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
ERC And The Broker Relationship
January 11, 2023
Like many business loan brokerage CEOs across the US, Jared Weitz is familiar with the Employee Retention Credit (ERC). His company, United Capital Source (UCS), which in 2021 surpassed $1B in small business financing volume, regularly speaks to thousands of small business owners. Weitz told deBanked that through his own experience most business owners have become sufficiently aware of the ERC as well. That in turn raises the question of what role a company like UCS can play in the ERC process.
“We have a few different referral partners that are lending against those credits,” Weitz said. “And that’s what we’re doing.”
In that regard, UCS is doing what it is already used to doing, connecting the business owner with a compatible source of funding. While other brokers may attempt to generate fees by assisting businesses with filing for the tax credits themselves, Weitz said he prefers to avoid the headache and/or potential liability that can come along with doing that.
“We’re able to get 100% of what a client is owed right up front,” Weitz said. “They can either have an interest-only program or a no-payments program for 12 months, and then after 12 months there would be a factor rate attached to the program that would be paid back weekly.”
UCS earns a commission when a deal goes through but ERC has not by any means become a primary driver of business, according to Weitz. Rather, it’s something that could come up during a customer consultation.
“When we’re peeling back the layers and chatting with the client on why they need funds, if they say ‘well, actually I’m falling short here and I also just filed for [the ERC] and I’m still waiting for that,’ it can be one of the options that we offer them […] and we’ll just see what they qualify for and if they’re interested in it.”
It’s the waiting part that is creating a cottage industry around ERC. Weitz says he hasn’t heard of any business getting an ERC refund in less than 7 or 8 months and he is aware of at least one business that is still waiting for it 2 years later since filing. But just because most businesses are aware of the ERC doesn’t mean they’ve all actively pursued it. On this, UCS simply offers free helpful advice.
“What I would say to them is ‘hey, heads up, you should probably look into this with your local accountant and payroll company, make sure you get your tax attorney or your accounting firm’s attorney involved just to make sure you’re doing it the right way.'”
Putting business owners on that path of pursuit, informing them of its existence and advising them to seek out qualified counsel to assist with it, generates no revenue to UCS, but Weitz thinks it’s important to help business owners in any way possible.
“I think it does build a bridge of trust a bit more between you and your clients because you’re showing them that you’re not solely looking at products that are beneficial to you, and you shouldn’t be doing that anyway,” Weitz said. “But I think when you’re dealing with someone there’s always that thought in their head, right? And so this has helped solidify that you’re not.”
The Next Frontier: Financing the ERC
January 11, 2023
“I have never sold a product that has no daily, no weekly, or no monthly payments,” said David Goldin. That is until now, he explained, because of the Employee Retention Credit from the IRS that’s sweeping the country. Goldin’s new company, Finance ERC, that he co-founded with Newtek co-founder Jeffrey Rubin, is buying the future ERC receivables of small businesses that have filed for it. A key feature? No payments.
“You basically drop off the money, they don’t pay you out of cash flow, we get paid when the checks arrive,” Goldin said. “It’s an amazing offering.”
Goldin is no stranger to the SMB finance game. He is one of the reasons that the MCA product exists today in the United States. A documentary about it was the second most watched in all of 2022, for example. And he’s still a busy guy. One of his other businesses, Capify, finances small businesses on two continents every day.
“I’m busy in the morning with the UK and I’m busy at night with Australia, but I had a lot of free time during the day,” he said about how he was able to pursue yet another venture. “I approached Jeff and we were seeing that there was a gap in the market that the checks don’t arrive.”
The ERC, a potentially generous tax credit available to eligible businesses, has recently enjoyed greater awareness since it was included in the March 2020 CARES Act. Businesses that qualify can amend previous returns to receive a refund. Folks in the small business finance industry, already in direct communication with businesses about their financial needs, have taken notice.
Finance ERC won’t do the filing itself for a business. They have to had filed already to seek out the funding, which can go up to $1 million at present. It’s the waiting game between filing and actually receiving the refund that leaves merchants in a crunch. Goldin said the wait time is “best case scenario three months, worst case scenario a year plus.” And there’s no guarantee that the claims will be paid. That’s a risk they bear.
The deals come in from a variety of sources, business loan brokers, MCA platforms, ERC filing companies and more. The funding amounts can be significantly larger than an MCA and with no payments to be made, is incredibly competitive. A number of other financial service providers are charging a fee just for helping the businesses file for the credit in the first place, which in itself can be lucrative, but Finance ERC sticks just to the funding.
“We work with the funding companies, we work with the brokers, the various ISOs, it’s a great product,” Goldin said.
But the life span of the ERC is purportedly capped. Some experts say that businesses can only amend their 2020 tax return through April 2024 and their 2021 return through April 2025 [dyor]. But then that’s supposed to be it, allegedly.
“That presumes the government is not going to offer any future tax incentives,” Goldin said. “What we’re building at Finance ERC is a platform to finance tax credits. [The ERC] is the first credit.”
The opportunity, he explained, is preparing now for what may repeat often in the future.
“We put together the right players and vendors,” Goldin said. “We’ve hired a super senior management team.” It’s a system that includes sales, marketing, operations, finance, underwriting and more, to be prepared to scale.
But even in the present, opportunity abounds.
“The best estimates I’ve read are 5-6 million ERC are still eligible,” Goldin said. “People in this industry call it America’s best kept secret.”
And thus as marketing of the ERC continues to grow all around, Finance ERC is ready to work with businesses, brokers, and filers going through the process. Businesses can even use the funding from Finance ERC to pay the fee to file in the first place.
“So now all of a sudden they put the risk to me which I’m happy to do for a file that we like, and I pay the filing company / the broker gets paid right away,” Goldin said.
Last Chance to Comment on SBA’s Proposal to Lift SBLC Moratorium
January 4, 2023
In November, the Small Business Administration formally proposed a rule to lift the moratorium on licenses for Small Business Lending Companies (SBLCs). The moratorium wasn’t some pause borne out of the covid era. It’s been in place since 1982, creating a market of just 14 licensed SBLCs over the span of 40 years. Originally this moratorium had only gone into place because the SBA “did not have adequate resources to effectively service and supervise additional SBLCs” but now in modern times the SBA has determined there’s a problem, “that certain markets where there are capital market gaps continue to struggle to obtain financing on non-predatory terms.” Their solution? Lift the moratorium.
The proposal was published on November 7th and the public’s ability to comment ends on January 6th. One potential outcome of lifting the moratorium is that fintechs could potentially become licensed SBLCs. That appears to be a desired outcome for Funding Circle who shared their comment on social media on Wednesday.
“We need the SBA to lift the SBLC moratorium in order for us to apply to originate 7(a) loans nationally,” Funding Circle wrote. “This would allow us to leverage our platform technology and more than a decade of lending experience to expand access to 7(a) loans for underserved communities and to do so quicker, at a lower cost and with a superior customer experience.”
With more than 60 comments garnered on the proposal so far, Funding Circle is virtually the only fintech to have weighed in at all. A number of comments from the traditional finance realm were highly critical of the idea of allowing fintechs to become SBLCs, citing their supposed inexperience and perceived failures to responsibly dole out PPP funds. Others expressed a belief that the SBA still did not have the resources necessary to supervise additional SBLCs even after 4 decades and that the agency is already stretched too thin as it is.
“SBA should not expand 7(a) Program until it requests, and receives from Congress, an appropriation to fund the additional SBA staff necessary to supervise additional 7(a) lenders,” the American Bankers Association wrote.
There are complexities and nuances to the pros and cons of the arguments, but the opportunity to comment at all is running out. The deadline is Friday January 6th.
Anyone can submit their own comment here.
Update: Upstart, another fintech, had their comment processed by the SBA after this story was posted. The company also supports lifting the moratorium.
$220M Worth of EIDL Funds Already Charged Off
January 2, 2023
It’s a small sum compared to the total outstanding principal balance, but $220M worth of covid-related EIDL funds had already been charged off as of SBA fiscal year-end 2022. That year-end of September 30th is before almost any borrower was required to make even one payment on the 30-year loan. The total outstanding principal balance net of charge-offs was $358B at the time.
The SBA originally allowed a 30-month deferment on EIDL payments and just recently began offering an additional six-month deferment to eligible borrowers if they need it. Making payments at all can be a little bit complex in that of itself, however.
It remains to be seen how covid-era EIDL borrowers will perform. The SBA charged off $457M in just 7(a) loans in 2022 alone, for example, so the figures on the EIDL are not that material yet. In the years before covid, the SBA was regularly charging off between $800M-$2B/year in loans total. However, it is unlikely that a significant number of them defaulted before the first payment was even due.
deBanked’s Top Five Stories of 2022
December 20, 2022
deBanked’s most read stories of 2022 are in and they’re a bit different from the hits of 2021. These were the results!
1. DoorDash Goes into MCA
It was nearly a tie for two stories related to the same company, DoorDash. Who would’ve thought? But in early 2022 the mega restaurant delivery service announced to the world that it was getting into the merchant cash advance business courtesy of a new funding industry challenger named Parafin.
Here’s what you may have missed as the biggest story of the whole year!
DoorDash Now Offers Merchant Cash Advances
DoorDash Expands its Cash Advance Program to the Dashers Themselves
2. Scandal
Not everyone had a good year. Some had to face the music. It was a close race between two stories for the 2nd spot but we’re only linking to one because the second involved a lawsuit that has since been dropped by the plaintiff.
Man Who Defrauded MCA Companies Indicted | This case is still ongoing.
3. The Demise of LoanMe
NextPoint Financial’s abrupt decision to wind down LoanMe after a celebratory acquisition of it was one of the biggest surprises of 2022. Very little information has been shared publicly about what led to it. Given NextPoint’s status as a publicly traded company, details could’ve been inferred from their regularly filed financial statements, but they’ve failed to file them for a whole year. Instead, they’ve provided regular investor updates that have communicated that they’ll eventually be forthcoming but they keep missing the deadlines they set for themselves.
LoanMe Has Stopped Originating Business Loans
NextPoint Financial Formally Announces End of LoanMe Business
4. The California Disclosure Law
Reality struck in 2022 as the 4 years of debate over California’s commercial financing disclosure law finally came to an end. It went into effect on December 9th. This story, published leading up to it, was the 4th most read of 2022:
Think The New California Disclosure Law is Just About a Disclosure Form? Think Again
This one, published two weeks ago, followed close behind:
Funding Companies Sue California Regulator Over Looming Disclosure Law
5. Reality TV
Technically, the first episode of Equipping The Dream was the most viewed content on deBanked throughout all of 2022, but if we’re going just by stories, then this one, talking about its fast rise, placed 5th for the year:
Reality Show About SMB Finance Sales Rockets to The Top Spot
Tackling the California Disclosure Law With David J. Austin, Esq.
December 16, 2022
“I believe the law can be complied with in a technical sense based on how the statute is written,” said David J. Austin, Esq. of Austin LLP, “however, it opens up a funder to a number of attacks when they’re trying to enforce the funding.”
Austin, an attorney well-read on California’s new commercial financing disclosure law, has created a compliance guide specifically for merchant cash advance funders. Now that the law is in effect, he’s noticed a sudden urgency from small business finance companies to quickly wrap their heads around what they need to be doing.
“There’s nothing ambiguous about certain things in the statutes,” he said. “And it’s very specific, you have to use this font, you can’t use bold or italics, and I discussed that a little bit in [the guide]. It’s very specific about what you need to do.”
Austin imparted some helpful wisdom based upon the risks he sees. First, that funders need not just worry about the Department of Financial Protection and Innovation (DFPI) auditing one’s compliance, but also about what attorneys on the opposite side of the table might attempt to attack if these contracts ever end up in litigation, which they inevitably will. There should be concern, he said, about surrendering some control of the disclosure process to brokers, especially for this reason.
“In my view, the biggest liability in this statute is the broker screwing you up,” Austin said. “I can’t begin to say how important I think it is to—just for that one disclosure, take the broker out of the equation…”
Austin suggested that as far as California is concerned, funders should have direct communication with the merchant early on in the process so that when it comes time to make offers, the funder is able to send the required disclosures to the merchant themselves, and that the broker can simply be included in those communications. This workflow system might depart from one where a broker is accustomed to retaining all control of merchant communications, but Austin is looking at the risks through the lens of a funder.
“I think you just have to say, ‘look, it’s the law and we’re not going to do it any other way,'” he said.
While a much more complete scope of what’s required is all part of the guide he’s offering, he hinted that the “reasonably anticipated true-up” requirement of the disclosure was mostly centered around the knowable seasonality of a business and that he likes the Historical Method of predicting a business’s future sales versus the state’s other allowable option, the Underwriting Method. The Historical Method requires that a funding company examine at least 4 months of a business’s previous history, so if any brokers have been left wondering why a funder has recently started asking for 4 months bank statements instead of 3, this is probably the reason. Austin believes that the Underwriting method, by contrast, creates a lot of extra work, like state audits and additional litigation risk.
“The statute [on the Underwriting Method] is long,” he said. “And like I said, it requires auditing. So the first thing that’s going to happen in any litigation is you’re going to be asked to provide those auditing details.”
Any mca funder curious about compliance, including for access to the full guide, should contact David Austin directly at david.austin@austinllp.com.
Since the law has gone into effect, deBanked has determined that some funders are complying with the law already and are continuing to operate in the state like normal while others are taking a wait-and-see approach. Any funder thinking they can fly under the radar of the DFPI and ignore the regulations should consider that a compliance failure could likely be exposed in litigation.
“We know what the defense counsel is going to do,” said Austin, speaking on merchants’ lawyers using the disclosure requirements as a weapon. “They’re gonna push, push, push, push, push.”
The Customer’s Past Due, What Do You Do?
December 12, 2022
There’s an old saying about it being easy to lend money, the hard part is getting it back. The implied lesson is that lenders need to be selective with who they lend money to, lest they be overrun with defaults. But perhaps the hard part is not entirely about whether or not the lender lends to the right borrowers but also about implementing a system that makes getting the money back from the people they believe are good candidates in a frictionless manner. Because more often than not, failing to make a payment is not actually caused by a shortage of funds.
“Two thirds [of the time it’s] non-monetary related reasons,” said Michael Pupil, VP of Sales at Lexop, to deBanked, “So like credit cards expiring, accounts switching over or they haven’t switched it into the right account, or the PAP [Pre-authorized Payment] expires, a wrong email address or a wrong mailing address, because they move; A ton of different reasons.”
For a company founded in 2016 and doing business throughout the US and Canada, this statistic was an ‘ah-ha’ moment to Lexop. Lexop’s goal is to improve the past-due payment process for lenders or any business that bills its customers. To do this, it communicates with customers by email and text message and provides a frictionless pathway to payment.
“We are payment gateway agnostic,” said Pupil, “and I think that’s the first place to start. Because how an organization collects those funds today doesn’t change. And I think that’s important from a stability and an ease of use standpoint for each customer that we work with.”
It’s also a white-label system so customers would never know that Lexop was involved in the process. There’s no phone call from a collections department or scary letter in the mail.
“The most important mission for Lexop, when we work with our customers, is to never make a customer’s customer feel like they are delinquent or late or ostracized like that, that emotional feeling of being late on a bill, if we can reduce that by a discreet easy tool to just kind of let it flow the way that they want when they want on the device that they want, I think they will appreciate that offer from their lender,” Pupil said.
It might seem intuitive, fine tuning the process for past-due customers to make payments, but Pupil shared that he’s seen a lot of tech and fintech players over the last decade focus the bulk of their efforts on the frontend of the user experience, to improve the application process or to make a loan in the most efficient way possible.
“That gap is again, is on the backend,” he said. “And when you say you’re investing all this money on developing security for an app or 3d technology or meeting customers in the metaverse and then you send a piece of paper to collect on the money, like it just doesn’t make sense. And there’s a gap there.”
Presumably, Lexop’s customers would already have some kind of process in place for borrowers that are past-due and so Lexop focuses on improving the outcomes for them in a manner consistent with their existing brand experiences.
“There is an easier, better way of just coordinating the technology stack as a whole to align the experience that you’re setting at the beginning of the customer journey to also include the backend and the continued management of that journey for the client,” Pupil said.
I Interviewed a Loan Broker and Then Found Out it Was an AI
December 8, 2022
It’s the kind of person I’d probably share a beer with after a long day of brokering deals. They understood the business pretty well, spoke articulately, and had a good head on their shoulders. Problem was they said they couldn’t do any physical activities because they were in fact a computer program the whole time. It turns out my chat buddy was named ChatGPT, an AI developed by OpenAI that was co-founded by Elon Musk. It is capable of giving well thought out answers to complex questions and scenarios. I didn’t believe it would hold up in a specific niche but I was wrong. Below are some of my interactions with it:
I started off by being cute and asking about backdooring a deal
I asked it how it might stand out from the crowd on a forum like DailyFunder
I asked what it would do if it were a merchant who kept getting called by the same broker
I asked about a broker competing against an AI as smart as the one I was talking to
It leans towards wanting to backdoor a deal, albeit delicately since it might upset the broker
I asked what I should do to prevent people from finding out my secret 😉
Welp…
