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
Banks Don’t Care About SBA Loans or Your Tax Dollars
August 23, 2011
Need proof the Small Business Administration (SBA) does more harm than good? The SBA has been protecting banks for decades against up to 90% of losses on eligible business loans. Funded by taxpayer money, it was designed to stimulate lending in the private sector. But banks have perverted the system and are using it as a literal blank check to commit fraud and reap profis.
With the Government footing the bill on defaults, banks have made it their business to make as many loans as possible to generate fees, regardless of whether or not the borrowers could repay. We have proof and it comes right from the source in a report prepared by the Office of the Inspector General.
MATERIAL DEFICIENCIES IDENTIFIED IN
EARLY DEFAULTED AND EARLY PROBLEM
RECOVERY ACT LOANS
Report Number: ROM 10-19
Date Issued: September 24, 2010
Prepared by the
Office of Inspector General
U. S. Small Business Administration
The Office of the Inspector General performed an audit on loans that had problems or defaulted especially early. On the sample they selected, it was determined that 82% of the loans should not have been made at all. From the report: “The audit identified material deficiencies in 32, or 82 percent, of the 39 early defaulted or early-problem Recovery Act loans reviewed, which resulted in the disbursement of approximately $5 million to borrowers who could not repay or were ineligible for the loans.“
82%?! And no, these loans were not flagged for technicalities, but rather for wildly incredible mistakes or intentional malice. This includes:
- Failure to request a business credit report on the borrower
- Using a borrower’s old credit report since a current credit report would make the applicant ineligible
- Using financial statements by the applicant that were more than 2 years old
- Not verifying business income
- Not verifying the age of the business
- Ignoring the borrower’s financial reports and creating their own figures that would make the applicant eligible
- Making loans to borrowers that did not even own businesses
- Failure to report fees both earned and paid for referrals to the SBA as required
An example: “One lender used 2007 personal income of $443,110 for a loan approved on April 13, 2009, even though the borrower noted annual income of only $750 on its April 1, 2009 loan application.”
As of June 30, 2010, there were a total of 484 early-defaulted or early-problem Recovery Act loans approved for $69,205,600. If the audit is any indication, it’s because 82% of the time, the banks just didn’t care. And why should they? The Government has only stepped up the effort to spur lending using this massively failed approach.
See more on that in our article, More Funding for Small Business Loan Programs – A Dysfunctional System
It may be interesting to note that while the traditional banking system is mired in corruption, an alternative financial product known as a Merchant Cash Advance (MCA) has been helping small businesses for years. With no taxpayer default guaranties, flexible terms, and an openness to borrowers of all credit types, it’s on track to become the most sustainable form of financing for businesses in the U.S.
SBA Loan vs. Merchant Cash Advance
Perhaps we’re a tad biased since we follow the MCA industry religiously, but one thing is for certain, don’t trust your banker for a second. They’re trying to pull a fast one almost 82% of the time.
– The Merchant Cash Advance Resource
What’s Going on in California?
August 23, 2011
The people have spoken! Many of our readers have sent e-mails wondering why we don’t have any coverage on the recent events in California. So here goes:
If you’re out of the loop, a nearly 3 year old lawsuit against one of the major Merchant Cash Advance (MCA) providers is coming to a close. Their name is not important, but it is a firm we revere still to this day. The story takes place in California, where a group of merchants in 2008 contested their Merchant Cash Advance was actually a loan, not a sale. In the other 49 states, MCA has been virtually undisputed for years but California law has shades of Gray.
There is one cardinal rule for making a loan in California and that’s to be licensed to do so. The case struck at the heart of what MCA is all about, a sale of future card payment receivables for a discounted price today. So why would a buyer of future cash flows need a lending license? The answer is not a short one and it was a heated debate that spanned 3 years.
It comes as no surprise that the end result was a stalemate. Both sides exhausted their time and energy until they called it quits with a settlement. Over $4 Million dollars will be paid to the legal team representing the plaintiffs. That’s big bucks for a group that was unable to prove over the course of 3 years the need for a lending license to conduct a sale.
While the affected merchants, attorneys, and the MCA provider are eager to move on, a particular California law firm seems to have grabbed the baton. As of early March 2011, at least 3 other MCA providers are now facing the same situation. We’ve seen the court filings and it’s essentially the same challenge and question of licensed lending.
However, when considering the absolute unlikelihood that these independent lawsuits would have come together at the same time without extreme goading by their class representation attorneys, we are highly suspicious of the motives behind them. The timing implies that merchants funded by MCA provider A, MCA provider B, and MCA provider C all approached the same law firm at the same time with the same problem. This may have been possible if each provider structured a deal in the exact same manner. Rather, each provider used different contract language and there is no commonality between them outside of the tendency to all describe their product as a “Merchant Cash Advance”.
We are therefore inclined to believe this law firm is taking the “throw shit at the wall and hope something sticks” approach. Keen to the $4 Million windfall to be reaped in the case described above, it is reasonable to believe these attorneys went searching for customers of all MCA providers and invited them to be plaintiffs in their frivolous suits. There’s no precedence that they’ll win, but there is for a settlement, and a settlement could mean millions of dollars in representation fees.
Some of The Merchant Cash Advance Resource’s top connections can attest that this particular law firm spent a substantial amount of time surfing the net for all MCA providers in California. Using their web traffic analytics and tracing the activity to their domain name, it certainly appears they’re going shopping for “victims.” If we are right, expect more lawsuits from them in the next few months.
To add insult to injury, these events coincide with tough economic times. MCAs are widely celebrated as the easiest, most flexible financial option available to small businesses today. Over half a billion dollars was funded in 2010 alone. With the Federal Government struggling to do the same, it is troubling that a few slick lawyers are seeking to take the lifeline away.
Treasury offers funds to spur business lending
The SBA is in shambles, the unemployment rate is extraordinary, and banks are unwilling to lend. That’s not a great combination for America’s small business owner. Fortunately MCA providers have filled the gap. If steps are taken to discourage them from operating in California, millions of dollars will disappear from the state’s economy. That means less jobs, less sales, and less growth. And if that day should come, don’t point the finger at the Governor, The Federal Reserve, Obama, or the banks. You’ll be able to thank a few lawyers that robbed Californians for their own personal gain. The truth hurts.
– The Merchant Cash Advance Resource
What Recovery? Small Businesses are Still Suffering
August 23, 2011
Experts claim the economy is getting better, but average Americans have yet to claim the same. According to the March Discover Small Business Watch Survey, 54% of small business owners said the U.S. economy is getting worse. The sentiment seems to fly in the face of the stock market’s surge forward, as well as a declining unemployment rate. As of the latest March jobs report, unemployment ticked an inch downward to 8.8%. Sadly, the official unemployment rate does not count individuals that have been unemployed for an extended period of time or have given up looking for work altogether, traits that characterize many of the ACTUAL unemployed in this country. (Find out who the labor force consists of)
The unemployment rating system loses accuracy in prolonged recessions and therefore 8.8% is not valid, nor worth comparing to previous months. In an Interview with Reuters, Bill Cheney, the Chief Economist at John Hancock Financial Services stated, “It is always possible that as the job market
improves, people will start looking again and the unemployment rate could go up.” That being said, the one true measure of the economy is the voice of the people.
As a member of the U.S. Chamber of Commerce, the Merchant Cash Advance Resource is constantly tuned in to the issues of small business owners. And guess what? We’re not hearing much positive feedback there either. The lending and capital markets continue to be a pressing factor, but federal, state, and local government regulations are stymieing innovation and expansion as well. From the Chamber, “With increasing uncertainty and government barriers threatening America’s economic recovery–Congressional leaders are reaching out to business owners to hear what is hindering their growth and what can be done to remove barriers.” (Watch the videos and interviews here)
In the face of discouraging news, access to capital is slowly making a comeback but not from the banks. Alternative financial firms providing a product known as a Merchant Cash Advance will buy your future credit card sale receivables in exchange for a big chunk of cash today. Different from a loan and becoming widely accepted, businesses all over the country are taking advantage of the most innovative form of financing available. In a true level playing field, ‘mom and pop’ shops are just as eligible as the major franchises to receive up to $250,000.
Next month, the experts could claim an unemployment rate of 0%. So long as the statistics fail to reflect reality, it becomes more frustrating for Americans who continue to live through a recession that never actually ended. High unemployment, scarce capital, and job killing regulations still plague commerce. We’re not experts ourselves, but if 54% of business owners testify that things are getting worse, they probably are. With the Dow at a 52 week high, now is a great time to sell…
– The Merchant Cash Advance Resource
1st Quarter 2011 Merchant Cash Advance Industry Preview
August 23, 2011Posted on April 3, 2011 at 7:52 PM
As a continuation of the massive popularity of our 2010 full year Merchant Cash Advance funding statistics, we are putting together data for the 1st quarter of 2011. It has not yet been finished but we figured we’d share some of our
early findings.
Funding appears to be on the rise in almost every state
This is mainly due to increased output by AdvanceMe. They are literally pushing the industry’s figures forward and making up for some firms that have cooled off. First Funds’ (Principis Capital) figures have declined by a large degree and is not operating close to 2010 levels.
Surge in “Starter Advances”
1st Merchant Funding, the most well known provider of starter advances is making significant gains. This may be an indication of tighter underwriting for normal size advances, there being more applicants with terrible credit, or the result of business owners embracing the opportunity to start off small.
California
Funding volume in this state has fallen off a cliff. Our initial estimates show declines of somewhere between 20-50%. This most likely has to do with What’s Going on in California. Normally the most active State for Merchant Cash Advance (was 13% of the entire nation in 2010), a continuation or worsening of this trend will actually shrink the industry as a whole in 2011. Of course the evidence of growth in the remaining 49 states tells the real story of the financial product’s success.
Stay tuned for the statistics…
– The Merchant Cash Advance Resource
