very good word” to characterize that period during which Gilbert abandoned medicine in favor of the world of commerce. In 1997, he earned a bachelor’s degree in business administration “with an emphasis in entrepreneurship.”
But it was fraternity life just as much as the classroom, his friends agree, that shaped him and foreshadowed his future. “It wasn’t ‘Animal House,’” Swerdlow says of Alpha Epsilon Pi. “We boasted the highest GPA (grade point average) on fraternity row.”
Nonetheless, Gilbert took to the social life and camaraderie that the fraternity offered with gusto, and his friendship with the colorful Newburger was especially fateful. A freewheeling entrepreneur today, Newburger takes a measure of credit — Gilbert’s disapproving parents might have preferred the word “blame” — for contributing to his fraternity brother’s metamorphosis. “Dave hated all of his pre-med classes,” Newburger insists. “He had zero stomach for it. He was so much like I was: a natural people person and a born entrepreneur.”
Newburger is the quintessential soldier of fortune. After college, he tried his hand as an actor, supporting himself by playing poker and getting paid to be a contestant on TV game shows including “The Dating Game,” “Card Sharks,” and “3’s A Crowd.” He’s now the co-president and co-inventor of Drop Stop, a patented device that “minds the gap” between a car’s front seat and the console and prevents coins, keys, glasses, and mobile phones from disappearing down that rabbit hole. (Drop Stop really took off after Newburger and his business partner appeared on the television show “Shark Tank” and scored a $300,000 capital injection from celebrity-investor Lori Greiner who took a 30% stake in the company and slapped her name on the brand.)
Back at the frat house, Newburger and Gilbert collaborated on business ventures. The pair once sold T-shirts sporting an off-color message about USC’s archrival, the University of California at Los Angeles. “The (anti-UCLA) message was pure hatred,” Newburger recalls. “But it was just for the day of the football game and it was all in fun.”
At first, sales at the stadium were lackluster. USC students kept trying to bid down the price or importune them to throw in an extra tee. As for the game itself, USC’s chances for victory looked equally unpromising. As time ran out, however, the Trojan quarterback completed a Hail Mary pass and USC won. The two fraternity brothers grabbed the bundle of shirts and sprang into action. “We got to the exit just in time and sold out in a matter of seconds,” Newburger recalls.
Newburger takes credit too for introducing his friend to Las Vegas’ gaming tables. Gilbert, his friend says, immediately demonstrated a knack for counting cards, handling money, and taking risks. “It was typically blackjack,” recalls Swerdlow, who sometimes accompanied them. “We didn’t have much money then. But there were moments when Dave would bet a big pile of chips. He’s willing to make a bet and live with the consequences.”
Sports are another of Gilbert’s enthusiasms. His friends say that, whether he’s returning serve at ping pong or standing over a putt — he plays to an 11 handicap at golf – he wants to win. Remarks Newburger: “He’s competitive to the point that — when he beats you — he wants the Goodyear blimp flying overhead to announce his victory.”
Gilbert, who is married with two children, is legendarily loyal to friends and family. While most members of a college fraternity might keep up with old companions after graduation by exchanging greeting cards and attending college reunions, Gilbert goes the extra mile.
He once footed the bill for Swerdlow to travel with the USC football team to an away game, arranging it so that his fraternity brother could view the action from field-level. After Newburger had a recent health scare (no worries, he’s O.K.), Gilbert rounded up a couple of dozen fraternity brothers and their wives (or companions), and put together a four-day bash in his buddy’s honor. The event was held at Cabo, the Mexican beach resort in Baja California, and Gilbert underwrote a fair amount of the cost. “He shares his success with his friends,” Newburger says, adding: “I don’t know anybody who works harder on friendships.”
Many of the personality traits described by friends and colleagues — tenacity and competitiveness, self confidence and leadership — played a key role in the development and success of National Funding, which Gilbert founded just two years out of college with $10,000 borrowed from his uncle, Howard Kaiman, of Omaha.
He’d worked a couple of quick jobs right after college, including a stint at small-business lender Balboa Capital, but he was always destined to be his own boss. Gilbert’s start-up was called Five Point Capital and, at first, it was located in the affluent Chatsworth section of Los Angeles and concentrated on equipment leasing.
“The first two years we were a cold-calling company and then we got into direct mail and saw some success and then we moved to San Diego and started to scale up the company,” Gilbert says. The decampment, he explains, was “for the quality of life, but we also felt we could hire from a better talent pool than L.A. We wanted to set ourselves apart.”
By 2007, Five Point was cranking up operations, revenues shot to $28 million and its headcount totaled 210 employees. “Then the Great Recession hit” in 2008-2009, Gilbert says. The company was forced to furlough 140 employees, two-thirds of its workforce. Yet even as it retrenched, the company managed to branch out. It began making merchant cash advances, Gilbert says, and, also in 2007, it linked up with CAN Capital to do broker financings. “We were pretty well known and they were looking for partners for factoring and leasing,” Gilbert explains.
It took time to recover after the financial crisis. But by 2013 – the year that Gilbert re-branded his company “National Funding” – the company was able to hire back as many as 15% of its laid-off employees (most had found other jobs, in many cases relocating to Silicon Valley, Gilbert reports). By then, the company had secured a $25 million credit facility from Wells Fargo Bank, which allowed it to move up the food chain to “become a balance-sheet lender,” Gilbert says, and offer a wider selection of financing options.
Key to driving the company’s phenomenal growth has been its flood-the-zone marketing and sales strategies. The company spends $16 million annually on marketing using a full panoply of channels and media, both online and offline. These include direct mail and targeted marketing, paid advertising, search-engine optimization or SEO, and sports sponsorships. “We try to build a whole range of marketing mechanisms,” explains marketing chief Bryla, “and when you get the mix right, they all help each other.”
Gilbert is a big believer in the benefits of sports marketing, the company’s website featuring the logos of the San Diego Padres (baseball), and Anaheim Ducks and Los Angeles Kings (hockey). Ever the faithful alumnus, Gilbert and his company back USC football as well. During the 2015 2016 college football season, the company paid for naming rights for what became, for one night, the “National Funding Holiday Bowl” at Qualcomm Stadium.
Janet Fink, department chair at the McCormack School of Sports Management located at the University of Massachusetts-Amherst, told deBanked that sponsorship programs can easily cost a million dollars or more. “It’s not cheap,” she says. “When a company sponsors a team, they get a number of benefits. One is that they get to put the team’s logo on their website. The idea is that fans are passionate or have an affinity for the team and that it will rub off on a sponsor.
“Sports enthusiasts,” Fink adds, “often make good customers. When you have enough disposable income to go to these sporting events, you’re probably a good prospect for a loan.”
The sponsorships — which include civic involvement such as offering Holiday Bowl tickets to members of San Diego’s large military contingent as well as to company employees — also build good will in the community and team spirit among the workforce. (National Funding also makes an effort to hire veterans, says Bryla.)
Gilbert believes in the old adage that you have to spend money to make money. The company spends $14 million rewarding its network of outside brokers. Inside the company, high-performing salespeople are compensated with commissions, bonuses and an assortment of rewards, including resort trips.
But sales representatives’ must conform to company guidelines. Justin Thompson, National Funding’s sales chief, explains that the “customer comes first” philosophy is not just a slogan but a core value. “We’re not a factory spitting out widgets,” Thompson says. “We’re here to build relationships and sell a repeatable product. We want that customer to come back to us. Every loan is customized. Six of ten customers who pay off their loans come back for a second financing. Whether your business is dog grooming or you’re an asphalt company,” he adds, “people will do business with people they like and trust.”
Using the software program “customer relationship management” (CRM), National Funding expends a lot of effort gathering data on its business customers and extrapolating the information for use in credit evaluations. But the use of technology only goes so far.
Gilbert reckons that the art of the deal involves about “70 percent algorithm and 30 percent people.” He adds, “You still need the people component to look at credit profiles. The algorithm spits out a recommendation but we still need the human element.”
If there’s a fly in the National Funding ointment, it’s that the company’s fees can be more expensive than a bank loan.
But borrowers who have been denied loans at a bank or other lender are likely to overlook those costs. Austin, the florist in West Palm Beach, for example, came to National Funding when his bank, North Carolina-based BB&T Bank, gave him the cold shoulder despite the $15,000 in deposits that he averages each month. “I’ve been with them for six years,” he fretted, “and they treated me shabbily.”
Even more grateful was Jimmy Frisco, of Annapolis, who is co-owner with his wife of Lisa’s Luncheonette, a business that includes a food trailer and several cafeterias located in the city’s office buildings. They employ about a dozen people.
Frisco had taken a nasty spill and was laid up for seven months. Health insurance covered the $18,000 in medical costs but he and Lisa fell behind in their bills and needed working capital to pay for food purchases and other business expenses. By the time a flyer from National Funding popped up in his mailbox, he and his wife “had been turned down by several other lenders, including banks,” he says, adding: “Things happen in life and we don’t have the best of credit.”
Getting that loan for $25,000 from National Funding took just three days. Frisco’s health is much improved and business is back to normal. He won’t discuss the terms of the financing, other than to say “it was reasonable.”
He adds: “There were no problems with National Funding, no hassle with the paperwork. They’re great people to work with.”
Déjà Vu: Some Small Business Funders are Fading Away
June 20, 2017
Apparently I’m old enough to see this happening all over again. A handful of big names in the alternative small business space are faltering and many of you have asked what this means for the industry. It really doesn’t mean anything other than those who do not learn history are doomed to repeat it.
We already went through this in 2008-2009 when at least half of the funders in the merchant cash advance industry were wiped out over the course of several months. Merit Capital Advance, Fast Capital, First Funds, Summit, and Global Swift Funding were the Goliaths of their time. Those companies going out of business seemed unthinkable in principle and for what that would mean for the industry as a whole. Smaller players disappeared too, names like iFunds, Infinicap, and others for those of you who might remember.
Those companies failed. The industry continued.
While it’s easy to finger the financial crisis as the culprit for their demise, the truth, or at least the truth through the fog of war and days gone by, is a lot more relatable. Funders were undone by their dependence on a single source of capital, sloppy underwriting, defaults, rogue ISOs, a race to hit origination targets, overpaying commissions, misplaced predictions, and even stacking. If any of those things remind you of what’s happening today, well then of course there are companies failing.
One lesson from the past is that you won’t necessarily get a year or two to adjust and figure things out. It will seem like everything is great and then suddenly it’s not. No company is going to sit you down and tell you their 1-2 year going-out-of-business plan to prepare you for change. They probably don’t have any such plan, will fight to avoid it and their end may be just as much a shock to themselves as it is to everyone else.
What we’re learning again this time is that some business models just won’t pan out long term. And some business models that used to work no longer work so much today. Things like stacking are not going away. It’s not illegal and no legal precedent has been established against it. If you’re an ISO though, you may be risking a relationship or breaching your own ISO contract by helping a merchant engage in it. So it’s a slippery slope but one that has permanently disrupted the landscape.
I have heard a lot of complaints from ISOs about the supposed decay of funder loyalty, as in they feel their deals are getting swiped. Another lesson from 2008 is that in times of strain, parties are more likely to look to their contracts for guidance and if the contract says they can take your deal after a certain amount of time and they very much financially need to, they probably will do it. The whole hey, we’re friends, we wouldn’t do that kind of thing goes out the window if survival is at stake and the contract allows for certain actions. That also means that if you’re an ISO who has violated an ISO agreement before and got nothing but a shrug in the past, don’t be surprised if suddenly one day you’re put on notice of a breach and are forced to reckon with the consequences of it.
What failures in the industry may also mean is a return to a semblance of order, a return to a code. 2010-2011 was a refreshing time to be in the business with so much unhealthy competition out of the way even though approval terms were less flexible and there were fewer options to shop around for. By 2013 however, a flood of participants discovering the industry for the first time, believed that they had stumbled upon something brand new and lost were the lessons of yore. Some of them introduced lasting change, like ACH debits over merchant accounts splits. Others just replicated the cavalier tactics that had proved fatal in the previous generation, distorting a happy market equilibrium in the process.
Ultimately, the market will prevail, albeit with some new names and new faces at the top. This is the way of things. It has happened before. It will happen again. Look at the companies rising rather than those that are falling. Whatever they are doing may be the future, whether you agree with how they do business or not.
Some Small Business Funders Are Pivoting or Closing Shop
October 20, 2015
One of the unique insights deBanked gets as a company that sends a lot of email and snail mail to folks in the industry is the rejection rate. One day an entrepreneur is telling us all about their new lending business and the next day the Post Office returns their magazine for a vacant address. Sometimes there’s a change in the model or a partnership didn’t work out. Other times lead generation became too hard or too many merchants defaulted very early on. The truth is, as much as the industry is growing, some companies are pivoting or closing their doors.
At Lend360, there were whispers around the trade show floor that acquisition costs have spiked and it was being felt on the bottom lines. Broker houses are opening, closing, merging with each other and being acquired. Funders have reacted by giving them lines of credit to either help them grow or stay afloat, hoping that their sources of deal flow don’t fall apart.
On one conference panel titled, A Discussion of Best Practices: Advancing The Cause for Business Finance, veteran underwriter and industry consultant Andrew Hernandez of Central Diligence Group, said he’s watched a lot of new entrants in this industry make mistakes. “We’ve seen guys lose their shirt,” he said. He explained that too often small business funding companies look to cut their acquisition costs in the wrong places, like simply paying less for leads or paying brokers lower commissions. That only works to a point. “Underwriters can help keep the cost of acquisition down by funding the right deals and trying to get good deals done,” he said.
The owner of one funder summed up his dilemma for me, my brokers are making more on a deal than I am and I’m the one taking all the liability on it. Maybe I should become a broker instead. Not that there would be anything wrong with that. For some companies in this industry, the best path forward is achieved through trial and error. For example, World Business Lenders’ Alex Gemici said at the conference that they started off by making unsecured loans and now only do loans secured by real estate. Gemici also said he believes the industry is heading for a major shakeout within the next three years and that irrational exuberance keeps him up at night.
If he’s right, an economic downturn could squeeze out a lot of players that are already feeling the pinch of high acquisition costs.
For those newer to the industry, they might not remember that the effects of the 2008-2009 financial crisis and ensuing recession was brutal. More than half of the providers of merchant cash advances went out of business, some within weeks when their credit lines were pulled.
A lot of the “industry leaders” of 2008 aren’t around anymore: First Funds, Fast Capital, Second Source, Merit Capital, iFunds, Summit, Infinicap, Global Swift Funding, and more.
Given the favorable economic climate and regulatory environment, this is a bad time to be struggling. 2015 may be one of the last years to pivot in a major way before it’s too late.
Funding Floodgates Reopen
September 20, 2011If you’re a business owner, it’s time to get ’em while they’re ~HOT! Small business funding is BACK and more available than they’ve been in years. And guess what? Because we’re just a news site, we’ve got no reason to douse you with a cheesy sales pitch. There’s a lot of money out there right now and that’s the truth.
Merchant Cash Advance (MCA) continues to dominate the alternative financing market but a few new options are changing the landscape. You might call them ‘alternatives to the alternatives’, deals that are based on MCA but have all the bells and whistles of a loan; Fixed time frame, a payment schedule, and even personal guarantees! The underwriting criteria generally requires a set of recent healthy bank statements and semi decent credit credit (yes, your credit still matters) to qualify. Beyond that, it’s up to the individual lender to present their respective checklist of closing documentation. This usually includes some combination of a business property lease, applicant ID card, business permit, and a recent tax return. That’s it. Oh, and the wait time? Expect a week long process if you’re quick on the draw with paperwork.
Two years ago, there wasn’t much variety in the MCA space. Business owners could shop all they wanted but the underwriting and cost structures were essentially identical everywhere. Now there are factor rates that range from from 1.20 to 1.65. It’s more merit based than it used to be. The higher credit rating, stronger cash flow businesses can earn something better than the one-size-fits-all 1.35 factor rate of yesterday. On the same token, the complete credit averse can grab a shot at financing too, but at a steep price.
But there’s more to it than just cost, there’s also the setup:
Don’t want to switch your merchant account?
Stay where you are: There’s a significant chance your merchant processor already has a contract with the MCA provider you’ve chosen. Often times your sales representative may encourage you to open a new merchant account for the lower discount fees and to have a higher degree of control if problems arise. Ultimately, a new merchant account is not essential if you want a MCA.
Leverage your strong cash flow history: If you’ve managed to keep a large positive balance in your bank account for the last few months, your MCA provider could simply extract the agreed percentage from there, rather than directly through the merchant account.
Lock it up: A Lockbox provides the MCA provider with peace of mind by obtaining their payments without the risk of Non-Sufficient Funds from the debit method but also allows you to keep your merchant account. It’s frequently used as a compromise for businesses that are legally prevented from changing their merchant account(i.e. franchisees), but are too cash flow weak to qualify for direct debit payments.
But the buck doesn’t stop at the many ways you can do MCA. You’ve got options!
Merchant Loan: An actual loan based on your credit card sales history. A percentage may still be withheld from each card sale but a periodic or an end-of-term lump sum payment will be applied as needed to ensure the loan is completed within the time frame allotted.
E-Bay/Amazon Loan: Get a loan based on your sales history on Ebay.com or Amazon.com. The largest lender of this type is Kabbage.
Cash flow loans: We described these in the 2nd paragraph. Expect cost ratios from 1.12 to 1.55 and term lengths between 4 and 24 months.
How can you find the floodgates?
You can refer to the directory of direct MCA providers but can check out alternative lenders such On Deck Capital, ForwardLine, Kabbage, and Sure Payment Solutions if you want to diversify your options.
Kennesaw based funding provider, AdvanceMe expects to fund $1 Billion in the next two years. That’s nearly as much as the entire MCA industry did in the last two years combined.
2009 was a year full of “I should’ves” as in “I should’ve obtained financing before the financial crisis.” Cash is finally available to small businesses again and although it is more expensive than it used to be at the local bank, there may never be a time where the process is this quick, approval is this easy, or where your credit score is weighted this lightly. We’re not the salesman here, just the messenger. If there was any project you were remotely considering, now is the time to make a move… Don’t wait until the funding levees have been restored.
– deBanked
https://debanked.com
2021: The Year of Uncertainty
January 7, 2021
For alternative lenders and funders, 2021 is starting out with a question mark and will lead (hopefully) to a resounding exclamation point of recovery.
Many industry participants waved goodbye to 2020 with relief, and are welcoming a bounce-back in 2021, despite some trepidation about potential bumps along the way and how long a full recovery will take. While things started to improve somewhat toward the latter half of 2020 after grinding to a halt earlier in the year, the pandemic is still raging, with economic growth highly dependent on the immunization trajectory. Then there’s the incoming Democratic administration and the possibility of new rule- making, along with January’s runoff elections in Georgia that could change the balance of power in the Senate, and thus impact the new president’s law- making abilities.
Beyond these macro-issues, the funding industry is also dealing with its own uncertainties. Small business lenders and funders have been hit particularly hard, with underwriting decidedly more difficult in this environment. Some industry players have been forced to find alternative revenue streams in order to ride things out. Not only that, but there are scores of small businesses still reeling from pandemic-induced shutdowns and lighter foot traffic, with some gloomy estimates about their ability to bounce back. Many alternative players are weighing diminished returns against a widely-held bullish outlook for the industry long-term. Many are simply hoping they can hunker down and stick it out long enough and to avoid additional carnage and consolidation that’s widely expected over the short-term.
Ultimately things will get better, but it’s unclear precisely when, says Scott Stewart, chief executive of the Innovative Lending Platform Association. “It’s going to be a bumpy ride for the next year to figure out who is going to be able to survive,” he says.
Here’s a deeper dive into how industry participants see 2021 shaping up in terms of the challenges, competition, M&A, regulation, changing business model, expansion opportunities and more.
SPECIFIC CHALLENGES FOR SMALL BUSINESS FINANCERS
Companies that focus on consumer financing haven’t struggled quite as much amid the pandemic as their small business brethren, and they could continue to see demand grow in 2021. Even amid high unemployment rates, many consumers still need loans for home repairs or as a stop-gap to pay necessary expenses, helping to mitigate the impact on firms that focus on personal loans.
Small business financers, however, got pummeled in 2020 and the situation remains precarious, especially given the prognosis for small companies broadly. Consider that 163,735 Yelp-listed businesses closed from the beginning of the pandemic through Aug. 31—at least 97,966 of them permanently. Further underscoring how dire the situation is for small businesses, 48 percent of owners feared not earning enough revenue in December to keep their businesses afloat, according to a recent poll by Alignable, an online referral network for small businesses. What’s more, 50 percent of retail establishments and 47 percent of B2B firms could close permanently, according to the poll of 9,204 small business owners.
A SHRINKING COMPETITIVE LANDSCAPE
For many lenders and funders, the latter part of 2020 proved more successful for originations, though business is still a far cry from before the pandemic. A number of players who suspended or reduced business operations for a period of time during the first wave of the pandemic have dipped their toes back in and are in the process of trying to adapt to the new normal. For some, though, the challenges may prove too great, industry observers say. Given that many brokers and funders that were on the fringe have been hurt by the pandemic, more shake- out can be expected, says Lou Pizzileo, a certified public accountant who advises and audits alternative finance companies for Grassi in Jericho. N.Y.
And, with fewer competitors, there will be more of a need for those who are left to pick up the slack, says Peter Renton, founder of Lend Academy. Beyond being a lifeline for many alternative financers, PPP loans helped open the eyes of many small businesses who hadn’t previously considered working with anyone but a bank. In the beginning, when it was so difficult for small businesses to get these funds, they looked beyond banks for options and some found their way to online providers. This could be a boon for the industry going forward since alternative providers are now on the radar screen of more small businesses, says Moshe Kazimirsky, vice president of strategic partnerships and business development at Become.
He predicts that larger, stronger players will gradually ease some of their lending and funding criteria early on in 2021, but no one is expecting a quick revival, with some predicting it could be well into 2022 before the industry is on truly stable footing. “I think it’s going to be a very slow recovery,” Kazimirsky says.
M&A
In 2020, the industry saw bellwethers like Kabbage and OnDeck get swallowed up, and with so many businesses pinched, there are likely to be more bargains ahead from M&A standpoint, Pizzileo says. “The damage from Covid is palpable; we just haven’t seen the real impact of it yet,” he says.
No matter what product you are providing, if you’re a smaller player who can’t find your way, you’re going to have a hard time staying in business,” says Stewart of the Innovative Lending Platform Association. “There will be some collateral damage going into next year,” he predicts.
In terms of likely buyers, Renton says he expects other fintechs to step in, and possibly even mid-size community banks snap up some alternative providers. If you can buy something for “a song” it’s compelling, he says. “I expect to see a few more offers that are too good to refuse,” he says.
CHANGING BUSINESS MODELS
Pizzileo, the CPA, predicts there will be ongoing opportunities in the year ahead for well-positioned, strong businesses with available capital. In some cases, however, this may require tinkering with their existing ways of doing business.
Before the crisis, some lenders applied the same or very similar lending model across industries. “That is going the way of the dinosaur. That’s not going to be a successful model going forward,” Renton says. Lenders will focus more on having a differentiated model for the businesses they serve. “I think the crisis created this necessity to treat each industry on its own merits and create a model that has some level of independence, he says.
The year ahead is also likely to be one in which e-commerce lending continues to thrive. According to the third quarter 2020 report from the U.S. Census Bureau, U.S. retail e-commerce stood at $209.5 billion, up 36.7% year over-year. E-commerce accounted for 14.3% of total retail sales in Q3. Because it’s such a high-growth area, and many businesses that didn’t have this vertical before are moving in this direction and more lenders are focusing on it and growing that part of their business, says Kazimirsky of Become.
It will also be interesting to watch how lenders and funders continue to reshape themselves. Sofi, for instance, is continuing to pursue its goal of receiving a national bank charter. Other lenders and funders may also seek to reinvent themselves as they attempt to stay afloat and compete more effectively.
“Monoline lenders that rely on a single product will have more difficulty supporting customers in the wake of Covid,” says Gina Taylor Cotter, senior vice president and general manager of global business financing at American Express, which purchased Kabbage in 2020. “Small businesses need multi-product solutions to not only access working capital, but also real-time insights to help them be more prudent with their cash flow and accept contactless payments safely to encourage more business,” she says.
CHANGES IN RISK MODELING
Another pandemic-driven change is that lenders have had to tweak their risk modeling. Everyone understands the economy is not in the greatest spot, but their challenge in 2021 will be developing a way to assess future losses in the absence of a baseline, says Rutger van Faassen, head of product and market strategy for the benchmarking and omnichannel research group at Informa Financial Intelligence.
Consumer behaviors have changed, for instance. So even though the pandemic will end, it’s too soon to say what the structural impacts on an industry will be and how that affects the desirability of lending to especially hard-hit businesses, such as restaurants, cruise lines and fitness centers. “Clearly the behavior that everyone is showing right now is because of the pandemic. The question is: how will people behave once the pandemic ends,” he says.
“In the meantime, a lot of lenders will have to do more in-the-moment decision-making, until we get to a point when we’re truly in a new normal, when they can start recalibrating models for the longer-term,” he says.
OPPORTUNITIES TO HELP SMALL BUSINESSES
One certainty in the year ahead is the need to help existing small businesses with their recovery, says Cotter of American Express. “Small businesses represent 99 percent of all jobs, two-thirds of new jobs and half of the non-farm GDP in America. Our country’s success depends on small businesses, and financial institutions have a great opportunity to meet their needs to recover and return to positions of growth in 2021,” she says.
How to make this happen is something many alternative financers will grapple with in 2021. Another opportunity may exist in providing funding solutions to new businesses or those that have pivoted as a result of the pandemic. Cotter points to the inaugural American Express Entrepreneurial Spirit Trendex, which found 76% of businesses have already pivoted their business this year and 73% expect to do it again next year. “New-business applications have reached record heights as entrepreneurs pivot and adapt, indicating a surge of new ventures that will require financial solutions to build their business,” Cotter says.
REGULATORY WATCH
Several regulatory issues hang in the balance in 2021, including state-based disclosure laws, expected rules on third-party data aggregation and demographic data collection, and the status of a special purpose charter for fintechs, says Ryan Metcalf, head of U.S. public policy, regulatory affairs and social impact at Funding Circle. With a new administration coming in, the regulatory environment could become more favorable for measures that stalled during Trump’s tenure.
Armen Meyer, vice president of LendingClub and an active member of the Marketplace Lending Association, says he’s hoping to see a bill pass in 2021 that requires more transparency for small business lending. He would also like to see more states follow the lead of California and Virginia and make the 36% interest rate standard of Congress’s Military Lending Act, which covers active- duty service members (including those on active Guard or active Reserve duty) and covered dependents, the law of the land. “We’re calling for this to be expanded to everybody,” he says.
CANADA
Meanwhile, our neighbors to the North have their own challenges and opportunities for the year ahead. The alternative financing industry in Canada originated out of the 2008 recession when banks restricted their credit box and wouldn’t lend to certain groups. While conditions are very different now, “this period of economic uncertainty is going to be an incredible fertile period of time for fintechs to come up with new and interesting and creative credit products just like they did entering the last financial crisis,” says Tal Schwartz, head of policy at the Canadian Lenders Association.
Open banking continues to be on the Canadian docket for 2021 and how the framework shapes up is of utmost interest to fintech lenders in Canada. Schwartz says he’s also hopeful that alternative players in Canada will have a role to play in subsequent government- initiated lending programs. He’s also expecting to see more growth in the e-commerce area, particularly when it comes to extending credit to e-commerce companies and in financing solutions at checkout for online shopping.
IN DEFAULT OR ABOVE WATER: How PPP Saved or Didn’t Save America
July 31, 2020
Kristy Kowal, a silver medalist in the 200-meter breast stroke at the 2000 Olympic games in Australia, had recently relocated to Southern California and embarked on a new career when the pandemic shutdown hit in March.
After nearly two decades as a third-grade teacher in Pennsylvania, Kowal was able to take early retirement in 2019 and pursue her dream job. At last, she was self-employed and living in Long Beach where she could now devote herself to putting on swim clinics, training top athletes, and accepting speaking engagements. “I’ve been building up to this for twenty years,” she says.
But fate had a different idea. The coronavirus not only grounded her from travel but closed down most swimming pools. At first, she tried to collect unemployment compensation. But after two months of calling the unemployment office every day, her claim was denied. “‘Have a great day,’ the lady said, and then she hung up,” Kowal reports. “She wasn’t rude; she just hung up.”
Then, in June, the former Olympian heard from friends about Kabbage and the Paycheck Protection Program. Using an app on her smart phone, Kowal says, she was able to upload documents and complete the initial application in fewer than 20 minutes. A subsequent application with a bank followed and within a week she had her money.
“I was down to ten cents in my checking account,” says Kowal, who declined to disclose the amount of PPP money for which she qualified, “and I’d begun dipping into my savings. This gives me the confidence that I need to go back to my fulltime work.”
Kowal is one of 4.9 million small business owners and sole proprietors who, according to the U.S. Small Business Administration, has received potentially forgivable loans under the Paycheck Protection Program. The PPP, a safety-net program designed to pay the wages of employees for small businesses affected by the coronavirus pandemic, is a key component of the $1.76 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Since the U.S. Congress enacted the law on March 27, the PPP has been renewed and amended twice. It’s now in its third round of funding and Congress is weighing what to do next.
Kowal’s experience, meanwhile, is also a wake-up call for the country on the prominent role that both fintechs like Kabbage as well as community and independent banks, credit unions, non-banks and other alternatives to the country’s biggest banks play in supporting small business. Before many in this cohort were deputized by the SBA as full-fledged PPA lenders, a significant chunk of U.S. microbusinesses – especially sole proprietorships — were largely disdained by the brand-name banks.
“After the first round,” notes Karen Mills, former administrator of the U.S. Small Business Administration and a senior fellow at the Harvard Business School, “more institutions were approved that focused on smaller borrowers. These included fintechs and I have to say I’ve been very impressed.”
Among the cadre of fintechs making PPP loans – including Funding Circle, Intuit Quickbooks, OnDeck, PayPal, and Sabre — Kabbage stands out. The Atlanta-based fintech ranked third among all U.S. financial institutions in the number of PPP credits issued, its 209,000 loans trailing only Bank of America’s 335,000 credits and J.P. Morgan Chase’s 260,000, according to the SBA and company data. Kabbage also reports processing more than $5.8 billion in PPP loans to small businesses ranging from restaurants, gyms, and retail stores to zoos, shrimp boats, beekeepers, and toy factories.
To reach businesses in rural communities and small towns, Kabbage collaborated with MountainSeed, an Atlanta-based data-services provider, to process claims for 135 independent banks and credit unions around the U.S. The proof of the pudding: Eighty-nine percent of Kabbage’s PPP loans, says Paul Bernardini, director of communications at Atlanta-based Kabbage, were under $50,000, and half were for less than $13,500.
The figures illustrate not only that Kabbage’s PPP customers were mainly composed of the country’s smaller, “most vulnerable” businesses, Bernardini asserts, but the numbers serve as a reminder that “fintechs play a very important, vital role in small business lending,” he says.
The helpfulness of such financial institutions contrasts sharply with what many small businesses have reported as imperious indifference by the megabanks. Gerri Detweiler, education director at Nav, Inc., a Utah-based online company that aggregates data and acts as a financial matchmaker for small businesses, steered deBanked toward critical comments about the big banks made on Nav’s Facebook page. Bank of America, especially, comes in for withering criticism.
“Bank of America wouldn’t even take my application,” one man wrote in a comment edited for brevity. “I have three accounts there. They are always sending me stuff about what an important client I am. But when the going got tough, they wouldn’t even take my application. I’m moving all my business from Bank of America.”
Lamented another Bank of America customer: “I was denied (PPP funding) from Bank of America (where) I have an individual retirement account, personal checking and savings account, two credit cards, a line of credit for $20.000, and a home mortgage. Add in business checking and a business credit card. Yesterday I pulled out my IRA. In the next few days I’m going to change to a credit union.”
Many PPP borrowers who initially got the cold shoulder from multi-billion-dollar conglomerate banks have found refuge with local — often small-town — bankers and financial institutions. Natasha Crosby, a realtor in Richmond, Va., reports that her bank, Capital One, “didn’t have the applications available when the Paycheck Protection Program started” on April 6. And when she finally was able to apply, she notes, “the money ran out.”
Crosby, who is president of Richmond’s LGBTQ Chamber of Commerce, is media savvy and was able to publicize her predicament through television appearances on CNN and CBS, as well as in interviews with such publications as Mother Jones and Huffington Post. A “friendly acquaintance,” she says, referred her to Atlantic Union Bank, a Richmond-based regional bank, where she eventually received a PPP loan “in the high five figures” for her sole proprietorship.
“It took almost two months,” Crosby says. “I was totally frozen out of the program at first.”
Talibah Bayles heads her own firm, TMB Tax and Financial Services, in Birmingham, Ala. where she serves on that city’s Small Business Council and the state’s Black Chamber of Commerce. She told deBanked that she’s seen clients who have similarly been decamping to smaller, less impersonal financial institutions. “I have one client who just left Bank of America and another who’s absolutely done with Wells Fargo,” she says. “They’re going to places like America First Credit Union (based in Ogden, Utah) and Hope Credit Union (headquartered in Jackson, Miss.). I myself,” she adds, “shifted my business from Iberia Bank.”
Main Street bankers acknowledge that they are benefiting from the phenomenon. “In speaking to our industry colleagues,” says Tony DiVita, chief operating officer at Bank of Southern California, an $830 million-asset community bank based in San Diego, “we’ve seen that many of the big banks have slowed down or stopped lending small-dollar amounts that were too low for them to expend resources to process.”
At the same time, DiVita says, his bank had made 2,634 PPP loans through July 17, roughly 80% of which went to non-clients. Of that number, some 30% have either switched accounts or are in the process of doing so. And, he notes, the bank will get a second crack at conversion when the PPP loan-forgiveness process commences in earnest. “Our guiding spirit is to help these businesses for the continuation of their livelihoods,” he says.
Noah Wilcox, chief executive and chairman of two Minnesota banks, reports that both of his financial institutions have been working with non-customers neglected by bigger banks where many had been longtime customers. At Grand Rapids State Bank, he says, 26% of the 198 PPP applicants who were successfully funded were non-customers. Minnesota Lakes Bank in Delano, handled PPP credits for 274 applicants, of whom 66% were non-customers.
“People who had been customers forever at big banks told us that they had been applying for weeks and were flabbergasted that we were turning those applications around in an hour,” says Wilcox, who is also the current chairman of the Independent Community Bankers of America, a Washington, D.C.-based trade group representing community banks.
Noting that one of his Gopher State banks had successfully secured funding for an elderly PPP borrower “who said he had been at another bank for 69 years and could not get a telephone call returned,” Wilcox added: “We’ve had quite a number of those individuals moving their relationships to us.”
For Chris Hurn, executive director at Fountainhead Commercial Capital, a non-bank SBA lender in Lake Mary, Fla., the psychic rewards have helped compensate for the sometimes 16-hour days he and his staff endured processing and funding PPP applications. “It’s been relentless,” he says of the regimen required to funnel loans to more than 1,300 PPP applicants, “but we’ve gotten glowing e-mails and cards telling us that we’ve saved people’s livelihoods.”
Yet even as the Paycheck Protection Program – which only provides funding for two-and-a-half months – is proving to be immensely helpful, albeit temporarily, there is much trepidation among small businesses over what happens when the government’s spigots run dry. The hastily contrived design of the program, which has relied heavily on the country’s largest financial institutions, has contributed mightily to the program’s flaws.
“The underbanked and those who don’t have banking relationships were frozen out in the first round,” says Sarah Crozier, director of communications at Main Street Alliance, a Washington D.C.-based advocacy organization comprising some 100,000 small businesses. “The new updates were incredibly necessary and long overdue,” she adds, “but the changes didn’t solve the problem of equity in access to the program and whom money is flowing to in the community.”
Professor David Audretsch, an economist at Indiana University’s O’Neill School of Public and Environmental Affairs and an expert on small business, says of PPP: “It’s a short-term fix to keep businesses afloat, but it missed in a lot of ways. It was not well-thought-out and a lot of money went to the wrong people.”
The U.S. unemployment rate stood at 11.1% in June, according to the most recent figures released by the Bureau of Labor Statistics, about three times the rate of February, just before the pandemic hit. The BLS also reported that 47.2% of the U.S. population – nearly half –was jobless in June. Against this backdrop, SBA data on PPP lending released in early July showed that a stunning array of cosseted elite enterprises and organizations, many with close connections to rich and powerful Washington power brokers, have been feasting on the PPP program.
In a stunning number of cases, the program’s recipients have been tony Washington, D.C. law firms, influential lobbyists and think tanks, and even members of Congress. Many businesses with ties to President Trump and Trump donors have also figured prominently on the SBA list of those receiving largesse from the SBA.
Businesses owned by private equity firms, for which the definition of “small business” strains credulity, were also showered with PPP dollars. Bloomberg News reported that upscale health-care businesses in which leveraged-buyout firms held a controlling interest, were impressively adept at accessing PPP money. Among this group were Abry Partners, Silver Oak Service Partners, Gauge Capital, and Heron Capital. (Small businesses are generally defined as enterprises with fewer than 500 employees. The SBA reports that there are 30.7 million small businesses in the U.S. and that they account for roughly 47% of U.S. employment.)
Boston-based Abry Partners, which currently manages more than $5 billion in capital across its active funds, merits special mention. Among other properties, Abry holds the largest stake in Oliver Street Dermatology Management, recipient of between $5 million and $10 million in potentially forgivable PPP loans. Based in Dallas, Oliver Street ranks among the largest dermatology management practices in the U.S. and, according to a company statement, boasts the most extensive such network in Texas, Kansas and Missouri.
Meanwhile, the design of the program and the formula for the looming forgiveness process is proving impractical. As it currently stands, loan forgiveness depends on businesses spending 60% of PPP money on employees’ wages and health insurance with the remaining 40% earmarked for rent, mortgage or utilities.
Many businesses such as restaurants and bars, storefront retailers and boutiques – particularly those that have shut down — are preferring to let their employees collect unemployment compensation. “Business owners had a hard time wrapping their heads around the requirement of keeping employees on the payroll while they’re closed,” notes Detweiler, the education director at Nav. “They have other bills that have to be paid.”
The forgiveness formula remains vexing for businesses where real estate costs are exorbitant, particularly in high-rent cities such as New York, Boston, Washington, D.C., San Francisco, and Chicago. Tyler Balliet, the founder and owner of Rose Mansion, a midtown Manhattan wine-bar promising an extravagant, theme-park experience for wine enthusiasts, says that it took him a month and a half to receive almost $500,000 from Chase Bank. Unfortunately, though, the money isn’t doing him much good.
“I have 100 employees on staff, most of whom are actors,” he says. “We shut down on March 13. I laid off 95 employees and kept just a few people to keep the lights on.”
At the same time, his annual rent tops $1 million and the forgivable amount in the PPP loans won’t even cover a month’s rent. “I haven’t paid rent since March and I’m in default,” Balliet says. “Now I’m just waiting to see what the landlord wants to do.”
Like many business owners, Balliet financed much of his venture with credit card debt, which creates an additional liability concern, notes Crozier of the Main Street Alliance. “It’s very common for borrowers to have signed personal guarantees in their loans using their credit cards,” she says. “As we get closer to the funding cliff and as rent moratoriums end,” she adds, “creditors are coming after borrowers and putting their personal homes at risk.”
Mark Frier is the owner of three restaurants in Vermont ski towns, including The Reservoir — his flagship — in Waterbury. In toto, his eateries chalked up $6.5 million in combined sales in 2019. But 2020 is far different: the restaurants have not been open since mid-March and he’s missed out on the lucrative, end-of-season ski rush.
Consequently, Frier has been reluctant to draw down much of the $750,000 in PPP money he’d secured through local financial institutions. “We could end up with $600,000 in debt even with the new rules,” Frier says, adding: “We live off very thin margins. We need grants not loans.”
As the country recorded 3.7 million confirmed cases of coronavirus and more than 141,000 deaths as of mid-July, PPP money earmarked by businesses for health-related spending was not deemed forgivable. Yet in order to comply with regulations promulgated by the Occupational Safety and Health Administration and mandates and ordinances imposed by state and local governments, many establishments will be unable to avoid such expenditures.
“What we really needed was a grant program for companies to pivot to a business environment in a pandemic,” says Crozier. She cites the necessity businesspeople face of “retrofitting their businesses, buying masks, gloves and sanitizers and cleaning supplies, restaurants’ taking out tables and knocking down walls, installing Plexiglass shields, and improving air filtration systems.”
Meanwhile, as Covid-19 was taking its toll in sickness and death, the economic outlook for small business has been looking dire as well. The recent U.S. Census’s “Pulse Survey” of some 885,000 businesses updated on July 2 found that roughly 83% reported that Covid-19 pandemic had a “negative effect on their business. Fully 38% of all small business respondents, moreover, reported a “large negative effect.”
Amid the unabated spikes in the number of coronavirus cases and the country’s grave economic distress, PPP recipients are faced with the unsettling approach of the PPP forgiveness process. As Congress, the SBA, and the U.S. Treasury Department continue to remake and revise the rules and regulations governing the program, businesses are operating in a climate of uncertainty as well. Currently, the law states that the amount of the PPP loan that fails to be forgiven will convert to a five-year, one-percent loan — a relaxation in terms from the original two-year loan which is not necessarily cheering recipients.
“One of the biggest problems with PPP is that the rule book has been unclear,” frets Vermont restaurateur Frier, glumly adding: “This is not even a good loan program.”
Ashley Harrington, senior counsel at the Center for Responsible Lending, a research and policy group based in Durham, N.C., argued in House committee testimony on June 17, that there ought to be automatic forgiveness for PPP loans under $100,000. Such a policy, she declared, “would likely exempt firms with, on average, 13 or fewer employees and save 71 million hours of small business staff time.”
She also said, “The smallest PPP loans are being provided to microbusinesses and sole proprietors that have the least capacity and resources to engage in a complex (forgiveness) process with their financial institution and the SBA.”
William Phelan, president of Skokie (Ill.)-based PayNet, a credit-data services company for small businesses which recently merged with Equifax, sounded a similar note. Observing that there are some 23 million “non-employer” small businesses in the U.S. with fewer than three employees for whom the forgiveness process will likely be burdensome, he says: “Estimates are that it will cost businesses a few thousand dollars just to get a $100,000 loan forgiven. It’s going to involve mounds of paper work.”
The country’s major challenge now will be to re-boot the economy, Phelan adds, which will require massive financing for small businesses. “The fact is that access to capital for small businesses is still behind the times,” Phelan says. “At the end of the day, it took a massive government program to insure that there’s enough capital available for half of the U.S. economy” during the pandemic.
For his part, Professor Audretsch fervently hopes that the country has learned some profound lessons about the need to prepare for not just a rainy day, but a rainy season. The pandemic, he says, has exposed how decades of political attacks on government spending for disaster-preparedness and safety-net programs have left the U.S. exposed to unforeseen emergencies.
“We’re seeing the consequence of not investing in our infrastructure,” he says. “That’s a vague word but we need a policy apparatus in place so that the calvary can come riding in. This pandemic reminds me a lot of when Hurricane Katrina hit New Orleans,’ he adds. “The city paid a heavy price because we didn’t have the infrastructure to deal with it.”
