Articles by Ed McKinley
The LendIt Story
February 12, 2017
The LendIt Conference was supposed to be a smallish local meetup for New York-based members of the online lending community. But founders Jason Jones and Bo Brustkern soon discovered they had the makings of a big annual industrywide national convention. And before long, they found themselves replicating their successful American show on other continents.
To understand how the trade show was born and how it’s matured, flash back about seven years. In 2010, Jones and Brustkern were putting together venture capital deals when they happened onto the fledgling peer-to-peer lending movement. “Consumer credit was something we weren’t all that knowledgeable about, but we could see the market was large,” recalls Jones. “There was a clear opportunity that was structural in the market, and there were stable, consistent returns.” So the two of them launched one of the first P2P funds.
Their lending business soon took off, but Jones and Brustkern felt they were working in a void. The industry lacked community, and they decided to do something about it. Jones contacted his friend, Dara Albright, who had been organizing a series of crowdfunding conferences for Wall Street starting in mid 2011.
To heighten the credibility of the new confab, Jones, Brustkern and Albright decided to seek the help of Peter Renton. They didn’t know Renton personally but considered him “the voice of the industry,” Jones says. Renton had nurtured and sold off two printing businesses and used the proceeds to take up online lending as a hobby. He had also launched the Lend Academy in 2010 to teach the world about peer-to-peer lending. Somehow, he had also found the time to develop a following for himself as a blogger.
In early January of 2013, Jones and Albright cold-called Renton to gauge his interest in putting on a show. As fate would have it, Renton had just made a New Year’s resolution to launch a conference for lenders and was receptive to joining up. Together, they put a plan in action.
The originators put up their own money and worked together daily from January to June of 2013, when the first show convened. They secured space that would contain 220 people and calculated their break-even point as 200 attendees. “This was never intended to be a profitable enterprise,” Jones says of those early days. “This was something we all wanted to do for the community. We thought that if we wanted it, others would want it.”
More than 400 people registered for that first conference. “We had a line literally out the door,” Jones notes. “We had to shut off registration. We ended up squeezing about 375 people into that first event. It was completely shocking to us.” From the beginning, attendees came from all over the world. “That’s when I learned China had a P2P industry,” Jones says.
After the initial event, Jones, Brustkern and Renton formed a unified company. Renton brought in Lend Academy, while Jones and Brustkern added their investment fund. The conference also became part of the united company. Ever since, a holding company has owned all three businesses. Dara went on to launch Fintech Revolution TV and continues to support LendIt.
From the initial attendance of 375, the U.S. conference grew to 975 attendees in 2014, 2,500 in 2015, 3,500 in 2016 and a projected 5,000 for this year. About 33 percent of attendees come from the fintech industry, 23 percent are investors, 23 percent are service providers, 14 percent are banks and 2 percent come from government, the media and other backgrounds, Jones says. At first, many of the attendees come from the ranks of CEOs and managing partners, but that’s changing as the industry comes to view the conference as an annual convention where lower-ranking members of an organization can learn about the business, he notes.
Meanwhile, the exhibition floor is becoming an increasingly important component of the show. The gathering attracted 18 exhibitors in 2013, followed by 47 in 2014, 112 in 2015, 177 last year and an expected 210 this year. “We’re transforming from a conference-led event to an expo-led event,” Jones says. This year, exhibitor booths will occupy a 120,000 square-foot hall in New York’s Jacob K. Javits Convention Center.
The U.S. LendIt conferences alternate between San Francisco and New York City, renting larger spaces as the show has grown, Jones explains. Two years ago, the gathering seemed cramped in the gigantic New York Marriott Marquis near Times Square, he says, necessitating this year’s move to the Javits Center. Javits is designed for conventions with at least 10,000 attendees so the show is a little small for that venue, he admits. But the facility could become LendIt’s long-time New York home as growth continues, he predicts.
Jones traces some of the growth in exhibitors to the expansion of the fintech industry. “You have a meeting of the start-ups with the more traditional players who are rethinking their businesses and how to apply the new technology that’s being developed into their businesses,” he says.
Conferences that compete with LendIt in the fintech category are proliferating because of the nature of industry, in Jones’ view. As soon as fintech companies are launched, the internet quickly makes them national or even international in scope, he says. At the same time, the anonymity of cyberspace creates a need for gatherings that provide face-to-face meetings, he maintains. “They live online,” he says. “The spend their year online so there is a need for a convention to meet with their peers, their clients, their service-providers, their customers, their suppliers. There is a need for that physical connection.”
The increase in fintech conferences is also driven by content-related companies that provide articles on fintech innovation. Those sites have regarded conferences as money-makers that complement their journalistic endeavors, Jones says. For example, TechCrunch, an online publisher of technology industry news, puts on the TechCrunch Disrupt conferences in San Francisco, New York City, London and Beijing. In another example, Business Insider conducts the IGNITION conference.
Those forces – the internet, globalization and web-based publishing – are making themselves felt in the convention business in general, not just in fintech, Jones notes. Event-related companies trade at roughly 12 times EBITDA (earnings before interest, tax, depreciation and amortization), he says, characterizing the convention business as “a very healthy category of our economy.”
Still, the fintech field’s crowded with more than 30 conferences, but LendIt is succeeding because of its early start and an emphasis on community, according to Jones. “We come from the industry,” he contends. “People are happy with what we can produce. They love our content so they come to learn.” Because the conference has become established, the media outlets focus on covering it, which encourages businesses to use it as a stage for introducing products or announcing mergers and acquisitions, he maintains.
Jones views LendIt and Money20/20 as the largest pure-play fintech conferences. The latter, which attracts 11,000 attendees, focuses on payments and contains a “layer” of fintech, while LendIt specializes in lending and likewise offers a “layer” of fintech, he says. Payments and lending represent the two biggest categories in fintech, so the structure of the shows makes sense, he suggests. By chance, Money20/20 occurs in the fall and LendIt takes place in spring, creating what he considers a “nice balance” that encourages prospective attendees to go to both shows.
Finovate holds a rival fintech conference that focuses more narrowly on innovation than do the LendIt and Money20/20 shows, Jones says. A competing bank securitization conference offers information on lending but doesn’t address fintech in great detail, he says.
While LendIt has been coming of age in the U.S., it’s also gained siblings in Shanghai and London. The Chinese edition of the show, which made its debut in 2014, ranks as the largest fintech show in Asia. The Chinese fintech market has grown to at least five times the size of any other market in the world, and it’s home to four of the world’s five largest fintech companies, Jones says. “We were completely blown away,” he says of learning about the industry during a visit to China.
Despite the language barrier and the challenges of dealing with an unfamiliar culture, LendIt has managed to prosper in China. Through a joint venture with a local financial think tank, LendIt helped produce annual Chinese events known as the Bund Summit for two years with attendance capped at 500. For the third year, LendIt parted ways with its partner and recast the show as a larger event. After the change, the confab, now called the Lang Di Fintech Conference, attracted 1,200 attendees, making it China’s largest. “There’s a ton of future opportunity,” Jones predicts of the China endeavor. “We want to be the annual convention for the Chinese fintech industry.”
Although it’s difficult to set up operations in China, cooperation has prevailed there in at least some areas. “The government has been quite supportive,” Jones says of of Chinese officials. “They appreciate what we’re trying to do there.” In January, LendIt launched its Chinese language daily news feed.
Thousands of miles away, the European-based LendIt confab ranks second in size on that continent only to the European version of Money20/20, Jones says. Attendance at the London-based LendIt show numbered 450 in 2014, which was its initial year. It climbed to 800 in 2015 and reached 925 last year.
Putting on the European event requires much less effort than the Asian version because it’s almost an extension of the U.S. original, he says. It’s dominated by firms from the United Kingdom but draws a smattering of companies from other European nations. Crossing borders presents challenges for European fintech companies, which keeps the industry’s companies smaller there than in the U.S. and China, but that may change, he believes. “There’s a lot of innovation there, but they still have a ways to go,” he says.
To handle its far-flung operations, LendIt relies on 20 full-time employees, 11 contractors and 10 people working in a joint venture in China for a total of 41 staff members. “These events are incredibly large shows, and we constantly feel understaffed,” Jones says. That feeling prevails despite recent additions to the staff, he notes.
And additional opportunity beckons in myriad locations. “The challenge is, do you have a bunch of conferences all over the world, or do you do a beachhead and pull people to those three events?” Jones wonders aloud when asked about the future. “For the moment, we have made the strategic decision to stick with these three events and go deeper with them. But there are so many opportunities all around the world. We’re constantly being asked to come to different countries.” Then, too, LendIt could convene smaller, one-day events around the glove as feeders to the three main conventions, he allows. “That’s something we’re batting around now.”
The established two-day conferences could also grow into three-day affairs – but not right away, Jones suggests. “We’re totally running out of time,” he says of trying to cram in all the speakers and exhibitors that LendIt would like to present. Stretching the format could create conflicts because some participants attend other events immediately before or after LendIt.
Notable LendIt speakers have included Larry Summers, who’s served as Harvard president and U.S. Treasury Secretary; Karen Mills, former administrator of the U.S. Small Business Administration; John Williams, president and CEO of the Federal Reserve Bank of San Francisco; and Peter Thiel, venture capitalist and member of the Trump transition team. This year, attendees can look forward to meeting the robot that represents Watson, the IBM computer. Watson will take the stage to field questions about fintech. For Jones, however, creating a conference isn’t just about the big-name speakers be they human or mechanical. “People who are lesser-known can be really fascinating,” he says.
Whoever handles the speaking duties, the LendIt Conference executives vow that they’re in it for the long run as the fintech industry’s annual convention during both boom times and economic slumps. As Jones puts it: “We want to be a reflection of our industry.”
A True Rapid Advance For Mark Cerminaro
December 16, 2016
In the 1999 film “Any Given Sunday,” Al Pacino plays a pro football coach whose obsession with winning has torn apart his family. He’s also plagued by a meddlesome team owner, challenged by an offensive coordinator who’s after his job, and vexed by a talented but narcissistic backup quarterback. But none of that stops the coach from reaching deep inside to deliver a stirring halftime pep talk to his dispirited losing team. Assuring his players that life and football are both games of inches, he beseeches them to look into the eyes of the men around them. “You’re going to see a guy who will go that inch with you,” he declares. “Either we heal now as a team or we will die as individuals.” The players rally and explode onto the field.
It’s a scenario the sales staff can’t get enough of at RapidAdvance, a Bethesda, Md.-based alternative small-business finance company with more than 200 employees. Mark Cerminaro has screened a clip of the scene countless times in a company conference room to fire up his crew. Salespeople emerged from those meetings eager to make that extra phone call, provide the telling detail on an application or do whatever else it would take to taste the victory of making the sale. For Cerminaro, the movie and the sales meetings embodied his penchant for winning ethically through teamwork, dogged persistence and great customer experience. That credo has helped propel him to top management at RapidAdvance and has earned him accolades from once-skeptical financial services peers.
Cerminaro’s story begins in his hometown of Highland Park, N.J., where he experienced a small-town vibe but enjoyed easy access to New York City, Philadelphia and the Jersey Shore. He graduated in a class of 85 students from the local public high school, playing varsity football, basketball and baseball. Summers, he worked construction, did landscaping, delivered flowers and umpired Little League. “It was a great place to grow up,” he says.
In high school, Cerminaro sometimes went along for the ride when his sister, who was five years older, was choosing a college. On a visit to Georgetown University in Washington, D.C., Cerminaro stood in the student center and gazed out at the campus. “I’m going to come here and play football,” he told himself.
He made good on that vow when his high school football team made a reputation for itself, and Georgetown was among the schools that recruited him. Besides, it made sense to go there because he was interested in studying politics and going to law school. Growing up with a father who was chairman of the local Democratic Party, Cerminaro had his eye on eventually becoming governor of New Jersey.
Playing for the NFL on the way to the governor’s mansion seemed like a good idea, too. But Cerminaro, a quarterback, blew out his throwing arm two years into his collegiate football career. His dreams of making the pros died, but that left more time for academics. He plunged into a series of four rigorous internships, three of them in politics. He served two in the Clinton White House and one on Capitol Hill with Sen. Robert Torricelli, D-N.J. He fondly recalls talking to President Bill Clinton for five minutes before a state dinner. Then two hours later, after spending time with heads of state, the President called out, “There’s Mark, my fellow Hoya.” Cerminaro will never forget it.
In the end, however, the fourth internship won out. Although Cerminaro hadn’t studied business or finance too much, he landed an internship in the local Washington, D.C., office of Morgan Stanley. If nothing else, it would help him manage his investments some day, he reasoned. However, he soon approached the operations manager and some senior brokers and offered to take on duties they didn’t want to fulfill. He had decided to learn about operations, and taking on extra work without additional compensation was in line with his new habit of figuring out what steps would take him where he wanted to go in life.
Cerminaro earned his managerial license with Morgan Stanley and accepted a job as associate branch manager in the Washington, D.C., office, managing and training new financial advisors. He considered the position great exposure to sales, management, operations and compliance – “elements that have paid dividends in the growth of my career,” he notes.
Early in Cerminaro’s tenure at Morgan Stanley, the company sent him for training with about 300 other new employees at 2 World Trade Center in Manhattan. The date was Sept. 10, 2001. When the trainees reported to the office the next day, they were in a 64th-floor conference room when they heard an explosion and saw shreds of paper floating past the windows. They didn’t realize yet that a terrorist-controlled jetliner had hit next door at 1 World Trade Center.
As they evacuated down a stairwell, the trainees heard and felt the concussion of the second plane that hit their building. “I’m 22 years old and I may be about to die,” Cerminaro remembers thinking. “Make sure my family knows I love them,” he prayed. He made it out and was greeted with smoke, debris, the flashing lights of emergency vehicles and panic in the streets. He walked to a restaurant some family friends operated in Little Italy and borrowed a working phone to call his family in New Jersey and let them know he was OK.
Returning to the D.C. office of Morgan Stanley, Cerminaro got back to work. He loved the entrepreneurial spirit at the company, but as the years passed he realized he was unlikely to amass enough power in the giant firm to dictate how it would operate, grow and change. So he was interested when someone he knew at Morgan Stanley told him about RapidAdvance, then a two-year-old company with about 20 employees. “I saw the opportunity to be part of building a company – that’s what drew me to RapidAdvance,” he recalls.
In 2007, Cerminaro interviewed with Jeremy Brown, who was RapidAdvance’s CEO at the time and has since advanced to chairman. “It was apparent that Mark had a well thought-out, well-articulated plan for sales,” Brown says of his first impression. “He had a presence about him, a command that said this guy a real leader – somebody who could make a long term component of the company.”
Cerminaro joined RapidAdvance as national sales director and began building a sales structure and team based on some of the elements of Morgan Stanley’s sales model. Developing KPIs, or key performance indicators, helped him measure progress. “You had to roll up your sleeves and get involved in every aspect of things,” he said of working for a startup in a fledgling industry. The company’s outbound call center came up with sales leads, and he cut and pasted them from an Excel spread sheet and divvied them up among the five or six account executives.
Cerminaro wanted to teach that handful of salespeople to function as business advisors and help them become the single point of contact for clients. His salespeople guided small-business owners through the application process and stayed in contact with them after the sale. He emphasized doing right by customers, teammates and the company as a whole. It was a vision that inspired the team.
“Mark was a great mentor and provided me a lot of guidance and tutelage over the years,” says Devin Delany, who started as an account executive at RapidAdvance and has moved up to director of sales. “His real mission was to create a sense of family and he executed on that to the fullest extent, creating a close knit team of upward of 40 folks who really care about one another.”
That sales “family” used dialogue marketing to refocus attention on prospects who had fallen out of the sales cycle. In those days they used a product-driven sales pitch based on merchant cash advances. Third-party partners included credit card processors and credit card ISOs. Brokers came onto the scene later.
Soon after Cerminaro arrived at RapidAdvance, the financial crisis struck. The company managed to navigate the troubled times and emerged with improved underwriting skills, a better understanding of leading indicators and a truer grasp of how its portfolio performs. Something else happened, too.
As traditional lines of credit dried up during the recession, small businesses that didn’t accept credit cards began to search for working capital. In response, Cerminaro, Brown and Joseph Looney, RapidAdvance’s chief operations officer and general counsel, sat down and outlined a plan to offer small-business loans as well as MCAs. “That effort really redefined who RapidAdvance was,” Cerminaro says of the new loans. “We went from a single-product company to now being more of a solutions-based company,” he maintains. “We were able to shift from selling a product to doing needs-based analysis with our clients and focusing on what was the right solution for them.”
Cerminaro found it exciting to develop the loan program and oversee sales, but he was looking for more. He turned part of his attention to business development and even expanded his purview to include marketing. The company was thinking along the same lines. In 2010, RapidAdvance promoted him to senior vice president, sales and marketing. “As the company has grown we have had different needs, and we leaned on Mark and his skill set every time we made a change,” Brown says. “Every time we made a change he has stepped up and done what’s asked of him.”
Producing one of the industry’s first national television ad campaigns highlighted Cerminaro’s period as senior vice president. “We were the pioneers in being able to market through that medium,” he says. “It was absolutely scary at the same time. It was a massive investment for us and we had no idea whether it would pan out.” The sales staff were waiting in anticipation when the phones began ringing after the public saw the commercial. “The original spot we put together still tests well and drives a lot of traffic,” he notes. Viewers find a tune featured in the ad sticks in their minds and can’t help humming it – sometimes when they’d prefer they didn’t, he adds.
Then came another promotion. In 2013, just before Detroit-based Rockbridge Growth Equity LLC acquired RapidAdvance, Cerminaro was named chief revenue officer and became responsible for all revenue-generating activities and all of the company’s front end efforts. The company had grown significantly over the years, but the merger increased financial backing and thus accelerated growth, he says. For him, that meant pursuing a new type of partner company – asset-based lenders and factoring companies. It wouldn’t be easy. “The traditional lending market had a lot of misconceptions about our industry,” Cerminaro admits. “A lot of people in that business were very critical.”
But Cerminaro made the rounds of trade shows and visited conference rooms until he succeeded in winning the hearts of bankers, according to Will Tumulty, RapidAdvance’s CEO. “Mark and his team have developed partnerships in the commercial lending space,” Tumulty says. “There are a number of companies that have historically viewed working-capital funding as a competitor. We don’t see ourselves competing with those companies. Mark and his team have worked with those companies to get merchants what they need.”
As a testament to Cerminaro’s success in that quest, the Commercial Finance Association named him to its 2016 list of “40 under 40” achievers. He was the only person from alternative small-business funding to make that venerable list of prominent young lending executives. He helped spur his company on to other awards, too. The RapidAdvance Bethesda office was chosen for The Washington Post Top Workplaces 2016 list, and the RapidAdvance Detroit office made the list of 101 firms recognized as Metro Detroit’s 2016 Best and Brightest Companies to Work For.
Meanwhile, Cerminaro was successfully courting mega retailers, says Brown. When the possibility of becoming a partner with Office Depot arose, Brown felt hopeful but remained skeptical because of the long lead time required to convince so many executives in such a large corporation. “But mark was dogged,” he says. “It took him probably a year to land and close the deal and negotiate the agreement and sign the account. He went to countless meetings down in Florida. He participated in endless conference calls, but mark got the deal done. It’s a relationship we’re proud of, and he is singularly responsible for closing that deal.”
In those encounters with Office Depot execs, Cerminaro displayed savvy and professionalism, Brown says. They’re traits that will continue to pay off not only for RapidAdvance but for the entire industry, maintains RapidAdvance’s Looney. “He’s out there with lots of big banks and other potential partners,” says Looney. “He’s a good face for the industry.”
For Cerminaro, it’s satisfying to see RapidAdvance become all he dreamed it could be. But that still comes in second for him and differentiates him from the coach played by Al Pacino. Cerminaro’s the kind of guy who asked his father to be his best man and now has a wife and two sons of his own. “Your family and your loved ones are by far more important than anything else in your life,” he says.
Sunshine and Deal Flow: Who’s Funding in Puerto Rico?
September 1, 2016
Lots of small businesses need capital in Puerto Rico and not many companies are trying to provide it. Combine that with the island’s tax incentives, tourist attractions and gaggle of ambitious entrepreneurs, and America’s largest unincorporated territory can seem like an archipelago of opportunity for the alternative small-business finance community – a virtual paradise.
But for alt funders, the sunshine, sandy beaches, swaying palms, picturesque rocky outcroppings, rich history and renowned cuisine can’t change two nagging facts about this tropical commonwealth that 3.4 million people call home. Alternative finance remains largely unknown on the island, and it’s difficult if not impossible to split credit card receipts there.
Let’s start with the good part. “If you call a restaurant in Los Angeles at 2 o’clock in the afternoon, you’re the 15th person to call them that day, but if you’re calling a business in Puerto Rico, you might be the only one,” says Andrew Roberts, director of partnership development for Merchant Cash Group, which funds some deals on the island. “So it’s not the same cutthroat competitiveness that we have here.”
But consumers in Puerto Rico’s tourist areas rely on PIN debit cards, which don’t qualify for split funding between merchants and finance providers because the cards don’t have Visa or MasterCard logos and thus merchants can’t run them as credit transactions, Roberts says. Besides, processors on the island don’t want to split the revenue from credit card transactions between funders and merchants, either, Roberts notes. “If there’s a processor in Puerto Rico that will split fund, I haven’t been unable to find them,” he says. “Believe me, I have looked.”
The two main processing platforms on the island, Global and First Data, require ISOs to carry 100 percent of the risk on a split, according to Elevate Funding CEO Heather Francis, who was involved in the island market at another company before taking her current job. That’s why split remittance “remains almost nil” in Puerto Rico, she says.
Splitting funds by using a “lockbox” – which works like an escrow account and distributes a certain percentage of receipts to the merchant and the rest to the funder – doesn’t provide a solution because banks in Puerto Rico decline to use the option, Roberts maintains. That’s why he advises that it’s easier to offer ACH-based products on the island.
Merchants on the island have to meet the same requirements for ACH that apply on the mainland, Roberts notes. That includes a reasonable number of checks returned for non-sufficient funds and a reasonable number of negative days. “The underwriting procedure on the island is pretty much the same as it is here,” he says.
Perhaps the difficulties of setting up the split in Puerto Rico shouldn’t cause any uneasiness about entering the market because the bulk of alternative funding on the island relies on daily debits—just as it does on the mainland, Roberts says. Still, he notes that some merchants in both places may qualify for split funding but fail to measure up for daily debit.
Though merchants and funders have those commonalities, the banking systems differ on the mainland and on the island. Banco Popular, which has held sway in Puerto Rico for nearly 120 years, controls much of the island’s banking and inhibits the growth of alternative funding for small businesses there, Francis says. Still, Puerto Rican merchants should have some familiarity with alternative finance or high-fee products because of the island’s high concentration of title loan companies, she notes.
Similarities and and differences aside, the Puerto Rican market provides a little business to some mainland alternative finance companies. United Capital Source LLC, for example, has completed five deals for small businesses on the island, says CEO Jared Weitz. Companies can provide accounts receivable factoring there, he says.
Alternative funding has yet to post runaway growth in Puerto Rico, Weitz says, because it’s not marketed strongly there, only a few mainland funders are willing to do business in Puerto Rico, the range of products offered there is limited, and small business remains less prevalent there than on the mainland.
But a handful of mainland-based companies have been willing to take on the uncertainties of the Puerto Rican market, and Connecticut-based Latin Financial LLC serves as an example of an ISO that has enthusiastically embraced the challenge. The company got its start in 2013 by offering funding to Hispanic business people on the mainland and began concentrating on Puerto Rico early in 2015, says Sonia Alvelo, company president.
Alvelo built a strong enough portfolio of business on the mainland that funders were willing to take a chance on her and her customers in Puerto Rico. Latin Financial now maintains a satellite office on the island, and the company generates 90 percent of its business there and 10 percent on the mainland.
Latin Financial has a sister company called Sharpe Capital LLC that operates on the mainland, says Brendan P. Lynch, Sharpe’s president. Alvelo describes Lynch as her business partner, and he says he’s started several successful ISOs. He credits her with helping Puerto Rican customers learn to qualify for credit by keeping daily balances high and avoiding negative days.
“It’s a small company with a big heart,” Alvelo says of Latin Financial. She was born in Puerto Rico and came to Connecticut at the age of 17. “For me it’s home,” she says of the island. She’s realizing a dream of bringing financial opportunity to business owners there.
To accomplish that goal, Alvelo spends much of her time teaching the details of alternative finance to Puerto Rico’s small-business owners, their families, their accountants and their attorneys. “You want to make sure they understand,” she says, adding that the hard work pays off. “My clientele is fantastic,” she says. “I get a lot of referrals.”
Latin Financial started small in Puerto Rico when a pharmacy there contacted them to seek financing, Alvelo says. It wasn’t easy to get underway, she recalls, noting that it required a lot of phone calls to find funding. Soon, however, one pharmacy became three pharmacies and the business kept growing, branching out to restaurants and gas stations. Already, some merchants there are renewing their deals.
Growth is occurring because of the need for funding there. Puerto Rican merchants have had the same difficulties obtaining credit from banks as their peers on the mainland since the beginning of the Great Recession, Alvelo says. “It’s the same story in a different language,” she notes.
Speaking of language, Alvelo considers her fluency in Spanish essential to her company’s success in Puerto Rico. “You have to speak the language,” she insists. “They have to feel secure and know that you will be there for them,” she says of her clients. Roberts agrees that it’s sound business practice to conduct discussions in the language the customer prefers, and his company uses applications and contracts printed in Spanish. At the same time, he maintains that it’s perfectly acceptable to conduct business in English on the island because both languages are officially recognized.
People in Puerto Rico have been speaking Spanish since colonists arrived in the 15th Century, and English has had a place there since the American occupation that resulted from the Spanish-American War in 1898. Still, more than 70 percent of the residents of Puerto Rico speak English “less than well,” according to the 2000 Census, but that’s changing, Alvelo says.
Whatever the linguistic restraints, the products Latin Financial offers in Puerto Rico have been short-term, most with a minimum of six-month payback and a maximum of 12 months, but Alvelo hopes to begin offering longer duration funding. She also believes that split funding will come to Puerto Rico. “It’s in the works,” she asserts, noting that she is campaigning for it with the banks and processors.
At the same time, mainland alternative finance companies are learning that the threat of Puerto Rican government default does not mean merchants there don’t deserve credit, notes Lynch. “Just because the government is having trouble paying its bills,” he says, “doesn’t mean these merchants aren’t successful. The island is full of entrepreneurs.” In fact, many of Puerto Rico’s merchants use accountants and keep their business affairs in better order than their mainland counterparts do with their homemade bookkeeping.
Alvelo also knows many merchants there are worthy of time and investment. She strives to listen to her customers when they express their needs and then help them fill those needs. “I’m very, very proud to be doing this in Puerto Rico now,” she says.
Is The “Uber” Of Merchant Cash Advance Actually Uber?
August 15, 2016
If imitation is the sincerest form of flattery, Uber is paying the alternative small-business finance industry a high compliment. The San Francisco based ride-sharing company is offering its drivers some programs that closely resemble merchant cash advances.
New drivers receive part of the advance before they pick up their first fare and the rest soon after that initial ride. Clearbanc, which bills itself as a financial services provider for “the self-employed, freelancers, independent contractors and entrepreneurs,” is putting up the money. As with a merchant cash advance, drivers can choose to pay back the Advance Pay funds by directing a portion of their weekly earnings to Clearbanc, according to a blog by Rachel Holt, an Uber regional manager. In the test the companies are limiting the automatic deductions to no more than 50% of the driver’s weekly paycheck, she said. Participating drivers can still work whatever hours they choose.
If $1,000 isn’t enough to put an aspiring Uber driver on the road, the company has another plan. Through the XChange Leasing program Uber automatically deducts car lease payments from drivers’ weekly income, a company spokesperson said. A number of financial institutions work with the ride-sharing company in the program, according to the Uber website.
Applicants have to agree to what the company calls “a routine screening.” If they’re approved they receive a list of participating local car dealers. The leases are up to three years for new cars valued at as much as $20,000 and used cars worth up to $18,500. Cars can’t be more than seven years old or have more than 75,000 miles. They have to have four doors and five seat belts. Drivers put up a $250 security deposit when they receive the leased car. Typically, they might have 156 payments of $115 each for a 2013 Toyota Corolla or 156 payments of $143 each for a 2016 Corolla. California requires rideshare insurance, and Uber provides it through Farmers Insurance or Mercury Insurance.
Unlike many standard automobile leases, XChange Leasing does not have mileage caps, and drivers can exit the program by giving two weeks notice and paying a $250 “disposition fee,” essentially forfeiting their security deposit, the Uber spokesperson said. For drivers who prefer to own their vehicles, Uber has negotiated fleet discounts with a long list of car manufacturers, the company said. The deals can reportedly bring drivers thousands of dollars in savings over the sticker price of a car. Meanwhile, Uber is testing another foray into financial services. Drivers can use “Instant Pay,” an Uber debit card from Green Dot’s GoBank division, to collect the cash immediately after finishing a ride, according to Holt. The cards don’t require a minimum bank balance and don’t carry any fees, she said.
The company seemed upbeat about its new offerings. “We look forward to seeing how these pilots progress and to making innovative payment solutions more widely available to drivers soon,” Holt said in her blog of Advance Pay and Instant Pay.
But some Uber drivers don’t share that optimistic view. In fact, Advance Pay and XChange Leasing have both come under fire for what critics view as disadvantages for drivers and for the economy as a whole. Some have gone so far as to label the lease terms practices as predatory.
Uber offers Advance Pay only to new drivers, and they could receive just about as much as a signup bonus, according to a blog on UberPeople.net, a website for drivers. The author of the blog speculated that the company is using Advance Pay to eliminate the signup bonus and also to do away with its bonus for referring new drivers.
Drivers have to pay off the advance in 15 weeks, according to the UberPeople blogger. At the rate of 30 cents per mile that drivers receive in Detroit, paying back the $1,000 would require logging 3,333 miles, approximately the distance from New York to California, the blogger lamented. However, Uber pays a lower rate in Detroit than in most cities, according to statements from other drivers.
And although Advance Pay carries no interest, Clearbanc charges drivers a fee of up to $50 if they fail to pay off the advance in 15 weeks, according to published reports.
Complaints also arise with XChange Leasing, according to a website called therideshareguy.com. Dealers sometimes refuse to provide used cars for the program because they can make more money with new cars, according to the site.
If the dealers are willing to provide used cars, problems sometimes surface because XChange Leasing prohibits leasing a used vehicle for more than 105% of its book value, the site said. Cars with a reputation for reliability, such as Toyotas and Hondas, often sell for more than book value, according to the site.
Drivers have reported elsewhere that they feel trapped by the leases, many of them continuing to work for Uber just to make the payments. However, the Uber spokesperson maintained that drivers can leave the program anytime after the first 30 days. Some critics bemoan the spread of subprime auto leases, which they have compared to the subprime mortgage debacle that contributed to the Great Recession that struck in 2008. Uber prefers comparisons to Amazon, a company that has expanded by continuing to enter new businesses.
In general, Uber has met resistance repeatedly from traditional taxi drivers who find their livelihood threatened by the ride-sharing service. Taxi drivers around the world have chided Uber for failing to pay taxes, obtain taxi licenses and uphold safety standards.
Complaints aside, Uber continues to grow prodigiously and now serves riders in more than 400 cities in 70 countries, according to metrics supplied by the Uber spokesperson. Seventy-five percent of Americans live in counties where Uber operates, the spokesperson added. Globally, Uber employs 7,000 workers and 1 million drivers, the company said.
The word “uber” is defined as “denoting an outstanding or supreme example of a particular kind of person or thing, according to a dictionary entry the company sometimes cites. In German, “uber” means “across” or “above.” Many potential riders know the word “uber” from the phrase “Deutschland, Deutschland uber alles,” a line from the German national anthem that translates as “Germany, Germany above all else.” The words to the song were written during Germany’s unification, and the lyrics refer to the idea that allegiance to the nation should trump loyalty to local kingdoms. Maybe Uber should stick with its own definition of “uber.”
FIRE DRILL IN ILLINOIS: BUSINESS FUNDING COMPANIES TARGETED IN REPRESSIVE BILL
June 30, 2016* Update 6/30 AM: Sen. Jacqueline Collins, D-Chicago is expected to introduce a revised bill today.
** Update 6/30 PM: Reintroduction of the bill has been delayed while they wait for comments from additional parties
Bankers and non-bank commercial lenders – two groups that often disagree – are united in their opposition to financial regulation proposed in Illinois. Both contend that if the state’s Senate Bill 2865 becomes law it could choke the life out of small-business lending in the Land of Lincoln and might set a precedent for a nightmarish 50-state patchwork of rules and regulations.
Foes say the measure was created to promote disclosure and regulate underwriting. They don’t argue with the need for transparency when it comes to stating loan terms, but they maintain that a provision of the bill that would cap loan payments at 50 percent of net profits would disrupt the market needlessly.
Opponents also regard the bill as an encroachment on free trade. “The government shouldn’t be picking winners or losers – the market should be,” said Steve Denis, executive director of the Small Business Finance Association, a trade group for alternative funders.
The states or the federal government may need to protect merchants from a few predatory lenders, but most lenders operate reputably and have a vested interest in helping clients succeed so they can pay back their obligations and become repeat customers, several members of the industry maintained.
“The ability to pay is really a non-issue,” noted Matt Patterson, CEO of Expansion Capital Group and an organizer of the Commercial Finance Coalition, another industry trade group. “I don’t make any money if a borrower doesn’t pay me back, so I don’t make loans where I think there is an inability to pay.”
Outsiders may find interest rates high for alternative loans, but companies providing the capital face high risk and have a short risk horizon, said Scott Talbott, senior vice president of government affairs for the Electronic Transactions Association, whose members include purveyors and recipients of alternative financing. Several other sources said the risks justify the rates.
Besides, a consensus seems to exist among industry leaders that most merchants – unlike many consumers – have the sophistication to make their own decisions on borrowing. Business owners are accustomed to dealing with large amounts of money, and they understand the need to keep investing in their enterprises, sources agreed.
In fact, no one has complained of any small-business lending problems in Illinois to state regulators, said Bryan Schneider, secretary of the Illinois Department of Financial and Professional Regulation and a member of Gov. Bruce Rauner’s cabinet.
Regulators should not indulge in creating solutions in search of problems, Sec. Schneider cautioned. “When you’re a hammer, the world looks like a nail,” he said, suggesting that regulators sometimes base their actions on anecdotal isolated incidents instead of reserving action to correct widespread problems.
But the proposed legislation could itself cause problems by placing entrepreneurs at risk, according to Rob Karr, president and CEO of the Illinois Retail Merchants Association, which has 400 members operating 20,000 stores. “It would stifle potential access to capital for small businesses,” he warned.
Quantifying the resulting damage would present a monumental task, but a shortage of capital would clearly burden merchants who need to bridge cash-flow problems, Karr said. Shortfalls can result, for example, when clothing stores need to buy apparel for the coming season or hardware stores place orders in the summer for snow blowers they’ll need in six to eight months, he said.
Restaurant owners and other merchants who rely on expensive equipment also need access to capital when there’s a breakdown or a need to expand to meet competition or take advantage of a market opportunity, Karr observed.
Capital for those purposes could dry up because just about anyone providing non-bank loans to small merchants could find themselves subject to the proposed legislation, including factoring companies, merchant cash advance companies, alternative lenders and non-bank commercial lenders, said the CFC’s Patterson.
Banks and credit unions are exempt, the bill says, but a page or two later it includes provisions written so broadly that it actually includes those institutions, said Ben Jackson, vice president of government relations at the Illinois Bankers Association.
Trade groups representing all of those financial institutions – including banks and non-banks – have joined small-business associations in working against passage SB 2865. “The most important thing is to make sure we’re coordinating with the other groups out there,” the SBFA’s Denis contended. “Actually, Illinois was good practice for the industry in how we’re going to go about dealing with attempts at regulation.”
Patterson of the CFC agreed that associations should coordinate their responses to proposed legislation. “We’ve tried to gather all the affected players in the space and have dialogue with them,” he maintained.
Even though that various associations reacting to the bill generally agreed on principles, their competing messages at first created a cacophony of proposals, according to some. “There was a lot of noise, and I think we’ll all learn from that,” Denis said. “The industry has to learn to speak with one voice to legislators.”
Citing the complexity of dealing with 50 states, 435 members of Congress and 100 senators, Denis said everyone with an interest in small-business lending must work together. “If we don’t, we lose,” he warned.
Many of the groups came together for the first time as they converged upon the Illinois capital of Springfield last month when the state’s Senate Committee on Financial Institutions convened a hearing on the bill. The committee allowed testimony at the hearing from three groups representing opponents. The groups huddled and chose Denis, Jackson and Martha Dreiling, OnDeck Capital Inc. vice president and head of operations.
City of Chicago Treasurer Kurt Summers was the only witness who testified in favor of the bill, according to Jackson. The idea of regulating non-bank commercial lenders in much the same way Illinois oversees lending to individuals arose in Summers’ office, said an aide to Illinois Sen. Jacqueline Collins, D-Chicago. Sen. Collins serves as chairperson of the Financial Institutions Committee and introduced to the bill in the senate.
Sen. Collins declined to be interviewed for this article, and Treasurer Summers and other officials in his of office did not respond to interview requests. However, published reports said Drew Beres, general counsel for Summers, has maintained that transparency, not underwriting, is the main goal. Talbott has met with Sen. Collins and said she’s interested primarily in transparency.
Support for the bill isn’t limited to the Chicago treasurer’s office. Some non-profit lending groups and think tanks back the proposed legislation, opponents agreed. The bill appeals to progressives attempting to shield the public from unsavory lending practices, they maintained.
Politicians may view their support of the bill as a way of burnishing their progressive credentials and establishing themselves as consumer advocates, said opponents of the legislation who requested anonymity. “It’s an important constituency,” one noted. “No one is against small business.”
After listening to testimony at the hearing, committee members voted to move the bill out of committee for further progress through the senate, Jackson said. Eight on the committee voted to move the bill forward, while two voted “present” and one was absent. But most of the senators on the committee said the legislation needs revision through amendments before it could become law, according to Jackson.
The legislative session was scheduled to end May 31. If the bill didn’t pass by then it could come up for consideration in a summer session if the General Assembly chooses to have one, Jackson said. If it does not pass during the summer, it could come to a vote during a two-week “veto session” in the fall or in an early January 2017 “lame duck session.” Unpassed legislation dies at that point and would have to be reintroduced in the regular session that begins later in January 2017, he noted.
Although time is becoming short for the proposed legislation, it’s a high-profile measure that could prompt action, particularly if amendments weaken the rule for underwriting, Jackson said. The Illinois General Assembly sometimes passes important legislation during lame duck sessions, he said, noting that a temporary increase in the state sales tax was enacted that way.
Whatever fate awaits SB 2865, some in the alternative funding business have suspected that the bill came about through an effort by banks to push non-banks out of the market. But cooperation among groups opposed to the proposed legislation appears to lay that notion to rest, according to several sources.
“I don’t get that impression,” Denis said of the allegation that bankers are colluding against alternative commercial lenders. “I think this shows banks and our industry can get together and share the same mission.”
Talbott of the ETA also counted himself among the disbelievers when it comes to conspiracy theories against alternative lenders. “I’d say that’s a misreading of the law and not the case,” he said. “Traditional banks oppose this because it would effectively reduce their options in the same space.”
The interests of banks and non-banks are beginning to coincide as the two sectors intertwine by forming coalitions, noted Jackson of the state bankers’ association. A number of sources cited mergers and partnerships that are occurring among the two types of institutions.
In one example, J.P. Morgan Chase & Co. is using OnDeck’s online technology to help make loans to small businesses. Meanwhile, in another example, SunTrust Banks Inc. has established an online lending division called LightStream.
At the same time, alternative funders who got their start with merchant cash advances and later added loans are contemplating what their world would be like if they turned their enterprises into businesses that more closely resembled banks.
And however the industries structure themselves, the need for small-business funding remains acute. Banks, non-banks and merchants agree that the Great Recession that began in 2007 and the regulation it spawned have discouraged banks from lending to small-businesses. The alternative small-business finance industry arose to fill the vacuum, sources said.
That demand draws attention and could lead to bouts of regulation. Although industry leaders say they’re not aware of legislation similar to Illinois SB 2865 pending in other states, they note that New York state legislators discussed small-business lending in April during a subject matter hearing. They also point out that California regulates commercial lending.
Many dread the potential for unintended results as a crazy quilt of regulation spreads across the nation with each state devising its own inconsistent or even conflicting standards. Keeping up with activity in 50 states – not to mention a few territories or protectorates – seems likely to prove daunting.
But mechanisms have been developed to ease the burden of tracking so many legislative and regulatory bodies. The CFC, for instance, employs a government relations team to monitor the states, Patterson said. The ETA combines software and people in the field to deal with the monitoring challenge.
And regulation at the state level can make sense because officials there live “close to the ground,” and thus have a better feel for how rules affect state residents than federal regulators could develop, Sec. Schneider said.
Easier accessibility can also keep make regulators more responsive than federal regulators, according to Sec. Schneider. “It’s easier to get ahold of me than (Director) Richard Cordray at the Consumer Financial Protection Bureau,” he said.
Also, state regulators don’t want to take a provincial view of commerce, Sec. Schneider noted. “As wonderful as Illinois is, we want to do business nationwide,” he joked.
State regulators should do a better job of coordinating among themselves, Sec. Schneider conceded, adding that they are making the attempt. Efforts are underway through the Conference of State Bank Supervisors, a trade association for officials, he said.
At the moment, state legislatures and federal regulators have small-business lending “squarely on their agenda,” the ETA’s Talbott observed. The U.S. Congress isn’t paying close attention to the industry right now because they’re preoccupied with the elections and the presidential nominating conventions, he said.
The goal in Illinois and elsewhere remains to encourage legislators to adopt a “go-slow approach” that affords enough time to understand how the industry operates and what proposed laws or regulations would do to change that, said Talbott.
At any rate, the industry should unite in a proactive effort to explain the business to legislators, according to Denis. “We need to work with them so that they understand how we fund small businesses,” he said. “That’s the way we can all win.”
Stairway to Heaven: Can Alternative Finance Keep Making Dreams Come True?
April 28, 2016
The alternative small-business finance industry has exploded into a $10 billion business and may not stop growing until it reaches $50 billion or even $100 billion in annual financing, depending upon who’s making the projection. Along the way, it’s provided a vehicle for ambitious, hard-working and talented entrepreneurs to lift themselves to affluence.
Consider the saga of William Ramos, whose persistence as a cold caller helped him overcome homelessness and earn the cash to buy a Ferrari. Then there’s the journey of Jared Weitz, once a 20 something plumber and now CEO of a company with more than $100 million a year in deal flow.
Their careers are only the beginning of the success stories. Jared Feldman and Dan Smith, for example, were in their 20s when they started an alt finance company at the height of the financial crisis. They went on to sell part of their firm to Palladium Equity Partners after placing more than $400 million in lifetime deals.
The industry’s top salespeople can even breathe new life into seemingly dead leads. Take the case of Juan Monegro, who was in his 20s when he left his job in Verizon customer service and began pounding the phones to promote merchant cash advances. Working at first with stale leads, Monegro was soon placing $47 million in advances annually.
Alternative funding can provide a second chance, too. When Isaac Stern’s bakery went out of business, he took a job telemarketing merchant cash advances and went on to launch a firm that now places more than $1 billion in funding annually.
All of those industry players are leaving their marks on a business that got its start at the dawn of the new century. Long-time participants in the market credit Barbara Johnson with hatching the idea of the merchant cash advance in 1998 when she needed to raise capital for a daycare center. She and her husband, Gary Johnson, started the company that became CAN Capital. The firm also reportedly developed the first platform to split credit card receipts between merchants and funders.
BIRTH OF AN INDUSTRY
Competitors soon followed the trail those pioneers blazed, and the industry began growing prodigiously. “There was a ton of credit out there for people who wanted to get into the business,” recalled David Goldin, who’s CEO of Capify and serves as president of the Small Business Finance Association, one of the industry’s trade groups.
Many of the early entrants came from the world of finance or from the credit card processing business, said Stephen Sheinbaum, founder of Bizfi. Virtually all of the early business came from splitting card receipts, a practice that now accounts for just 10 percent of volume, he noted.
At first, brokers, funders and their channel partners spent a lot of time explaining advances to merchants who had never heard of them, Goldin said. Competition wasn’t that tough because of the uncrowded “greenfield” nature of the business, industry veterans agreed.
Some of the initial funding came from the funders’ own pockets or from the savings accounts of their elderly uncles. “I’ve met more than a few who had $2 million to $5 million worth of loans from friends and family in order to fund the advances to the merchants,” observed Joel Magerman, CEO of Bryant Park Capital, which places capital in the industry. “It was a small, entrepreneurial effort,” Andrea Petro, executive vice president and division manager of lender finance for Wells Fargo Capital Finance, said of the early days. “A number of these companies started with maybe $100,000 that they would experiment with. They would make 10 loans of $10,000 and collect them in 90 days.”
That business model was working, but merchant cash advances suffered from a bad reputation in the early days, Goldin said. Some players were charging hefty fees and pushing merchants into financial jeopardy by providing more funding than they could pay back comfortably. The public even took a dim view of reputable funders because most consumers didn’t understand that the risk of offering advances justified charging more for them than other types of financing, according to Goldin.
Then the dam broke. The economy crashed as the Great Recession pushed much of the world to the brink of financial disaster. “Everybody lost their credit line and default rates spiked,” noted Isaac Stern, CEO of Fundry, Yellowstone Capital and Green Capital. “There was almost nobody left in the business.”
RAVAGED BY RECESSION
Perhaps 80 percent of the nation’s alternative funding companies went out of business in the downturn, said Magerman. Those firms probably represented about 50 percent of the alternative funding industry’s dollar volume, he added. “There was a culling of the herd,” he said of the companies that failed.
Life became tough for the survivors, too. Among companies that stayed afloat, credit losses typically tripled, according to Petro. That’s severe but much better than companies that failed because their credit losses quintupled, she said.
Who kept the doors open? The firms that survived tended to share some characteristics, said Robert Cook, a partner at Hudson Cook LLP, a law office that specializes in alternative funding. “Some of the companies were self-funding at that time,” he said of those days. “Some had lines of credit that were established prior to the recession, and because their business stayed healthy they were able to retain those lines of credit.”
The survivors also understood risk and had strong, automated reporting systems to track daily repayment, Petro said. For the most part, those companies emerged stronger, wiser and more prosperous when the crisis wound down, she noted. “The legacy of the Great Recession was that survivors became even more knowledgeable through what I would call that ‘high-stress testing period of losses,’” she said.
ROAD TO RECOVERY
The survivors of the recession were ready to capitalize on the convergence of several factors favorable to the industry in about 2009. Taking advantages of those changes in the industry helped form a perfect storm of industry growth as the recession was ending.
They included making good use of the quick churn that characterizes the merchant cash advance business, Petro noted. The industry’s better operators had been able to amass voluminous data on the industry because of its short cycles. While a provider of auto loans might have to wait five years to study company results, she said, alternative funders could compile intelligence from four advances within the space of a year.
That data found a home in the industry around the time the recession was ending because funders were beginning to purchase or develop the algorithms that are continuing to increase the automation of the underwriting process, said Jared Weitz, CEO of United Capital Source LLC. As early as 2006, OnDeck became one of the first to rely on digital underwriting, and the practice became mainstream by 2009 or so, he said.
Just as the technology was becoming widespread, capital began returning to the market. Wealthy investors were pulling their funds out of real estate and needed somewhere to invest it, accounting for part of the influx of capital, Weitz said.
At the same time, Wall Street began to take notice of the industry as a place to position capital for growth, and companies that had been focused on consumer lending came to see alternative finance as a good investment, Cook said.
For a long while, banks had shied away from the market because the individual deals seem small to them. A merchant cash advance offers funders a hundredth of the size and profits of a bank’s typical small-business loan but requires a tenth of the underwriting effort, said David O’Connell, a senior analyst on Aite Group’s Wholesale Banking team.
The prospect of providing funds became even less attractive for banks. The recession had spawned the Dodd-Frank Financial Regulatory Reform Bill and Basel III, which had the unintended effect of keeping banks out of the market by barring them from endeavors where they’re inexperienced, Magerman said. With most banks more distant from the business than ever, brokers and funders can keep the industry to themselves, sources acknowledged.
At about the same time, the SBFA succeeded in burnishing the industry’s image by explaining the economic realities to the press, in Goldin’s view.The idea that higher risk requires bigger fees was beginning to sink in to the public’s psyche, he maintained.
Meanwhile, loans started to join merchant cash advances in the product mix. Many players began to offer loans after they received California finance lenders licenses, Cook recalled. They had obtained the licenses to ward off class-action lawsuits, he said and were switching from sharing card receipts to scheduled direct debits of merchants’ bank accounts.
As those advantages – including algorithms, ready cash, a better image and the option of offering loans – became apparent, responsible funders used them to help change the face of the industry. They began to make deals with more credit-worthy merchants by offering lower fees, more time to repay and improved customer service. “The recession wound up differentiating us in the best possible way,” Bizfi’s Sheinbaum said of the changes.
His company found more-upscale customers by concentrating on industries that weren’t hit too hard by the recession. “With real estate crashing, people were not refurbishing their homes or putting in new flooring,” he noted.
Today, the booming alternative finance industry is engendering success stories and attracting the nation’s attention. The increased awareness is prompting more companies to wade into the fray, and could bring some change.
WHAT LIES AHEAD
One variety of change that might lie ahead could come with the purchase of a major funding company by a big bank in the next couple of years, Bryant Park Capital’s Magerman predicted. A bank could sidestep regulation, he suggested, by maintaining that the credit card business and small business loans made through bank branches had provided the banks with the experience necessary to succeed.
Smaller players are paying attention to the industry, too, with varying degrees of success. Predictably, some of the new players are operating too aggressively and could find themselves headed for a fall. “Anybody can fund deals – the talent lies in collecting the money back at a profitable level,” said Capify’s Goldin. “There’s going to be a shakeout. I can feel it.”
Some of today’s alternative lenders don’t have the skill and technology to ward off bad deals and could thus find themselves in trouble if recession strikes, warned Aite Group’s O’Connell. “Let’s be careful of falling into the trap of ‘This time is different,’” he said. “I see a lot of sub-prime debt there.”
Don’t expect miracles, cautioned Petro. “I believe there will be another recession, and I believe that there will be a winnowing of (alternative finance) businesses,” she said. “There will be far fewer after the next recession than exist today.”
A recession would spell trouble, Magerman agreed, even though demand for loans and advances would increase in an atmosphere of financial hardship. Asked about industry optimists who view the business as nearly recession-proof, he didn’t hold back. “Don’t believe them,” he warned. “Just because somebody needs capital doesn’t mean they should get capital.”
Further complicating matters, increased regulatory scrutiny could be lurking just beyond the horizon, Petro predicted. She provided histories of what regulation has done to other industries as an indication of the differing outcomes of regulation – one good, one debatable and one bad.
Good: The timeshare business benefitted from regulation because the rules boosted the public’s trust.
Debatable: The cost of complying with regulations changed the rent-to-own business from an entrepreneurial endeavor to an environment where only big corporations could prosper.
Bad: Regulation appears likely to alter the payday lending business drastically and could even bring it to an end, she said.
Still, regulation’s good side seems likely to prevail in the alternative finance business, eliminating the players who charge high fees or collect bloated commissions, according to Weitz. “I think it could only benefit the industry,” he said. “It’ll knock out the bad guys.”
Having Problems With Leads? Don’t Feel Alone
April 24, 2016
Having problems with leads? Don’t feel alone. Funders and lead providers say response rates to offline marketing have been cut in half while the price of pay-per-click campaigns has skyrocketed. They blame intense competition in an increasingly crowded field of funders, market saturation by lead generation companies, better email spam filters and comparison shopping by small-business owners who are becoming more savvy about how much they need to pay for merchant cash advances and loans.
Clicks that cost $5 each seven years ago now command a price of nearly $125, says Isaac Stern, CEO of Yellowstone Capital LLC, Green Capital and Fundry. “Pay-per-click marketing has gotten out of control,” he laments. “So you need a hefty, hefty budget to compete in that world.” He reports spending $600,000 to $700,000 a month on internet marketing, compared to $100,000 monthly on direct mail.
Even when the price of individual clicks isn’t measured in hundreds of dollars, the cost of the multiple clicks required to create a lead can mount up, according to Michael O’Hare, CEO of Blindbid, a Colorado Springs, Colo.- based provider of leads. If it takes 15 clicks that cost $25 each to obtain a lead, that comes to $375, he notes. Still, some companies manage to use key words that cost $8 or so per click to get decent leads for less than $100, he says.
While the cost of pay per click is exploding, the response to direct mail marketing is declining precipitously, says Bob Squiers, who owns the Deerfield, Fla.-based Meridian Leads. The percentage of small-business owners who respond to advertising they receive in the mail has fallen from 2 percent just a few years ago to 1 percent now, partly because they receive so many mailings from so many more lead-generation companies, he says. “There weren’t too many people doing direct mail into this space five years ago,” he notes. His company’s leads range in price from pennies to $60, he says.
While Blindbid and Meridian both specialize in finding leads by sending out direct mail pieces and then qualifying the respondents in phone conversations, one of their competitors, Lenders Marketing, takes a different approach, according to Justin Benton, sales director for the Camarillo, Calif.-based company. Benton’s data-driven method combines his company’s databases with the databases of financial institutions. He cultivates relationships with the banking industry’s executives to facilitate that process, he says, and his company does not make phone calls to qualify leads.
But placing too high a value on data gives rise to two problems, the way O’Hare views the search for leads. First, analyzing the data creates plenty of challenges, he says. Second, human beings just aren’t rational enough in their decision-making to fit data-driven profiles or cohorts, he maintains. “The holy grail is to find some algorithm that will predict that a merchant needs funding, and they can then find these people through massive data,” he says with skepticism.
Whatever path a company takes to finding and verifying leads, it pays to establish three elements before classifying them, O’Hare says. First, prospects should qualify financially for credit or advances. Second, prospects should demonstrate a genuine interest in obtaining funding, as opposed to less-than-serious “tire kicking.” With both of those characteristics in place, O’Hare informs prospects they can expect to hear from funders.
Blindbid also wants to guide the expectations of the funders who are calling the leads, O’Hare says. To that end, the vendor invites funders to listen to recordings of the phone calls it makes to qualify leads. Just the same, funders should bear in mind that they may not receive the same reception when they contact the lead, he cautions. “We see it all the time, he says. “We speak to the merchant in the morning and they’re pleasant. Then in the afternoon when they speak to the funder or the broker, the merchant is grumpy.”
Retailers’ mood swings aside, funders can soon gauge the quality of the leads they’re buying. “You can’t judge a lead on cost, Squiers admonishes. “Judge them by performance.” However, performance fluctuates according to the funder’s sales skills, product offering and product knowledge, he maintains.
Meanwhile, the problems plaguing the lead business should prompt funders to become creative in their approach to finding prospects. That’s why even vendors who make their living selling leads encourage funders to search for prospects on their own. “We always advise generating your own leads,” says Benton. “The only leads you can truly count on are the ones you generate yourself.”
Knowing where to look for leads can require a thorough grasp of what’s happening in a particular market. “You can look at what industries are hot,” O’hare suggests. The trucking business is heating up, for example, because so many truckers need funding to buy expensive equipment to meet new requirements for electronic logs, he says. Meanwhile, the recession has wracked the martial arts industry, so dojos might require funding for marketing to help them recover, he notes.
Understanding every industry in that much detail isn’t practical, so lead generation companies urge funders to specialize in just a few niches. Building a network of customers who know each other can result in referrals, Benton observes. It also soothes skeptical prospects, he notes. “Once you say I’ve worked with Fred down at Tony Roma’s – they can feel more comfortable, especially if you’ve done it in the same city,” he maintains.
Whether leads arise internally or come from a vendor, funders have to work them properly to succeed in closing deals, lead-generating companies agree. “The real key is being consistent and persistent,” Benton says. “Research has shown the average lead is called 1.3 times, so once you make that second call you are ahead of the curve.” He advocates that funders use their CRM system by taking copious notes on their calls, setting up nurture campaigns and following up with leads in an organized manner.
And don’t forget that at least some prospects are getting pummeled with calls. “A lot of brokers are carpet bombing – they’re on the phone all day,” says O’Hare. “I talked to one guy who said he makes 400 or 500 calls a day on a manual dial. I’d like to do a video of that.
Commercial Finance Coalition Emerges – An All Inclusive MCA Industry Trade Group
March 16, 2016
A new trade association hopes to bring together every type of company in the alternative-finance industry to form a united front capable of managing state and federal regulation.
The fledgling Commercial Finance Coalition (CFC) welcomes potential members that include funders, brokers, payments processors, data providers and collection agencies, said Matt Patterson, CEO of Sioux Falls, SD-based Expansion Capital Group LLC and a board member and organizer of the new trade group.
Patterson began thinking about forming an association early last year when he learned that the established Small Business Finance Association (SBFA), formerly the North American Merchant Advance Association, wasn’t communicating with legislators and regulators on behalf of the industry. “When I talked to them six or nine months ago, they had no road map for affecting legislation or regulation,” he said.
Since then, the SBFA has hired an executive director with legislative and association experience to tell the industry’s story on Capitol Hill. (See here.) So, two industry groups now plan to begin contacting government officials to educate them on the cause of small-business alternative finance.
The decision to create the CFC came at a dinner meeting convened Dec. 3 in New York. That gathering came together after several months of conference calls and videoconferences, Patterson said.
The CFC is working with two well-established lobbying groups, Patterson noted. Both organizations advised the CFC during its formation, he said.
Law firm WilmerHale was selected to represent the CFC. The combination of Polaris and WilmerHale will give the association an immediate Washington presence, he noted.
The group intends to write best practices for its members but doesn’t contemplate starting a trade show, trade publication or merchant watch list, Patterson said.
The CFC is beginning its journey with nearly 20 member companies, according to Patterson. Recruitment of additional members is scheduled to intensify after the association has been operating for a while.
Inviting members from all facets of the industry indicates a philosophy that differs from that of the SBFA, which includes only funders on its roster, Patterson said. “We want to be inclusive,” he said. “We’re interested in building a broad base of constituents that all have an incentive to see that the industry survives and thrives.”
The coalition’s trusted service providers include:
- Arena Strategies
- Catalyst Group
- Polaris Consulting
- Wilmer Cutler Pickering Hale and Dorr
