Articles by deBanked Staff
Upstart is having a tough time in the current interest rate environment.
“In the third quarter, rates were at an all-time high in our marketplace, higher than we expected them to be, reflecting both decades high interest rates and significantly elevated risk in the consumer economy,” said Upstart CEO David Girouard during the company’s Q3 earnings call. “This is not a path we would have chosen and is obviously not constructive to our growth, but it reflects the reality of operating responsibly in this environment.”
The company won’t offer loans above 36% APR which means if the risk models indicate a rate higher than that would be necessary to move forward, they just decline the loan altogether. Notably, this and other economic factors has had a negative impact on their conversion rates.
“I think our [conversion rate] for this quarter was around 8.5%,” said Upstart CFO Sanjay Datta. “So meaning, of all applicants to fill in an application and submit, about 8.5% of them become funded loans. I think at our peak, that number was closer to 24%.”
And of all loans that get approved, only 1/3rd of them fund.
It’s been a rough couple of years for Upstart. The stock is down 92% from its all time high in October 2021. At the time the company was planning to expand into the small business loan market, which it finally did in June 2022. In the subsequent quarter it originated $9M in small business loans. But earlier this year the company suspended it entirely. At the time Girouard said, “This was a necessary step to ensure we can adequately resource the rest of the roadmap. We look forward to the day when we can resume our pursuit of the world’s best AI-powered business loan.”
It has not resumed business lending though it continues to cite in its quarterly earnings presentations that the addressable small business loan market numbers $895B.
Block’s Square Loan division chugged along in Q3, originating 120,000 loans for a total of $1.17B. The company’s origination figures in the first nine months of this year are basically on par with the origination figures of the last nine months of 2022. This suggests that Block is being cautious and conservative.
Block also said that loss rates on Square Loans “remained consistent with historical ranges.”
Square loan originations for the past six quarters:
Q2 2022: $1.01B
Q3 2022: $1.14B
Q4 2022: $1.16B
Q1 2023: $1.10B
Q2 2023: $1.10B
Q3 2023: $1.17B
Block did not talk about Square Loans on its earnings call except to say that it’s among a number of products it offers that serves as a retention tool and that in the future it will become more of an acquisition channel as well.
Shopify Capital is still experiencing an increase in business loan and merchant cash advance originations, according to the company’s latest Q3 earnings report. The company recently stopped disclosing precisely how much it is they are originating, however. It used to give precise numbers but starting this year Shopify now only cites its loans and merchant cash advance receivables balance.
“Transaction and loan losses decreased for the three months ended September 30, 2023 compared to the same period in 2022, primarily due to a decrease in losses related to Shopify Capital.”
So funding is up, losses are down, which is precisely the opposite situation that is going on at rival PayPal.
Shopify somewhat skimmed over its Shopify Capital business in its Q3 earnings announcements and on its official call except to state that it’s a strong segment that is growing.
PayPal’s merchant cash advance and small business loan originations in 2023 are down significantly from 2022. The company revealed that it had only purchased $1.3B in merchant receivables for the first 9 months of this year versus $2.3B over the same period last year.
In the earnings call, Acting CFO Gabrielle Rabinovitch said that the company is maintaining a “tightened origination strategy for the PayPal business loans portfolio.”
Charge-offs are up. “The increase in the charge-offs for the nine months ended September 30, 2023 compared to the same period of the prior year was due to the expansion of acceptable risk parameters in 2022, which resulted in a deterioration of the overall credit quality of loans outstanding,” the company disclosed.
Add Pennsylvania to the list of states with commercial financing bills. Last week, Representative Kristine C. Howard introduced HB1791 and HB1972, which would outlaw Confessions of Judgment provisions in contracts and require mandatory disclosures to businesses respectively. In the latter, commercial financing providers would be required to disclose the total amount of funds provided, the total dollar cost of the financing, the term or estimated term, the payment method/frequency, prepayment policy, and APR.
The bills were expected. Rep. Howard pledged to introduce them back in February when she circulated a memo titled “Protecting Small Businesses from Predatory Lending.“
Enova originated $783M in small business loans in Q3, which is up from $770M in Q1 and $712M in Q2. Overall company profitability was slightly down but mainly because they increased marketing spend later in the quarter in which there was not enough time to also experience the corresponding revenue increase.
Enova also recorded some slightly higher-than-expected chargeoffs that came from their 2nd half 2022 smb loan vintages.
“As you would expect, our underwriting models adjusted based on this data and vintages since January of this year are back in line with our expectations,” said Enova CEO David Fisher on the earnings call. “But since there is a 9 to 12-month emergence period for charge-offs in our small business products, charge-offs from those second half 2022 vintages were at their peak in Q3 of this year.”
Given the current interest rate environment, the call drew out some insightful information about the small business loan market. Bullet points below:
- “…while prime and super prime borrowers are facing higher interest expense due to the increase in the Fed funds rate, we have not raised our pricing.” – Fisher
- “I think the competitive environment is still pretty benign, like we’ve been talking about for a while. Nothing new on the small business side. I think we’ve seen, as we talked about, competitors struggle with liquidity, also a couple move more towards the prime space in SMB.” – Fisher
- “On the small business side, still a lot coming through the wholesale channel through ISOs, but we continue to grow our direct channel. It’s a very fast-growing channel for us” – Fisher
- “So if the consumer falls on their face, small businesses are in big trouble. We saw that during COVID, but if the consumer is still spending and doing well, the small businesses tend to be a big beneficiary of that incremental spend.” – Fisher
- “While there’s a lot of uncertainty in the economy today, both internal and external data lead us to believe that both our consumer and small business customers are navigating it well.” – Fisher
- “Inflation continues to moderate, while the labor market and wage growth continue to be very strong.” – Fisher
- “To be clear, Enova overall is in great shape, and we’re feeling good about Q4 and next year.” – Fisher
NetSuite announced a series of new product innovations last week, including one named NetSuite Capital. NetSuite Capital is an embedded service that allows NetSuite customers to “accelerate payments and increase working capital by reviewing, pricing, and submitting invoices from accounts receivable for immediate payment.”
NetSuite’s market is large. Over 25,000 businesses use it to process $1 trillion in invoices annually.
The technology that makes NetSuite Capital possible is powered by Raistone, a b2b finance payments company that has landed big partnerships including Mastercard, SAP, C2FO, and more. According to Raistone, “4 million companies submit and receive $6 trillion in invoices annually.”
NetSuite is a cloud ERP system that was acquired by Oracle in 2016. Unlike Quickbooks which is mainly an accounting software for small-to-midsize businesses, NetSuite is primarily for larger businesses that are looking for an all-in-one ERP solution.
When the SBA revealed it had charged off $220M worth of covid-related EIDL funds before the first payment on any of those loans was even due, it suggested that things were not going to go well. Payments on just the earliest issued loans started at the end of last year and by March the SBA made a shocking disclosure. $62 billion worth of loans were already delinquent. This number is all the more alarming when put into the perspective that there were only $380B in EIDL funds loaned total. That means that 16% went bad straight out of the gate.
Oh, and this number is growing and the SBA is feeling overwhelmed to the point where they’re not even trying to collect on many loans.
“…the SBA had already decided that it would not take the most aggressive actions possible to pursue borrowers who received loans worth $100,000 or less,” the Washington Post reported.
This strategy has not been well received by Office of Inspector General Hannibal Ware. In a letter Ware wrote to SBA Administrator Isabella Guzman on September 29, he said, “SBA’s decision to cease collections risks violating the Debt Collection Improvement Act of 1996, which prohibits ending collections on fraudulent, false, or misrepresented claims, because SBA OIG and other oversight agencies are continuing to work on identifying COVID-19 EIDL fraud that may not have been identified by the agency. It is also unclear whether SBA plans to end active collections on loans for borrowers who received multiple COVID-19 EIDLs of $100,000 or less that, when combined, exceed $100,000.”
Unlike PPP loans, which if not forgiven had to be repaid in full within two years, the EIDL program extended very generous terms with a 30 year repayment schedule.
The OIG has asked the SBA to evaluate the possibility of selling a portion of its EIDL debt to maximize the return to taxpayers.