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
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.
Citing Unnamed Sources, Reuters Reports Kabbage Possibly Looking to Acquire OnDeck
March 23, 2017
Reuters is reporting that Kabbage is in talks to raise equity capital to potentially use for acquisitions and that OnDeck is one of several targets under consideration. As Reuters attributed the OnDeck portion to just one of their multiple unnamed sources, it’s entirely speculative at this point.
From a theoretical perspective, would such a thing make sense?
Kabbage has momentum on their side right now. Their recent half billion dollar securitization that was finalized earlier this month was oversubscribed. Although they only originated about half the loan volume of OnDeck last year, Kabbage’s last private market valuation ($1 billion in Oct 2015) is nearly 3x as large as OnDeck’s current market cap.
Valuations in the industry have changed a lot over the last 18 months but there’s no doubt that Kabbage has become a unique competitor. At LendIt, company CEO Rob Frohwein revealed a bit of their secret sauce when he said that their customers borrow from them on average 20-25 times over the course of 4 years, whereas their competitors make only 2.2 loans to their customers on average.
There is a general view in this industry that acquiring a competitor adds little value other than more marketshare. Kabbage, however, may potentially believe that (1) OnDeck is too undervalued to pass up (2) That OnDeck could generate better margins using Kabbage’s strategy (3) That OnDeck’s partner relationships would add additional value (4) That the company cultures are compatible enough to make an acquisition work (5) that the combined entity would allow them to better align their political and regulatory agendas.
We mustn’t forget however that a single unnamed source is pretty weak to go off of. One possible reason that someone would want to report that OnDeck is an acquisition target is to cause a temporary spike in their stock price. (and I certainly do not have any position in the stock)
For now, it’s fun to think about such an acquisition scenario and we’ll report more, if and when we hear anything.
In This Online Lender’s Earnings Report, Profits, MCAs and Term Loans
March 22, 2017Limited details were offered when Enova, a publicly traded company, acquired The Business Backer (TBB) in June 2015. For one, the Cincinnati Business Courier had the exclusive, which one might not describe as the typical go-to source for online finance news. But TBB was not typical. Based in Blue Ash, Ohio as opposed to New York City or San Francisco, the company had originally focused on offering merchant cash advances before eventually expanding their suite of solutions to include other products.
According to Enova’s earnings report, TBB had been purchased for $26.4 million with an estimated contingent $5.7 million of that being based on future earn-out opportunities. There was a caveat though. If future operating results exceeded expectations, that contingent amount could increase over time, but not beyond where the total consideration paid for the company exceeded $71 million. As of 2016’s year-end, that contingent amount had increased by $3.3 million.
Enova’s report makes several mentions of their merchant cash advance business or as they call them, receivable purchase agreements (RPAs). For the most part, they obscure the financial metrics of this aspect by lumping it in with installment loans. These installment loans are described as “multi-payment unsecured consumer installment loan products in 17 states in the United States and in the United Kingdom and Brazil” with repayment periods of two to sixty months, so yeah, they’re pretty different.
Their RPA customers, however, “average approximately $1.5 million in annual sales and 10 years of operating history while those who obtain an open line of credit account average approximately $450 thousand in annual sales and 7 years of operating history,” the report says. These lines of credit are primarily offered through a business lending subsidiary called Headway Capital.
While companies like Lending Club and OnDeck grab all the headlines, Enova describes itself as a “leading technology and analytics company focused on providing online financial services.” And in 2016, they extended nearly $2.1 billion in credit to borrowers and had a net income of $34.6 million.
On the company’s Q4 earnings call in February, Company CEO David Fisher said, “There currently seems to be a bit of a shakeout occurring in the non-bank small business lending and financing industry. A number of our competitors have either ceased funding or completely shut down over the past several months. From the intelligence we were able to gather, this is largely due to credit issues and their portfolios. As we mentioned last quarter, we have taken a more methodical approach than some to growth for our small business products. And we’re now seeing the benefits of that approach. Recent advantages of our small business book are performing well and the unit economics continue to improve especially as acquisition costs have dropped following the shakeout I just mentioned.”
Enova’s small business financing portfolio only constituted 12% of their loan portfolio at the end of last year. And at $13.70 a share, the company’s current market cap is larger than OnDeck’s.
Are Those Shopping for an Online Loan More Risky?
March 18, 2017ID Analytics is enabling online lenders to know a thing or two they might not be able to find out on their own. For example, did a loan applicant apply for other loans on the same day? There’s a good chance ID Analytics can tell you the answer since they claim their Online Lending Network has achieved visibility into 75% of marketingplace lending activity in the US.
Their network includes business lenders but it’s the individuals behind the businesses that they monitor and data shows that 1.5% of online loan applicants applied for additional loans elsewhere within six hours of submitting their application. Conventional wisdom might suggest that a shopping borrower is an engaged and responsible borrower but ID Analytics’ early research found that this group was twice as risky as the average online loan applicant.
During a brief interview at LendIt, company VP Patrick Reemts said that their service isn’t limited to the point-of-application. Members can monitor their borrowers for up to 90 days and see if they apply for other loans or take other loans, Reemts explained. How lenders make use of that data is up to them though, he added.
Members of the Online Lending Network must report all their volume for the value of the data to be effective. They can’t selectively decide which applicants or borrowers to put in the system. ID Analytics is also not a startup, Reemts said. Having been in business for 15 years, they’re tapped into some of the nation’s largest credit card issuers so they have visibility into traditional credit sources too.
The company is a subsidiary of LifeLock, Inc.
