Undercover in the Underwriting Room
March 22, 2019
Think of the stereotype of a high energy, high testosterone sales floor of men practically shouting on the phone. And then scale it down to a level of about 2 out of 10. That was the environment I stepped into on a recent visit to a room of small business finance underwriters. They let me shadow one for a day so long as I didn’t reveal who they were.
In the glass room where almost 10 underwriters sat, some spoke on the phone, but the conversations were measured. No shouting. No arguing. Sometimes there was near silence. More than anything, there was an air of focus. After all, when you’re evaluating dozens of documents, just a single oversight can cost the company a lot of money.
“You don’t want to be the guy who loses the company money because you didn’t see a red flag,” said the underwriter.
He asked me to sit beside his desk and watch the funding decisions he was making based on what he saw in the file. He surely didn’t take the merchant’s monthly sales numbers at face value. For instance, in one file, in addition to subtracting a $2,000 transfer from the owner’s personal account into their business account, he also noticed a $4.18 refund from Walmart that was being counted as sales.
“That’s not sales,” he said, and he subtracted $4.18 from the monthly sales number. In one instance, $103,000 in reported sales became $75,000, according to the underwriter.
While you could certainly feel the concentration in the room, it wasn’t quite a library either.
“His FICO sucks,” one of the underwriters said to the others. “His FICO went down and he’s stacked. No.”
When an underwriter is uncertain about a decision, he’ll ask for everyone’s two cents. He said they call these impromptu discussions the “underwriters’ den.”
All the deals we looked at got declined, but I’m told that one underwriter can fund as many as five deals in a day, and then go a few days without funding any.
While the underwriting criteria is taken seriously, sometimes you can be a little more aggressive and push the boundaries a bit if it’s a deal you really like. That takes considerable thought and reasoning. But when the answer is going to be no, it can come at light speed. A few of them happened in under three minutes while I was there. And that was with him slowing down to narrate for me what he was thinking.
“I give a look at [most of] the documents in the file first,” he said, “so that if there’s an obvious red flag, I don’t want to spend time on it.”
In his cursory glance, he’ll look at the business owner’s FICO score, years in business, if the company has other financing, and if so, how they’ve been able to handle those payments. He’ll also count the number of negative days (when the company owes money and has none) and note how consistently the company makes sales.
“Consistency gives me comfort,” he said. “I can give them a stronger offer when they show consistent sales.”
Of course, funding a file takes a good bit longer because you have to continue to vet the business and the business owner, almost as if you suspect there’s something wrong. Has the owner ever been convicted of fraud? Have they owned any other businesses? Did the owner ever default on a loan? It can seem hard for small businesses to pass all these background checks. But the funder has to protect itself and the underwriter’s job is to do just that.
“We’re in the business of giving out money, but within limits.”
WeWork, The Home Office of Small Business Finance Startups
March 20, 2019
Kunal Bhasin, owner of brokerage 1 West Finance, funded three A paper deals for companies that all happened to work out of the same Manhattan office building on the corner of 42nd Street and Third Avenue. It’s actually not as big a coincidence as it sounds because it’s the same building where 1 West Finance operated out of, along with likely hundreds of others at a midtown WeWork, the giant co-working company that has 59 offices in New York City alone.
What is remarkable is that the co-working concept (where companies work alongside each other for the benefit of all) actually works. At least it did for Bhasin. Because Bhasin’s company was expanding and needed to find space very quickly, he was unable to find a larger office at that same WeWork office. And because location was critical, he relocated to a Regus right nearby. Regus, which preceded WeWork, also rents space to companies, but focuses less on encouraging resident companies to get to know each other.
“I already miss it a lot,” Bhasin said of his old office at WeWork.
Bhasin said he met his former WeWork colleagues, who became clients, at the communal coffee stations and lunch events organized by WeWork.
Peter Graves, founder of Two Trees Funding, a one-man ISO shop, runs his business out of the WeWork office at 110 Wall Street. He said that he has gotten referrals from colleagues at other companies in his WeWork office. And he really appreciates the ability to to expand without having to change your lease.
The office culture is one of the main reasons why another company in the small business finance space loves WeWork. “Here, we engage with other people [and] we get a fresh perspective from other people, whether it’s a graphic designer or someone who works in cryptocurrencies,” a representative who asked to remain anonymous said. They also appreciate the flexibility, acknowledging that when they started with only four people, they rented month to month. Now, they have 12 people and a lease agreement for two years.
“We could have gotten a commercial space for 5 years,” they said. “But maybe we’d need a bigger space. This allows for flexibility.”
How to Turn Your Client List Into a Business Referral Network
March 19, 2019
Excel Capital CEO Chad Otar was so impressed by a marketing company he helped obtain funding for that he turned around and emailed his other clients about the potential benefits of their service. As a result Otar said that about five of his clients actually started working with the marketing company, including Lori Miller, the owner of LGC Interior Design in Melville, Long Island. Excel Capital, in effect, started creating its own business referral network.
“[The marketing company] helped me fix my website and get me out there,” Miller told deBanked. “It helped me significantly.”
For a year, Miller worked with the company, which helped to expand her company’s social media presence, get her work into a showhouse, and get one of her rooms published in Architectural Digest. And this was all thanks to a referral from Otar.
Kunal Bhasin, owner of 1 West Finance, said that he will sometimes introduce his clients to one another. These are usually clients he has funded, but they could include a prospective client, he said.
Jonathan Casillas, founder of Casillas Capital Partners, an ISO in North Carolina, said he will refer clients to specialists that can help them. “Our direct job is to get them money…but if I see a problem, I try to fix it,” Casillas said. “And if I can’t, I point them in the right direction. I’m here to help the entire business, not just get them money.” Casillas said that startups, in particular, need a lot more than money. They often need help with structural parts of their business and Casillas said he will refer them to a lawyer or an accountant, or whoever they need to get where they want to go.
Can a Merchant’s FICO Score Increase By the End of the Day?
March 16, 2019
Earlier this week, Alan Hayon had a challenge – to get a merchant above a 500 FICO score in order to make them eligible for small business funding. Within 30 minutes, Hayon increased the merchant’s personal FICO score by 59 points, getting them above 500. And the deal funded the following day. Hayon is the founder and CEO of The Credit Desk, a credit repair company in Long Island, and he used Experian Boost to get the merchant’s score up. It’s a brand new product from Experian that allows you to add and get credit for bills you have been paying on time, like gas, electricity, water, TV, internet and phone.
What used to take two to three weeks is now instantaneous with Experian Boost, according to Hayon. And the potential ramifications for small business funding are quite astounding. John Celifarco of Horizon Financial Group, a brokerage in New York, said that he had never heard of credit repair happening so quickly and that if it actually works, it could revolutionize the industry.
“Every deal could move up a grade,” Celifarco said. “This could have huge effects not just on the low end. You could jump someone from mid to high credit.”
Hayon conceded that it’s much harder to get a credit score up to, say 650, very quickly. That is harder and takes a little more time. Still, the new Experian Boost product means the ability to cross a FICO score minimum threshold and move a merchant from unfundable to fundable, almost immediately.
“It’s a positive domino effect,” Hayon said of Experian Boost, and what follows. “Then they can pay their credit card bills, get caught up with vendors and improve their credit further.”
This practice, often called “rapid rescoring,” has been used in the mortgage industry for years, according to Daniel Dias, owner of Small Business Lending Source, a brokerage in San Diego. Dias said that the rapid rescoring of a FICO score for someone applying for a mortgage can take as little as a day. Pretty fast. But for his clients, which are small businesses, he always tells them to wait at least 30 days to see an increase – from 20 to 60 points – in their score. By complete chance, when asked who he directs his clients to for credit repair, he said it was Hayon. Merchants pay Hayon directly, not via the broker.
In Celifarco’s experience, credit repair generally takes three to six months, which is usually too long for the merchant to wait to improve their FICO score. So he approaches credit repair a little differently. He advises his merchants to seek credit repair services after their first funding. This way, they can improve their credit and get a better rate the second time they go for funding.
Cory Petitte, who has worked both as a broker and a funder in South Florida, cautioned against inflating FICO scores in a way that misrepresents the merchant.
“I want to make sure the merchant can handle the payment,” he said.
He thinks that rapid rescoring is not a good practice and drew parallels to the 2008 mortgage crisis.
“You had mortgages that really weren’t A paper. [Instead,] they were B, C and D paper that were being represented as A paper.”
Furthermore, he said that he has spoken to underwriter who have told him they can sometimes tell when a FICO has been rapidly rescored.
LinkedIn Posts Are Turning Into Deals & Dollars
March 14, 2019
On average, I sign up one ISO every time I post a message on LinkedIn, says Jennie Villano, VP of Business Development at Kalamata Capital Group. They don’t all end up submitting business, she adds, but overall it works. It costs her nothing more than her time and it produces results.
Villano is among the growing crowd of industry insiders attempting to convert social media posts into measurable business. With more than 600 million users on LinkedIn, there is no question about the potential to reach clients. The prevailing wisdom is that you need to be on social media and sharing, but share what exactly?
New Hampshire-based Everlasting Capital is building a window into the business lives of co-founders Josh Feinberg and Will Murphy. One of their recent social media posts focused on their search for a new office lease, while another was a video stream of Feinberg making a real live cold call. The rewards span the gamut, from merchants seeking funding to offers to speak professionally in front of large audiences. And it’s not just about them. “We have worked with our employees to get confident on camera which is making them a lot more comfortable on the phone,” Feinberg said.
Anthony Collin, CEO of New York-based Smart Business Funding, also attests to LinkedIn. “We definitely generate sales from posting online,” Collin shared, explaining that it was a mix of ISOs and merchants who reach out. Collin said that he and two others in the company meet weekly to generate ideas for the daily posts. They try to make the posts timely, either related to something going on in the industry or to current events, like national elections.
For Jennie Villano, it’s not always a sales pitch. She has posted about being a single mom and about how to keep an upbeat attitude. “Your co-workers, your friends. Are they positive, or are they always complaining?” Villano asks in the video. “Try to surround yourself with positive people who see the best in everything.” She’ll typically extend the offer to do business in the videos that she makes and shares, but not all of them. She shares 2-3 videos a week and her posts typically receive thousands of views.
Sometimes a video needs a little bit of priming to draw the viewer in. Everlasting Capital, for example, filmed an executive making a sales pitch in their conference room to company CEO Josh Feinberg. But it’s something you must watch, or so the title of the post suggests, because they say the executive drove 10 hours to the office for the opportunity.
Though other social networks are being used in full force by many industry players, LinkedIn is definitely a platform to consider. “We’ve gotten tremendous value from posting to LinkedIn,” Smart Business Funding’s Collin said.
Competition Steps Up in Canadian Small Business Lending Market
March 11, 2019
Last week’s announcement by Funding Circle that it will establish an operation in Canada later this year is part of a trend of large non-Canadian funders entering or expanding into the Canadian market, according to Adam Benaroch, President of CanaCap, a small business funder based in Montreal.
Funding Circle started in the UK and expanded outwards to the US, Germany, and The Netherlands, but the UK still comprises of more than 60% of their global origination volume. Their foray into Canada is a good thing for small business owners and lenders, according to Paul Pitcher, founder and CEO of SharpShooter, a funder based in Toronto.
“I see it as win-win,” Pitcher said.
He said that a win for Canadian small business owners is a win for SharpShooter because it means more potential merchant clients. Pitcher said that he loves OnDeck, a rival, is in Canada, in part because OnDeck’s marketing has helped educate Canadian merchants about alternative lending products.
Similarly, Benaroch said he thinks that big companies entering the Canadian market will affect CanaCap positively. For instance, Benaroch said that CanaCap hopes to capture companies that get turned down from OnDeck. And perhaps CanaCap can also capture merchants that are declined by Funding Circle.
Funding Circle’s loan originations by country by year
Benaroch noted that not all outside funding companies have succeeded in Canada, often because they never established a physical presence there. But Funding Circle will be opening a physical office in Toronto.
“We have been evaluating options for expansion over the last year,” said Tom Eilon, who will be Managing Director of Funding Circle Canada. “Canada’s stable, growing economy coupled with good access to credit data and a progressive regulatory environment, made it the obvious choice. The most important factor [in coming to Canada] though was the clear need for additional funding options among Canadian SMEs.”
Funding Circle’s announcement comes on the heels of OnDeck’s December 2018 acquisition of Evolocity Financial Group, a small business funder based in Montreal. While OnDeck started operating in Canada as early as 2015, CanaCap’s Adam Benaroch said that the acquisition of Evolocity is a significant step for OnDeck because Evolocity has an ISO channel in Canada. That runs counter to Funding Circle’s model of mainly going direct to merchant, at least in the US.
Common Mistakes Commercial Tenants Make
March 8, 2019
deBanked recently heard a live presentation given by Dale Willerton, “The Lease Coach.” Willerton is an expert in helping commercial retail tenants to find and negationate spaces. But much of his advice applies to commercial office tenants as well. Below are some common mistakes he urges tenants to avoid:
Not Looking at Multiple Spaces Simultaneously
You want the landlords pursuing you, not the other way around. Therefore, Willerton said that you want to see multiple spaces at once so that you have options and bargaining power. Particularly if you don’t have much time, you don’t want to be at the mercy of one landlord.
Making the First Offer
Let the landlord make the first offer, Willerton says. If you like a space, tell the broker or the landlord, “Why don’t you send me a proposal.” Otherwise, if you make the first offer, you could end up offering more than what the landlord was willing to accept.
Overpaying for Space
Commercial rent is often based on square footage. So if the space you’re looking at has an unusual configuration, or even if it doesn’t, measure it independently to make sure that you’re paying the correct amount. Even if you are already in the space, if you measure the space and see that you actually have less space than what you’re paying for, you can ask for money back from the landlord. Or at least a rent reduction moving forward.
Telegraphing Your Feelings/Intentions
Don’t let a landlord know that you really like their space or that you really want to renew a lease. It gives them leverage. They now know that you really want what they have and that gives them more negotiating power.
Not Walking Away from a Bad Deal
Like deals that include certain personal guarantees. Some tenants require a personal guarantee and others only ask for it. Find out which and avoid personal guarantees when possible.
Looking Too Successful
If the landlord sees that you’re now driving a Porsche to work, or that your 17-year-old daughter has her own Mercedes, he or she may assume that your business is doing very well and may increase your rent when it comes time for a lease renewal. You may, in fact, be doing well. Or you may just appear to be doing well and then get hurt by a rent increase. This doesn’t mean you shouldn’t drive a Porsche if you can afford it – just to fool your landlord. It’s just something to be aware of.
Not Doing Your Homework
Just as you would do your research on a merchant before funding them, research the building and the landlord. Try to find out how long previous tenants have stayed in the building. Why did the previous tenant leave? Are they expanding, or did they have a bad experience with the building or the landlord? Is the building up for sale? If a building changes ownership, that can impact tenants down the road.
Also, Be Mindful of Commercial Agents’ Motives
Willerton said he doesn’t believe that commercial agents are bad or are working against the tenant at all. But he said that if the agent is getting paid on commission by the landlord, it’s important to be mindful that their ultimate “boss” is the landlord and not you.
The Art of Moving The Deal – When it becomes too high risk for you
February 27, 2019
OakNorth, a small and medium sized business lender and online bank, has mastered a strategy to avoid merchants from defaulting 100% of the time, according to a story published in Quartz. The strategy: tell the merchants at risk of defaulting to refinance their loans at a competitor.
“We’ve said [to merchants], ‘Go renegotiate with another bank and refinance,’” OakNorth co-founder Joel Perlman said at the Finovate Europe conference in London on February 14, according to the Quartz story. “And they’ve gone and refinanced and then a few months later they’ve gone into default.”
Perlman’s phrasing may sound a little harsh, but the practice of moving at-risk merchants to another funder is really not uncommon. In fact, it seems like a fairly common and well-understood concept.
CEO of Accord Business Funding Adam Beebe said that brokers will contact Accord when their merchant is up for renewal. And if Accord knows it can’t continue to fund the merchant – either because it has missed payments or because it has become overburdened with other debt – the broker will shop that undesirable merchant elsewhere.
The merchant goes to a new funder and Accord is pleased to be rid of the merchant and not have it default on Accord’s balance sheet. Beebe notes, however, that the new funder is made aware of the merchant’s financial situation and is able to handle the higher risk. Transparency, he says, is important, particularly in a scenario like this.
Similarly, Heather Francis, CEO of Elevate Funding, said that she is more than happy for an ISO to move a stacking and defaulting merchant away from Elevate, as long as Elevate gets paid. Elevate only funds first position and Francis said they make it very clear to merchants that stacking (taking on additional funding from other sources before satisfying an existing contract) is not allowed.
“If a merchant is stacking, that’s not someone we want to work with,” Francis said. “And if the [new] funder understands the high risk, then is fine.”
As long as nothing is being hidden from the new funder, then it seems this practice is just an element of how funding works.
From the broker side, Rob Addison, Managing Member of Sentra Funding, an ISO, said that when a funder knows it will not be renewing one of his merchants, they will ask him to take the merchant away.
Addison said that some funders are so eager to get rid of defaulting merchants that they will offer deals like reducing the merchant’s balance just to get the merchant away from them.
It may not sound nice to jettison a defaulting merchant, but if a funder can avoid a merchant defaulting on its dime, then in many cases, it will.
“We try to move a financially distressed merchant from from, say, an MCA to a longer term loan,” Addison said. “If they haven’t been stacked, they have options. If they have, it’s harder. But if they have something, like commercial property or equipment, there’s usually a [a funder] willing to step in.”
