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Greenbox Capital® Advocates For Fair Lending to Women- and Minority-owned Businesses in CFPB Panel

October 19, 2020
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Greenbox Capital participates in small business lending data collection rulemaking for section 1071 of the Dodd-Frank Act protecting women-owned and minority-owned businesses

Miami, FL: Greenbox Capital® announced it is serving as a Small Entity Representative (SER) to the Consumer Financial Protection Bureau (CFPB) that is responsible for amending the Equal Credit Opportunity Act (ECOA) protecting women-owned, minority-owned, and small businesses looking for financial assistance. Section 1071 of the Dodd-Frank Act amends the ECOA by requiring certain data be collected and submitted to the Bureau to protect these types of businesses.

“It’s an honor to be selected to the industry panel providing feedback on section 1071 of the Dodd-Frank Act ensuring fair lending laws to women- and minority-owned businesses”, said Greenbox Capital CEO Jordan Fein. “Over 2 million businesses across the U.S. are either women or minority owned and it’s vital they can secure funding as easily as non-minority owned businesses.”

Greenbox Capital, an alternative lender, serves small businesses in all industries across the United States, Puerto Rico, and Canada with the working capital needed to grow. Greenbox Capital is committed to supporting clear, secure, and fair financing solutions and is an active member of the Small Business Financial Association (SBFA).

For more information visit, www.greenboxcapital.com.

Puerto Rican Businesses & People Resilient In Spite of Pandemic and Challenges, Says Alvelo

September 16, 2020
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Puerto Rico flagWhile the US economy slowly opens back up to careful in-person commerce, the territory of Puerto Rico is still facing rising case numbers- So how is business in the “Island of Enchantment?”

“I don’t think there’s anything that will shake the confidence of our small business owners in Puerto Rico,” said Sonia Alvelo, CEO of Latin Financial. “Businesses and the people of Puerto Rico are the most resilient I have ever known: I know that as I am one of them.”

Alvelo, a native to the island, has won awards as a top entrepreneur of the year for her business financing partnerships in the US and Puerto Rico. She said that even as the island faces its hardest challenges, the spirit of entrepreneurship remains unbroken.

Puerto Rico has been hit by irregular misfortune in the past couple of years. Destruction from Hurricane Maria and Irma damaged the 2017 infrastructure of the island immeasurably, and the response of the US government was painfully lacking. Commerce continued with caution, seeming to rebound. Then this year, earthquakes and aftershocks punctuated January and February, foreboding the coming storm.

The pandemic was slow to reach the island; Puerto Rico was the first US state/territory to impose a quarantine, banning business and all travel March 15th. The region is a territory of the United States, so it could not directly enforce control over its borders. Recently, Puerto Rico made the news with an increasing case count.

There’s also been the troublesome search for a new governor. After a mass protest, Governor Ricardo Rosselló stepped down last year. After his successor ‘appointment’ was deemed unconstitutional by the Supreme court of Puerto Rico, Wanda Vazquez, the former Secretary of Justice, took office.

In the August primary, thousands of ballots got stuck in delivery trucks that did not move, never reached polling locations. The candidates are now petitioning for a re-vote and the counting of the votes that were cast. The courts are still deciding, so even the election is facing challenges in Puerto Rico.

Besides that, the tourism industry has been devastated. Though the early shut down saved lives, the island saw an unemployment rate of up to 23% in July alone. That could be a low estimate, considering that half of the Puerto Rican workforce hold a job in the “informal economy.” The New York Times reports that the real unemployment rate in the middle of the summer could have reached close to 40%.

Sonia Alvelo Award at the Latinas & Power Symposium
Above: Latin Financial CEO Sonia Alvelo receives the 2019 Entrepreneur of the Year Award from Connecticut Secretary of State Denise Merrill

Even so, Alvelo conveyed the enduring willpower of the Puerto Rican people, that there was still confidence things would turn around. 

Alvelo is partnered with more than 97 pharmacies in Puerto Rico as an MCA provider, as well as with gas stations and other small businesses. She said that she has been receiving calls for business financing options non-stop, on a day-to-day basis. Alvelo shared information she learned from one of her clients.

“They suffered the most at the beginning, but you know only 5-10% of pharmacies in the islands are open,” Alvelo said. “But even still, and we’re talking a hurricane, earthquakes, a pandemic, everything- I still don’t think that anything will change the confidence of business owners in PR.”

“THAT WAS THE BEST EXPERIENCE, WHEN THEY GOT THE PPP FUNDS”

Alvelo is standing right next to Puerto Rican business owners, talking to them through their increasing needs during this time, she said. Latin Financial facilitated almost $2 million in PPP loans and $2 million in EIDL loans in the US and PR. 

“That was the best experience- when they got the PPP funds,” Alvelo said. “They were crying over the phone; it was incredible.”

Brendan Lynch, Alvelo’s fiancé and business partner, said that the program had a rough rollout. It was unclear how long the Fed money would last, but PPP ended up working well for Puerto Rican businesses. He even saw BlueVine begin funding Loans in PR for the first time.

“One of our finders here in the US was approved for the program, and we were able to use their online platform,” Lynch said. “And normally they don’t really fund in Puerto Rico, but they did allow Puerto Rican businesses to apply for funding; which is great because they had the technology to make it so simple and quick.”

Lynch said Latin Financial was sure to share links to a PPP loan application with every client to make sure aid funds were as accessible as possible.

“Businesses are probably still down-scaled somewhere between 60 to 70% of their total revenue,” Lynch said. “they’re still working shorthanded with less people in the office, and regulations on how many people you can have in your business are making it harder.”

Alvelo and Lynch are no strangers to environmental forces affecting their plans- the pair were planning on getting married in PR in 2017 before the hurricanes hit. 

Puerto Rico“We started actually looking [for a venue] again, and then COVID happened,” Alvelo said. “Clients were going to be invited and are always asking how they can help, just like when everything happened with COVID, the pharmacies all got together, and said if you need this let us know. Businesses are really working together because they know that they need each other.”

Maria Barzana, the owner of Farmacia Asturias, has been a longtime client of Latin Financial, one of the first dating back to 2015. Barzana went to Alvelo for help. She said the island did not feel an economic impact until this August. Businesses, including most medical offices in the country, have been closed for the past five months. Pharmacies are finally feeling it.

“At the beginning of COVID-19, we were able to manage the economic factor by invoicing refills of prescriptions and the sale of basic necessities related to COVID,” Barzana said. “Due to social distancing, the flow of clients/patients has decreased, concentrating on items necessary to combat COVID-19 and maintenance medications.”

Latin Financial is almost back to regular funding after rushing to help complete PPP and EIDL stimulus loans. Sonia Alvelo will be a panelist speaker this Sept. 24, for the annual Latinas & Power Symposium.

Par Funding Files Strong Response to SEC’s TRO After “Lockout”

August 4, 2020
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United States Securities and Exchange commission SEC logo on entrance of DC building near H streetPar Funding’s attorneys at Fox Rothschild filed a strong response with the Court over the apparent actions taken by the Receiver to lock out its employees and suspend ACH debits, the docket shows.

“On the afternoon of July 28, the SEC advised that Mr. Stumphauzer (the appointed receiver) would cause the immediate dismissal of all the employees of the businesses and that no employees of the business would be permitted to enter the premises – leading to over 100 employees being barred from the business premises for the last week despite the fact that thousands of merchants around the country rely on ongoing communication with CBSG to ensure the ongoing viability of their business operations.”

It continues…

“To date, not a dollar has been taken in by the Receiver to pay investors, and they have not been paid. The Receiver’s and SEC’s actions are ruining a business with excellent fundamentals and a strong financial base and essentially putting it into an ineffective liquidation causing huge financial losses. In taking this course of action against a fully operational business, the key fact that has been lost by the SEC, is that their actions are going to unilaterally lead to massive investor defaults.”

You can view the entire argument here.

Par’s attorneys are expected to file a more comprehensive opposition by the end of the week.

deBanked did not reach out to any party for comment given the unlikelihood that any would be shared on pending litigation.

“Panic Induces Panic”: David Goldin on Small Business Funding and the Coronavirus

March 12, 2020
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With companies in Australia, Britain, and the United States, David Goldin has weathered storms of various sizes and seriousness over the past two decades. Whether it was the recent wildfires that saw state-sized infernos engulf the Australian countryside, the regulatory upheaval that is Brexit, or the unprecedented shockwaves sent by the 2008 financial crisis, the CEO has seen his fair share of global disruption.

So when deBanked got in touch with Goldin about his perspective on the coronavirus pandemic, how it compares to what he’s seen before, and what funders should do to combat contagion, he was happy to discuss the insights he’s garnered from twenty years in business.

The following Q&A has been lightly edited for clarity and succinctness:

 

deBanked: Generally speaking, how bad do you think the coronavirus pandemic is going to get?

David Goldin Headshot“I don’t think anyone knows the outcome. I think what you’re going to see is the industry completely change over the next few days. In the last 48 hours you went from mild cancellations to, today alone, the NBA, NHL, and MLB. And Cuomo just announced in New York that there can be no more than 500 people at events, colleges are shutting down left and right, and schools as well. Basically, we’re heading in the direction of shutting down the entire country at some point.

So I think funders have two issues. One is their existing customers, right? And how do you lend in this market? There’s the obvious and the not so obvious, because, for example, a deal that may have been great a few days ago, let’s say there’s a college bar near SUNY Albany, and they just announced this shutting down of schools, that bar may not see any business for who knows how long.

I’m not the CDC, I’m not the WHO, I’m not a medical expert, but I know in life, people are always afraid of the unknown and panic induces panic, but this is just my opinion. So I think once people start getting this virus, which is inevitable, and they recover from it, I think that’s going to offset some of the panic.

I think you’re going to have a couple of more shock factors. I would not be surprised if we learn in the next few weeks that the President of the United States has it.”

 

And what about our industry specifically?

“I think right now, lenders will say, ‘Well, if I [tighten up], typically what happens in our industry is if a company runs into trouble, it’s usually just that company,’ right? So if they start tightening up, they lose the business.

The entire playing field will be level by Monday or Tuesday of next week, by the latest. I think some of the playbook will be that some funders may take the position to stop funding for the next couple of weeks and look to see what happens because no one knows how bad this is going to get.”

 

Do you have any advice for funders?

“I think you have to price the risk because I think everyone is foolish to think that the bolts are not going to go off. So you’re either going to have to increase the pricing to the customer or raise the rates to the broker and limit the amount they could charge the customer temporarily for the increased risk your portfolio is now going to take.

I think you need to shorten the term. During the 2008 recession, the industry was at a 1.35 to a 1.37 factor rate, averaging six or seven months. There weren’t too many providers back then going past a year, there really was no such things as a second or third position.

This is a much different world we live in. So I think, unfortunately, some of the platforms that tend to be longer-term players which do one year, two years, three years, even four years, I think they’re going to be in a lot of trouble. Their ships are too far out to sea and I think they’re really going to have to focus on portfolio management and collections.

There’s going to be opportunities in the marketplace for those that don’t take a prudent approach, but I think in the short term people have to shorten their terms, potentially raise pricing for risk, and decrease the amount of capital that they’re taking out of a customer’s gross sales.”

 

What lessons do you think can be learned from this?

“I think as a platform you have to look at redundancy of capital, and that the time to raise money is when you don’t need it. So I think this could be a lesson for all to perhaps have more than one funding source.

I think brokers are going to really have to diversify. There’s good and bad, I think the approval rates at companies are going to fall through the floor, but I think you’ll get a lot of borrowers over the next few weeks that can typically go to a bank that won’t be able to go to a bank. But you’re going to see a lot of watching and waiting right now. And you’re going to see the industry revert back to where it was a while ago: shorter term deals, pricing in the risk, lower gross sales taken.”

 

How does this compare to previous crises?

“So I think this one’s a little bit different. It’s affecting everything and your playbook is going to change literally daily. This will be affecting the majority of the major cities. When you’re shutting down things like the MLB, the NBA, the NHL, shutting down colleges and universities, I don’t think this country or the world has ever experienced anything like this for this extended period of time.

Now that doesn’t mean everyone’s going to go out of business, there’ll be a redistribution. For example, if it was a restaurant in midtown Manhattan that relied a lot on people going from work, and these people are now working from home, perhaps their local restaurants or supermarket may see an uptick in business.

I think you’re going to see decisions slowing down and really digging a lot deeper into the underwriting, understanding what the business actually does, how it’s potentially affected.”

 

What should funders be doing to combat contagion?

“They should be testing a disaster recovery plan to work remotely.

But most importantly it’s really about everyone being healthy, helping their families and their employees. That’s first and foremost.”

Funding Metrics Announces New $100 Million Revolving Credit Facility

March 4, 2020
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Funding Metrics

Bensalem, PA, March 4, 2020 – Funding Metrics, LLC (the “Company”) announced today the closing of a new $100 million revolving credit facility with a multi-billion dollar institutional credit fund. The Company will use the funds to expand and accelerate the growth of its small business funding platform. Brean Capital served as exclusive financial advisor to the Company on the transaction.

“We are very pleased to announce this new $100 million facility, which will allow us to significantly expand our ability to provide funding to the growing small business community across the United States,” said Co-Founder, Chairman and Chief Executive Officer, David Frascella. “This new facility represents an exciting milestone in our continued growth. Funding Metrics has tripled its origination volume since 2017, totaling over $500 million since company inception. I am very proud of the robust funding platform our team has created, the strong relationships we have developed with our independent sales organization partners, and especially the trust placed in us by our merchants. Funding Metrics has created a best of breed technology based platform allowing most funding offers to be sent in under three hours.”

Additional capital provided by the facility will allow Funding Metrics to capitalize on growth opportunities in 2020 and beyond as well as on the extensive infrastructure of people and technology it has built over the last few years. Mr. Frascella added, “We look forward to additional submissions from the ISO network and funding the next wave of small business leaders nationwide.”

About Funding Metrics

Funding Metrics is a leading data and analytics driven online provider of funding for small businesses throughout the United States. The Company uses proprietary risk models combined with real-time cash flow data to evaluate business performance and provides growth capital for entrepreneurs in a fast and efficient way through its two online brands, Lendini and QuickFix Capital. Since 2014, the Funding Metrics has provided over $500 million in funding to more than 9,500 small businesses in all 50 states. The Company is headquartered in Bensalem, PA, with additional offices in Jersey City, NJ and San Jose, Costa Rica.

For more information, please visit: www.fundingmetrics.com

For more information / questions / interview requests / media inquiries, please contact:

David Frascella

Email: info@fundingmetrics.com | Phone: 855-212-6610

United Capital Source Partners with Brex to Offer Deal on Card

February 21, 2020
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UBrex - United Capital Sourcenited Capital Source has partnered with Brex on a deal that will see UCS customers receive bonuses upon sign-up for a Brex Corporate Card. Such rewards include 100,000 points in statement credit and waived card fees for life.

“We really wanted to start to offer business credit cards to our clientele. We believe that as we’re helping people solve their lending or funding issues, it’s also helpful to solve any problems that they face when running their day-to-day business,” UCS Founder and CEO Jared Weitz told deBanked in a call. “The key point that we really love about Brex which we’re offering to our clients is a 60-day, no-interest float on expenses. And that’s really helpful for folks when you’re making weekly and bi-weekly payrolls, when you’re purchasing inventory, and when you have folks that pay you every 30 or 45 days.”

The news comes as companies from various backgrounds are beginning to offer debit, credit, and charge cards. Apple, BlueVine, and challenger banks such as N26 and Varo are now all offering cards of some kind to their customers.

In Weitz’s view, this is the next step for the industry. With tech becoming more and more ingrained in finance, the convergence between the two fields is inevitable and ultimately beneficial for brokers.

“They’re already doing it on the personal side. And I think that once these tech-enabled companies start to get business data on their clients’ trends in their business account, they’ll be able to offer other products to them as well. For me, as a broker, if someone says, ‘Hey, does that make you nervous?,’ honestly, I don’t believe so. Because I think it opens up the sources for me to send deals to … I’m not a lender, so I’m not competing against them. I’m someone that would send them business. So when I look at them, I say this is just a new potential partner for me, a new opportunity.”

United Capital Source Placed $199M In Deals In 2019

January 5, 2020
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Jared WeitzUnited Capital Source, a commercial finance brokerage based in New York, placed 3,883 deals in 2019 for a grand funding total of $199.3 million. Company CEO Jared Weitz said on LinkedIn of the milestone, “Our employees all saw growth (again) this year both professionally and personally. As we come into 2020 we are going into our 10th year of business!!!!! I cannot wait to see what these next year(s) hold for us. I’m so thankful for our Funding Partners and most of all our wonderful staff.”

Weitz is scheduled to speak at deBanked CONNECT MIAMI on January 16th at the Loews Hotel on a panel discussion about how to make money in 2020.

The FTC Wants To Police Small Business Finance

October 22, 2019
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This story appeared in deBanked’s Sept/Oct 2019 magazine issue. To receive copies in print, SUBSCRIBE FREE

FTC PoliceOn May 23, the Federal Trade Commission launched an investigation into unfair or deceptive practices in the small business financing industry, including by merchant cash advance providers.

The agency is looking into, among other things, whether both financial technology companies and merchant cash advance firms are making misrepresentations in their marketing and advertising to small businesses, whether they employ brokers and lead-generators who make false and misleading claims, and whether they engage in legal chicanery and misconduct in structuring contracts and debt-servicing.

Evan Zullow, senior attorney at the FTC’s consumer protection division, told deBanked that the FTC is, moreover, investigating whether fintechs and MCAs employ “problematic,” “egregious” and “abusive” tactics in collecting debts. He cited such bullying actions as “making false threats of the consequences of not paying a debt,” as well as pressuring debtors with warnings that they could face jail time, that authorities would be notified of their “criminal” behavior, contacting third-parties like employers, colleagues, or family members, and even issuing physical threats.

“Broadly,” Zullow said in a telephone interview, “our work and authority reaches the full life cycle of the financing arrangement.” He added: “We’re looking closely at the conduct (of firms) in this industry and, if there’s unlawful conduct, we’ll take law enforcement action.”

“IF THERE’S UNLAWFUL CONDUCT, WE’LL TAKE LAW ENFORCEMENT ACTION”

Zullow declined to identify any targets of the FTC inquiry. “I can’t comment on nonpublic investigative work,” he said.

cojsThe FTC investigation is one of several regulatory, legislative and law enforcement actions facing the merchant cash advance industry, which was triggered by a Bloomberg exposé last winter alleging sharp practices by some MCA firms.

The Bloomberg series told of high-cost financings, of MCA firms’ draining debtors’ bank accounts, and of controversial collections practices in which debtors signed contracts that included “confessions of judgment.”

The FTC long ago outlawed the use of COJs in consumer loan contracts and several states have banned their use in commercial transactions. In September, Governor Andrew Cuomo signed legislation prohibiting the use of COJs in New York State courts for out-of-state residents. And there is a bipartisan bill pending in the U.S. Senate authored by Florida Republican Marco Rubio and Ohio Democrat Sherrod Brown to outlaw COJs nationwide.

Mark Dabertin, a senior attorney at Pepper Hamilton, described the FTC’s investigation of small business financing as a “significant development.” But he also said that the agency’s “expansive reading of the FTC Act arguably presents the bigger news.” Writing in a legal memorandum to clients, Dabertin added: “It opens the door to introducing federal consumer protection laws into all manner of business-to-business conduct.”

“IT OPENS THE DOOR TO INTRODUCING FEDERAL CONSUMER PROTECTION LAWS INTO ALL MANNER OF BUSINESS-TO-BUSINESS CONDUCT”

FTC attorney Zullow told deBanked, “We don’t think it’s new or that we’re in uncharted waters.”

The FTC inquiry into alternative small business financing is not the only investigation into the MCA industry. Citing unnamed sources, The Washington Post reported in June that the Manhattan district attorney is pursuing a criminal investigation of “a group of cash advance executives” and that the New York State attorney general’s office is conducting a separate civil probe.

ftc COMMISSIONER rohit chopra
FTC Commissioner Rohit Chopra

The FTC’s investigation follows hard on the heels of a May 8 forum on small business financing. Labeled “Strictly Business,” the proceedings commenced with a brief address by FTC Commissioner Rohit Chopra, who paid homage to the vital role that small business plays in the U.S. economy. “Hard work and the creativity of entrepreneurs and new small businesses helped us grow,” he said.

But he expressed concern that entrepreneurship and small business formation in the U.S. was in decline. According to census data analyzed by the Kaufmann Foundation and the Brookings Institution, the commissioner noted, the number of new companies as a share of U.S. businesses has declined by 44 percent from 1978 to 2012.

“It’s getting harder and harder for entrepreneurs to launch new businesses,” Chopra declared. “Since the 1980s, new business formation began its long steady decline. A decade ago births of new firms started to be eclipsed by deaths of firms.”

Chopra singled out one-sided, unjust contracts as a particularly concerning phenomenon. “One of the most powerful weapons wielded by firms over new businesses is the take-it-or-leave-it contract,” he said, adding: “Contracts are ways that we put promises on paper. When it comes to commerce, arm’s length dealing codified through contracts is a prerequisite for prosperity. “But when a market structure requires small businesses to be dependent on a small set of dominant firms — or firms that don’t engage in scrupulous business practices — these incumbents can impose contract terms that cement dominance, extract rents, and make it harder for new businesses to emerge and thrive.”

Watch a recording of the FTC panels below

As the panel discussions unfolded, representatives of the financial technology industry (Kabbage, Square Capital and the Electronic Transactions Association) as well as executives in the merchant cash advance industry (Kapitus, Everest Business Financing, and United Capital Source) sought to emphasize the beneficial role that alternative commercial financiers were playing in fostering the growth of small businesses by filling a void left by banks.

The fintechs went first. In general, they stressed the speed and convenience of their loans and lines of credit, and the pioneering innovations in technology that allowed them to do deeper dives into companies seeking credit, and to tailor their products to the borrower’s needs. Panelists cited the “SMART Box” devised by Kabbage and OnDeck as examples of transparency. (Accompanying those companies’ loan offers, the SMART Box is modeled on the uniform terms contained in credit card offerings, which are mandated by the Truth in Lending Act. TILA does not pertain to commercial debt transactions.)

FTC paneSam Taussig, head of global policy at Kabbage, explained that his company typically provides loans to borrowers with five to seven employees — “truly Main Street American small businesses” — that are seeking out “project-based financing” or “working capital.”

“The average small business according to our research only has about 27 days of cash flow on hand,” Taussig told the fintech panel, FTC moderators and audience members. “So if you as a small business owner need to seize an opportunity to expand your revenue or (have) a one-off event — such as the freezer in your ice cream store breaks — it’s very difficult to access that capital quickly to get back to business or grow your business.”

Taussig contrasted the purpose of a commercial loan with consumer loans taken out to consolidate existing debt or purchase a consumer product that’s “a depreciating asset.” Fintechs, which typically supply lightning-quick loans to entrepreneurs to purchase equipment, meet payrolls, or build inventory, should be judged by a different standard.

A florist needs to purchase roses and carnations for Mother’s Day, an ice-cream store must replenish inventory over the summer, an Irish pub has to stock up on beer and add bartenders at St. Patrick’s Day.

The session was a snapshot of not just the fintech industry but of the state of small business. Lewis Goodwin, the head of banking services at Square Capital, noted that small businesses account for 48% of the U.S. workforce. Yet, he said, Square’s surveys show that 70% of them “are not able to get what they want” when they seek financing.

Square, he said, has made 700,000 loans for $4.5 billion in just the past few years, the platform’s average loan is between $6,000 and $7,000, and it never charges borrowers more than 15% of a business’s daily receipts. The No. 1 alternative for small businesses in need of capital is “friends and family,” Goodwin said, “and that’s a tough bank to go back to.”

florist owner waving goodbyePanelist Gwendy Brown, vice-president of research and policy at the Opportunity Fund, a non-profit microfinance organization, provided the fintechs with their most rocky moment when she declared that small businesses turning up at her fund were typically paying an annual percentage rate of 94 percent for fintech loans. And while most small business owners were knowledgeable about their businesses — the florists “know flowers in and out,” for example — they are often bewildered by the “landscape” of financial product offerings.

“Sophistication as a business owner,” Brown said, “does not necessarily equate into sophistication in being able to assess finance options.”

Panelist Claire Kramer Mills, vice-president of the Federal Reserve Bank of New York, reported that the country’s banks have made a dramatic exit from small business lending over the past ten years. A graphic would show that bank loans of more than $1 million have risen dramatically over the past decade but, she said, “When you look at the small loans, they’ve remained relatively flat and are not back to pre-crisis levels.”

Mills also said that 50% of small businesses in the Federal Reserve’s surveys “tell us that they have a funding shortfall of some sort or another. It’s more stark when you look at women-owned business, black or African-American owned businesses, and Latino-owned businesses.”

On the merchant cash advance panel there was less opportunity to dazzle the regulators and audience members with accounts of state-of-the-art technology and the ability to aggregate mountains of data to make online loans in as few as seven minutes, as Kabbage’s Taussig noted the fintech is wont to do.

merchant cash advance panel ftcInstead, industry panelists endeavored to explain to an audience — which included skeptical regulators, journalists, lawyers and critics — the precarious, high-risk nature of an MCA or factoring product, how it differs from a loan, and the upside to a merchant opting for a cash advance. (To their credit, one attendee told deBanked, the audience also included members of the MCA industry interested in compliance with federal law.)

A merchant cash advance is “a purchase of future receipts,” Kate Fisher, an attorney at Hudson Cook in Baltimore, explained. “The business promises to deliver a percentage of its revenue only to the extent as that revenue is created. If sales go down,” she explained, “then the business has a contractual right to pay less. If sales go up, the business may have to pay more.”

As for the major difference between a loan and a merchant cash advance: the borrower promises to repay the lender for the loan, Fisher noted, but for a cash advance “there’s no absolute obligation to repay.”

Scott Crockett, chief executive at Everest Business Funding, related two anecdotes, both involving cash advances to seasonal businesses. In the first instance, a summer resort in Georgia relied on Everest’s cash advances to tide it over during the off-season.

When the resort owner didn’t call back after two seasonal advances, Crockett said, Everest wanted to know the reason. The answer? The resort had been sold to Marriott Corporation. Thanking Everest, Crockett said, the former resort-owners reported that without the MCA, he would likely have sold off a share of his business to a private equity fund or an investor.

By providing a cash advance Everest acted “more like a temporary equity partner,” Crockett remarked.

In the second instance, a restaurant in the Florida Keys that relied on a cash advance from Everest to get through the slow summer season was destroyed by Hurricane Irma. “Thank God no one was hurt,” Crockett said, “but the business owner didn’t owe us anything. We had purchased future revenues that never materialized.”

The outsized risk borne by the MCA industry is not confined entirely to the firm making the advance, asserted Jared Weitz, chief executive at United Capital Service, a consultancy and broker based in Great Neck, N.Y. It also extends to the broker. Weitz reported that a big difference between the MCA industry and other funding sources, such as a bank loan backed by the Small Business Administration, is that ”you are responsible to give that commission back if that merchant does not perform or goes into an actual default up to 90 days in.

“I think that’s important,” Weitz added, “because on (both) the broker side and on the funding side, we really are taking a ride with the merchant to make sure that the business succeeds.”

NO APRFTC’s panel moderators prodded the MCA firms to describe a typical factor rate. Jesse Carlson, senior vice-president and general counsel at Kapitus, asserted that the factor rate can vary, but did not provide a rate.

“Our average financing is approximately $50,000, it’s approximately 11-12 months,” he said. “On a $50,000 funding we would be purchasing $65,000 of future revenue of that business.”

The FTC moderator asked how that financing arrangement compared with a “typical” annual percentage rate for a small business financing loan and whether businesses “understand the difference.”

Carlson replied: “There is no interest rate and there is no APR. There is no set repayment period, so there is no term.” He added: “We provide (the) total cost in a very clear disclosure on the first page of all of our contracts.”

Ami Kassar, founder and chief executive of Multifunding, a loan broker that does 70% of its work with the Small Business Administration, emerged as the panelist most critical of the MCA industry. If a small business owner takes an advance of $50,000, Kassar said, the advance is “often quoted as a factor rate of 20%. The merchant thinks about that as a 20% rate. But on a six-month payback, it’s closer to 60-65%.”

He asserted that small businesses would do better to borrow the same amount of money using an SBA loan, pay 8 1/4 percent and take 10 years to pay back. It would take more effort and the wait might be longer, but “the impact on their cash flow is dramatic” — $600 per month versus $600 a day, he said — “compared to some of these other solutions.”

Kassar warned about “enticing” offers from MCA firms on the Internet, particularly for a business owner in a bind. “If you jump on that train and take a short-term amortization, oftentimes the cash flow pressure that creates forces you into a cycle of short-term renewals. As your situation gets tougher and tougher, you get into situations of stacking and stacking.”

On a final panel on, among other matters, whether there is uniformity in the commercial funding business, panelists described a massive muddle of financial products.

“THEY’RE TELLING US THAT IT’S VERY DIFFICULT TO FIND EVEN SOME BASIC INFORMATION”

Barbara Lipman: project manager in the division of community affairs with the Federal Reserve Board of Governors, said that the central bank rounded up small businesses to do some mystery shopping. The cohort — small businesses that employ fewer than 20 employees and had less than $2 million in revenues — pretended to shop for credit online.

As they sought out information about costs and terms and what the application process was like, she said, “They’re telling us that it’s very difficult to find even some basic information. Some of the lenders are very explicit about costs and fees. Others however require a visitor to go to the website to enter business and personal information before finding even the basics about the products.” That experience, Lipman said, was “problematic.”

She also said that, once they were identified as prospective borrowers on the Internet, the Fed’s shoppers were barraged with a ceaseless spate of online credit offers.

John Arensmeyer, chief executive at Small Business Majority, an advocacy organization, called for greater consistency and transparency in the marketplace. “We hear all the time, ‘Gee, why do we need to worry about this? These are business people,’” he said. “The reality is that unless a business is large enough to have a controller or head of accounting, they are no more sophisticated than the average consumer.

“Even about the question of whether a merchant cash advance is a loan or not,” Arensmeyer added. “To the average small business owner everything is a loan. These legal distinctions are meaningless. It’s pretty much the Wild West.”

ftc office washington dcIn the aftermath of the forum, the question now is: What is the FTC likely to do?

Zullow, the FTC attorney, referred deBanked to several recent cases — including actions against Avant and SoFi — in which the agency sanctioned online lenders that engaged in unfair or deceptive practices, or misrepresented their products to consumers.

These included a $3.85 million settlement in April, 2019, with Avant, an online lending company. The FTC had charged that the fintech had made “unauthorized charges on consumers’ accounts” and “unlawfully required consumers to consent to automatic payments from their bank accounts,” the agency said in a statement.

In the settlement with SoFi, the FTC alleged that the online lender, “made prominent false statements about loan refinancing savings in television, print, and internet advertisements.” Under the final order, “SoFi is prohibited from misrepresenting to consumers how much money consumers will save,” according to an FTC press release.

But these are traditional actions against consumer lenders. A more relevant FTC action, says Pepper Hamilton attorney Dabertin, was the FTC’s “Operation Main Street,” a major enforcement action taken in July, 2018 when the agency joined forces with a dozen law enforcement partners to bring civil and criminal charges against 24 alleged scam artists charged with bilking U.S. small businesses for more than $290 million.

In the multi-pronged campaign, which Zullow also cited, the FTC collaborated with two U.S. attorneys’ offices, the attorneys general of eight states, the U.S. Postal Inspection Service, and the Better Business Bureau. According to the FTC, the strike force took action against six types of fraudulent schemes, including:

  • Unordered merchandise scams in which the defendants charged consumers for toner, light bulbs, cleaner and other office supplies that they never ordered;
  • Imposter scams in which the defendants use deceptive tactics, such as claiming an affiliation with a government or private entity, to trick consumers into paying for corporate materials, filings, registrations, or fees;
  • Scams involving unsolicited faxes or robocalls offering business loans and vacation packages.

“THIS IS A WAKE-UP CALL”

If there remains any question about whether the FTC believes itself constrained from acting on behalf of small businesses as well as consumers, consider the closing remarks at the May forum made by Andrew Smith, director of the agency’s bureau of consumer protection.

“(O)ur organic statute, the FTC Act, allows us to address unfair and deceptive practices even with respect to businesses,” Smith declared, “And I want to make clear that we believe strongly in the importance of small businesses to the economy, the importance of loans and financing to the economy.

Smith asserted that the agency could be casting a wide net. “The FTC Act gives us broad authority to stop deceptive and unfair practices by nonbank lenders, marketers, brokers, ISOs, servicers, lead generators and collectors.”

As fintechs and MCAs, in particular, await forthcoming actions by the commission, their membership should take pains to comport themselves ethically and responsibly, counsels Hudson Cook attorney Fisher. “I don’t think businesses should be nervous,” she says, “but they should be motivated to improve compliance with the law.”

She recommends that companies make certain that they have a robust vendor-management policy in place, and that they review contracts with ISOs. Companies should also ensure that they have the ability to audit ISOs and monitor any complaints. “Take them seriously and respond,” Fisher says.

Companies would also do well to review advertising on their websites to ascertain that claims are not deceptive, and see to it that customer service and collections are “done in a way that is fair and not deceptive,” she says, adding of the FTC investigation: “This is a wake-up call.”