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
Fundry Secures $75 Million Credit Line, Confirming That This Niche Is Still Hot
July 5, 2016
Fundry has secured a new $75 million credit line, according to the company’s CEO Isaac Stern. The transaction was facilitated by Brean Capital and Pi Capital.
Fundry is commonly known by one of their subsidiary companies, Yellowstone Capital. According to a document obtained by deBanked, the company did more than $40 million in deals last month, with the vast majority funded in-house. The positive announcement follows their recent big move from NYC’s financial district to Jersey City, NJ, after being wooed to the state with tax incentives in return for creating jobs.
While confidence has retreated from online consumer lending after the scandals at Lending Club, specialty tech-enabled commercial finance companies, some of whom specialize in merchant cash advance, are still finding enthusiasm from institutional investors. Just over the last three weeks, Bizfi secured a $20 million investment from Metropolitan Equity Partners, Pearl Capital secured $20 million from Arena Investors, and Legend Funding secured a $3 million debt facility from Ango Worldwide. That’s $118 million invested into a very specific niche industry in less than a month.
Fundry alone, facilitated $422 million in funding to small businesses just last year.
American Express Expands Business Loan Options
July 5, 2016
American Express is expanding beyond their merchant financing program. The new Working Capital Terms program makes small business owners who are simply Amex cardholders, eligible for funding as well.
There’s a catch however. The funds must be used to pay vendors, according to Bloomberg, a process which Amex controls by paying the vendors on the borrower’s behalf. The program is more a way to enable small businesses to pay vendors using their Amex card in situations where vendors don’t accept Amex, rather than providing businesses with capital to use on a discretionary basis like OnDeck and Square Capital offer.
The Bloomberg story headline, “AmEx Challenges Square, On Deck With Online Loan Marketplace” is pretty misleading. They actually quote Susan Sobbott, AmEx’s president of global commercial payments, as saying “It’s a big opportunity for us to go into an area where businesses want to pay vendors that don’t accept any credit cards.”
There does not appear to be any “marketplace.”
In April, AmEx made their merchant financing program available on the Lendio platform. That product, which is different than the new Working Capital Terms program, was called a hybrid between a merchant cash advance and a bank loan, according to Lendio CEO Brock Blake. Merchants with a minimum revenue of $50,000 and two years of operating history can apply for that loan based on cash flow and historical credit card sales activity.
Split-Funding MCA and Daily Debit Loans Are Spreading Across the World
July 4, 2016
When banks say no, merchants all over the world are getting funded via non-bank alternatives that resemble products here in the USA. In Hong Kong for example, a special administrative region of China, there are non-bank businesses that offer merchant cash advances and/or daily debit loans.
Having had the opportunity to visit with some of those funders there last week, I was surprised to learn that we spoke the same language. By that I mean that they price deals with factor rates, work with local finance brokers, underwrite files using recent bank statements, do site inspections and more. They even a have decision issued by the highest court in the land that declared merchant cash advances to be purchases, not loans.
Even the pitch is basically the same. “Banks aren’t lending to small businesses,” I heard time and time again in Hong Kong. And that’s probably not going to change any time soon. While the non-bank business financing scene is starting to take off, merchant cash advances in particular have been around there for about seven years already.
Hong Kong’s population is a little less than a third of the size of Australia, where many US-based funders have been expanding to over the last couple years.
Letter From the Editor – July/August 2016
July 1, 2016
Challenges facing some of the most well-known consumer lenders in the technology era has caused the mainstream media’s love affair with “marketplace lending” to erode. For example, the Wall Street Journal published a story on July 7th with the cheeky title New Growth Plan for Online Lenders: Layoffs. “In the world of online lending, the hot, new thing is the pink slip,” wrote WSJ’s Peter Rudegair. But if you make it past the headlines, you’ll notice that most of the gloom is constrained to the consumer side. The commercial side on the other hand, is still booming.
I saw this firsthand at a ribbon cutting I attended to celebrate the opening of a new office in Jersey City. And I saw it firsthand when a commercial finance ISO put up help-wanted ads after signing a long-term lease in lower Manhattan. And when I didn’t see it with my own eyes, I read the press releases or conversed with the execs that had just closed major deals. While confidence has retreated from its euphoric highs, a feeling we were actually able to attribute a score to, optimism certainly persists.
In this issue, we shed a spotlight on some of that optimism, while continuing to do what we do best, keeping you apprised of what’s happening out there. Whether it’s ways to keep salespeople motivated or exploring the boundaries of a product at home and abroad, I hope you walk away from this magazine and all of our future ones, a little delighted, determined and debanked…
Are These The Loans? (That Lending Club Messed Around With in 2009)
June 29, 2016
NSR Invest’s Zach Richheimer thinks he may have found some of the loans that the former Lending Club CEO made to himself and his family members as part of an alleged scheme to inflate the company’s quarterly volume seven years ago.
Granted, this was many years before they went public and the CEO has since resigned anyway, but they’re still worth a look nonetheless.
You can check them out HERE.
In his blog post, Richheimer makes the point that Lending Club’s transparent platform is valuable because of the opportunity afforded to the average investor to examine things like this. While true, the data points used to identify likeness, the credit profile, same borrower location, issue date within days of each other – all for amounts exceeding $20,000 are still speculative. For one, nobody even noticed these similarities for seven years.
On the plus side, Lending Club has been subject to a thorough internal review as of late after the recent scandal and this is the worst case of platform abuse that was found, and it was very long ago back when they were a struggling startup.
In a press release on Tuesday, Lending Club announced changes to their internal process, presumably to avoid something like this from happening ever again.
Over the last seven weeks, Lending Club initiated a comprehensive review of its controls, compliance and governance and has taken actions that included implementing KPMG best practice recommendations; increasing testing of data changes; increasing compliance and oversight resources; aligning business and control functions into a better risk management structure; and retraining employees on code of conduct and ethics and reinforcing the importance of a high compliance culture.
Scott Sanborn, the company’s temporary CEO, was upgraded to permanent CEO.
Alternative Funders Continue to Look Down Under
June 29, 2016
Add CapRock Services to the growing list of US-based small business funders that have joined the scene in Australia.
CapRock has formed Sprout Funding as part of a joint venture with Sydney-based family office Huntwick Holdings. Together, they will provide small businesses with loans or revenue-based MCA products up to $100,000.
What’s truly unique is that CapRock will actually be underwriting the deals from their Dallas-based office. And they hope to fund $20 million in two key Australian markets in their first year. Luke Schmille, CapRock’s CEO, told the Dallas Business Journal that he believes the Australian market is very similar to the US. “70 percent of the population is employed by small to medium sized businesses,” he said.
Other funders in Australia that have US-backing include Capify, Prospa via Strategic Funding Source, Kikka Capital via Kabbage, and OnDeck.
Last Fall, John de Bree, the managing director of Capify’s Sydney-based office, told deBanked that he was surprised of the American interest in Australia. “The American market’s 15 times the size of ours,” he said.
One of his competitors, Lachlan Heussler, managing director of Spotcap Australia, was not so shocked. “This is a market that will evolve over time, and we think the opportunity is enormous,” he said.
In an email, CapRock’s Schmille, wrote that they were excited about the expansion abroad.
Madden v Midland Won’t Be Heard By The US Supreme Court
June 27, 2016
The US Supreme Court has decided not to hear the case of Saliha Madden v Midland Funding.
This was to be expected after US Solicitor General Donald Verrilli filed a devastating brief last month on behalf of the United States government that argued the US Court of Appeals for the Second Circuit was incorrect in its ruling. There is “no circuit split on the question presented,” he wrote, and “the parties did not present key aspects of the preemption analysis” to the lower courts.
Vincent Basulto, a partner at Richards Kibbe & Orbe LLP in New York, said “While it is not expected that other circuits will adopt the reasoning of the Second Circuit, in part due to the arguments made by the Solicitor General, the appellate decision stands as good law in NY. The case will return to the district court for further consideration of other issues and there is reason to believe that the outcome there may be favorable for the financial services industry due to a choice of law issue which remains to be decided.”
US Solicitor General Verrilli resigned three days before the Supreme Court’s decision, but his brief on the case will likely be cited for years to come.
“For the foreseeable future,” Basulto added, “parties can be expected to structure their arrangements in an attempt to distinguish the Madden decision from their transaction, though it is not clear how best to do that.”
Merchant Cash Advance is Not a Loan in Hong Kong
June 26, 2016
It’s not just the New York Supreme Court system upholding the sanctity of merchant cash advances where future receivables are sold for cash up front. In Hong Kong, Global Merchant Funding Limited was charged criminally by the Secretary for Justice for conducting business as a money lender without a license.
The Secretary argued that the Merchant Cash Advance contract was really just a loan in disguise. The court disagreed and dismissed the charges. Government prosecutors appealed the decision to the Court of First Instance, where the future of the product in Hong Kong hung in the balance.
The issue, according to the judiciary brief was one of categorization: whether the relevant transactions should be categorized as loans or as purchases of receivables under the Money Lenders Ordinance.
As a criminal case, the Court reviewed the matter seriously, acknowledging that there could be a chilling effect on commercial activity if the verdict were to be overturned and the defendant found guilty.
The prosecution argued that such receivables purchased did not actually exist:
“The Purchased Amount does not represent a debt due from any customer or other third party, including the credit card processor, but is an amount in respect of which the merchant is the only primary obligor and the guarantees given to GMF are guarantees of the merchant’s own liability and not are guarantees for the performance of any debt or obligation that has been sold.”
The court rejected this argument on the basis that such receivables were not defined by the agreement as the prosecution tried to define them:
The expression “Purchased Amount” is defined as “The total amount of the Future Receivables sold by the [merchant] to [GMF]” to be “collected by [GMF] through the deduction of a specified percentage of the [merchant’s] periodic batch settlements from the [Processor]”. […] The receivables consisting of credit card settlement payments to be made by the Processor, are assignable choses in action. In consideration of the Purchase Price received, the merchant bound itself irrevocably to instruct the Processor to pay to GMF directly the Split Settlement amounts upon processing each batch settlement until GMF had collected sums totaling the Purchased Amount. Such instruction was duly given by the merchant. This constituted an equitable assignment of the relevant sums which took effect as and when they came into existence.
Ultimately, the Court decided that even if the economic outcome of the transaction was not distinguishable from a loan with interest, it was not a loan in legal substance and effect and is therefore not covered by the Money Lenders Ordinance.
For these reasons the Secretary’s appeal was dismissed, but the prosecution appealed it even further.
In May 2016, in the Court of Final Appeal, Global Merchant Funding Limited’s contract was once again upheld as not a loan.
The Court held that the MLO’s definition of a “loan” to include “every agreement (whatever its terms or form may be) which is in substance or effect a loan of money” must be understood to be referring to an agreement which has the legal substance or effect of a loan and not an agreement with such an economic or commercial substance or effect. The Courts will only look beyond the agreement between the parties when the agreement is a sham, which was not the case in this appeal.
So decided, merchant cash advances structured in such a way as these contracts are not loans in Hong Kong.
