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
MCC and BizFi Founder Stephen Sheinbaum on Bloomberg
August 4, 2015Earlier today on Bloomberg TV:
“Automation doesn’t mean no underwriting,” said Stephen Sheinbaum, the founder of Merchant Cash and Capital and BizFi.
Sheinbaum also said that they have never raised an equity round from an institution.
“We do want to go public,” he added. If they can obtain an equity investor, he put their timeline to go public at 12 to 18 months.
Watch the video below:
Have Your Marketing Response Rates Changed?
August 4, 2015
Notice anything different with your marketing response rates lately? OnDeck has…
During the OnDeck Q2 earnings call yesterday, company CEO Noah Breslow said, “there are no two or three competitors dominating this trend (direct marketing), but we know the sheer number of marketing solicitations targeted to small businesses has grown meaningfully over the last six months which impacts our response rates.”
The comments were interesting because while they opposed any correlation between the increased competition and their continuously declining interesting rates, it was an acknowledgement that they are not alone in their marketing efforts, nor are their marketing methodologies proprietary.
The comment was focused mainly on direct mail campaigns and Breslow argued their strategy was to “break through the clutter” and “better communicate our value proposition.”
“Competition for customer response remains elevated,” he later added.
OnDeck still managed to fund $419 million for the quarter, up only $3 million from the previous quarter, but a 69% increase over the same time period a year ago.
During the Q&A which was unfortunately not part of the recorded transcript so I will paraphrase as best I can from memory, a few analysts inquired deeper about the competition.
One wondered if their competitors’ marketing efforts were sustainable or if they were simply on a market share binge and would eventually go away. Breslow said there would probably be a combination of both, that some would continue to stick around long term and others might fall off. It was a safe answer because while some of their competitors may indeed have high acquisition costs, there are still profits being made and nobody should expect the competition to subside any time soon, if ever.
Breslow also shared that the competition was bidding up the price online, talking at least in part about Pay-Per-Click marketing.
OnDeck shed more Funding Advisors (brokers) in Q2 than they expected to because of their “re-certification program.” Brokers either didn’t make the cut or would not go through the program. Only 20.6% of their loans were originated by brokers in Q2 of this year as opposed to 30.8% during this time last year. Brokers brought in bigger loans though on average because they made up 28.4% of the dollar volume of loans originated this year. Last year at this time they made up 42.9% of the volume.
OnDeck has managed to grow despite their dwindling reliance on brokers and a marked increase in competition.
Have your direct mail and online advertising response rates changed recently? If OnDeck has taken notice, surely you must have too…
Update: You can read the full transcript of the call here, including the Q&A
deBanked’s Next Issue Shipping Soon
August 3, 2015Are you ready for another issue of deBanked Magazine?!
In this edition, we explore the Australian market, the commission chargeback debate here at home, the quest for national bank charters, a deeper look at the Midden v. Midland case and MORE!
Haven’t been receiving the print edition in the mail? You need to SUBSCRIBE for that. It’s free.
We distribute thousands of copies to ISOs, brokers, lenders, funders, and other players in the alternative business lending ecosystem. Want to be included in future issues? Drop me a line at sean@debanked.com
New Funding Brokers Struggle As Industry Grows
August 3, 2015
Here’s a few things that will have you scratching your head.
1. A new sales agent recently took to an industry forum to ask for help with ACH processing. According to him, he charged a closing fee on a loan that closed and then realized that he had no idea how to collect the fee. His problem was perplexing because he had the merchant sign an agreement that authorized him to debit the funds out despite not having an ACH processing account.
Some sympathetic veterans advised him to have the merchant write him a check, but others were too dumbfounded by his use of an ACH agreement when he did not know anything about ACH. The agreed fee was probably too large to write off as a mistake so hopefully the merchant will understand and write him a check for services rendered.
The lesson: If you don’t know how to do something, don’t guess. The agent would’ve been in a much better situation if he had asked how to collect fees prior to drawing up an agreement that referred to a methodology he had no familiarity with.
2. A semi-seasoned sales agent griped about a recent experience on an online message board about a business lender that stole his deals and turned out to be a repeat felon. The broker community was not sympathetic when they learned that the “lender” used a gmail address to communicate. What’s worse is that a perfunctory Google search revealed a record of violent crime.
The lesson: At the very least, do not send deals to anyone using a free email address. This was item #3 on my Advice to New Brokers list, published back in February. This also violated item #4 on my list, which says, don’t send your deal to some random company just because they went around posting on the web. A simple Google search for this broker would’ve showed that the “lender” was a serial criminal.
3. One broker e-mailed me to say that a lender had stolen his syndication money and disappeared. Another told me that they had stopped receiving their syndication deposits for their entire portfolio and wasn’t sure what was going on. This situation often doesn’t make the public forums because the aggrieved parties are sometimes too embarrassed to tell others that they got hustled. I recommended a lawyer to one of them.
The lesson: Refer to #4 on my Advice to New Brokers list. Even if others claim to be having a positive experience, there are a few red flags to look out for when it comes to syndication:
- Were they too eager to accept your money?
- Did they have an Anti-Money Laundering process in place?
- Would your funds be co-mingled with their operating funds or isolated in a separate account?
- How is their system structured? Will you get paid even if they declare bankruptcy?
- Was the owner of the company ever charged or convicted with fraud? This is probably the most important and for some reason the most overlooked. If the owner was previously charged with fraud and your money eventually gets stolen, you can only blame yourself. And if you don’t know if someone has a past criminal history, you should probably ask around in addition to conducting a formal background check.
Syndicating brings me to item #1 on my Advice list, hire a lawyer. If you can’t afford a lawyer, you definitely can’t afford to syndicate.
OnDeck to Announce to Q2 Earnings
August 3, 2015
OnDeck will announce their second quarter earnings today at 5:00 PM EST. Anyone can dial in by calling (877) 201-0168 and using conference ID 80861672.
The company’s executives may have to endure more questions than in previous calls because of the low stock price and the curious guidance reversal issued two weeks ago. After Q1, OnDeck projected Adjusted EBITDA for Q2 to be a loss of $3 million to $4 million. But on July 15th, they revised that to a GAAP net income of between $4 million and $5 million.
The sudden change was attributed to a one-time sale of loans in which the proceeds were booked as revenue.
Compass Point analysts Michael Tarkan and Andrew Eskelsen wrote in a note to clients, “if we exclude the one-time gains, core revenues came in well below our expectations, suggesting a meaningful deceleration in loan origination growth and/or another decline in yields.”
OnDeck closed Friday at $13.37, down 33% from its IPO price, though it’s higher than its all time low of $11.15.
The depressed value has invited a slew of ominous sounding press releases from law firms that questioned whether or not previous statements about the company’s prospects were false or misleading.
The distractions may have been compounded by the false rumor picked up by most of the web that claimed OnDeck was scheduled to release earnings last month on July 6th.
Notably, most analysts have issued Buy recommendations for the stock. Deutsche Bank analyst Ross Sandler set a price target of $18 and Stifel Nicolaus has it at $22. For now, Wall Street is still bullish about OnDeck.
Yellowstone Capital Continues to Reach New Heights
August 2, 2015
An anonymous source inside NYC-based Yellowstone Capital revealed the company had recently reached two milestones. One was that they had funded more than 50,000 deals since inception. The other was that they had funded just a hair shy of $40 million in the month of July, a new internal record.
The monthly figure puts them on pace with their competitor Merchant Cash and Capital, who announced having funded $115 million across the second quarter of this year.
Yellowstone’s $1.1 billion+ funded since inception raised eyebrows at the recent AltLend conference in NYC when Lendio’s Brock Blake put deBanked’s industry leaderboard up on the big screen during the event’s opening presentation.
Since then, other funders have shared their figures through public announcements. Coral Springs, FL-based Business Financial Services officially joined the billion dollar club just a few days ago.
Yellowstone’s continued rise can likely be attributed to the expansion of their risk box from high risk to moderate risk. Back in March, company CEO Isaac Stern led a management buyout backed by a private family office that brought on a new executive team. Private equity turnaround expert Jeff Reece came on as the company’s President. Reece is a former Director of Cogent Partners, a boutique, private equity-focused investment bank and advisory firm.
The company is also reportedly on a massive hiring spree after having leased another floor at 160 Pearl Street in Manhattan.
Yellowstone has a strategically diverse business model that allows them to either fund small businesses in-house (on their own balance sheet) or broker them out to other funders. My source says that the 50,000 lifetime deals funded figure includes both.
What’s in the SoFi AAA Rated Bonds?
July 30, 2015
Should you buy student loan debt from a startup tech-based lender? DBRS is signaling yes with a AAA grade to $387 million of the notes in a $418 million offering. To put that into perspective, the U.S. Dollar was given the same grade just months before. Bonds issued by Goldman Sachs however were rated two levels lower at A on July 6th.
As Safe as the U.S. Dollar?
Founded just four years ago in 2011, SoFi has already made more than $2.3 billion in student loans. The company CEO Mike Cagney is a regular fixture at FinTech trade shows and I myself admittedly often wear a SoFi t-shirt on hot summer days around the city.
Of all the loans to invest in though, I would’ve put student loans at the very bottom of my list. Everywhere I turn, recent college grads and the elderly alike are lobbying against what they perceive as an unfair system.
In a bombshell article in the New York Times last month titled, Why I Defaulted on My Student Loans, author Lee Siegel argued that repaying student loans will lead to “self-disgust and lifelong unhappiness, destroying a precious young life.”
The story ignited a political firestorm across social networks. But Siegel was unapologetic and encouraged others to follow his example of defaulting.
“I chose life,” he wrote. “That is to say, I defaulted on my student loans. As difficult as it has been, I’ve never looked back. The millions of young people today, who collectively owe over $1 trillion in loans, may want to consider my example.”
He’s found sympathy from millennials who came of age right during or after the financial crisis, since many of them have struggled to find jobs or move out of their parent’s homes.
And it’s not just them, “Over 16% of the $1.2 trillion in outstanding student loan debt belongs to individuals over 50 years old.” According to Forbes, the epidemic of student loan debt is even affecting seniors in retirement, some of whom are facing garnishment of their social security checks.
The outlook isn’t good either. According to the Wall Street Journal, the Class of 2014 is the most indebted ever, that is unless the Class of 2015 steals the title.
And there’s another statistic to consider. “The problem developing is that earnings and debt aren’t moving in the same direction,” reports the WSJ. “From 2005 to 2012, average student loan debt has jumped 35%, adjusting for inflation, while the median salary has actually dropped by 2.2%.”
But the SoFi rating is based on data, not on emotionally charged arguments over social networks regarding the morality of paying for college. Obviously the numbers must indicate something to give them a creditworthiness equal to U.S. Dollar, at least for the pool of notes that earned the grade.
Across the entire offering, dubbed 2015-C, there are also notes with a BBB grade. Altogether, the portfolio contains a weighted-average credit score of 777 and a weighted-average borrower income of $143,132. This isn’t exactly a group of poor struggling borrowers.
100% of the loans were refinanced from another lender so they had a prior track record of making payments.
“Refinancing Loan borrowers have already graduated, have proven well-documented incomes and have stronger credit profiles as compared with typical newly originated student loans,” the DBRS report states. “Further, such borrowers have demonstrated an ability to gain employment and repay their student loan debt.”
And yet a large portion of borrowers have a variable rate loan, with the average balance on those being $74,315. It’s a recipe that could shake the system years down the road.
A AAA rating is an eye-opening assessment even with the quality of borrowers. The final maturity dates for those notes are in August, 2035, a full two decades from now. SoFi has only been in business for four years.
Technologists and scientists say to trust in the data, but there’s got to be credibility afforded to the noise coming from millennials over the last few years. That message, at least the one that I’ve heard, has been that student loans are ruining lives.
Breaking news stories about predatory colleges feed into this narrative. Just last month, the NYT alluded that as many as 350,000 students were scammed by Corinthian Colleges. “Corinthian was a longtime target for federal and state regulators, with a host of investigations and lawsuits charging falsified placement rates, deceptive marketing and predatory recruiting, targeting the most vulnerable low-income students,” the NYT stated.
A Corinthian College graduate would probably not qualify to be a SoFi borrower. 3.5% of borrowers in 2015-C graduated from NYU and 2.5% from Columbia. 59% have an MBA, law, or medical degree.
If the DBRS report makes anything absolutely clear, it’s that these are the types of borrowers you’d bring home to meet your parents.
The irony is not lost however that Lee Siegel, the NYT author that encouraged kids to default on student loans like he did, is a graduate of Columbia.
Perhaps for that reason, competing ratings agency Moody’s graded the senior notes only AA2, two notches below what they consider perfect.
Yesterday I would’ve told you that I would never consider student loans as an investment, but now I’m not so sure.
The data and the review by the ratings agencies definitely conflict with what I hear from real life borrowers and their attitudes about student loan debt.
What are your thoughts?
Double Factoring Puts Business Owners in Jail
July 29, 2015
It’s a case of receivables being sold to two parties at the same time. According to the FBI, Brian Newton and Victoria Snow were convicted last week on 1 count of conspiracy, 13 counts of mail fraud, and 11 counts of wire fraud. They face a combined 40 years in prison.
The pair owned a company called Dataforce International in Clearwater, FL and began factoring their invoices in 2003 through a firm called Amerifactors. “As part of their scheme, Newton and Snow submitted a series of invoices for factoring to Amerifactors that were inflated and that did not reflect work that had been performed by Dataforce,” the report says. “In addition, the two engaged in ‘double factoring,’ which involved submitting the same Dataforce invoices for factoring to both Amerifactors and Prestige Funding.”
That aspect of the crime is significant because of how closely it relates to a questionable practice in the merchant cash advance industry known as stacking. Traditional merchant cash advances are purchases of future receivables and stacking is the instance of when a merchant allegedly sells those receivables to more than one party.
The practice is part of the reason the International Factoring Association actually voted to ban merchant cash advance companies from their trade association last year. “The merchant cash advance financing arrangement often leads to breaches of factoring agreements, because the factor client granted junior liens against the factor’s collateral or took on additional debt without the factor’s consent and knowledge,” wrote Steven N. Kurtz, Esq. last year in The Commercial Factor.”
Notably, Newton and Snow did more than just double factor invoices. Newton was secretly a partner in Prestige Funding, one of the factoring companies. Prestige Funding had raised more than $8 million from over 50 investors according to the FBI’s report and the scheme allowed Newton to divert more than $3 million into his personal bank account.
Sentencing has been set for October 9, 2015.
