Articles by Sean Murray

Business Loan Brokers Encounter Hard Times

Feeling a little bearish about the business lending industry lately? If you’re a business loan broker, you’re not alone.

Marketing costs are going up while the response rates of marketing are generally going down. It’s a trend that’s lightly covered in the March/April issue of our magazine that has just been dropped in the mail. But there’s more to it. Several recent new broker shops have failed or are failing within just their first few months of operation. Employers have become more litigious with former employees, alleging violations of non-competes and/or non-solicit agreements, and at least one sales agent apparently went too far and was arrested in early February for backdooring deals.

The number of emails deBanked has received about stolen commissions, rogue employees and general grievances has shot up in recent months, and on one industry forum, sales agents are now publicly voicing their frustrations. One thread that was aptly titled, Merchant cash advance crushed me, was posted by a discouraged broker. “I’ve been in this business for a year and I can say this is the hardest thing I’ve ever done from a business perspective,” he said. One user responded by saying, “fail rate is very high. Competition is crazy. If you can’t spend money on marketing, including a sizable outbound sales force, you are a dead duck.”

“The market has changed,” said Fundzio CEO Eddie Siegel to deBanked in the previous issue. “The cost of capital has gotten a lot lower for the customer, and since there are more brokers in the marketplace they are willing to take a lesser amount just to get the deal to the finish line.”

“A lot of brokers are carpet bombing, they’re on the phone all day,” said Blindbid President Michael O’Hare. “I talked to one guy who said he makes 400 or 500 calls a day on a manual dial.”

In an environment of more calls, lower response rates and lower commissions, it’s no surprise that outrage over backdoored deals has overshadowed stacking as the industry’s most pressing issue.

Even funders have stepped up their legal pursuit of other funders through allegations of tortious interference. Whether such cases have merit is for the courts to decide, but they are a sign of the times that money is no longer raining from the sky. Lines are being drawn. In a market where everyone was once a winner, now there must be losers.

Even the political atmosphere is changing. In just the last few months, the Small Business Finance Association has hired an executive director and two additional new advocacy groups were formed, the Commercial Finance Coalition and the Coalition for Responsible Business Finance.

“A few years ago, individual brokers could be making $20,000 or even $40,000 a month. Now those numbers are much more difficult to reach unless brokers have a unique lead generation method or their own money to participate in the deals,” said Zachary Ramirez, a vice president at World Business Lenders.

Of course, it’s not bad for everyone. In February, deBanked featured a sales closer whose team collectively originated $47 million in deals last year. He’s not alone. Veteran players, particularly those that have been in the industry for nearly a decade acknowledge that they have first mover advantage over the newer entrants because their portfolios are so big or they have weathered the bumps and don’t get as frustrated by them.

Funders that know the pains brokers are going through are attempting to address it in their marketing, with some assuring their prospective partners that they have no inside sales force, and thus no way to steal a deal. For those with inside sales forces, they are relying on their well established reputations to do the talking.

Anonymous deal soliciting has been mostly outlawed on industry forums to curtail bad experiences, but they still happen on other mediums. One broker complained on LinkedIn this week that a lead generator based in the Philippines had allegedly pocketed his $2,500 upfront fee and then changed their phone number and disappeared. That lead generator is still advertising his wares through social media.

If that’s not a sign of the times, then I don’t know what is.

The APR Enigma Confuses Everyone – Even Lenders

A study published by Lendio last week confirmed the results found in recent government studies, that small businesses are confused by Annual Percentage Rates. But they’re not alone…

It might be time to reconsider the calls for APR standards in small business lending. In a recent survey of 1,000 small business owners, only 17.4% of respondents chose APR as the easiest method to understand the cost. The vast majority selected the total net dollar cost of the loan as being the easiest.

The data matches the results found in a study conducted by the Federal Reserve Bank of Cleveland last year, in which small business owners generally responded that there was nothing confusing about a loan when cost was presented as a total dollar value. It was interest rates that tripped them up, the Fed determined.

When attempting to answer questions about the total amount owed and interest rates, participants became notably less confident in their ability to make an informed borrowing decision, with many qualifying their answers or indicating they were “not sure.”

– Federal Reserve Conclusion from Alternative Lending through the Eyes of “Mom-and-Pop” Small-Business Owners 8/25/15

Additionally in the Fed study, small business owners guessed the interest rate of a presented hypothetical loan to be anywhere from 5% to 50%, with some saying they just didn’t know. All of them were wrong. An analyst for the Federal Reserve Bank later acknowledged that it was a trick question. “The correct answer is that ‘it depends on how long it takes to pay back,'” said Ellyn Terry, an economic policy analysis specialist. The Fed report itself had to be amended more than a month later because this question and the answers produced in the study were confusing to even the sophisticated parties trying to make sense of it. That amendment reads as follows:

*Note: In practice, for a credit product structured like Product A, the effective interest rate varies depending on how long it takes a borrower to repay which, in turn, depends on the volume and timing of credit card sales receipts. Simply put, the interest owed on Product A is 30% of the principal value, but assuming consistent monthly sales and daily payments, the effective interest rate is on the order of 60%, and higher if funds are repaid sooner than one year. (Added 9.29.2015)

Does that clear it up for you??? Even the added note intended to make the interest rate question more clear is confusing. Small business owners never stood a chance…

But it seems those on the lending side of things are confused too.

Lendio CEO Brock Blake followed up his study with a blog post on LendAcademy to try and articulate the implications of the findings. Titled, Communicating the Cost of Capital in Alternative Lending, Blake was roasted in the comments for comparing a 6-month loan to a 5-year loan by those presumably involved in lending themselves.

Apparently, math is very subjective

In an example Blake used to illustrate a point, he gave a 6-month loan an Effective APR of 83% and a 5-year loan an Effective APR of 19%. Critics eager to point out holes in his argument challenged the fundamental numbers used to construct it.

In sparking this debate, Blake may not have fully convinced readers that a 6-month high-APR loan can be better than a 5-year low-APR loan, but he did unintentionally demonstrate support for his study’s findings, that APR as a universal measurement is flawed since even those that believe they understand it came up with different percentages than their peers.

Consider that the Federal Reserve study referenced above implied to business owners that APR is simply an abbreviation for interest rate, which isn’t true. “When it comes to borrowing for the short term, are you more comfortable knowing the interest rate (APR) or total cost of repayment?” it asked those polled.

Bad form

The Truth in Lending Act (TILA) makes a clear distinction between an APR and an interest rate. “Since an APR measures the total cost of credit, including costs such as transaction charges or premiums for credit guarantee insurance, it is not an ‘interest’ rate, as that term is generally used.” Well then why are they presented as the same thing in a Fed study measuring comprehension of loan costs?

Note also that only one of the Fed study’s mock products mentioned an APR and only in the context of an Effective APR, something that the Fed has long known to be confusing. In April 2006, Macro International (now ICF International) was hired by the Fed to examine the comprehensibility of these very formulas.

One of the most consistent findings was that very few participants understood the meaning of an Effective APR (At that time known as the Fee-Inclusive APR). “Participants had a wide variety of incorrect interpretation of these percentages, including that they were the interest rates that would be paid on fees, penalty rates that would be charged if late payments were made, or the percentages of total transactions that were made of each type.”

It got worse though, because “in addition to a general lack of understanding of the [Effective APR], qualitative testing also found several instances when participants confused this term with their nominal APR for a given transaction.”

But it’s gotten better right?

For all of the studies conducted and regulations implemented, one might expect that banks, which bear the brunt of disclosure requirements in the financial world, would receive the highest marks on transparency. But that’s not the case. Another study, one jointly published by seven Federal Reserve banks, found that dissatisfied business borrowers were slightly more likely to encounter transparency issues with large banks than they were with online lenders.

Bankers probably aren’t surprised by that

Last Fall, B. Doyle Mitchell Jr, who spoke on behalf of the Independent Community Bankers of America during a House subcommittee hearing, said that new loan disclosures [required by Dodd-Frank] was not making it easier for borrowers to understand, to the point that they don’t even know what they are signing anymore. “In fact it is even more cumbersome for them now,” he said.

Non-bank lending critic Ami Kassar has publicly claimed that lenders are simply afraid of disclosing APRs because they don’t want their borrowers to know the real cost.

The data indicates however that borrowers don’t know what to make of APRs. Worse, the issue seems to be a universal one, one that confounds consumers, business owners, government surveyors and those within the lending industry itself.

APRs also struggle to remain relevant as a measure for short term loans. For example, OnDeck CEO Noah Breslow has said that a six month loan with a 60% APR may actually only cost 15 cents on the dollar. “The APR overstates the actual cost of the loan to the borrower,” he previously told Forbes.

“Asked which method was easiest to understand, two-thirds of respondents chose total payback amount,” Lendio’s survey concluded.

That seems to be the trend indeed.

Small Businesses Say ‘Yes’ to Online Lending Through NFIB Partnership With Kabbage

The largest association of small and independent business owners in the country is embracing online lending.

The National Federation of Independent Business (NFIB) announced a strategic partnership with Kabbage yesterday. The NFIB has more than 325,000 members.

Speaking about Kabbage, NFIB SVP Mark Garzone said, “Access to working capital for an expansion, repairs or short-term cash flow needs is essential for small businesses to thrive. We know that our members will benefit from this valuable resource.”

While the partnership is clearly a sign of Kabbage’s prowess, it also serves to reinforce the value that online lenders can provide to small businesses in general. “Many of our members – like a number of small businesses – struggle with the standard loan process when they need access to working capital,” said Garzone.

Not all online lenders are created equal, but a few have stood out from the crowd, in this case, Kabbage.

Earlier this month in The Atlanta Journal-Constitution, NFIB representative Holly Wade said, “Our fear is that they will over-regulate [online lending] out of existence or to the point that it’s no longer a benefit.”