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
MCA Case One of the Most Notable of the Year for Factoring Industry
April 17, 2017
At the 2017 Factoring Conference in Fort Worth, TX, industry attorney and talk radio show host Bob Zadek, cited Merchant Cash & Capital, LLC v G&E Asian American Enterprise., Inc. as one of the most notable legal decisions in 2016.
The contract in question was a purchase of future receivables, i.e. a merchant cash cash advance. A summary of the decision appeared on the Usury Law Blog last year.
During Zadek’s Reports from the Courts session at the conference, he summarized the lessons as follows:
This case is interesting because it appears to confirm that a common contract structure utilized by merchant cash advance companies protects them from usury defenses. When analyzing whether a transaction is usurious, courts look to whether usurious interest is or will be charged to the Borrower from inception of the transaction. Subsequent events do not affect the analysis.
To paraphrase what Zadek also said, the New York Court correctly acknowledged that usury cannot be backwards-looking.
In that case, the MCA company was represented by New York attorney Christopher Murray of Giuliano McDonnell & Perrone, LLP
81% of Online Business Lending Borrowers Report Being Satisfied or Neutral
April 12, 2017The latest Small Business Credit Survey published by the Federal Reserve shows that 81% of small business borrowers were either satisfied or neutral about their online loan experience. Online lenders were defined as nonbank alternative and marketplace lenders, including Lending Club, OnDeck, CAN Capital, and PayPal Working Capital.
Of the 19% that were dissatisfied, nearly half cited transparency as a root cause. But that’s to be expected given that businesses dissatisfied with their loan from a large or small bank also cited transparency just as often.
While these charts indicate that there is still room for online lenders to improve, the 2016 report paints a more honest narrative than last year. Last year’s report used net satisfaction scores, which measured the difference between satisfied and dissatisfied borrowers. That methodology resulted in 15% net satisfaction for online lenders in 2015, which unless you read the fine print, easily misled even the most sophisticated of readers to conclude that only 15% of borrowers were satisfied. (Those readers included experts testifying in congressional hearings, the media, and government agencies, all of whom relied on that report to argue that online borrowers were terribly dissatisfied).
The 2016 report shows that businesses borrowing from an online lender were only slightly more likely to be dissatisfied than those that borrowed from a large bank (19% vs. 15%). And it’s the high interest rates that stand out to those dissatisfied online borrowers. 33% said that a high interest rate was the reason for their dissatisfaction. This is to be expected since non-banks inherently suffer from a higher cost of capital than banks.
Cash Advances?
Unfortunately, all of their data on “cash advances” is tainted. If they meant “merchant cash advances” or sales of future receivables, they should’ve specified such in the survey that went out to small businesses. Instead, the survey repeatedly asked about cash advances, a term most commonly associated with borrowing money through an ATM with a credit card. Those surveyed were also asked if they used personal loans, auto loans or mortgages so the multiple choice context suggests a credit card cash advance. Similarly, a cash advance could also mean a payday loan. With so many interpretations, the consequence is that it’s impossible to tell what the Federal Reserve meant or what those being surveyed thought they were being asked.
Notably, one question asked businesses if “portions of future sales” were used as collateral for a debt, but since merchant cash advances do not collateralize future sales (the future sales are actually sold, they don’t serve as collateral for a loan), it’s difficult to understand what they meant or how a respondent might interpret that.
Statistically representative?
The 2016 report also spends more time defending the Fed’s sampling methodology. Perhaps they are aware that their data is being put under the microscope.
Read the full Fed report here
For Factoring, Different Spin, Same Issues as MCA
April 10, 2017
They called it the 2017 Factoring Conference, but an MCA professional would’ve hardly noticed. On the agenda was news about Dodd-Frank’s Section 1071, the now-dead NY lending legislation, usury litigation, confessions of judgment, stacking, fintech and gripes about brokers. And yet factors and MCA companies still largely live separate lives.
The underlying differences between the two industries are as much cultural as they are contractual. The International Factoring Association’s directory reports having nearly twice as many members from Texas as they do from New York. They also list having more members from Utah than they do New Jersey. Compare that to our own readership at deBanked in which website visitors and magazine subscribers are most heavily concentrated in New York, California, Florida and New Jersey. Texas ranks 8th for subscribers and Utah is much, much farther down. And while purely based on my unscientific observation, I’d wager a bet that the average age of a factoring company owner is at least a decade older (probably much more) than the average age of an MCA company owner.
Differing philosophies between the two industries are perhaps exacerbated by this generational and demographic gap.
On a fintech disruption panel at the factoring conference last week, Pearl Capital CEO Sol Lax told attendees that the MCA industry was not only innovative but ultra competitive. “You either need to evolve or become a phone booth,” he said. Other panelists explained that today’s average small business is focused on speed and simplicity and that they’ve built their models around that.
But factoring has survived the test of time. In the latest issue of The Commercial Factor, Jeremy B. Tatge traces the first factoring agreement in America to 1628. “This spirit has endured and survived wars of independence, such as the American Revolution, two World Wars in the Twentieth Century, and even down to the present day (NATO being but one of many examples),” he writes.
Will technology finally break that spirit or will today’s stereotypical young MCA company owner from New York and Florida eventually find themselves becoming older, wiser, and ready to lay down roots in the midwest? Will they trade the Las Vegas conferences for honky tonks in Cowtown?
I don’t believe that such a transition even has to happen. Whatever differences the two industries have, they are united by common causes and issues and can evolve together.
Can Factors and MCA Companies Get Along?
April 7, 2017
At the factoring conference in Fort Worth, TX on Thursday, the 2 PM panel was officially called The Fintech Disruption. But it could’ve just as easily been named The MCA Disruption considering that the panelists all ran companies engaged in either unsecured business lending or MCA. The tension in the packed room was palpable. For some factors, the competitive pressure they feel with unsecured finance companies cuts deep, down to their soul. So naturally it only made sense, being that it’s Texas and all, that they lassoed a few of those unsecured guys up and put them on stage to explain theirselves.
So what’s the best way for an MCA company to make a peace offering to a room full of factors?
Sol Lax, the CEO of Pearl Capital Business Funding LLC, kicked it off by telling the audience that a small business customer might begin their quest for capital by searching the internet for a small business loan. “There’s no factoring companies that are going to pop up,” he exclaimed, suggesting that they were already losing when it came to the Internet to acquire customers and had little hope of catching up. But if you are a small factor, he conceded, you should continue generating leads through relationship building since the Internet is now so cost-prohibitive.
Dean Landis, the President of Entrepreneur Growth Capital, ran with that and asked attendees to raise their hands if they really pay attention to the cost of lead acquisition. While this was an informal survey, virtually no one raised their hand, seeming to confirm that deal flow for factors is largely acquired through relationships. Landis, who played the role of moderator and devil’s advocate, asked if MCAs and factors were really even targeting the same customers. Would you lend to someone who already has a senior lien? he asked. “These [MCA] guys figured out how to do that.”
Dan Smith, President of Fora Financial and Paul Rosen, Chief Sales Officer of OnDeck, explained that their customers often seek a fast-paced application-to-funding process, which drew a rebuke from an audience member who had a hard time believing that so many merchants truly needed that speed and simplicity. Smith and Rosen countered by saying that customers will choose whatever is best for them and that not every customer fits their boxes.
Lax advised factors to look at the bigger picture, that one big lender on their own might not seem like a threat but that a company like OnDeck could license out their scoring model to banks and banks could adapt that to make loans to companies they have otherwise been ignoring (the same ones that go to factors) and compete against the factors directly.
As the audience chipped away with questions about the soundness of these scoring models and fintech, Smith of Fora reminded everyone that they still have underwriters that are manually overseeing deals, rather than let computers do everything entirely on their own. “You can literally fintech yourself out of the business,” Smith cautioned lenders who might overzealously replace their core competency with algorithms that don’t perform as well.
But even then, do these scoring models work when merchants gets stacked on? This question was asked and it suggests that stacked merchants have a higher risk of default. Rosen of OnDeck confirmed that when he said “customers that stack on us have much higher loss rates.” Meanwhile, Smith said that when customers are doing something that affects their model, they just need to improve their model, just like they would if there was a recession or some other economic event underway. “All of our models are built on lifetime value,” he said. They want to grow and nurture their clients, he explained.
While factors fear that MCA companies could stack on their clients, there are signs that a path forward exists. An informal poll of the room indicated that not only are factors referring prospects to MCA companies but that MCA companies are returning the favor and sending prospects to them. The former was more prevalent.
Lax of Pearl, was more pointed about the future for factors. “You either need to evolve or become a phone booth,” he proclaimed. He prefaced that with a story about a child who was absolutely befuddled by an old Superman movie, as in ‘what were all these ridiculous random booths doing in the city that enabled Clark Kent to go around changing his clothes?’ The concept of a phone booth could hardly even be explained to the next generation. “Your industry is suffering a phone booth moment,” Lax said to the factors.
Is he right?
To the unsecured lenders and MCA companies who attend the factoring conference, they invariably see value in partnerships. And for the factors still hesitant to take that step, is it really the MCA model that’s causing friction? Or is it the evolution of the way that businesses interact with financial technology, i.e. fintech? And might fintech disrupt everyone in the end?
Only time will tell.
Quotes and paraphrases were derived from the panel. The summary is my own analysis of it and much of the 90-minute discussion was omitted here for brevity.
Lights Out for New York’s Attempt to Impose Stricter Lending Rules
April 5, 2017
In a late night session on Tuesday, and days past the budget deadline, the New York State Senate voted 58-2 in favor of a key budget bill. Noticeably gone from it was Part EE, which would’ve imposed stricter licensing requirements on not only just lending, but also other forms of finance. Part EE was originally put there by the Governor’s office as an amendment to Section 340 of the State’s banking law.
Over the last two months, several trade groups used what little time they had to express concerns over the language. Their biggest frustration was that no one had consulted with them in advance. In February, Dan Gans, the executive director of the Commercial Finance Coalition (CFC) said, “They should allow all the stakeholders to have their voices heard.” The CFC, which represents many small business financing companies, did their best to do just that last month by actually making the trek to Albany.
Ultimately, the legislature did not support the Governor’s plan. Both the Senate and the Assembly removed Part EE from their versions of the budget and on Tuesday night, the Senate passed it. The Assembly passed it the day after.
This is the first time the budget deadline has been missed under Governor Andrew Cuomo. The last miss was in 2010 under Governor Paterson, which came in 125 days late.
Did UCC Lead Generators Overload NY State’s System?
April 4, 2017
In the small business finance industry, New York State is known as one of the friendliest places to conduct a UCC search. You can not only search by debtor, but also by secured party, and get just about everything you need to create a list of prospects for free.
But the State’s website isn’t exactly a pillar of technological achievement. Indeed, the UCC Lien Search welcome page makes clear that searchers will need to be using Netscape Navigator 4.0 or higher and that version 3.0 of Internet Explorer or lower is not supported. Those browser iterations were released in 1997 and 1996 respectively, before some in the business finance industry were even born.
And the online system built for Windows 3.1 users didn’t seem to be doing so well over the last few months. Routine manual searches that I occasionally conduct were leading to error messages and crash pages instead of results. Were UCC lead generators querying the system to death?
Last week, New York took the entire UCC system down for “maintenance” and when it finally came back up, a tool to combat automated queries had been installed.
Curiously, this has only been implemented for secured party searches and other debtor search options. Standard debtor search options remains unchanged.
As Captchas are designed to thwart automated queries, could this be a sign that lead generators were crashing the system?
To check it out yourself, it’s best to be using Windows 95 or higher. Typewriters and Etch-A-Sketch users may experience performance issues.
For Marketplace Lending Securitizations, A Bumpy Road But Strong Investor Sentiment
April 3, 2017A new report by published by PeerIQ contains 10 recent examples of trigger breaches in marketplace lending ABS transactions.
“Since the inception of MPL ABS market, we have observed 10% of deals breaching triggers historically,” the report says. It goes on to say that these events are typically manifestations of “unexpected credit performance, poor credit modeling, or unguarded structuring practice.”
“If an early amortization trigger is violated, excess spreads are diverted from equity investors to senior noteholders with the goal of de-risking the senior noteholders as quickly as possible.”
CAN Capital is the lone small business lender on the above list and we reported on their trigger breach back in December. Little public information has come out about the company since they stopped lending late last year.
The most recent trigger breach on the list was SoFi, a company known for courting super prime borrowers.
“Trigger breaching events do not necessarily imply credit deterioration of the collateral pool,” the PeerIQ report states. In another section of the report that addresses increased losses for non-bank lenders, it says that two of the three primary drivers of that are borrowers stacking loans and lenders shifting to riskier borrowers.
Nonetheless, Q1 was a record quarter for marketplace lending securitizations with seven deals priced for $3 billion. That’s a 100% increase over Q12016. “The industry continues to experience strong investor sentiment as evidenced by growing deal size and improved deal execution,” they say.
“We expect higher volatility from rising rates, regulatory uncertainty, and an exit from a period of unusually benign credit conditions. Platforms that can sustain low-cost stable capital access, build investor confidence via 3rd party tools, and embrace strong risk management frameworks will grow and acquire market share.”
Enrolling a Merchant’s “Debt” May Be Harmful… to the Merchant
March 29, 2017
How would you like to make $12,000 on a single referral?, a flyer directed at business finance brokers asks. This ad wasn’t offering a commission for brokering a loan or advance, but rather for enrolling a merchant’s debt into the company’s restructuring program. Debt restructuring, negotiation, or settlement is a booming cottage industry these days. Some of these debt restructuring companies promise ISOs that they will be completely discreet with referrals. Others offer them commission bonuses for achieving certain enrollment targets. It’s a way to monetize declined deals, they typically say.
For merchants, the allure of a restructuring company’s help might just be payment terms tied to their monthly budget. That’s allegedly what one NJ firm’s agreement says, in fact. “I hereby authorize [the company] to negotiate my unaffordable business debts and to enter into affordable repayment terms on my behalf based on my monthly budget,” reads a document submitted in a New York Supreme Court case involving Creditors Relief. And based on the marketing materials deBanked has reviewed from several similar companies, their definition of debt is so broad that it can even include things that aren’t debt, like merchant cash advances, for example.
Even if the restructuring company held a critical view of MCAs and believed them to be loans, treating them as such for the purpose of negotiation might actually cause harm to their customers. That’s because a well-formed MCA contract already offers payment adjustments at regular intervals to appropriately match a merchant’s sales activity. Depending on what the language says, a merchant might just have to call their funder and ask them to reduce the debits to reflect their current sales activity. And yes this goes for ACH-only deals. Even ones that could appear to have fixed payments do not actually have fixed payments. This is basically how all MCAs work by the way, so if you are a broker or funder and this all sounds foreign to you, you need to take this course ASAP.
The point is this: a merchant need not pay a fee to an outside company to restructure anything when sales drop because a free remedy already likely exists and is a key benefit to MCAs in the first place. And yes, I’m talking about MCAs with daily ACH debits. If you’re confused by this, you need to take this course ASAP.
The best advice a restructuring firm can give a merchant struggling with an MCA due to slow sales is to tell them to look for a reconciliation clause in their contract that explains how to get the payments reduced. Once the merchant finds it, have them call the funder and execute it. There’s no need to enroll anything, negotiate anything, risk breaching a contract, or pay a broker tens of thousands of dollars in commissions. The debt restructuring firm might not want merchants to simply take advantage of what they’re already entitled to however, because they stand to make no money that way. In this regard, mischaracterizing future receivable sales as loans only serves to carry out their agenda to confuse merchants about what their rights might be under those agreements.
I myself, am occasionally contacted by merchants who claim to be facing hardship and in one instance where a merchant had spoken to a negotiator, the negotiator didn’t tell him that the remedy he sought was already a natural provision of his contract. I helped him find it. He didn’t have to pay any fees which would’ve gone to pay someone a huge commission or end up in some crazy situation where he’s being sued for breach of contract. Think about this the next time you encounter a distressed merchant. Not everything is debt and that can be very much to the merchant’s benefit.
If you work for a debt restructuring, settlement, or negotiation company, you should probably take this course too. It will help you understand MCA agreements and what remedies merchants already have at their disposal.
