Sean Murray: Hi, I'm Sean Murray.
Johny Fernandez: And I'm Johny Fernandez. Sean. It's great to
be here. Let's dive right into we have a couple of surprises.
But before we get into that.
Sean Murray: Okay, I feel like I feel like I never know what they
are. You always start off by telling people we're gonna have
a surprise and then I start to panic because I don't know what
they are, but okay, all right. Good to know.
Johny Fernandez: So we're gonna talk about quarterly fundings.
Okay. First.
Sean Murray: That's true. Yeah, I do. I do have some numbers in
front of me here. I want to tell everyone what's going on in the
industry, we are seeing a surge in funding activity, it's one
thing to kind of just talk about it broadly and not give any hard
figures. Fortunately, we do have hard figures. I'm gonna give you
a stats for three different companies. The first one is
OnDeck, which is now owned by Enova, OnDeck is funded, or I
guess you could call them Enova now, Enova has funded $722
million year to date. And to give you some kind of
perspective as to what that number means, it's still
trailing behind where they were in 2019. They're probably at
about 50%, of where they were in 2019. So even though their
volume is picking back up after being acquired by Enova, they're
not quite on pace with where they were pre COVID. But OnDeck
through Enova is definitely seeing a surge back, they've
already funded $722 million worth of small business loans
this year so far. Compare that to Shopify Capital, if you're
not familiar with Shopify Capital, that is the MCA and or
business loan arm of Shopify, Shopify is the number two
ecommerce site in the world second to Amazon. So imagine
that, they have their own lending arm, they do MCA too not
just loans, MCA and loans. Shopify Capital has already
funded $671 million for the first half of 2021. Pretty close
to Enova and OnDeck. Yeah. And then on top of both of those
companies is Square, Square, formerly known as Square Capital
is their funding arm Square Capital is now known as Square
Loans, Square Loans has funded $1 billion for the first half of
2021. So they're ahead of OnDeck and Shopify.
Johny Fernandez: 1 billion with a B.
Sean Murray: 1 billion with the B. Now all three companies are
not exactly ahead of where they were. Actually, that's wrong.
Shopify of the three Shopify is ahead of where it was in 2019.
So they're doing really good. Yeah. Whereas the other two are
not quite back to where they were. But they're quickly
catching up. Yeah. So those are those are the top three that we
have stats for. Yeah. Other companies will release the stats
over time, we're getting a lot of it from public filings.
People are a lot more tight lipped about how much they're
funding nowadays versus pre COVID. Because everyone's
suffered. But if it's a public company, we get all that info
when it's and it's public. So that's where we are with funding
volume and small business loan in MCA industry.
Johny Fernandez: Awesome. So it's definitely, I guess, when
you read that, would you say it's something? It's a recovery
for these guys? Are they you know, is this where, they
expected to be? Are they doing overall big picture, would you
say they are they doing well?
Sean Murray: You know, I think what's telling you about those
three is that Shopify is the one that performed at almost better
during COVID than before COVID. Yeah. And that's because they
were 100% ecommerce based. Ecommerce did really well,
during COVID. That's all you can you can only shop online, but
for the most part, right. Yeah. And so I think it's telling that
Shopify is in a good position to weather any future pandemics, or
any type of shut down or lock down by virtue of having an E
commerce platform to base everything off of as for Square
Square also did pretty well, during the pandemic, they deal
with a lot of small merchants. Just how small became evident
this morning, I did the math and the $1 billion that they funded
this this year so far, has come out to a an average size loan of
$6,000 per loan. Oh, wow. The average loan that Square does is
only six grand, that's tiny. Yeah. That's super, super tiny.
Yeah. So I think part of their their risk is hedged by how
small the loans are. Because some lenders out there, you
know, they'll do large loans. 100k 200k 300k and if a bunch go
bad, you can lose literally, you know, millions at a time, where
if we're talking about businesses that are you know, 6k
here, 5k here, 7k here, you know, the volume makes up for.
Yeah. The volume makes up for it. And Square also has a lot
of, you know, has a lot of micro and, you know, retail merchants
that are, you know, a little bit different than I guess you could
say your traditional, you know, restaurant so to speak, although
they are really heading into into that market, I think OnDeck
is probably the one that is lagging behind, maybe where it
should be just in terms of origination volume, but from
what we've heard so far is that the loan performance has
actually been really good. In fact, Enova, has reported that
the cash flow generated by the legacy portfolio has far as
surpassed their expectations. And so even though OnDeck's loan
volume isn't where it's supposed to be, you know, where you know,
versus it's pretty COVID level, the performance of its portfolio
has has been great. And so I think we can look at all those
factors in the context of the type of lending they do, and
businesses they target and say, it's definitely a sign of a
recovery, for sure. And for the for Shopify Capital, the story
of E commerce is that that's the place to be if you want to if
you want to be in the business lending market, because not only
do they weather, the pandemic, but they like totally thrived.
And they're doing more now. They were doing more during COVID.
Yeah. Than before COVID. And now they're doing more more now,
still, than they were during the middle of COVID. So it's just
been, it's been great for them.
Johny Fernandez: Awesome. That's good to hear. So, to transition
out of that. So the other surprise that we have today is
another lightning round.
Sean Murray: Why did I know it was gonna be a lightning round?
Every time you say surprise, I'm like, is it gonna be another
lightning round? Okay.
Johny Fernandez: So just to clarify, these lightning rounds
have been, they've been very popular. And I think it's
because not only do we try to make it somewhat fun, but also,
it's very informative. It's very educational. And it is one of
those things that people are clicking on, you know, these
videos, because they want to know more about the industry.
And I think overall, they just want to learn more about what
exactly does certain things mean, when you're in a world
that everyone kind of understands. Or they seem to
understand these big terminologies, basic
terminologies, but it's always scary to be the one that doesn't
know. Because then that means you don't know.
Sean Murray: So Johny. So you know, people I don't know, you
know, I don't know where you're finding all the questions, but
how can people reach you? If they have a question that they
want answered on this particular show, what would be a good way
to reach out to you?
Johny Fernandez: Social media.
Sean Murray: Okay.
Johny Fernandez: Yeah, you can follow me on Johny Fernandez TV,
Instagram, you can, same thing with Twitter. I know. I, you
guys always tag me on like videos and things like that. So
Twitter, Instagram. That's kind of the main source.
Sean Murray: What about like LinkedIn?
Johny Fernandez: LinkedIn, LinkedIn's a big one, too. Yes,
I do have a LinkedIn, you can definitely reach me out there.
Because it's one of those things that, you know, the more
questions I get from you guys, we can share it here and get
more. Because if you're asking the question, someone else is
also asking that same question. I heard one time really quick
story time in a class, if someone is asking a question,
that means there's seven other people that don't know and that
also want to know, and have that same question. Seven.
Sean Murray: Okay. Even if it's a class of like, eight people?
Johny Fernandez: Yeah.
Sean Murray: Like, what's the average class size for that?
Johny Fernandez: College.
Sean Murray: Okay.
Johny Fernandez: Good question.
Sean Murray: Okay. Yeah. But it was. Okay. I like where you're
going with it, ya know, so, you know, sometimes I'm surprised to
see the feedback that we get on a few of them, it seems it does
seem, some of the questions are complicated. And perhaps, you
know, you know, it might be better for, you know, a larger
discussion, but I think it's good. And people have found them
helpful so far. So whatever, whatever you got, keep throwing
it throwing them at me. And if you ever stump me, you know,
I'll let you know. If I don't know the answer. You know.
Johny Fernandez: But you know everything.
Sean Murray: I don't know everything. By the way, it's
okay out there people like if you don't know the answer, to
something is don't pretend to know the answer. If there are
times when I don't know the answer, then I'll just straight
up tell you I don't know the answer. Just just so you know.
I'm hoping I'm hoping doesn't happen when we're live. But it
could happen. Yeah. And there are times I'm not gonna know the
answer. And I'm going to try not to give you know, someone bad,
bad information, try to give everyone the best information
possible to the extent that I have it.
Johny Fernandez: Cool. Let's start.
Sean Murray: Okay.
Johny Fernandez: Question number one.
Sean Murray: Okay.
Johny Fernandez: Should I form an LLC to be a broker?
Sean Murray: Should you form an LLC to be a broker? So I don't
know that it has to be an LLC, per se. But if you're gonna be a
broker in the small business finance industry, you should
certainly organize a legal entity from the beginning. I
think that there's a tendency for new entrants to think, let
me try it first. And if it's working out, well, then I'll do
that. Yeah. Because it costs money to form an LLC or form an
S corp or form a C Corp or whatever it is, someone's gonna
form. But you're kind of you're kind of setting yourself up for
some level, some level of failure if you're not willing to
commit that much. Because forming like an LLC. You know,
it might cost you a couple 100 bucks to do it, right. You're
probably going to need a bank account in that name. You're
probably going to need like a tax ID to go along with it. But
all those things kind of prepare yourself mentally that this is a
commitment. Yeah. To move forward. Yeah. And by taking
those steps, you're really truly saying this is something I'm
gonna try. I'm investing in it to some extent. And if you don't
do those things, you're kind of giving yourself an out well. You
know, what did I, what did I really put into it? You know
what I mean? That type of thing. But the flip side of that
question is, should you form an LLC, and it doesn't have to be
an LLC, LLC, per se, I'm not, you know, I'm not an accountant
or a lawyer. But um, you should really think about forming an
entity for the purpose of legal liability, because one thing we
have talked about on here is that if you are a broker in the
commercial finance world, no matter what, no matter what
anyone has told you, about being a broker, and how easy it is,
and work from home and all this other stuff. Yeah. You know,
there, there are certain situations that arise that will
make you feel as if you really are in commercial finance. And
you could end up in like a lawsuit, you could end up
meeting a lawyer and and you never know what could happen,
you could be in a contract dispute with a funding company,
you could have a merchant that was unhappy with, you know,
what, what happened with the funder, and they're blaming you
and you're an independent sole proprietor, you're kind of
making yourself legally liable individually, and you want to
avoid that. So I would say you should definitely form some type
of entity for a variety of different, different reasons.
One is to protect yourself legally, and to prepare yourself
mentally, that this is something you're truly interested in
pursuing.
Johny Fernandez: Yeah. And I think to kind of piggyback off
of that, I know for a fact that if you are planning on joining
this industry, definitely speak with an accountant that
understands the MCA world number one, and also, you know, maybe
an LLC may not be the best fit for you, like you said, you
know, depending on everyone's situation, there could be other
entities that they could go after, and something that's
going to fit you cause sometimes, you know, an LLC may
not be the best option for you. Because, you know, you may be an
entrepreneur, dig digging into other things or other projects.
So it's definitely worth it to consult with an accountant.
Sean Murray: Yeah, yeah. It can't be said enough, you gotta
consult with somebody, I know that there's plenty of advice.
So get out there that says you don't need any of that you can,
you know, work from home, all you need is a computer, etc. But
this is the commercial finance industry, commercial means big
boy table. Yeah. And you got to act like a, you know, big boy,
big girl, whatever, to be a part of it. And so you need to do
these things, if you're going to be in commercial finance, no
matter what anyone else has told you about how the business
operates.
Johny Fernandez: And I think, to, you don't do this, but one
of the videos that we talked about was not, if I'll ever get
to this one, I'll get sued. And we talked about, you know,
getting sued and hiring a lawyer. And that's like a very
popular video, because no one really talks about that. When
you start in this industry, like, oh, like, you're gonna get
sued, like, here's how to prepare, like, sometimes, people
blindly get served with documents and you're like, so
that's something to avoid. Yeah. And, you know, if they come
after you having like, some type of entity with whether it's an
LLC an S corp, whatever it is, it's gonna help them out.
Sean Murray: Yeah, it's, it's all it really is a matter of
time, where you're going to need some type of legal defense, I
don't, I don't mean like, you know, that you're definitely
gonna end up in court. But there's gonna be a time when
there's a miscommunication between parties, and it might
not even be you, it might even it might be the merchant, and
the funding company, and you're the broker, and you're like, I
have no part in it, right. But let's say it's like a $500,000
deal. And you made a nice commission off that. And, you
know, something went wrong in terms of how the deal played out
well, and the merchant deals, or the even the funder fields that
you were involved in what went wrong. And all of a sudden, you
know, you have a lawyer asking questions to you. And you're
going to need to have someone who is able to do the same on
your behalf. And so even if it doesn't end up in court, or in a
lawsuit or whatever, you're gonna end up in a situation, at
some point, no matter what, where you're going to need an
advocate a legal advocate on your behalf to kind of navigate
you through, you know, whatever, whatever the best course of
action is for yourself. And so the sooner you do those things
from the beginning, have them all lined up, the better. That's
the the very long answer to your simple question.
Johny Fernandez: All right, so simple question number two, what
is the difference between secured and unsecured?
Sean Murray: Okay so what did.
Johny Fernandez: Two sentences, go.
Sean Murray: Two, two? Okay, yeah, two sentences. All right.
What are the differences difference, what is the
difference between secured and unsecured if it's a secured
loan, or line of credit, that means that the loan is actually
secured by an asset. So if you if the borrower defaults on the
loan, that asset serves as you know kind of protection they can
go and repossess that asset to get paid back, right, and it's
against that very specific thing. An unsecured loan is one
and when, it's not backed by anything essentially backed by
the full faith and credit of the borrower. And if the borrower
doesn't pay back, well, there's not anything specific that the
lender can go and pursue kind of like a credit card as a good
example of what's unsecured, they can hurt your credit. Yeah.
They can send you angry letters you want I mean, they can
pursue, they can pursue you, but they can't come and repossess
something specific. Whereas if it's a secured loan, they can go
and say, you know, this was secured against this piece of
equipment or this property, whatever and go and repossess
it.
Johny Fernandez: Awesome. Next question, what is a clawback?
Sean Murray: What is a clawback? A clawback is when the funder or
lender takes back the commission it gave to the broker there, I
don't know if this is where it came from. But there in my in my
imagination. I picture like a claw, a claw coming in, clawing
back the commission. They're literally clawing it back.
Johny Fernandez: Remember that Jim Carrey Movie? The claw.
Sean Murray: I don't, yeah. I don't know. I don't remember
that one. But.
Johny Fernandez: Well he's a lawyer, and he's his dad and the
claw.
Sean Murray: I don't I don't remember that. What year was
that?
Johny Fernandez: 1994, 1995 with Jim Carrey. Oh, man, what's that
movie called?
We're going way back.
I know. Not way back. It's like 20 years ago.
Sean Murray: Wait were you born yet?
Johny Fernandez: I was born. I was alive. I was born. I was
going to school. Anyways.
Sean Murray: All right. All right. Yeah just to get back to
your question, so what is a clawback? A clawback is when a
lender or funder claws back the commission, and they they're
doing that because they have a stipulation in their contract
that allows them to take that commission back or claw it back,
if the deal defaults within a certain amount of time. So if
you're a broker, you broker this deal you get paid the
commission, you're like, awesome, you know, this is
great, I rule. And then the next day, that merchant turns around
and you know, runs off with the money or or, you know, goes out
of business suddenly, within like 24 hours, that can be
considered a material breach of the agreement that results in a
clawback in which that lender or funder says, hold on, something
went wrong here from the beginning, this wasn't a
legitimate deal. We have the right to now clawback the
commission it defaulted too quick.
Johny Fernandez: All right. Next question is what is what is a
payoff letter?
Sean Murray: A payoff letter is a letter that a merchant gets
from its funder or lender that details the outstanding balance.
And the amount that would need to be paid to be paid off, so
the payoff letter is how much is required to pay it off.
Johny Fernandez: Cool. What is a zero balance letter?
Sean Murray: What is a zero balance letter? A zero balance
letter is essentially a payoff letter in which the balance is
actually already zero, that formally states that there is no
balance it's something that another lender or funder might
want to see, to be 100% certain that there's no outstanding
obligation with a competitor, they might say, we need the zero
balance letter in order to move forward on the deal.
Johny Fernandez: What are stips?
Sean Murray: What are stips? So stips is really just short for
stipulations. Basically, it's the it's the it's the
documentation that will be required to close the deal.
Oftentimes, in the small business finance industry, a
merchant will be expected to provide some level of
documentation upfront to get a pre approval, and then they need
the stips to walk them through the end, close and get funded.
Johny Fernandez: Awesome. What is a renewal?
Sean Murray: What is a renewal? A renewal is just additional
funds. So if you're a lender or a funder and your merchant, or
customer needs additional funds, and they haven't satisfied the
current outstanding obligation, you just renew them by giving
them additional funds.
Johny Fernandez: What is a true up?
Sean Murray: A true up? Okay, good question. What is a true
up? So a true up, in the circumstance, I'm assuming in
the context of which I'm assuming it was asked is a true
up is this would be probably part of a merchant cash advance
deal. And in a merchant cash advance, payments are supposed
to be collected in accordance with the revenue that a merchant
generates. So there are some companies that will debit out a
fixed amount per day. And that's supposed to be tied to how much
they're actually doing in revenue, is based on a
projection. Now, let's say that the merchants revenue doubled.
And the amount that they the funder or lender collected this
is the funder because it's MCA, the amount that the funder
collected was really tied to what the normal volume would be.
But now they found out that the volume doubled, they technically
would be entitled to take double the money, because that would be
consistent with the revenue that's being generated. And a
merchant could choose to true up the deal by saying please debit
out even more than what you've already taken, so that we're
living up to the, you know, the exact precise arrangement of the
contract. However, on the flip side, and here's where it's most
often talked about, cause most merchants don't want to pay more
sooner is, let's say the the business, the revenue dropped in
half. And the merchant said, you took this amount of money, and
that was supposed to be in relation to this volume of
revenue, but my revenue dropped in half and so now the amount
you took, is technically more than you were supposed to. So
they can true it up by saying, here's what my actual revenue
was, you know, that shows some kind of proof. Here's my bank
statement. And then the funder is supposed to, as long as the
merchant has everything that they're supposed to, the funder
is supposed to refund, the overage that they collected to
be consistent for the collection to have been consistent with the
terms of the actual MCA arrangement and they call that
truing it up or a true up.
Johny Fernandez: Awesome. So really quick, going back to the
clawback the movie was Liar Liar.
Sean Murray: Okay.
Johny Fernandez: With Jim Carrey.
Sean Murray: Okay.
Johny Fernandez: I remember. He goes to his son, he's like the
claw and he does his thing with his son. And, you know, it's a
pretty cool part of the movie.
Sean Murray: We should make that part of a an official course.
Like, for for brokers. What is the clawback and then you have
to watch that movie.
Johny Fernandez: Yeah, or that specific.
Sean Murray: Yeah.
Johny Fernandez: Where it's like the claws is coming to get you.
The claw back.
Sean Murray: I'm thinking of Inspector Gadget. No. Isn't it
doctor claw?
Johny Fernandez: Dr. Claw, yeah.
Sean Murray: That for me, that's when I picture a claw. Well, I
picture it first. Like a crab claw.
Johny Fernandez: Okay.
Sean Murray: Like doing that. And then when it's not a crab
when I hear clawback, I see like Dr. Claw, Inspector Gadget being
like, next time.
Gadget next time.
Johny Fernandez: All right, so in the voice of Dr. Claw.
Sean Murray: Yeah.
Johny Fernandez: We'll see you next time here on deBanked. I'm
Johny Fernandez.
Sean Murray: And I'm Sean Murray.
Johny Fernandez: See you guys next time.