Articles by Todd Stone
Bitty Advance has expanded to midtown Manhattan. The company’s first location, in Fort Lauderdale, FL, will remain intact as the corporate office.
“We wanted to have a New York presence to hire sales talent, underwriters and, of course, raise more capital because obviously this is the mecca for finance,” said CEO of Bitty Advance Edward Siegel.
Siegel said he is currently hiring salespeople and experienced underwriters for the New York office. There were about 10 well-dressed salespeople at the spacious Bitty Advance office in New York this morning, and Siegel said he plans to grow the office to about 20. He said there are 30 employees in Florida, none of whom moved to the New York office. The New York office does sales and underwriting, while the corporate office in Florida also handles sales and underwriting and houses the customer service and executive teams.
“We also wanted to have a presence in New York for our partners,” Siegel said.
Siegel’s partners include ISOs and other funders that don’t fund the smaller deals that Bitty Advance specializes in. Bitty Advance provides “micro advances” (from $2,000 to $10,000) to merchants doing less than $100,000 in revenue.
Siegel has another Florida-based funding company called Fundzio, and Bitty Advance launched in 2017 when Siegel recognized that almost 50% of online applications to Fundzio were coming from merchants doing less than $100,000 in revenue.
“I realized that the only proper way to do this was to create another company, carve out a niche, and build a team that was just focused on micro advances,” Siegel said.
ForwardLine Financial originated well over $65 million in loans in 2018, according to CEO Steve Carlson. ForwardLine would not share its origination numbers, but Carlson said the company is comfortably on the deBanked list of top originators. ($65 million is the lowest origination number on the list).
Last week, the company announced that it secured a $100 million credit facility from Credit Suisse AG and Neuberger Berman private equity funds. This is the company’s largest credit facility to date. Its previous credit facility was with East West Bank and that relationship is still in place.
ForwardLine is a direct marketer that provides working capital loans of up to $200,000 to small businesses.
Carlson told deBanked that ForwardLine, which was founded in 2003, has been scaling its business dramatically over the past year and a half. This is no coincidence. Instead, Carlson said this is the result of years worth of planning following a majority investment in ForwardLine in 2015 by a private equity firm called Vistria Group.
“We spent 2016 and 2017 very thoughtfully building out a technology platform, a data infrastructure, and a management team to scale the business,” Carlson said. “We’re now actioning on that plan. So this is all part of a multi-year strategy.”
A company statement said that the company’s loan performance in 2018 was record-breaking. ForwardLine increased year-over-year total originations by over 300% in the first quarter of 2019.
Carlson said that the new facility will be used primarily to grow the business. ForwardLine is located in Woodland Hills, CA, and it employs 110 people, more than half of whom work in the sales department. Other employees include underwriters and data and analytics people.
The Commercial Finance Association (CFA) recently published a report on asset-based lending and factoring which showed a 10.4 % increase in domestic factoring volume in 2018 compared to 2017. While the increase isn’t enormous, it is consistent with a gradual growth in factoring, according to Jeff Goldrich, CEO at Princeton, NJ-based North Mill Capital, which provides invoice factoring.
“It’s not a hockey stick, it’s gradual growth,” Goldrich said.
Goldrich attributed the growth, albeit moderate, to two factors. One is that, while not everywhere, he said there’s been some tightening of credit with banks, which leads companies to consider factoring.
The other is that he said large sized companies are increasingly using factoring as a financing option. While factoring is generally more expensive than taking out a bank loan, companies don’t have to worry about having stellar financial history because factors are less concerned with the financial health of the borrower and more concerned with the strength of the receivable.
Another finding in the CFA report is that Recourse factoring increased by roughly 11% in 2018 compared to 2017. Recourse factoring is when a factor has recourse if a company fails and is unable to pay a receivable to a factor’s client, according to Harvey Gross, Executive Director of the New York Institute of Credit. This is unlike the more common Non-Recourse factoring, where the factor can do nothing if the company that the owes the receivable goes out of business. Gross says that Recourse factoring is becoming more common as factors don’t want to take on as much risk.
Gross said that the older, traditional factors (which often cater to the apparel and toy industries, for example) are still Non-Recourse factors. They shoulder the loss if a company can’t pay its invoices. But at the same time, Gross said that these factors want clients with a large volume of invoices and invoices from solid companies.
BlueVine is one of the few companies that offers factoring online, where a company can get funded online without first interacting with a company representative.
“I see a continuation of factoring marrying fintech,” Goldrich said. “That’s where the big backers have interest.”
Liquid FSI announced today that it has entered into a joint venture with Stackfolio, an online loan marketplace, which allows small banks, hedge funds and credit unions to buy and sell loans. Liquid FSI funds mostly doctor’s offices, as a factor, and it also builds financial technology products to make it easier to fund healthcare providers.
Through this new partnership with Stackfolio, all of Liquid FSI’s applicants will now automatically be posted to Stackfolio’s marketplace. Since Liquid FSI is a funder, why send deals to the competition?
“Just like there’s a college for everyone, there’s a loan [or type of funding] for everyone,” said CEO of Liquid FSI Frank Capozza.
And for deals that come from Liquid FSI but are funded elsewhere on the Stackfolio marketplace, Liquid FSI will get an origination fee and a transaction fee.
Capozza said that their proprietary technology gives banks a far clearer picture of the finances of medical offices, which can be risky to fund because insurance companies often pay a fraction of what doctors bill.
“Now they don’t have to turn business away,” Capozza said of banks that have declined medical offices because of imprecise data which he says Liquid FSI provides.
From Stackfolio’s CEO, Pavleen Thukral, “We are excited for this new partnership with Liquid FSI. It not only aligns our view of the loan trading and origination markets moving online, but more critically for our clients, it helps fill a loan growth gap with commercial and industrial customer opportunities in the healthcare industry.”
In conjunction with this new partnership, Capozza said that he is in final talks with a 55-person, California-based brokerage that will help increase medical office applications to Stackfolio, via Liquid FSI.
“We’re the acquisition engine,” Capozza said.
He said that this brokerage, to be announced at the end of the week, will have its people on the phone and on the ground (i.e., pitching doctors in their offices). Brokers will get a percentage of the origination and residuals on monthly factoring transactions.
Their product research lab was the real deal. That’s what a business seeking capital hoped to convince a lender of when they snapped a photo of a $450,000 microscope and sent it over to underwriting along with two dozen other photos of their warehouse.
Most of the pictures were genuine, but the microscope was not. Truepic, a virtual site inspection and photo verification company that the lender had relied on, algorithmically determined that the microscope was actually a photo of a photo, one that had been grabbed off the web.
If they had just emailed these photos directly to the lender, the loan would’ve been issued, but this image analyzing technology changed everything.
Truepic founder and COO Craig Stack said that they were able to identify the false ones because of software they have that can detect when a photo is being taken of a two-dimensional image. Truepic didn’t just obtain the photos, they were taken in real time using their mobile photo-taking app. In addition to detecting only two dimensions, Truepic also found the real photos online through a reverse-image search to show where the photos came from.
Photo verification isn’t brand new. Nationwide Management Services has been providing these very same services to their customers since 2015, according to its CEO John Marsh. Marsh started his company in 2005 and originally provided traditional on-site inspections with certified field agents taking pictures.
“You can’t tell the difference,” Marsh said of photos taken by a field agent, compared to those taken virtually by the owner of the store or office. In the virtual one, the merchant receives a text and clicks on a link that essentially turns the merchant’s phone into a live video feed for the lender.
Commonly, the lender wants to see, among other things, the company’s signage, credit card machine and merchant’s driver’s license. Using GPS technology, Nationwide Management Services can tell exactly where the merchant is, so they can’t be taking photos – in real time – of a different store.
Marsh still offers on-site inspection for clients, but mostly as discreet, unannounced visits to check up on a merchant that is having a hard time making payments. Sometimes a field agent will find that a direct competitor moved in across the street or the neighborhood is declining and there are a number of vacant stores, Marsh said.
Marsh’s virtual video verification product is instantaneous, allowing the lender to see the merchant’s space – and face – in real time, virtually eliminating misrepresentation of the merchant’s store. Stack said that Truepic also has a video verification product that they will be releasing in less than three weeks.
Marsh said that would-be merchant fraudsters get scared as soon as they hear about a real time virtual inspection.
“When we reach out to them for the virtual inspection, they go dark,” Marsh said.
Most of the deception Marsh has encountered is of merchants giving a P.O. Box address as the address of their “physical store.”
Gayle Juhl, President and CEO of Metro Inspections, said that one of her field agents found a merchant with a far more unusual distortion of its company address. The field agent went to the address of the merchant only to find a 1970s bright blue Volvo station wagon with a sign on it, parked in front of the address listed, which belonged to a completely different store.
The man seeking funding, who came out of the car-turned-store, was apparently confrontational, according to the field agent’s report.
Juhl said that she will coordinate a virtual inspection upon request, but that her company primarily does onsite inspections.
“You can’t replace a handshake and an eye-to-eye to see what’s really going on,” Juhl said.
This may be true, but Marsh said that it can take 24 to 48 hours to collect photos for his onsite inspections whereas it can take as little as four minutes with his virtual video or virtual photo services. (This depends on how many images the lender is looking to capture.) Granted, Juhl said that Metro Inspections’ on-site inspections can be collected and delivered on the same day it was requested, given that the request comes early enough in the day.
Stack, who has only been servicing the online lending industry for about five months, says that he has gotten financial services clients who are very excited about the speed of virtual inspections and the fact that they are far less invasive for the merchant. Rather than have a stranger come in to take pictures – raising questions among employees and customers – the business owner can discreetly photograph their space at their convenience. Stack’s company has never offered onsite inspections and says he never will.
“Our camera doesn’t lie,” he said.
The Innovation Lending Platform Association (ILPA), a group of online small business financing and service companies, announced today the addition of BFS Capital. ILPA is known for creating the Straightforward Metrics Around Rate and Total Cost (SMART) Box.
“We believe that transparency matters,” Ruddock told deBanked.
“BFS Capital is committed to being both a responsible and an innovative lender,” Ruddock said. “Our membership in the ILPA allows us to work with industry leaders who are dedicated to advancing standards and best practices in the critical small business lending marketplace… [and] we believe that clarity and transparency is critical in helping [small businesses] make educated and informed financial decisions.”
As a new member of ILPA, BFS will join current members including OnDeck, Kabbage, BlueVine and 6th Avenue Capital.
“We applaud Mulligan Funding and BFS Capital for committing to adopt fair and transparent disclosure best practices to ensure small businesses are well informed when seeking funding,” said ILPA CEO Scott Stewart. (ILPA announced that Mulligan Funding has joined the association as well).
BFS is also a member of the Small Business Finance Association (SBFA) and Ruddock told deBanked that BFS will remain a member of that trade association as well.
Separately, BFS announced today that it has named Fred Kauber as the company’s new Chief Technology Officer and Chief Product Officer. Kauber was previously with fintech marketplace platform CAIS Group and he served in senior roles at First Data, Dun & Bradstreet and IBM.
“I’m confident that Fred is the right person to advance both our vision and our capabilities [at BFS,]” Ruddock said.
“We’re still getting resids from a company 14 years later.” That’s what Phil Dushey said about a factoring client he has at Global Financial Services, a New York-based financial brokerage firm he founded.
He was speaking at deBanked’s “Broker Fair” to a room filled mostly with MCA brokers. Years ago, in the early stages of the merchant cash advance industry, brokers would earn residual payments from credit card processing companies when the merchants were converted from one merchant account to another to make the advance possible. Brokers also got residuals from MCA funders that would pay them over time as the merchant paid back.
Now that MCA companies rarely ever rely on credit processors and since they started to offer brokers their entire commission upfront, the concept of residual payments for MCA brokers became history. But for MCA brokers interested in broadening their product offering, residuals can resurface as a revenue stream if they embrace factoring.
Dushey later conceded that residuals from a factoring client lasting 14 years is highly unusual. What is common, though, is to get residuals that last four to five years, he said.
Ed DeAngelis, founder of Amerifi, a brokerage of 12 in Pennsylvania, said that brokers’ residual payments can be anywhere from 8% to 15% of what the factor collects from the merchant. He presented what he said was a realistic example of a merchant factoring a $100,000 invoice. The factor might typically take a 2% factoring fee, or $2,000. And the broker might take 10% of that amount, or $200, for every month that the invoice is outstanding.
“It’s a steady drip that makes a puddle,” DeAngelis said.
Of course, for a larger invoice, like for $500,000, the broker would get $1,000 a month, as long as the client keeps factoring. But DeAngelis said that most factoring companies have a one year agreement and that most clients stay with their factoring company for two to three years. And some, like Dushey’s client, stay for as many as 15 years. Since DeAngelis opened his brokerage two years ago, he said that all of his factoring clients are still in their agreements.
Eyal Lifshitz, CEO of BlueVine, one of the larger factoring companies, said that MCA brokering definitely pays more upfront, whereas factoring is more about building a book of business.
“There are factoring brokers that make quite a lot, but I would say they probably focus on larger deals,” Lifshitz said.
Lifshitz wouldn’t disclose the average size of a BlueVine factoring deal, but his estimation was that the industry average was $250,000 to $500,000.
“What we’re trying to build is a 20 to 30 year sustainable business,” DeAngelis said. “…So we’re trying to build those small residuals because five years from now, who knows? With regulations [in] cash advance, it may not be around. We’re already diversifying our portfolio with all these other traditional products so we’re not cash advance dependent.”
Not all brokers of factoring deals make residuals, according to Frank Capozza, founder of LiquidFSI, which provides factoring services to doctors offices. He said that he works with select brokers and they generally don’t get residual payments from his company. Instead, he pays them an origination fee.
Still, it seems more common for brokers of factoring deals to receive residuals. But it might not be for everyone.
For MCA brokers interested in also offering factoring, Lifshitz said: “They need to understand the product and what merchant could fit the criteria. It is more complex to understand than MCAs in my opinion.”
When it comes to hiring, it’s quality over quantity. That’s what the co-founders of Everlasting Capital Josh Feinberg and Will Murphy told a packed room at deBanked’s Broker Fair last week. They presented a panel called “How to Scale Your Broker Shop,” where they shared tips on how to do just that.
“We wanted to scale so badly and throw bodies in seats,” Murphy said.
And that’s what they did until they realized that they were doing just as much volume when they had fewer people.
CEO of National Funding Dave Gilbert, who spoke on a different panel at Broker Fair, said that he’s a fan of small brokers. He later explained to deBanked that when brokers get too big, they can get stuck with legacy staff. Instead, he said that when they stay lean and spend money on high quality salespeople, they can be much more effective with five or fewer people than with 10.
“It’s not the amount of bodies in the office, it’s the processes you have in place,” Murphy said.
Processes like hiring, training employees and organizing data, which they said should be as simple as possible. Bigger isn’t better and perfect isn’t realistic, they conveyed.
“Don’t worry about trying to create the perfect website or business card,” Feinberg said.
Instead, he said to think about five elements when trying to scale a brokerage shop:
- Focus on cash flow.
- Know that you will fail.
- Don’t quit before the miracle happens.
- Be different than your competition.
- Think bigger.
Meanwhile, Murphy presented concrete actions to take to grow a broker shop:
- Get customers.
- Build relationships.
- Be transparent.
- Find a mentor.
- Ask questions.
- Specialize in two programs (products)
- Brand yourself / your company
Everlasting Capital, which now has 19 people on staff and is based in New Hampshire, facilitates MCA funding and equipment financing.
On Diversification: Acknowledging that MCAs have an uncertain future, Feinberg said it’s important to diversify. He said that three years ago they were doing exclusively MCA deals and now they do 50% MCA and 50% equipment financing.
On social media marketing: “Be consistent. It’s not about the likes. It’s about [good] content and consistency,” Murphy said.
On broker performance: Brokers are given a six month training program at Everlasting Capital. After the six month period, they’re expected to fund four deals a month.
They also said it’s important to make friends with people in the industry.
Brokers will often say that building strong relationships with their merchants is critical to their success. John Celifarco, Managing Partner at Horizon Financial Group, a five person ISO in Brooklyn, said that the advantage they have over larger competitors is the relationships they’ve developed with their merchants. Celifarco’s office is even in a streetfront store, where a number of their merchants are actually neighboring stores. Celifarco sees this as a strength.
But Michael Bernier, Vice President of 1 West Finance, a 14-person brokerage based in New York, said that things have changed as competition has increased in the space.
Customers gravitate towards companies that can provide them with not only the best pricing, but also the best user experience, which is why we believe so many new players in the space have achieved scale so quickly.
While customer relationships are important, funders in the space that are improving their speed, efficiency, and pricing are going to win the deals.
“In general, if [end users] find a better price on Amazon, 9 times out of 10 they’re going to buy that product on Amazon, regardless of the sales person on the phone” Bernier said.
Bernier suggests that rate or speed may win the customer but another more legally-binding circumstance may guide the relationship accordingly.
Kapitus CEO Andy Reiser served as moderator.
“Contractually, we own the customer,” said National Funding CEO Dave Gilbert on a panel at Broker Fair. “But we work in conjunction with the broker.”
Fellow panelist and Chairman of Rapid Finance, Jeremy Brown, said that he used to say what Gilbert said, but now says: “We own the loan. [And] we have the right to first renew the customer.”
Brokers seeking a very cozy relationship with their clients should therefore consider what rights and responsibilities are afforded to them under their referral contracts so that there’s no confusion with actions taken by either party with the customer down the road.
“I get close to people very quickly, it’s just who I am,” Kemp, a broker, told deBanked in an interview last year. “And in my opinion it works to my advantage because I have merchants that renew with me multiple times a year. And I know that no matter how many calls they get [from other brokers], they’re going to turn to me. I know that they trust me.”
Likewise, Chad Otar, CEO of Excel Capital in New York, has said that building trust with merchants is very important and is what leads to renewal business. Otar introduced one of his merchants, a marketing company, to his other clients. A few of them ended up working with the marketing company, which was a win for everyone and led to even stronger word of mouth from Otar’s merchants.
“I don’t think anyone owns the customer,” said CEO of BFS Capital Mark Ruddock on the panel alongside Gilbert and Brown. “Customers are a privilege, not a right.”
If a tiny ray of light were created from every conversation about small business financing, then the Roosevelt Hotel in midtown Manhattan would have been tantamount to the sun on May 6th. It was the site of deBanked’s 2nd annual Broker Fair and the grand old lobby was abuzz with brokers, funders and vendors from across the industry. And it wasn’t only the lobby. The hallways and ball rooms and bathrooms were filled with people in jackets or dresses with colorful conference badges hanging from their necks. You could not open your eyes without seeing a Broker Fair attendee.
The day kicked off with an address to the crowd by deBanked’s founder and president Sean Murray.
He spoke to a packed audience in one of the hotel ballrooms that was actually the site of a famous scene in the 1987 movie, “Wall Street,” starring Charlie Sheen and Michael Douglas. It was in this scene where one of the most well-known lines, “Greed is good,” was delivered in a speech by the character Gordon Gekko, a ruthless businessman played by Michael Douglas.
In Murray’s speech, he acknowledged the classic financial thriller, but gave it a twist.
“Funding small business is good,” Murray said. “It’s not greed that’s good. Aligned interests are good.”
This very room was a marriage of old and new. The 1924 room with soaring ceilings and crystal chandeliers was packed with mostly young faces in a still relatively new industry. The stage was simple, the chairs sleek, and colored strobe lights circled the ceiling in what created a fresh energy.
The first panel of the day, called “The Great Debate,” was dominated by discussion of technology among the CEOs of some of the largest companies in the small business funding industry: National Funding, Rapid Finance, BFS Capital, and Kapitus.
“Technology is an inevitability and a powerful way for brokers to stay relevant,” BFS CEO Mark Ruddock told deBanked. “The question is, ‘Does that preclude the small [brokers] who don’t have the money to invest in technology?’”
He sees great opportunity for software platforms that can connect an individual broker to lenders, similar to how Shopify connects small mom and pop retailers to a wider consumer audience.
One of the other CEOs on the panel said he was bullish on digitally savvy brokers and all of them seemed to agree that brokers should offer more products.
“Having a broader set of products benefits brokers because they become the go-to person for merchants rather than simply serve a transactional function,” Chairman of RapidAdvance Jeremy Brown told deBanked.
For brokers looking to expand their product offerings, there was a well-attended session called “Commissions with Factoring and Leasing” that was led by factoring and leasing professionals, Phil Dushey and Edward Kaye, respectively.
Meanwhile, the co-founders of the successful brokerage Everlasting Capital, led a session called “How to Scale Your Broker Shop” which included advice on everything from hiring to customer acquisition and social media marketing. One of the founders, Josh Feinberg, had his marketing person follow him around with a video camera throughout the day.
There were also sessions on regulations affecting the industry, plus a session called “Operating with Integrity: Why Ethics Matter.”
“The speakers are very relevant,” said Dexter Bataille, a broker at Pivotal Funding in Florida who attended Broker Fair. “And the panels are really good too.”
“deBanked always finds ways to make the shows more professional,” said Senior Sales Leader at Reliant Funding Nicolas Marr, who flew in from California to attend the conference. “The details really count.”
In another hotel ballroom, Broker Fair attendees meandered around high tables where event sponsors had representatives talking about their products and handing out free t-shirts and pens. As the day wound down and Broker Fair’s “networking happy hour” approached its end at 6 p.m., the figurative sun (created by small business finance conversations) began to set at the Roosevelt Hotel. But a crowd of about 100 lingered at the hotel bar, buzzing away, eager to make just a few more connections.
With most 2019 Q1 earnings in for public companies, the industry’s biggest lenders are off to the races. Square reported on Wednesday that Square Capital, its business lending arm, originated $508 million in loans in the first quarter of the year. Meanwhile, OnDeck originated $636 million this quarter, according to its earnings report released yesterday. Kabbage, which is not a public company, has been trailing very closely behind OnDeck for the last few years but someone familiar with the company said that Kabbage’s originations in the first quarter of this year surpassed OnDeck’s.
Then there is PayPal, which has not released official origination numbers for 2019 Q1. But earlier statements from PayPal that they had surpassed a billion dollars in quarterly small business funding in 2018 (already more than OnDeck), would put it in the #1 slot for originations. Additionally, a comment made by PayPal CEO Dan Schulman during the company’s earnings call last week implied that its Q1 2019 earnings are again over a billion dollars.
PayPal’s estimated originations number represents its US and international originations, including their business financing products available in the UK, Australia, Germany and Mexico. Likewise, OnDeck’s number represents originations from the US along with its smaller markets in Australia and Canada.
Square Capital operates exclusively in the US, so its originations number is US-only. And Kabbage’s undisclosed estimated originations number represents purely US originations.
|Company Name||2019 Q1 Funding Volume|
OnDeck’s originations dipped in the first quarter of this year to $636 million, down from $658 million in the previous quarter.
“We made some adjustments to credit policy mid-quarter to pull back in certain areas and our funding advisor channel volume decreased sequentially as a result,” said OnDeck CEO Noah Breslow.
In other words, OnDeck has tightened its credit box.
“If you tighten [your credit box] and your competitors stay exactly the same, on the margin, your funnel is going to deteriorate a little bit because you’re not making as aggressive offers as you were before,” Breslow said in response to a question on this morning’s earnings call.
But he also said that OnDeck has a lot of historical data on its portfolio that tells them that this tightening for now is a wise decision.
“And we’re not making a seismic shift in who we’re targeting or what we’re trying to do,” Breslow said.
When asked by an analyst on the conference call if competition in the space is now more intense, he agreed that it is.
“But it’s broad based, not localized to any one competitor,” Breslow said. “There are larger players in the market that are getting a little more mature. Some of them are improving their access to capital as well.”
Kabbage likely sees itself as a primary competitor and not just part of “broad based” competition. After all, it originated $2 billion last year, compared to OnDeck’s $2.48 billion.
“The small players actually have pretty good access to capital too,” Breslow said on the call. “So any single one of them is not that big, but if you put them all together, they’re equivalently sized to another OnDeck. So that’s something we watch as well.”
While total originations dropped for OnDeck, Breslow said that the company’s line of credit volume was at an all time high, accounting for $150 million. Also, 43% of volume for the first quarter of 2019 came from OnDeck’s direct channel. Yet the company continues to build out its partnerships.
“Given the attractive customer acquisition costs in the strategic partner channel…adding new partnerships remains a focus,” Breslow said.
Breslow said OnDeck expects to return to quarterly growth in the second half of this year.
At Purdue University, home of the Boilermakers, there’s a brick bell tower that stands high above everything else on this handsome campus of stately college buildings and green lawns. Paul Laurora, a senior Chemical Engineering student, said the bell rings on the hour and at 20 minute intervals throughout the day, as that’s when classes begin and end. And at 5 p.m., the bell rings out the melody of Purdue’s school song, “Hail Purdue.” That’s a lot of bell ringing. Laurora is a fraternity member, he lives with seven other roommates in a house on campus and he really likes film. He’s also a part of Purdue’s “Back a Boiler” Income Share Agreement (ISA) program, which is an alternative to a student loan. An ISA is an arrangement where college students pay a percentage of their future earnings to the college and other investors.
Laurora was introduced to the ISA program by Purdue. It launched in 2016 and was the first of its kind. He said he signed up for it because he was denied student loans by banks and because he said the ISA is more transparent and easier to obtain.
“If I hadn’t gotten the ‘Back a Boiler’ ISA, I would have had to take a semester off to work to contribute to my tuition,” Laurora said.
Purdue’s ISA program works such that the percentage of a student’s future earnings that go to repaying the advance is based on the amount of money they are likely to make given their major. But the math works out such that all graduates are expected to pay roughly the same minimum amount. The graduates are given six months to find employment and then the clock starts ticking, like the one inside the campus bell tower.
As a senior, Laurora has been on an active job search. Earlier last week, he said he wasn’t too concerned about paying off his ISA, but he said it was definitely a factor when considering different jobs and their salaries. Last Friday, Laurora got a job offer from a Washington, D.C. firm to be an Engineering Technology Analyst, and he feels comfortable that he’ll earn enough money for himself while still being able to give a percentage of his salary to the ISA.
For Laurora, he is required to give 2.57% of his income for a little more than 7 years. What Laurora and other students find attractive about Purdue’s ISA Program is that, like all ISA programs, there is a time cap (usually 10 years) after which the graduate no longer owes money. The program simply concludes.
Florin Handelman is a junior at Purdue who wanted to go there because of its prestigious engineering program. He ended up switching his intended major to Industrial Design, which he’s very passionate about. He’s even part of a student club where upperclassmen mentor underclassmen in industrial design.
Handelman also has an ISA, which he said he really likes because of the time cap. But he noted a potential downside – which is that if you end up making far more than what Purdue anticipated, you still pay the same percentage on your income, which could end up being a lot more than a fixed-rate student loan. He conceded, though, that earning far more than expected is “an ok problem to have.” For extremely high earners, Purdue has a cap so that no one pays more than 2.5 times the principal amount they were given.
Handelman said that none of his friends have an ISA and that, unless you’re applying for financial aid, “no one really knows about it.”
Since 2016, Purdue’s “Back a Boiler” program has served over 500 students with 820 contracts for a total amount of almost $10 million, according to Tim Doty, Director of Public Information and Issues Management at Purdue. Last year’s freshman undergraduate class had more than 8,000 students, so 500 in the ISA program altogether is still a very small number. But the program has been growing steadily. And in the time since Purdue launched the first ISA program, there are now about 25 other ISA programs at institutions of higher education in the U.S., according to Charles Trafton, co-founder of Edly, a new online marketplace that connects ISA investors.
Purdue is a public school, so tuition is less expensive in general, particularly for in-state students. For the 2018-19 academic year, tuition for in-state students was $9,992 a year and $28,794 a year for out-of-state students.
“College is ridiculously priced in general,” said Laurora, who is an out-of-state student from New Jersey. “I have a friend who’s paying $80,000 a year at NYU.”
Savanna Williams is an in-state junior and an Elementary Education major at Purdue. She’s also a member of a sorority and is an officer in a student run dance club. One thing Williams said she likes about the ISA program is that if she wants to start a family and not work for a few years, she wouldn’t owe money then. With Purdue’s program, a graduate can take off time and not pay for up to five years. But the ISA payment term is then extended for however long a period that the graduate stopped working.
Given their shared experience and future commitments, students in Purdue’s ISA program are kind of like members of a club. When Laurora was at Harry’s Chocolate Shop, a popular bar near campus, he ran into someone he knew who was in the program.
“We said hi and both agreed it was helpful.”
Lending Club will no longer be underwriting small business loans, according to Lending Club Head of Communication VP Anuj Nayar. The company will still accept applications for them, but will direct them instead to Opportunity Fund and Funding Circle in exchange for referral fees. Less established businesses, or those with lesser credit, will be sent to Opportunity Fund, while more established businesses with better credit will go to Funding Circle.
According to Nayar, there will be no layoffs. Some employees who had worked in small business underwriting will move elsewhere within Lending Club while others will become contractors for Opportunity Fund. Opportunity Fund is a non-profit with the mission of investing in small businesses that have been shut out of the financial mainstream. It is backed by major financial institutions including Bank of America, Goldman Sachs and the JP Morgan Chase and Knight Foundations. In fiscal year 2017, Opportunity Fund made over $92.5 million in loans to more than 2,900 small business owners.
“[These two partnerships] enables us to both deliver greater value to our applicants and capture a new revenue stream for Lending Club, while further simplifying our business and setting the stage for more partnerships and innovations for Club Members,” said Lending Club CEO Scott Sanborn.
The new revenue stream Sanborn refers to is the referral fees Lending Club will get from its new funding partners when they fund loans sent to them from Lending Club. And Lending Club’s business will be streamlined as it jettisons small business lending backend operations. They will now focus exclusively on consumer loans, which has been the company’s primary business since it was founded in 2006.
Lending Club expanded into small business lending several years ago, but this component of its business never really took off, and was declining over the last few years. At the end of December 2016, Lending Club’s non-consumer loan originations (including small business loans) accounted for 10% of its business. In December 2017, it was 9%. And in the fourth quarter of 2018, it was 7%.
Nayar said that these new partnerships will allow Lending Club to focus even more on consumer lending. Headquartered in San Francisco, Lending Club has lent more than $44 billion to 2.5 million customers.
From approximately July 2015 until May 2017, Prosper excluded certain non-performing loans from its calculation of annualized net returns that it reported to its investors, according to an SEC order released last Friday. The order found that Prosper reported overstated annualized net returns to more than 30,000 investors on individual account pages on Prosper’s website and in emails soliciting additional investments from investors.
As a result of the inflated numbered, which the SEC order says Prosper management was aware of, many investors decided to make additional investments based on the overstated annualized net returns. The SEC order said that Prosper failed to identify and correct the error that overstated its annualized net returns “despite Prosper’s knowledge that it no longer understood how annualized net returns were calculated and despite investor complaints about the calculation.”
“For almost two years, Prosper told tens of thousands of investors that their returns were higher than they actually were despite warning signs that should have alerted Prosper that it was miscalculating those returns,” said Daniel Michael, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit.
Prosper neither admitted nor denied the findings. The company did not refute the SEC order’s findings, including that it violated the antifraud provision contained in Section 17(a)(2) of the Securities Act of 1933. Prosper will pay a $3 million penalty for miscalculating and overstating annualized net returns to retail and other investors.
According to a 2017 Financial Times story, one Prosper investor wrote on the Lend Academy forum in 2017 that their returns were restated from about 14 percent to 7 percent.
“Shame on me for just assuming that I was getting a higher rate,” the investor wrote, “but shame on Prosper x 1000 for misleading investors.”
In a written statement to deBanked today, a Prosper representative characterized the miscalculation as an error only, not a scheme. She conveyed that when Prosper discovered the error in 2017, they notified investors who were impacted and changed the numbers so that they accurately reflected the investors’ returns.
“We’re pleased to have the SEC inquiry resolved and appreciate the SEC’s recognition of our cooperation as the agency looked into this matter,” read a statement provided by Prosper. “Since discovering and fixing this issue two years ago, we have put additional controls in place designed to detect and prevent similar errors in the future, and we are committed to providing transparent information on returns to our retail investors.”
Prosper’s CEO, David Kimball, was awarded “Executive of the Year” at this year’s LendIt Fintech conference earlier this month.
In 2018, the company originated $2.8 billion in loans, remaining flat compared to 2017. Prosper’s net revenue last year was $104 million, a decrease compared to $116 million in 2017. Founded in 2005 and headquartered in San Francisco, Prosper provides personal loans up to $40,000 and was one of the first peer to peer lenders.
Back when lenders used to visit the site of a merchant’s business, a “doctor” once hired actors to play nurses and patients to give the illusion of a thriving medical practice when the lender came to check in on the business before financing it. The doctor’s office looked legitimate, it got funded and the fraudster ran off with the money.
This story was shared last night by Lowell Isaacs, Chief Credit Officer at Fora Financial, as part of an anti-fraud panel discussion organized by Ocrolus. Meanwhile, another panelist relayed a story about a nine-year old who was cheating the system at a chess club he brings his son to.
“If kids can do it, customers can do it too,” said Vivek Nasta, VP of Product at Ocrolus, which designs and implements technology to verify the authenticity of financial data, primarily bank statements.
Another panelist, CEO of PeerIQ Ram Ahluwalia, spoke about synthetic fraud, or people using manufactured identities.
“They”ll be a very good payer and then three years later, they’ll draw out all the money and disappear,” Ahluwalia said.
Nasta spoke of how, after the financial crisis, it became impossible to get a loan from banks. And what developed, Nasta said, was “a race for customers” to fill the void that banks left. Since the online lenders were competing – and still do – around speed, he said that customers started assuming that they could get money very quickly.
Isaacs acknowledged the role that funders played in rushing money to merchants.
“In some ways, this is something we’ve brought on ourselves,” Isaacs said. “I’m not sure it was a demand issue. I think a lot of it came from the supply side.”
Ahluwalia, however, acknowledged that many legitimate borrowers, particularly consumer borrowers, do prioritize speed over rate, often because they have no savings for emergencies.
“I hope you’ll never see a lender fund a merchant instantly,” said Yaakov Erlichman, VP of Fraud at Kabbage, “unless they have all the data on that merchant.” Granted, Kabbage can already approve a merchant in less than 10 minutes, so Kabbage is definitely focused on speed.
Everyone on the panel seemed to agree that it’s impossible to eliminate fraud altogether.
Nasta said that Ocrolus can protect against counterfeiting by recognizing, say, that the font of one character in a Bank of America bank statement is a font that hasn’t been used by Bank of America in 10 years. Kabbage’s Erlichman told deBanked he believes that fraudsters are not just random guys in their basement, but rather highly organized teams of people who spend their days creating fake identities and applying for loans. Still, he said that the number of people trying to defraud Kabbage is very small.
“99.9% of our customers are good actors,” Erlichman said, “so you want to make their experience awesome.”
In a fast gentrifying section of Downtown Brooklyn, online lenders are waging a silent turf war. Each day, hungry consumers flock to DeKalb Market, a subterranean hipster food court where lunch and a drink can cost $17. The maze-like space with retro neon signs and rustic wood countertops offers a dizzying array of cuisines, and with it, the opportunity to indulge in one’s own individual preferences. But if you’re looking for the vendor’s payment machines, you’ll notice an eerie sameness amidst a cacophony of color.
Square processed $85 billion in payments in 2018 and here in DeKalb Market, 75% of the vendors deBanked surveyed relied on Square’s Point-Of-Sale technology. The publicly traded company generated $2.5 billion in payment transaction fees last year alone, but it’s the add-on products like Instant Deposit, Cash Card, Caviar, and Square Capital that are propelling the growth. 244,000 businesses received a loan from Square in 2018 for a total of $1.6 billion. Borrowing is as simple as clicking a few buttons on the POS dashboard, making Square the presumptive lender of choice for businesses in the food court.
But the rankings on a national level say that Square trails behind Kabbage, an online lender with no reliance on a POS system. Kabbage’s growth trajectory has been epic, once a lending service for eBay merchants, the company is now one of the largest online small business lending companies in the United States.
Undeterred by the sea of Square dashboards, billboard advertisements for Kabbage once blanketed the periphery. The ads, which few consumers seemed to gaze at, were clearly meant for the business owners in between the food court and the mall above it. There was also a competitive feel to it, as if Kabbage was subconsciously communicating to Square that they were not alone.
Nowhere to be found was OnDeck, an online lender headquartered a short distance away in Manhattan that does more in loan volume each year than Square and Kabbage. But just because they can’t be seen doesn’t mean they’re not there. Blending into the crowd of consumers, deBanked spots business loan brokers, ones reputed to refer business to alternative capital sources and online lenders, OnDeck among them. 29% of OnDeck’s business in 2018 was attributed to Funding Advisors, an army of independent sales professionals across the country.
But they’re here for lunch just like everybody else, or are they? Their in-person presence may complicate their rivals’ efforts. Can a face and a handshake trump familiar software and the Internet? OnDeck’s $2.5 billion in 2018 loan volume suggests that their diverse sales strategy, including the use of Funding Advisors, has an impact.
Some vendors in DeKalb Market fail and go out of business. Others, like Cuzin’s Duzin, a homemade donut vendor made semi-famous by its feature on a Vice Media TV Show, The Hustle, recently completed renovations and further expanded its business into the nearby Barclay’s Center. Public records show the company just received financing from an equipment leasing company based in Washington State, a possible missed opportunity for the online lenders canvassing the space. Not for long, perhaps, as OnDeck announced it would be entering the equipment finance market this year.
As for Square, the love for the POS product presents a perceived edge. A general manager of Two Tablespoons, another food vendor, told deBanked that he thinks the Square system they rely upon is very easy to use. He said it also creates promotions that allow businesses like them to track customer spending and text a customer (with their permission) if they’ve earned, say, $5 off at a store.
But converting these vendors into borrowers is not guaranteed. Kabbage’s ads could not be found on a recent trip to the food court. And one shop selling burgers there told deBanked that they were aware of the loan product through Square because they use the POS for payments, but that they had no interest in using it to borrow money.
“It’s like a credit card,” she said. “What you take out, you owe. And we choose not to owe.”
Edly, a new online marketplace that connects Income Share Agreement (ISA) investors, announced last week that a prestigious software engineering school in San Francisco listed $2 million in inaugural ISA trades via the Edly marketplace. The school is called Holberton and offers only two payment programs, an ISA or pay it all upfront. LinkedIn CEO Jeff Weiner and many others who are well-established in tech are closely involved with the school.
An ISA is an arrangement where investors front the cost of a students’ college education in exchange for a percentage of their future earnings. According to Charles Trafton, co-founder of Edly, ISAs differ from traditional student loans in three primary ways, all of which protect the student: 1) repayments don’t begin until the graduate starts making above a certain amount of money, 2) repayment is limited to a certain amount of time (usually 8 years) and 3) there’s a cap on the amount that the graduate repays, usually one to two times tuition.
“Today, schools have an incentive to maximize the amount they get from each student on their way in – which usually means maximum borrowing – and then spend as little as possible on the student as he matriculates through the school,” Trafton said. “The school has no skin in the game.”
With the ISA model, the school usually has skin in the game. The Edly marketplace requires that participating schools own part of the ISA. This way, the school’s interest is aligned with the student, and later the graduate. If the students are well trained, then they are likely to succeed in the workplace, earn good money quickly and pay the money owed.
The first ISA program in the U.S. was launched at Purdue University in 2016 and Trafton said there are now 23 programs in the country. His mission with the Edly marketplace is to provide liquidity for these investments and Holberton’s $2 million of ISA trades is its first transaction.
Holberton’s ISAs are set up so that graduates only make payments when their salaries are more than $40,000. But Trafton said that Holberton graduates are usually hired by top Silicon Valley tech companies and they typically make nearly six figures in their first year after graduation.
What’s the present role of computers in the underwriting process?
“It’s faster and more accurate,” CEO of Kapitus Andy Reiser said of the company’s new AI process. “We get thousands of pages a day of bank statements, and we can digitally read it through [our system] and then manipulate that data and analyze it.”
Co-founder of Clearbanc Michele Romanow said they don’t even have underwriters on staff. Instead, they have data scientists who work to improve their automated process.
CEO of Idea Financial Justin Leto said they have a robust AI model. It receives information like credit score, business type and details about other positions the company has; with that, it generates the term, rate and amount for a deal. But at Idea Financial, the human underwriters evaluate this information and make a decision.
“Human underwriting is still a critical part of funding,” Leto said. “There is an art to underwriting. It’s not just a science. It can’t be cookie cutter.”
Kapitus also employs underwriters. Despite continuing improvements to its AI system, Reiser acknowledged that there are always exceptions that require an underwriter, like if a merchant’s credit is extremely low. Also, underwriters generally get involved on deals for $150,000 or more, implying that more careful consideration by a human being has value, particularly when there’s more money at stake.
“There’s been a big uplift in the amount and quality of data available,” said Farrah Lakhani, Director of Growth and Operations for OakNorth Analytical Intelligence, which ultimately makes small business underwriting decisions mostly using AI.
“The more data you give [the AI machine], the better it learns…but you have to give the machine the right data.”
The right data, she explained, is similar enough data so that it can start to detect patterns and irregularities.
“All the data is useless if you’re not getting insights from it,” she said.
As for AI replacing human beings altogether, Lakhani doesn’t believe that will happen. She thinks we will always need human beings to think and reason.
“AI is replacing tasks, not people,” said Alex Jaimes, SVP of AI & Data Science at Dataminr at the Disruption Forum Fintech conference in New York this week. “So if all you do is tasks, then you might lose your job to AI.”
One thing you can’t get back is your company.
Michele Romanow, a judge on Dragon’s Den, Canada’s version of Shark Tank, realized from the show that a lot of companies should not be pursuing venture capital at all. She recalled a company that was willing to give an investor 25% of their company in exchange for $100,000.
“Why use the most expensive form of capital, which is equity?”
It led her to co-found Clearbanc, a Toronto-based small business funding provider that does their own spin on merchant cash advances. The amounts range from $10,000 to $10 million and their caution against equity capital-raising is explicit.
“No equity, no fundraising, no dilution, no warrants/no covenants, no board seats, and no bullshit” is a pitch prominently displayed on the company’s homepage.
Romanow speaks from experience. In 2014, GroupOn acquired a company she co-founded and she joined Dragon’s Den shortly after at just 29 years old. She’s a serial entrepreneur with a net worth reported to be over $100 million.
VC money may be harder to obtain, regardless, even if an entrepreneur is willing to make the sacrifice. Funding from VCs tends to be unequally distributed geographically. She cited a May 2018 report by PwC and CBInsights that showed that more than half of all VC dollars invested in small businesses and startups during the first quarter of 2018 went to companies in California. And 80% of VC money in that quarter funded companies either in California, New York, Massachusetts or Texas, a trend bucked by alternatives provided by companies like Clearbanc whose backgrounds are much more diverse.
The message has worked. Clearbanc recently announced that it plans to invest $1 billion in 2,000 e-commerce companies within the next 12 months and the company has raised more than $120 million to-date. It probably helps that Romanow is a TV business celebrity. She is now on her fifth season of Dragon’s Den. And as for those pesky VCs? They tend to be big referral partners for Clearbanc. Go figure.