Articles by Sean Murray

Congressional Effort Underway to Reinstate the SBLC Moratorium

It only took 40 years for the SBA to lift the moratorium on licenses for Small Business Lending Companies. Now there’s a congressional effort underway to reinstate it. The “Community Advantage Loan Program Act” which had not been assigned its own individual bill number in the Senate at the time of this writing, nevertheless garnered 18-1 approval by the Senate’s Small Business and Entrepreneurship Committee last week.

First, the proposal concludes that the SBA does not have adequate resources to issue more than 3 new SBLC licenses. Second, it calls for a 5-year moratorium on new licensees having Delegated Authority which is the authority granted to a lender to process, close, service, and liquidate SBA loans without prior SBA review. Third, it imposes new annual stress tests that would enable the SBA to revoke the new licenses. All in all, it is effectively a rollback of the new SBA rules, and those are just some key components of it.

Senators Ben Cardin, D-Md. and Joni Ernst, R-Iowa, are the sponsors of the proposal.

Among the small business lending companies that would be impacted by this is Funding Circle. Ryan Metcalf, Head of U.S. Public Affairs at Funding Circle, told deBanked that “We estimate that the proposed Cardin/Ernst bill would reduce 7(a) Small Loans made by Funding Circle over the next three years by 26%, of which 33% is to SMB in LMI neighborhoods and 40% in rural areas.” That’s without considering the increased regulatory costs or the likely reduced borrower conversion rate as a result of having non-delegated authority, Metcalf added.

The initiative by Cardin and Ernst does not come as a surprise. The two had been critical of the the SBA’s plans to allow more SBLCs all along, arguing that new licensees were likely to be fintechs who were “the very entities responsible for issuing billions of dollars-worth of Paycheck Protection Program (PPP) fraud”

Sales, Tech, Funding, and the Law in California

deBanked sat down with three individuals from across the spectrum of the small business finance world in Southern California.

With David Austin, an attorney and Managing Partner at Austin LLP, we discussed merchant cash advance law and the importance of legal counsel to run one’s business correctly.

With Trey Markel, VP Sales & Marketing at Centrex Software, we discussed corporate finance, AI, blockchain, tech, and more.

With Justin Thompson, Chief Revenue Officer at National Funding, we talked about what’s changed in sales and the state of selling.

They’re all on deBanked TV or listen to them on Spotify!

And don’t forget to register for deBanked CONNECT San Diego!

Federal Legislators Jump on Commercial Financing Disclosure Bandwagon, Renew Push to Give CFPB Authority Over Industry

Feel like there’s a lot of state-level disclosure going around lately? Well now some members of Congress believe another layer is needed at the federal level. In a bill titled the “Small Business Financing Disclosure Act of 2023,” the language looks awfully familiar. There’s a Double Dipping clause in it, for example, which was a term first seen in a New York State law.

The federal bill, which was introduced by US Senator Robert Menendez and Congresswoman Nydia M. Velázquez, seeks to place the small business finance industry under the authority of the Consumer Financial Protection Bureau (CFPB). As part of that, the Director (currently Rohit Chopra) would be responsible for devising all the rules and formulas, according to the bill. Furthermore, with regards to sales-based financing, the bill specifically states:

1. The provider must disclose an APR.

2. The estimated term of repayment and periodic payments based on projected sales volume must be disclosed.

“Small businesses are the lifeblood of the American economy,” said Congresswoman Velázquez. “But for too long, predatory lenders have taken advantage of businesses in need of capital by offering loans and similar products with unclear terms and exorbitant interest rates.”

Supporters of the bill, including Senator Sherrod Brown and Senator Ron Wyden, also stated that the bill is aimed at “predatory lenders.”

In Senator Menendez’s press statement for the bill, it cites Funding Circle, a small business lending company, as a supporter.

“We believe a free and fair market operates most efficiently when there is transparency in pricing, terms and conditions,” said Ryan Metcalf, Head of U.S. Public Affairs at Funding Circle U.S. When a small business has all of the necessary information up front including the annual percentage rate (APR), they can comparison shop and make informed decisions that are best for their business. Funding Circle supports one national uniform small business financing disclosure law because it is in the best interests of small businesses and interstate commerce.”

The push for a small business financing bill is not new. A similar bill introduced by Velázquez last year did not move forward, nor did the one from 2021, nor the one from 2019. The difference is that previous versions focused on Confessions of Judgment and fairness in small business lending. The latest version takes on the air of disclosure while attempting to subjugate the whole industry to CFPB regulatory authority.

ChatGPT Makes it Debut in The Secured Finance Market

“Based on the balance sheet provided, the business appears to have a healthy financial position,” the report states. This is the opening line of the written Financial Health Analysis conducted by OpenAI’s ChatGPT. From there it elaborates at length with all the relevant financial stats that an underwriter could ever dream of, even going so far as to recommend all on its own that recent tax returns, among other stips, should be requested to move forward.

What the world is coming to know as a chatbot, is capable of much, much more, according to Dave Kim, co-founder and CEO of Harbr, Inc. Harbr’s flagship product, IntakeIQ, is taking online application technology to new advanced places thanks to the introduction of real artificial intelligence. But there’s a right and wrong way to do this because keeping applicant information anonymous and secure is paramount.

“…security is massive, right?” said Kim. “Like you have to know going in that if you’re going to use a GPT or a Large Language Model that’s being hosted and you don’t have control of it yourself, that the data is 100% being used for machine learning.”

And along with security is the science of data input. Roughly speaking, the more information you send to ChatGPT the more it costs to spit out an answer. That means data not only needs to be secure but condensed down to such compact bits of input that the cost is acceptable and scalable. This is no domain for amateurs who think they can accomplish this with a basic monthly ChatGPT subscription. And Kim is no amateur.

“My background is in enterprise software development,” Kim said. A previous company he co-founded, GoInstant, was acquired by Salesforce for $70 million in 2012. Kim was already developing AI-driven technologies long before ChatGPT became known to the world, more recently in the commercial construction business. The aspect of invoices and payments combined with OCR technology soon evolved into a separate use-case where it could be used in financing like factoring and more. But their tech had to understand the niche particulars of the information it was analyzing.

“So we essentially started training a natural language processing model using machine learning techniques around those sorts of phrases and terminology for the construction industry,” said Kim. “So we were building that kind of tech first and then it became relatively easier when dealing with broader information in documents and other invoices that were coming in for not just construction.”

In 2022, Kim first encountered the capabilities of ChatGPT. He said that while the AI is great at creating a diversity of answers, the way they engineered their prompts with financial data produced consistent output. That’s what’s key. Harbr’s technology does a lot of the work on its own side first before sending off a highly secure, highly redacted, anonymized and reduction-optimized prompt to ChatGPT. The process can start with a pdf statement because it’s automatically OCR’d and analyzed first before any of this happens. Harbr isn’t able to view or retain any of the data and ChatGPT does not know anything identifiable about the applicant. Only the lending company is privy to the applicant’s info and the results. Setting this up for a lender can be accomplished very quickly.

The object isn’t to entirely replace underwriting, but to make it more efficient.

“Today we work with businesses that are in asset based lending, factoring, supply chain finance,” Kim said. “We’re starting to look at equipment, transportation, equipment financing and leasing. […] I think the entire secured finance market, there’s a fit here as the technology grows.”