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
deBanked Magazine Cover Teaser
September 30, 2015Can you guess who is on the cover of the September/October magazine issue of deBanked? Make sure you’re subscribed to the magazine to find out who it is!
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Sam Hodges on Fox Business
September 30, 2015Funding Circle’s Sam Hodges appeared on Fox Business on Monday, September 28th. One of the things he said is that loans under $1 million are still out of reach for most small businesses.
He also mentioned that his company has the lowest loss level of any digital small business lender anywhere in the world.
Details about Funding Circle disclosed:
- $1 billion lent to more than 10,000 businesses
- 40,000 investors globally
- $25,000 to $500,000 small business loans
Watch the full video below:
What The BFS Capital IPO Announcement Means for the Industry
September 29, 2015
Under the Jumpstart Our Business Startups (JOBS) Act, “an emerging growth company may confidentially submit to the Commission a draft registration statement for confidential, non-public review by the Commission staff prior to public filing.”
According to the New Yorker, this process “allows companies that are thinking about going public to test the waters—they can gauge investor reaction, get feedback from the S.E.C. on their filings, and so on—before deciding if they want to go ahead with an I.P.O. If a company goes through that process publicly, and then decides to abandon the offering, its reputation gets damaged, even though it often makes sense for a company not to go public. Do it privately, and no one gets hurt.”
That’s what makes BFS Capital’s announcement (formerly Business Financial Services) that they had filed a confidential draft registration so bold. Companies normally choose this method if they don’t want anyone to know what they’re up to. But BFS is a different funder than the ones that came before them. OnDeck submitted their original draft registration confidentially for example and actually tried to keep it a secret.
“The initial public offering is expected to commence after the SEC completes its review process, subject to market and other conditions,” states BFS’s September 25th release.
The intent to go public follows a recent rebrand and the announcement that they had crossed $1 billion in funding since inception.
The most shocking part about a BFS IPO is that it’s not a CAN Capital IPO. While CAN is both older and larger, the industry has heard no word about a CAN Capital IPO since rumors leaked in Bloomberg almost an entire year ago. Back on November 20th, 2014, it was reported that the “New York-based company could be worth as much as $2 billion in the share sale.”
There was kind of a universal expectation that CAN Capital would go public immediately after OnDeck and Lending Club. Some insiders have pointed to OnDeck’s disappointing reception and performance as the reason CAN has delayed moving forward. OnDeck is currently trading at less than 50% of its IPO price and is facing a lawsuit from its own shareholders over it.
Others have said that CAN Capital isn’t waiting for anything because the company doesn’t actually need to go public. Long reported to be profitable and self-sustaining, opening themselves up to the volatility and fickleness of the public markets may not be worth the additional capital.
And still more have pondered if CAN Capital has what it takes to excite investors. Unlike some of the brand new tech startups that dominate the headlines, CAN has been operating since 1998, a time when only 42.1% of American households had computers and only 26.2% had Internet access. Of course the company has evolved and these days is as tech-equipped as their young brethren but a 17-year old lender may not be as easy to sell in a market obsessed with companies such as Uber, Snapchat and Airbnb.
BFS Capital was founded 13 years ago in 2002 so they’re not exactly new either. And their CEO, Marc Glazer, has led the company since its beginning.
BFS has been expanding however both here in the U.S. and abroad. In the U.K., they operate under the name Boost Capital. Meanwhile, independent financial brokerage firms such as Entrust Merchant Solutions are being acquired and rolled up into their organization.
What makes BFS different from OnDeck and Lending Club is that BFS also does merchant cash advances, not just loans. The only other publicly traded company that is significantly involved in merchant cash advances is Enova International and that’s only due to their recent acquisition of The Business Backer. The investor uncertainty surrounding lenders and marketplace platforms might not carry over to a company that got its start by purchasing future credit card processing receivables 13 years ago.
It would be safe to say that there’s a whole group of industry insiders who feel that Lending Club is a poor representative sample of the tech-enabled business financing space and that OnDeck’s unique model prejudices investors into thinking all lenders are like them. A BFS Capital IPO could in effect set the record straight for the industry and revive the IPO plans of their peers and competitors.
It might actually take a BFS IPO for us to finally see a CAN IPO, not that there aren’t plenty of other quality candidates right behind them.
What would a BFS Capital IPO mean for the industry? Perhaps a chance at redemption. There’s a lot of great things happening in this industry and investors ought to know about them.
OMG: Same Day ACH
September 25, 2015
Coming soon, the ability to ACH funds same-day will finally exist. The change will be a boon to tech-based lenders that have become famous (or infamous) for their ability to approve and issue loans quickly. No matter how fast the systems have become however, the ACH network has continued to slow the process down.
Next-day funding has long made borrowers skeptical about the online lenders they apply to and many applicants become anxious when they hear that the funds will be in their account tomorrow rather than today, after the deal has been closed.
Speaking from my own experience, there was almost nothing worse than telling a merchant that the funds had gone out and would be in their account the next day because they would disregard the last part of that statement and check their bank accounts immediately and of course would not see those funds. They’d immediately reach back out to me or the underwriter and say that they had been deceived because no money was there. This scenario played out on at least half of all the deals I ever worked on and it was awful.
And I’d remind them, “It’s an ACH. It’s overnight. It should be there in the morning depending on your bank. If for whatever reason it isn’t, give me a call.”
Even after repeating myself, I’d often get an email later that day at 6 pm (bank closing time) to say that they were at the bank and the teller has just told them that they don’t see any incoming wires.
So many merchants just could not believe that a tech-based funding company could not make the money appear instantly in their account and every passing second caused them more anxiety and fear that they had been tricked.
Enter Same Day ACH, which is slated to launch in September 2016. According to the National Automated Clearing House Association (NACHA), who governs the ACH network, there will be two settlement times.
A morning submission deadline at 10:30 AM ET, with settlement occurring at 1:00 PM.
An afternoon submission deadline at 3:00 PM ET, with settlement occurring at 5:00 PM.
Virtually all types of ACH payments, including both credits and debits, would be eligible for same-day processing, according to their announcement.
The industry can’t get Same Day ACH fast enough!
And if you thought you were excited about ACHing, just watch the below video produced by NACHA about how awesome their network is.
Qwave Fails to Acquire IOU Financial, But Becomes Major Shareholder
September 24, 2015
After some tense fanfare, Qwave Capital failed to acquire a controlling stake in IOU Financial but has succeeded in becoming a major shareholder. In a published statement, Qwave manager Serguei Kouzmine said, “As a significant shareholder in IOU, I plan to work constructively with the Board of Directors to ensure the company is focused on growing profitably and creating value for all IOU shareholders over the long term. I appreciate the support my offer has received and look forward to helping IOU realize its potential.”
Nearly 15% of the company’s issued and outstanding shares were acquired under the offer.
Qwave stands to materially benefit in the long run especially since the timing coincides with IOU Financial hitting historic milestones.
“The Company’s loan originations for the months of July and August, totaled US$31.3 million, representing a year over year increase of 150% in comparison to the same period in 2014,” IOU announced.
They also funded more than $100 million in 2014 and if that volume is a metric that anyone is measuring then IOU is substantially undervalued.
If the takeover attempt accomplished anything, it may have stirred IOU from a slumber at just the right moment in alternative lending history. They’ll be a lender worth keeping an eye on.
Is Lending Club Not Disruptive After All?
September 21, 2015Timothy Puls, an equity analyst for Morningstar is not sold on the Lending Club model. One of his chief critiques is that the platform does not provide a network effect, meaning that the value of the company doesn’t grow just because more users are on the platform.
Puls also feels that the underwriting and distribution model is easily replicable. And that’s not all, you can listen to his analysis in the video below:
Do you agree or disagree?
BFS Capital Joins the Ranks of Consolidated Powerhouses in Alternative Lending
September 21, 2015
Coral Springs, FL-based Business Financial Services has joined the ranks of consolidated powerhouses with the announcement of their rebrand to BFS Capital. As part of the move, the company has unified its North American business affiliates.
Entrust Merchant Solutions, GBR Funding and Premium Capital Group will now also use the BFS Capital name. Entrust, who was acquired by BFS Capital on August 26th, has become the firm’s direct sales division. Ilya Fridman, Entrust’s former CEO, is now a Senior Vice President of BFS Capital and will oversee sales.
Boost Capital, their UK arm, is not changing its name.
BFS Capital is the latest small business funding provider to consolidate their affiliates and change their name.
Already this year, Merchant and Cash and Capital became Bizfi, AmeriMerchant became Capify, and RetailCapital became Credibly. Industry insiders have noticed one thing in common about all these changes, that they’re memorable.
“I think people are thinking about going public and want names that are easily identifiable more than wanting to sound techy,” said John Celifarco, Sales Manager at NY-based Sure Payment Solutions. “Maybe a little of both.”
When deBanked previously asked Rory Marks, a Managing Partner of NY-based Central Diligence Group, about the name recognition-value of certain funders in the industry including Business Financial Services, he said “when choosing to use words that are ubiquitous in the industry, it could be difficult to distinguish yourself. Ultimately this could potentially impact the customer’s ability to fully understand the nature of your business.”
Business financial services could be confused as a genre or a category, a few insiders commented, instead of a company name.
The BFS Capital brand should remedy any confusion, although Justin Benton, Executive Loan Producer of Lenders Marketing shared, “a simple name that conveys what you do has value, not only in the eyes of your potential clients, but in the eyes of search engines like Google. At the end of the day, if you do your job well and the client is pleased with the loan product and service you provide, your name will be positively associated as a trusted resource.”
Business Financial Services has long been referred to as BFS by industry insiders so unlike other funders that completely transformed during their rebrand, BFS Capital may retain more of their previous name’s goodwill.
“Bringing all your companies under one umbrella can bring each company’s unique strengths together in one collective effort, rowing towards one common destination,” said Benton.
BFS Capital has been a hot news item this summer. In July, they surpassed $1 billion in lifetime funding.
Dodd-Frank and More Paperwork Make Lending Harder
September 19, 2015
It’s not just alternative lenders that have concerns about Dodd-Frank, Section 1071 and the CFPB. Several community bankers recently testified in front of The House Committee on Small Business Subcommittee on Economic Growth, Tax and Capital Access to explain just how detrimental regulations have been to their lending operations.
While the discussion encompassed all types of lending including consumer mortgages, B. Doyle Mitchell Jr, the CEO of Industrial Bank said that, “Dodd-Frank was intended for maybe 50 to 100 institutions. It was not intended for mainstream institutions, minority banks around the country.” Mitchell was speaking on behalf of the Independent Community Bankers of America (ICBA).
While repeatedly making the case about how important community banks were to local communities, he explained that Dodd-Frank had not helped them achieve their goals. “It has only increased our costs,” he testified.
Mitchell also expressed a feeling of perpetual anxiety over the loans they make, worrying that a regulator will not like them.
Dixies FCU CEO Scott Eagerton, who was there speaking on behalf of the National Association of Federal Credit Unions (NAFCU) said, “I really feel like we’re getting away from helping people and making sure that we make the loans that Washington agrees with and I think that needs to change.”
While alternative lenders were not on the agenda, the subject of government mandated transparency and its intent to help make things easier for borrowers is both timely and relevant. Referencing some of the new disclosures required in loan documents by Dodd-Frank and/or the CFPB, Congressman Trent Kelly asked if all the added pages to loan agreements make it easier for their customers to understand.
“Do they understand what they’re signing?” he asked.
Mitchell responded that they do not. “It is not any more clear,” he answered. “In fact it is even more cumbersome for them now.”
Regulators should pay special attention to this especially in light of a Federal Reserve study that came to the same conclusion. In Alternative lending: through the eyes of “Mom & Pop” Small-Business Owners, small business owners were asked if they understood financing terms offered by typical online lenders. The feedback was overwhelmingly positive that they did. But when asked a trick question about annual percentage rates, most got confused. While some advocacy groups interpreted this to mean that small business owners are confused by online lenders, it actually offers pretty compelling evidence to the contrary. A future standard of government mandated transparency as it relates to annual percentage rates would only serve to make it harder for small businesses to understand contracts, not easier.
Both Eagerton and Mitchell made the case that increased compliance costs undermined the ability of community banks to grow the economy. “You cannot expect a trillion dollar institution to focus on hundred thousand dollar loans,” Mitchell said. And Subcommittee Chairman Tom Rice said, “the burdens created by Dodd-Frank are causing many small financial institutions to merge with larger entities or shut their doors completely, resulting in far fewer options where there were already not many options to choose from.”
Eagerton argued that,”lawmakers and regulators readily agree that credit unions did not participate in the reckless activities that led to the financial crisis, so they shouldn’t be caught in the crosshairs of regulations aimed at those entities that did. Unfortunately, that has not been the case thus far. Accordingly, finding ways to cut-down on burdensome and unnecessary regulatory compliance costs is a chief priority of NAFCU members.”
But Congressman Donald Payne, Jr wondered why the ICBA was objecting to Section 1071 of Dodd-Frank, the part that grants the CFPB authority to collect certain pieces of data from financial institutions. Regulation B of Section 1071, for those that aren’t aware, was intended to study gender, racial and ethnic discrimination in small business lending.
Payne likened the law to The Home Mortgage Disclosure Act (HMDA), pronounced HUM-DUH, in which raw data is disclosed to the public but no penalties are specifically imposed if the data leans one way or another.
Mitchell responded to that by saying HMDA was a good example of something that was already very burdensome and another reason why Section 1071 was a bad idea. “While there is a clear need to outlaw discrimination at any level, I don’t think [this law is] necessary for community institutions,” he said. He pointed out that his bank could suffer reputational damage in the community by disclosing the gender and racial statistics of their business loans to the public at large.
While he did not expand on what he meant by reputational risk, one could fill in the blank that he meant the context that such data would lack. For example, if 75% of Hispanic-owned businesses were declined for business loans while only 25% of African-American-owned businesses were declined for business loans, one might infer from that raw data that there is potential discrimination taking place. Since small business loans are less FICO driven than consumer lending and focused more on the story of the business and the projected financial future, it is impossible to infer anything from raw data as it relates to discrimination.
“Simply put, Dodd-Frank needs to be streamlined,” said Marshall Lux, Cambridge, MA, John F. Kennedy School of Government, Harvard University.
And “the problem with Dodd-Frank,” Mitchell voiced, “is you cannot outlaw and you cannot regulate a corporation’s motivation to drive profit at all costs so while it had a lot of great intentions in over a thousand pages it has not helped us serve our customers any better.”
You can watch the full hearing below:
