Sean Murray is the President and Chief Editor of deBanked and the founder of the Broker Fair Conference. Connect with me on LinkedIn or follow me on twitter. You can view all future deBanked events here.
Articles by Sean Murray
Coming Soon: Domain Names as Loan Collateral
April 25, 2024
It’s called a DeFi Cash Advance, a collateralized loan with 1-30 day terms. It’s just one of many products created by Teller, a peer-to-peer lending platform that relies on smart contracts to facilitate the transactions. The key word is “collateralized” because the blockchain-tethered asset doesn’t necessarily have to be crypto-native per se anymore. Virtually any business owner with a website can offer up its online domain name as collateral for a loan thanks to rapidly developing blockchain technology.
“Essentially what Teller is at the core is basically like an OTC desk as a way to think about it because Teller doesn’t do any lending,” said Kieran Daniels, Growth at Teller.
Instead it’s done by peers which have historically used the platform to lend against very esoteric crypto assets that traditional commercial finance folks would probably roll their eyes at. But all that’s poised to change ever since a Silicon Valley-based startup called Namefi recently found a way to bridge regular old internet domain names to the ethereum blockchain. Namefi’s tech can turn any .com or similar internet domain into a real life NFT without any disruption to the underlying website it hosts. And once ownership of the domain name is governed by whomever owns the NFT, then voilà, it can be offered up as collateral for a loan on the blockchain.
The advantage of doing something this way is the efficiency in which it transforms a widely recognized digital asset, a domain name, into a liquid piece of collateral for a loan. For example, a loan can be made instantly just with a smart contract, it can be transferred to escrow (while still working the whole time) instantly, and also transferred to the lender in the instance of a default without any headache or hassle. The hard part, if one could even consider it hard, is that in order for the domain name to turn into an NFT, it has to be transferred from the owner’s current domain name registrar to the one operated by Namefi. This can be accomplished in less than an hour. It’s the exact same process as if one were to transfer a domain name from say Godaddy to Namecheap. Namefi does all the techy stuff that turns it into an NFT and the user can still manage their regular DNS settings via Namefi.
As mentioned previously, Teller is accustomed to other assets on its platform, things like “meme coins” and digital artwork, some of which use a technological token standard called ERC-721. That’s kind of where I ironically enter the story because I noticed that Namefi relied on the same standard when turning domain names into NFTs. And so without informing either Namefi or Teller of what I was up to, I turned a domain name that I owned into an NFT via Namefi and then used the Teller platform to set up and execute a loan transaction, resulting in a self-aggrandizing press release this past January about how smart I was for possibly doing the first domain name loan over ethereum in the world.
It was noticed. The outcome is that Namefi and Teller have been talking to each other since. On February 28, the two took to social media to announce a partnership.
Namefi is partnering with Teller (@useteller) to bring DeFi to your internet domains! Now lending with Namefi domains as collateral is made easy through this partnership.
As a result of the partnership, customers will be able to:
1. List DNS names gaslessly for liquidity: List… pic.twitter.com/nHJpkUKeXj
— Namefi.io 🍊 (@namefi_io) February 28, 2024
“We’re fully leaning into it,” said Daniels to deBanked, “we did a spaces [on X] with Namefi.”
“I think we’re just really bridging that gap for a lot of people right now and actually making that connection to say that ‘hey, NFTs aren’t just JPEGs, they aren’t just digital identity, they can have other forms of utility,'” said Alexander Walker, Ambassador at Namefi. “And there’s millions of people out there with domain names already.”
And that’s sort of the point. Everyone already understands domain names as a digital asset. The tech has just finally caught up to do that much more with them.
The typical challenge of any upstart peer-to-peer lending platform, however, is liquidity. As some readers may recall in the very early years of LendingClub and Prosper, hopeful borrowers would languish on those platforms while they waited for individual retail investors to pool together enough money to actually fund the full value of the loans. Teller has already come up with a solution for other assets it understands well, standing liquidity pools funded by peers or investors that will automatically lend against assets it recognizes. There would be a similar goal with certain categories of domain names.
“When you go to Teller, you’ll see Pokemon on ENS or 999s or certain collections of NFTs,” said Daniels of Teller. “So those are the more popular NFTs and so what Teller has done is created standing offers for those. So again, Teller isn’t the LP, but LPs can come in and add to that pool. And anyone with one of those categories can instantly get a loan or instantly borrow against that.”
Enter .coms into the fray.
“The bigger vision is right now when you go to Teller you see Tokens, NFTs, and ENS,” Daniels said. “We want to change that to Tokens, NFTs, and Domains. […] Once we integrate that and once we get set up, then we can really lean into it and grow it from there.”
The market is still mostly unaware that this technology is here. Early interest seems to be coming from domain name investors in particular, those that think about the standalone speculative or resale value of a domain name independent of any active business use. Valuations on that basis might be too small or risky for a commercial lender to get excited about. The real opportunity then perhaps is domain names that are actively in use where the corresponding website is driving revenue for a business or even generating it on site. In the digital era, it’d be reasonable to say that many businesses depend on their web traffic to generate hundreds of thousands or millions of dollars a year in annual sales. A domain name that is being used to make that all happen is theoretically worth much more than an unused clever sounding domain name. It’s also the sort of collateral that could be monetized by a lender familiar with the market of its borrower.
With 360 million domain names registered worldwide as of Q3 2023, there’s a large market at stake.
“Domains don’t have that liquidity as of yet,” said Walker of Namefi. “But we’re currently building out that infrastructure. And that’s what makes me really excited.”
Backdooring Deals? You’re a Loser
April 24, 2024
“Backdooring is just for losers,” says Thomas Chillemi, founder and CEO of Harvest Lending, a small business finance brokerage. “Like I think anybody who participates in it is just a loser.”
Backdooring, as colorfully referenced by Chillemi, is a colloquial term used widely across the industry to describe how leads, apps, or entire deals are stolen from brokers. The deal gets submitted through the front door and then leaks out the back door to an unauthorized third party. Chillemi sums it up as such: “backdooring is ‘I secured a lead, I secured a file in some way, shape or form. And that merchant is being contacted through my efforts somehow that I didn’t give permission to.'”
It’s a scenario that’s been top of mind at brokerages across the country for years, and it’s a problem that’s getting worse, according to sources that deBanked has spoken with.
“I would say backdooring is the worst of the worst right now,” says Josh Feinberg, CEO of Everlasting Capital, another small business finance brokerage. “I think as far as rogue employees go at direct funders, it’s the worst it’s ever been.”
Feinberg’s reference to “rogue employees” is just one such way that backdooring can occur. It can be an employee of a lender, management of a lender, an employee of the broker, a broker pretending to be a lender, and possibly in a worst case scenario even a cyber intruder like a hacker. Sometimes it’s a clandestine operation structured in a way to make it difficult for the broker to detect that their client’s file has been intercepted while other times backdooring is such a normalized function of one’s business that accepting a submission from a broker and then shopping it elsewhere to circumvent them is practically firm policy and done on an automated basis.
Some of the more seasoned brokers who are used to being on guard with what a lender intends to do with their file advise that their peers approach any proposed ISO agreement with a fine-tooth comb to establish what is or isn’t allowed. After all, if the agreement grants the lender the contractual right to backdoor the broker, is it really backdooring?
Others say the contract’s language can only carry the relationship so far.
“I only try to board up with people that seem to be good actors, but then you never know what an employee might do, right?” says Chillemi.
Whether it’s a jaded underwriter, a slick admin, or Bob in accounting who never says a peep, it only takes one individual to set eyes on an application to be in a position to transfer the information elsewhere for personal gain. deBanked examined this subject in years past and learned the lengths that rogue employees go through to extract deal data. For example, when one funding company blocked the ability to transfer data outside of the company’s network, an employee took photos of their screen with their phone. When the employer banned cell phones in the office in response, one employee wrote down deal data on scrap paper, threw it in the garbage, and then returned to the office building after hours to try and fish it out of the dumpster.
The absurdity of that visual alone implies there must be big bucks in the backdoor business. Indeed, according to screenshots forwarded to deBanked of what appears to be an underground Whatsapp group, backdoored deals are currently being marketed for sale with bank statements, social security numbers, and all. A single fresh backdoored file can go for $20 – $35 or buyers can purchase them in bulk, up to 600 at a time, for a discounted price.
“Fresh Packs” apparently fetch more because the applicants may not have signed a funding contract with anyone yet and are theoretically more warm to doing a deal even if they’re not quite sure how the company approaching them got all of their information. And it’s this speed and efficiency of the backdooring happening that’s making things extra difficult for brokers. For Chillemi, he says the backdooring in earlier years would reveal itself when someone would try to call his customer a month or two after the fact. “Like even if it happened after two or three days that felt really fast,” he says. “But now, you’re talking hours, like these people have it within hours and I just don’t even know how anybody could really compete with that.”
Brokers, ready for this, developed a tactic that is still used today as a front-line defense mechanism. They replace the applicant’s email address and phone number on the application with ones they control, so that when an attempted backdooring occurs, the caller is unsuspectingly contacting the very broker they are trying to steal the deal from. The result? They’re caught red-handed.
“I got a text from somebody claiming that they worked at Fidelity,” says Chillemi. “They texted me a picture of my own application. They’re so brazen that they’re just texting the merchant… they thought they were texting the merchant.”
Not only was the Fidelity component a deception, but the mistake of texting the broker who was just waiting to catch them is causing the backdoor shops to evolve. New backdoor callers know the application contact info might be booby-trapped so they’re now skip-tracing the applicants on an automated basis and getting their real contact info and using that instead.
For Feinberg at Everlasting, he says the method of substituting out an applicant’s contact info is not something they do, though he’s aware that it’s done by others in the working capital space. He says that it’s not something that would really be tolerated in the equipment finance side of the industry which operates much cleaner with no backdooring, at least in his experience. The lenders there hate it and everyone involved needs to be able to communicate with the customer. It’s just the working capital deals where all these problems happen.
“It’s defeating, and it’s a very very difficult thing to diagnose,” Feinberg says. He adds that the feeling is worse when realizing that it has happened even when submitting to top tier A players. There’s no delay either. He says that the customer can be called literally within the same hour of submitting it, which puts them in an awkward position.
“They lose complete trust in our company,” Feinberg says. “And it makes it very difficult to be able to work with these clients.”
According to Chillemi of Harvest, “Most of the time what happens is the merchant calls us and says, ‘Now I’m getting all these phone calls people saying they’re working with you,’ and it’s just kind of like an embarrassment of where I’ve got to explain to this person that somebody at these companies leaked their information that wasn’t supposed to. And it just makes me look bad, right?”
Another owner of a large broker shop, who did not authorize his name to be used in connection with this story, says that while everyone’s mind immediately goes to the lending companies, the most common source of backdoored deals is actually from rogue employees inside the brokerages themselves. Whether it’s the rep backdooring their own deals to circumvent splitting commissions with their employer or someone else in the chain that has access to the data, his advice was that brokerage owners first need to look extremely inwards before pointing fingers outwards. Investing in proper security is critical, he says.
But assuming that base is covered, Feinberg says that brokers should do a background check on the lenders and interview them like a lender would interview a merchant for funding.
“We absolutely look into the agreements that we sign but a lot of due diligence happens just on the first phone call,” Feinberg says. “Just on the first phone call we can judge whether this is going to be a real lender…”
A key question to ask, he says, is how compensation works. And that’s because an individual lender will have a defined fixed system whereas a backdoor broker pretending to be a lender is subject to the different compensation structures they have at all their different lending relationships and would not be able to guarantee any fixed commission pricing to the broker they are trying to trick into submitting, that is if they are intending to pay them out a percentage of the deals they backdoor them on in the first place.
“Trust is the number one thing with us,” Feinberg says. “And if trust gets broken, then it’s over. So we really try to work with people that we know personally. And the way that we’ve met people personally is through trade shows, specifically deBanked events.”
Chillemi argues that someone who tries to make their living off of backdoored deals are not salespeople at all, but as he reiterates, losers.
“[the backdoor broker] knows he’s a liar,” says Chillemi, “He’s calling these people saying he’s an underwriter… he’s not strong, he’s not learning. They don’t know what they’re doing. They’re putting the lenders at risk.”
What We’ve Got for Brokers
April 19, 2024If you’re a small business or commercial finance broker, I hope you take advantage of the many resources we’ve put together. With the exception of tickets to our in-person events, everything we put out there is FREE TO CONSUME with no strings attached.
In addition to articles, stories, newsletters, and regular product marketing materials, we’ve produced nearly 1,000 videos including short documentaries and sit-down interviews, explainer videos, and sound bites from participants across the industry.
If you’re wondering what’s the next big thing to look out for, it’s the Broker Fair conference in New York City on May 20. There’s a big pre-show open bar party the night before as well. See you there!
Broker Fair 2024 Sponsorships Have Sold Out
April 18, 2024
Sponsorships to Broker Fair 2024 in New York City have already sold out. Only tickets are still available. Brokers pay less than all other attendees. The main event takes place on May 20 at the Metropolitan Pavilion, while the pre-show (sponsored by Triton Recovery Group) will happen the night before on May 19 at Somewhere Nowhere NYC.
WHY GO IF YOU’RE A BROKER?
- Learn from the founder of one of the most successful broker shops in history, Peter Ribeiro, who will be speaking there.
- Learn about diversifying your deal flow by brokering SBA loans from SBA broker training expert Bob Coleman.
- Learn about the regulatory and legal status of certain SMB financing products in New York given some recent developments.
- Meet hundreds of people representing funders, lenders, tech vendors, lead sources, and more!
The event is open to anyone that’s part of or interested in becoming part of the small business and commercial finance ecosystem.
Staying Vigilant in the Funding Business
April 15, 2024There’s a lot of funny business going on these days, so here are some things for you and your merchants to look out for:
The LOC Bait and Switch
A scammer offers the customer an impossibly good deal on a line of credit that is contingent on first entering into some other product. After the customer enters into the first transaction, the LOC offer and the scammer disappear. If your customer is susceptible to falling for something like this, make sure to advise them ahead of time accordingly.
The Mystery Funder
Despite a customer claiming to work exclusively with you as a broker, at some point a third party mysteriously enters the process and offers a separate deal to them to compete with you. Although there could be many reasons for this happening both legitimate or otherwise, including the customer not being completely forthright about exclusivity, you should communicate with your customer beforehand about who or who not to expect a communication from. Also, there are methods you can use to mitigate this by plugging up common attack vectors like an email address or phone # on a submitted application. Allow an attorney to guide you on how to do this most effectively and legally.
The Debt Advisor
Beware the debt advisor who claims they are there to help a merchant reduce the obligations of their loans or advances as many do not understand the contracts they claim to advise on. Because of this, they can potentially push a customer into a much worse situation than they otherwise might’ve been in. A merchant’s best bet is to communicate directly with the source of capital on their own. Oftentimes a contract spells out the proper protocol to follow depending on what the situation is.
Pac-man
They got hot full packs for sale including bank statements, social security #s, and other data ready to send your way! Before engaging in any such transaction, please consult with an attorney about the potential implications of doing something like this. Same goes for you if you were thinking about “selling your declines.”
The Ghost
Brokers often complain about customers falling for obvious scams over the phone, including the classic LOC scam, however, brokers can be just as susceptible to the same tactics. Before working with any lender or funder, you should conduct a full range of due diligence on them. This includes investigating their precise address, who the owner is, what their background is, what their ISO contract says, what their merchant contract says, etc. Too often brokers are drawn in by a commission they believe they stand to make and a smooth talking biz dev rep they talked to on the phone and skip over all the fundamentals. If the funder turns out to be a scammer, then you’ve potentially placed customers with that scammer and put yourself doubly at risk. A commission isn’t worth waiving due diligence. The stakes are too high for this industry.
What’s Happening to Trucking?
April 10, 2024
When deBanked examined the trucking industry in late 2022, the cost of trucks had shot up while margins were being squeezed. Since then major trucking firm Yellow Corp filed for bankruptcy, a bank in Iowa went belly up over bad trucking loans, Fox said that trucking had entered a Great Recession, and Freight Waves labeled trucking a “bloodbath.”
In the Freight Waves story, it summed up the issue as “too many trucks and not enough freight to move.” Other trade publications have said the real issue is a shortage of truck drivers.
deBanked pulled some of the granular stats from acclaimed data source Bizminer to see what was happening under the hood.
For General Freight Trucking (over long distances), average revenues were down approximately 20% between 2018 and midway through 2023. For refrigerated trucking services, average revenues were down 24% over the same time period. This drop coincides with a rapid rise in inflation, which means that the dollars generated more recently have even less purchasing power than they did in 2018. For example, $1 million earned in 2018 would equate to $1.24 million earned in 2024. So if one’s revenue didn’t keep pace with that, or worse yet, dropped significantly from where it had been, then they would be worse off. That’s what’s happened to trucking.
Or as the lenders in the commercial finance industry have noticed, trucking has been a complicated business as of late. Between the compressed margins and potential risks, some have opted to suspend working with this segment to err on the side of caution. It’s a big business to step away from given its depth and impact. At last count, for example, 8.4 million people worked in the trucking industry, of which 3.5 million were truck drivers. So even if one doesn’t finance trucks or lend to trucking companies, just about every business there is still depends on trucks to ship and deliver supplies. So what’s happening to trucking affects everyone.
Don’t Just Say You Can Do SBA Loans, Learn How to Broker Them
April 6, 2024
“As in anything else, once you master the learning curve, you’re fine,” says Bob Coleman. “The reason why SBA lending is difficult is you may not know the rules.”
And that’s where Coleman comes in, a former lender turned news source and educator of SBA loan brokers, he offers his own online course called the Certified SBA Loan Broker Training, which is open to commercial loan brokers of various backgrounds that want to master SBA. Without training, brokers unaccustomed to the process can get lost and bogged down if they try to figure it out on the fly.
For instance, “If you drop something off at your lender, the lender is going to come back with 15 things and you may not know exactly what they want,” Coleman says, “and therefore the difficulty arises when you don’t know exactly what the lender wants and you ask the borrower and then it becomes a long drawn out affair.”
It’s precisely this scenario that scares brokers accustomed to light paperwork and perks like 2-hour approvals in the short-term working capital space from even attempting to try their hand at SBA. But even the merchants can be scared off by a longer more arduous process. Coleman also acknowledges that there has been a collective awakening throughout the mainstream commercial finance space that speed is on every business owner’s mind.
But speed can be a matter of experience and just knowing what to do, how to do it, and who to do it with. Besides, in an era of creeping one-stop-loan-shops that can do it all, it will become increasingly difficult for today’s broker to tell a customer that they don’t really know how to do the harder stuff and to always default to a short term loan or MCA when the broker next door is ready to put an SBA loan together if that’s the best course of action. As most brokers are aware, many short-term working capital brokers also offer equipment financing at the very least and vice-versa these days.
“A successful broker is one that cultivates a relationship with a few lenders,” Coleman says. “A broker is more entrepreneurial [versus an in-house business development officer], has access to a number of different products, and they work with a core level of lenders or funders.”
And that all comes down to training, which Coleman’s course offers for SBA.
“The loan broker course is geared for loan brokers who have a basic knowledge of commercial lending,” Coleman says. “We’re not going to go through and tell them how to analyze an income statement or a balance sheet, but we are going to tell them what SBA lenders are looking for.”
Coleman’s course is designed to take 12 weeks, though with it being online those enrolled can move at their own pace. As a benefit those taking the course get access to Coleman himself and can ask him questions and can join his weekly live show. There’s also the Coleman Roundtable where brokers and lenders dial in together once a week so that lenders can provide updates on what type of deals they’re looking for.
“It’s always a moving target of what the lenders will do,” Coleman says, “As we go through economic cycles, lenders tweak their credit boxes of what they want, and the brokers have to understand the lenders have a tremendous amount of pressure from a lot of stakeholders on how they want their portfolios to look.”
To that end, any broker that maybe tried their hand on an SBA loan in the past and walked away discouraged shouldn’t give up on it entirely.
“SBA is constantly changing,” Coleman says. “If you had a bad experience three or four years ago with a particular lender, forget about it and find out what’s new.”
Bob Coleman will be speaking alongside Sean Murray at Broker Fair New York City on May 20 if you’d like the opportunity to learn more from him and pick his brain in person.
Federal Regulator Tasked With Small Business Finance Oversight is Now Protesting Itself?
April 5, 2024If you saw a protest outside the office of the CFPB in Washington DC lately, you’d be forgiven for assuming it was a group of aggrieved consumers. Alas, it’s something much more bizarre, the CFPB protesting itself. That’s because the regulator is currently engaged in a labor union dispute with its own employees over fair pay. Mind you this is the same regulator that is tasked with adjudging fairness in the private sector. CFPB employees are members of Chapter 335 of the National Treasury Employees Union (NTEU) and this union is currently engaged in heavy mobilization and protest efforts against the CFPB.
The campaign slogan is Pay Up, CFPB, which has been printed on banners that are being paraded by CFPB enforcement attorneys outside the CFPB office on 1700 G St NW. The NTEU actually has a formal online signup sheet for CFPB employees to pick their time to picket outside. On April 3rd, the union even took a page out of the New York City playbook when it apparently wheeled in a Scabby the Rat inflatable.
Apparently this guy was in front of CFPB headquarters yesterday. pic.twitter.com/5mq7R2h1Tf
— Evan Weinberger (@reporterev) April 3, 2024
As recent as March 27, the National President of the NTEU scolded CFPB Director Rohit Chopra in a letter that accused him of being uncooperative in negotations.
“I believed you when you said you valued CFPB employees and that you respected NTEU as CFPB’s exclusive representative. However, your actions have not supported your words. I have reached out to your office multiple times, both by letter and by phone without receiving a proper response. To build a strong relationship, we must prioritize communications to work through issues, especially when we disagree. Instead, you have avoided all communication. I have even offered to meet with you on the weekend to let you know my commitment to this relationship and to stress to you how important having ongoing discussions is to help resolve this dispute. Your lack of response is unacceptable.”
– NTEU President Doreen P. Greenwald to CFPB Director Rohit Chopra
The irony of this all cannot be overstated. While the CFPB is literally preparing to enforce 888 pages of regulations in small business lending to assess fairness in the marketplace, the union representing the CFPB’s employees has declared that the CFPB’s leadership does not believe in fairness.
Meanwhile, the CFPB just settled a separate lawsuit with its own employees over previous claims that it had discriminated on the basis of race.
