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
Who’s On Your Fantasy Funding Team?
September 14, 2015
A few years ago, a friend of mine was dropped by the funding brokerage he worked for and put on the waiver wire. He was promptly picked up by a competitor and today ranks among one of the top closers in the industry. It was one of the strangest moves of the season because his numbers had been really good month after month. It turned out that he was turned loose for earning too much money, something the firm wasn’t content with.
Even though he was compensated on a commission-only basis, he was apparently putting the company over their salary cap. That of course begged the question, why was there a compensation cap for a top performer, somebody who was directly leading to the firm’s growth? For what it’s worth, he was entitled to approximately 20% of the company’s gross commission revenue. So on every deal funded the company took home the other 80% of the commission. This worked for both parties until the closer started earning well into the six figures, at which point they told him he wasn’t allowed to earn more than a certain amount.
Although discouraged by the sudden limitation, he continued to work hard to prove why the cap should be removed. It wasn’t. Soon afterward he found himself on the waiver wire.
He was replaced by two rookies fresh out of college who were willing to do the same job for a lot less, but neither had any experience in the field.
As someone who has been active in this industry for nearly a decade, I’ve watched this scenario play out dozens of times.
- Firm needs top talent to grow
- Firm hires Talent
- Talent produces
- Firm grows
- Firm doesn’t like that Talent is making so much
- Firm fires Talent or Talent quits
As the firms gallop off to the next scouting combine to find somebody younger and more malleable, the pool of experienced talent is dispersed across a sea of competitors. A consequence of this is that each of those companies become more evenly matched and it becomes increasingly difficult to stand apart from the crowd.
At trade shows and happy hours, it’s not uncommon for top players to openly question what would happen if they all joined forces to create a funding dream team of sorts. And while such cohesion rarely actually happens, I can’t help but imagine if given the opportunity to build the best team to win, who I would pick.
Top talent is expensive. I know this because I recently spent 89% of my budget in a fantasy football auction draft to acquire just three players. And last year I spent a similar percentage on only four players and won the entire league. My thought process was to build a team that was centered around the best of the best. Previous years of conservative play led to mediocre results and I wanted to change that.
Today, there are hundreds of alternative business financing companies and thousands that can be considered brokers. There’s a lot of decent teams out there but few that are built around a group of all stars. And oddly, some companies seem to be dumping their best and brightest on purpose, just like I described previously. That might lead to improved margins for the firm, but probably won’t help them win in the long run.
Here’s something to think about while you’re watching Monday Night Football. If you had to build your company around a core group of talented people, who would you pick? Don’t worry about whether or not they’re available or if they fit into your budget. Those are obstacles that can be overcome.
Here’s a list of positions to help you imagine your fantasy funder:
- 1 Senior Manager
- 2 Underwriters
- 2 Closers
- 1 Flex Spot
- 1 Admin
- 1 Collector
- 1 Tech Person
Good luck!
Financing Not Really an Issue for Small Business According to the NFIB
September 11, 2015
Small businesses need money right? Well according to an August 2015 survey conducted by the National Federal of Independent Business, 21% of respondents said that taxes were the single most important problem facing their business today. That ranked highest on a list of ten issues. Only a minuscule 1% said that financing and interest rates were the most important problem. Even inflation was ranked as more important than financing.
Thirty-three percent of all owners reported borrowing on a regular basis and similarly, thirty-three percent reported all credit needs met. 49 percent however, explicitly said they did not want a loan. This data is based on a sample of 3,938 small-business owners/members that translated into 656 usable responses received for a response rate of 17%.
20% of respondents said that government requirements and red tape were the single most important problem they face, second to taxes.
One could infer from the data that access to capital is not a challenge for small business right now, which would make sense given how many non-bank alternatives are currently available. It also raises the question as to why regulations for non-bank alternatives would be considered a priority when small businesses seem to be pretty content with the way things are. If anything, the message here is that the best solution to grow small business is to lower their taxes. With that remedy being unlikely, a potential takeaway from this study then is that non-bank financing companies should consider ways to address their prospects’ two biggest pain points, taxes and government requirements. And if not those two, then the third issue that respondents said was the single most important problem, poor sales.
How can non-bank financing companies help small businesses address poor sales? This may be the key to long-term mutual success.
Yellowstone Capital to Drive Job Growth in New Jersey
September 11, 2015
According to Business Facilities Magazine (BF), NYC-based Yellowstone Capital is considering a move to Jersey City and was approved for up to $3.3 million in Grow NJ tax credits over 10 years.
Grow NJ is a New Jersey job creation program that is designed to give the state a competitive economic edge against surrounding states.
BF says that Yellowstone Capital would create 45 jobs.
The move would loosen the grip that Manhattan’s financial district has on the fast growing alternative business financing industry. Currently located at 160 Pearl Street, just steps away from Wall Street, Yellowstone surprised many industry insiders several months ago when their lifetime funding figures of $1.1 billion were published on the industry’s leaderboard.
A move to the Garden State would not be surprising in the midst of all the infrastructural improvements the company has made in 2015.
Competing Factions Hurt Alternative Lending’s Message
September 10, 2015
It’s over. Legislators and regulators in Washington DC know alternative lenders exist, and there’s no going back. There will be regulations that impact the industry in some way. That seems to be a definite at this point. What aspects will be regulated and to what extent however is yet to be determined.
And here’s the important thing you need to know about that impending conversation with folks in DC; They’re not up to speed on many of the issues being debated between industry insiders, and honestly probably won’t be for a long time, if ever.
They’re literally on square one. So if you were secretly hoping that regulators were on the verge of outlawing stacking, excessive broker fees, or high interest rates, you’re going to be very disappointed. I would argue that more than likely they’d have no idea what you were talking about if you broached these issues with them and it would come across like this:
And that’s because they’re trying to fully understand more basic things such as, why would a small business borrow money online as opposed to a bank? And what does marketplace lending really mean and how does it work?
Folks in DC are genuinely curious about the basics. They want to understand because they don’t want to be caught not understanding and ignorantly lead the nation into another financial crisis. That’s why the Treasury recently issued a Request For Information. You should notice how there’s nothing about stacking in it, but rather more fundamental issues like whether or not marketplace lending is helping borrowers that were historically underserved.
You have to applaud the Treasury’s approach because informed regulations, if that’s what this all leads to, would be much better than uninformed regulations.
The process could easily be jeopardized however if everyone’s so caught up in choosing teams, sides, and points of view that they believe are the “right” ones with the hope of scoring nothing other than perceived political points.
If this is what folks in DC see while they are in the information gathering stage, well then it’s probably not going to be a good outcome for anyone:
Companies that buy future receivables with daily payments and lenders originating 3-year loans with monthly payments actually have a lot in common on the fundamental level. They’re both bank alternatives. And for a number of reasons, small businesses are choosing them over more traditional sources. That’s where the conversation needs to begin.
The opportunity to communicate with rule-makers shouldn’t be squandered on complaints about what other people are doing, but rather on the what, why, and how for small business.
The worst thing that could happen is that divisive language within the industry leads to a regulatory result that negatively impacts all the parties involved, including the small businesses that benefit from this improved system of accessing capital.
Surely there is a way forward for everyone…
Revenue Advance Searches Up, Small Business Loan Searches Down
September 8, 2015Back in early 2013, I explored the popularity of Google search phrases related to the industry. At the time, keyword phrases such as merchant cash advance were on a downswing after reaching their peak back in September 2008. Oddly, the keyword hasn’t been able to match the popularity it had seven years ago, but it is on the way back up.
Other keywords are just about dead, but perhaps most interesting of all is that small business loans has been declining consistently for about ten years straight, though it appears to have tapered off a bit.
Take a look:
three additional terms: merchant loans, ach loan, merchant financing
Hanna Kassis of Oarex Capital Markets noticed that the term Revenue Advance is at an all-time high. You can read his thoughts about that here:
My Marketplace Lending Yield Dropped: What Gives? (SCRA)
September 6, 2015
It’s a case of the ‘ol bait and switch, at least at first glance. The interest earned on fixed rate notes is supposed to be predictable, but it can change at any moment due to the Service members Civil Relief Act (SCRA). The earliest versions of the law were enacted in 1940, and they provided America’s active duty military servicepeople with certain protections while they were abroad.
One of those protections is a cap on interest rates. Specifically, the SCRA requires that the interest rate on preexisting debts, such as Loans, be set at no more than 6% while the qualified service
member or reservist is on active duty. This rule extends to online lenders as well, not just traditional banks and credit card companies.
I personally was reminded of the law when one of my Lending Club notes had their interest rate dropped from 12.69% to 6%. I guess I should’ve known it was a possibility considering the borrower’s job title was listed as Command Sergeant Major.
When the serviceperson returns from active duty, the rate goes back to what it originally was but the difference between the agreed upon rate and 6% while away is automatically forgiven.
The Lending Club prospectus states, “We do not take military service into account in assigning loan grades to borrower loan requests. In addition, as part of the borrower registration process, we do not request our borrowers to confirm if they are a qualified service member or reservists within the meaning of the SCRA.”
The risk of deployment is one that investors take on their own. The SCRA cap has affected a measly .004% of all the consumer notes that I’ve acquired across two platforms. To an investor, the impact on portfolio yield should be immaterial, and as for servicepeople, well I hope it makes a difference for them. They deserve all the protections and benefits they can get!
Qwave Capital Steps Up Pressure to Acquire IOU Financial
September 2, 2015
The nuclear scientists in venture capital clothing have laid out their case to IOU Financial’s shareholders that they would be better served if they were running things. In a letter distributed on Monday by Qwave Capital, the firm trying to acquire IOU, they criticized the lender’s state of affairs.
In all, IOU continues to demonstrate that it cannot grow profitably and compete effectively within its current model. This is made worse by the fact that, because IOU does not have sufficient capital, conservative lenders are reluctant to provide IOU access to capital at competitive rates. In comparison, OnDeck, IOU’s major online lending competitor, had raised far more capital when at the same stage of development that IOU is at today. OnDeck can now attract the lower interest funds it requires to lend out to customers and support its profitable growth in the U.S. and Canada.
Qwave chastised IOU’s board members for decisions it didn’t feel aligned with the best interests of the company.
“IOU transactions have allowed Board members and insiders to maintain their dominant interest in IOU and purchase shares for below-market value,” they wrote.
And continued:
“For instance, IOU recently completed a private placement financing at $0.40 per share, a 20% discount to Qwave’s Offer and the private placement’s original $0.50 per share price. IOU completed the $0.40 per share offering even though Qwave’s offer was on the table and IOU had confirmed offers at $0.50 per share on its books. Parties related to IOU management subscribed to approximately 17% of the offering at the discounted offer price.”
Judging by the rest of the letter, IOU shareholders will certainly have a lot to consider. You can read a full copy of it here.
Stock Slump Makes Marketplace Lending Look Like Safe Haven
September 2, 2015
The premium might be gone in peer-to-peer lending, but a step forward is definitely still better than three steps back. Probably the most frustrating thing for long term investors in the stock market is the day-to-day volatility. Some of it’s rational, and some of it’s just, well, who knows…. it’s the stock market.
It’s a hopeless feeling to see your stock portfolio balance drop substantially all because something is happening in China. But if you’ve diversified your overall investment portfolio beyond just stocks, it’s not all bad right now. It’s actually a bit of a golden era.
On Lending Club, my portfolio’s Adjusted Net Annualized Return is 8%. On Prosper, my Annualized Return is 11%, though that portfolio is younger and smaller. And then there’s my merchant cash advance portfolio which is beating both of those by a long shot.
These investments are a wonderful balance to the stock market because they don’t care what’s happening in China either. It’s times like these though when you need to be patient and not overreact. The easy mistake to make right now is to substantially reallocate your portfolio so that the majority of your capital is in marketplace loans.
LendingMemo’s Simon Cunningham believes that having 20% of your portfolio in peer-to-peer lending investments is reasonable.
And Lend Academy founder Peter Renton told Equities.com last year that, “The official word from the platforms is that you should not invest more than 10 percent of your net worth.” He also went on to say that some people are putting half their life savings into this and that it’s probably not a good idea.
And he’s right. As volatile as stocks can be, your steep loss today can be erased by a rally tomorrow. With notes backed by the performance of loans, a loss today can’t just rally back tomorrow. When the loans go bad, the money is gone and thus the risk of loss is a little bit more permanent since you can’t just ride it out.
In that same interview, Renton said, “If there were another 2008 or 2009 now, I feel very confident that my returns would remain positive. I’m earning close to 12 percent right now. If there were another 2008-9 right now, I might go down to 6 percent.”
I think that’s probably a best case scenario in a worst case scenario. Everyone should plan for events or contingencies that will lead to losses. If there were no possible outcomes that could lead to losses, then the market has obviously mispriced the loans and I don’t believe that has happened.
One nightmare scenario to consider for example, is if the loans are invalidated by a court. Oddly enough, this very possibility is being discussed after the outcome of the Madden v. Midland ruling which hurt the reliance on chartered banks to originate loans. Lending Club’s CEO answered concerns over that by saying they were protected by their choice of law provision, a safeguard that just recently proved to be imperfect.
As Patrick Siegfried, Esq, wrote, “Last Thursday, the Attorney General of North Carolina was granted an injunction against Western Sky Financial and CashCall prohibiting them from offering any loans to North Carolina consumers or collecting on any outstanding accounts in that state.” The companies pointed to their choice of law provisions that supposedly made the rates permissible. This practice is actually commonplace for alternative lenders. But Siegfried said, “Because the Attorney General was not a party to the agreements, the court found that the Attorney General was not bound by the agreements’ choice of law. Therefore it could enforce North Carolina’s usury laws against the defendants.”
Now however remote the possibility of judicial or regulatory invalidation of loans, it is sobering possibilities like these that should prevent anyone from putting half their life savings into marketplace lending. It is a nice complement to a portfolio of stocks, but not a replacement for one.
Over the last week, my marketplace lending portfolios have been a bright spot and a source of optimism in a news cycle and market that has suddenly turned bearish. I’m tempted to reallocate my investments accordingly, but I’m not going to.
Hopefully you won’t make any impulsive maneuvers either…
