Business Lending
Cumulative Covid EIDL Chargeoffs Now Exceed $70 Billion
November 19, 2024The latest data from the SBA is in. It charged off $18.7B in Covid EIDL loans in FY 2024. That was down from $52B charged-off in FY 2023. The program still has an unpaid principal balance of $277B.
PPP loans were still being written off in FY 2024 as well, coming in $2.5B charged-off vs $10.6B charged-off in FY 2023 and $4.8B charged-off in FY 2022.
The EIDL program suffered astonishingly high losses during covid. Regular 7(a) loans, for example, only experienced $646M in charge-offs in FY 2024.
Undercover Agents Working for Federal Regulators Posed as Merchants, Inquired About Business Loans
November 13, 2024
If you want to get a sense of what CFPB oversight of small business financing is going to look like when it goes into effect in 2025, then consider the federal regulator just revealed that it hired undercover agents last year to pose as business owners, had them inquire about business loans, and recorded it all. All with the assistance of the DOJ.
Focused entirely on Nassau County, NY and Fairfax, VA, the fake merchants pretended to do $100k – $400k in annual revenue and be open for less than 5 years with 700+ FICO. With what amounted to more than 100 total in-person visits across 23 financial institutions (all of which were bank branches) for the duration of the operation, the CFPB allegedly hoped to gauge potential racial discrimination with the lenders they spoke with.
The undercover agents, described as testers, were instructed to tell representatives at banks that they were “looking to expand their business and to inquire about financing through business loans and business lines of credit.”
“All calls and visits with the lenders were audio recorded,” states the official report issued by the CFPB. The CFPB paid close attention to whether or not bank representatives suggested alternative financing products and whether or not they encouraged or discouraged to do one thing versus another.
While anyone is free to opine on what the findings actually were and the context of which they were found (FULL REPORT HERE), readers are reminded that the CFPB will be tasked with reviewing these very demographic metrics, like the ones they inquired about during this investigation, for almost all small business finance companies starting in July 2025 (even if you’re a broker). These regulations apply to revenue based financing providers just the same as lenders unless the incoming administration intervenes.
The CFPB’s role in small business finance was dictated in 2010 during the passage of Dodd-Frank, but it has taken nearly 15 years for the rules to finally go into effect. While the statute empowering the regulator to collect demographic data from small business finance companies does not specifically state that it has been granted any authority to bring enforcement actions based upon that data, the revelation that the regulator conducted an undercover operation that included them pretending to be business owners looking for loans across two states with the assistance of the Department of Justice should be a good indication of where things were at least planning to go. The current head of the CFPB, for example, Rohit Chopra, had expressed publicly that his plan was to wipe out all companies engaged in merchant cash advance. It is not known at this time who, if anyone, might replace Chopra under Trump. The last time Trump became president, the CFPB head that had been installed by Obama, famously claimed at the time that the President of the United States did not possess the authority to remove him. He was later removed.
Ready Capital Grows as Leading Non-Bank Small Business Lender
November 10, 2024
“Ready Capital has become a leading national non-bank lender to small businesses providing a full suite of loan options from $10,000 unsecured working capital loans to $25 million plus real estate-backed USDA loans,” said Ready Capital CEO Thomas Capasse during the company’s Q3 earnings call.
Ready, in some ways, has flown under the radar in recognition. On the one hand the company is the top non-bank SBA lender in the country and fourth overall SBA lender in the country. On the other hand, the company has previously acquired Knight Capital, iBusiness Funding, Madison One Capital, select non-SBA assets of Fountainhead, and Funding Circle USA. The result is that the overall organization is a powerhouse with a current public market cap of $1.25B.
iBusiness Funding, once the technology arm of Knight Capital, has played an integral role for the company. For example, when Ready acquired Funding Circle USA, it did it through the iBusiness Funding brand.
“[In 2019, iBusiness Funding was] a leader in unsecured small business lending,” Capasse said on the call. “And then they adopted their tech to the PPP which was very accretive. And since then there’s been the initiative within the SBA to emphasize small loans below $350,000, which many times are minority women-owned businesses, and so that’s been a significant initiative by the SBA–so what we’ve done is iBusiness has developed a tech stack, which is now being marketed as a third-party underwriting model for banks. Banks just do not focus on that at all. Even if they do SBA loans, it’s mostly for larger loans again above the $350,000 to the $5 million. So the idea with iBusiness is to grow the revenue stream from this software-based business.”
On Funding Circle, Capasse said that the newly acquired subsidiary would be “accretive to earnings once fully ramped.” The numbers offered so far was that $6.6 million growth in Q3 origination income came from small business working capital loans through the Funding Circle platform.
Square: Our Customers Actually Grow Faster With a Square Loan Than Without One
November 7, 2024On average, Square customers that used the Square Loan product grew 6% faster than those that did not use it, the company revealed. Jack Dorsey, the CEO of Square’s parent company, Block, used the 3rd quarter earning’s period as an opportunity to discuss its lending operations. The relevant parts are excerpted in non-sequential order below:
“In 2013, we began offering capital to sellers because we saw a meaningful gap in the market: small businesses were often denied access to credit, in the same way they were once denied access to accepting credit cards. We utilized our deep understanding of the seller and their business to build a technology that invited them to accept a loan with transparent rates, and pay back simply by making sales to their customers. We called it Square Capital (which is now known as Square Loans).
Since then, we’ve underwritten more than $22 billion in loans globally, with aggregate loss rates below 3%. And we’ve proven we can expand access: 58% of Square Loans are to women-owned businesses, and 36% are to minority-owned businesses, both of which are higher than the benchmark we track If our sellers grow, we grow – and we believe Square Loans has a direct impact on our sellers’ growth. Sellers who take out a Square Loan grew on average 6% faster than sellers who did not take out a loan.
Many financial products trap borrowers in cycles of revolving debt. We don’t allow customers to take on new loans if they have an overdue balance. And repayment is built into how our products work: Square sellers repay loans through a fixed percentage of their revenue, creating a manageable-real-time payment flow.
On credit risk management, we have a long history of maintaining stable loss rates and these products act as working capital, which means they are usually short in duration. What that means for us is that a dollar used on our balance sheet can turn multiple times, driving capital efficiency while providing us with high-quality data to continually refine our technology-driven underwriting.”
– Jack Dorsey
Square shared some stats as well, showing that the average loan term was 150 days and average loan size is only $10,208.
Loss rates on Square Loans have historically been less than 4%. Square is a company to watch considering it is likely the largest online business lender in the United States.
Nerdwallet: Continued “Pressure in SMB Loan Originations”, Search Engine Traffic Flux
October 30, 2024
“We continue to see pressure in SMB loan originations, with rates remaining elevated and underwriting remaining tight,” said Lauren StClair, CFO of NerdWallet on the Q3 earnings call, “However, this was more than offset by growth in our renewals portfolio, which showcases the benefit of our vertical integration strategy and the reoccurring nature of the vertical when we pursue a higher touch experience.”
NerdWallet CEO Tim Chen further said that it was a “tough macro environment in SMB loans.”
Their SMB business overall, which includes several products, not just loan referrals, did well however in Q3, generating double digit YoY growth for a total of $27.8M in revenue.
Of additional note is NerdWallet’s commentary on search engine traffic and its impact to its business.
“After a stronger start of the quarter, we saw some additional deterioration in our search visibility in mid-Q3,” said Chen. “While traffic to our monetizing shopping-oriented content started to rebound as we exited the quarter, traffic to our non-monetizing learning-oriented content did not. As a result, Monthly Unique Users were down 7% year-over-year in Q3.”
deBanked drew attention to their search engine observations this past August after hearing Chen muse that the current state of organic search result rankings were not actually helping business owners get business loans. Chen dived into this subject yet again on the Q3 call, the full quote of which is worth including:
“So, during our Q2 call, our search visibility was broadly stabilizing and actually starting to rebound a little bit. And then soon after our Q2 call, things took a turn for the worse. So with our shopping traffic, things got worse in August and September. But then going into October, rebounded back to a level that was a bit better even than where we were when we did the Q2 call. We think we did some things on our end to clean up the user experience that were net positive. Now, there were some exceptions, so for example, parts of credit cards and personal loans are still lagging. But, overall, we got a pretty good place – we got to a pretty good place on shopping pages and feel like we’ve figured out what to improve.
Conversely, for that far bigger bucket of education-oriented traffic that is less commercial in nature, things got progressively worse throughout the quarter and recently stabilized at a lower level. So, what’s happening there is a renewed push by search engines to incorporate their own answers directly into the search results, like you mentioned AI overviews as an example. So, for those of you who have been following search over the years, this isn’t really anything new. So, for example, at one point when you search for the weather, it didn’t show up directly in the results, and eventually a module was inserted there. That trend towards the simpler stuff being pulled into search results is inevitable, and we’ve always been more insulated from that, but historically it happens in waves, and sometimes haircuts are MUUs.
So, we’ve generally seen a re-baselining after any major changes, and then eventual growth from there as you lap the impact. Oftentimes, those changes are rolled back. And so, over the last 10 years, I’d say these changes come in waves, and we’re in the middle of a big wave, and as long as we focus on delivering consumer value, we’re steering in the right direction, and things tend to sort themselves out. So, this headwind is driving our outlook for further MUU deceleration in Q4, because of the full quarter impact of some of the stuff that happened with those headwinds.
Now, in the long run, I do think an improving search experience is a win for the overall ecosystem and keeps it healthy and growing. And, really, I’d say the silver lining here is that Q3 was pretty brutal as far as some of the headwinds we faced in organic search, especially in highly commercial areas, and being able to hit like a 12% NGOI margin in Q3 in spite of that headwind is really a testament to some of the progress we’ve made in building a brand and a direct relationship with our users and our increasing competitiveness in other channels.”
PayPal is Back to Growing its Merchant Lending Program
October 29, 2024
After taking drastic action over the last year to rein in surging SMB lending charge-offs, PayPal believes it has corrected the issue.
“We have now fully lapped the actions taken last year to tighten credit underwriting and reduce on balance sheet risk,” said PayPal CFO Jamie Miller on the Q3 earnings call. “We’re seeing better performance across the portfolio, and have now started to modestly grow merchant originations. We’ll continue to prudently manage the portfolio’s exposure with the goal of sustaining our balance sheet-business model, while providing our customers with more ways to manage their cash flow, spending and borrowing needs.”
The reduction in originations since the pullback had been severe, down by as much as 50% by deBanked’s prior estimates.
Enova Surpasses $1 Billion in SMB Loans in a Single Quarter For First Time
October 23, 2024Enova’s small business loan arm had a huge 3rd quarter.
“Notably, for the first time in our history, we originated over $1 billion in small business loans, up 33% year-over-year and 14% sequentially,” said Enova CEO David Fisher during the company’s earning call. “The main drivers of this growth are consumer spending and confidence from small business owners in this current economy.”
Additionally, he said:
As discussed on our first quarter call, we identified opportunities within our SMB business that we believe would support continued strong growth with improved unit economics. We continue to see the benefits of this strategy in the third quarter as small business originations growth was strong, small business revenue yield continued to move higher sequentially and the small business quarterly net charge-off ratio remained on the low end of our expected range. Expectations for our future credit performance remained stable as the consolidated consumer and small business fair-value premiums were all largely unchanged from last quarter.
How Erica Bell of Tax Guard Won Second in The Poker Tournament
October 13, 2024
When the final hand of the B2B Finance Expo’s official poker tournament had concluded, Erica Bell, a Business Development Account Executive for Tax Guard, walked away with 2nd place. Bell has enjoyed poker for a long time and knows the game well. She’s even played in tournaments at the Ameristar Casino in Blackhawk, Colorado and won 1st place in one of them.
“The game’s strategy is what I truly enjoy,” Bell told deBanked. “A couple of individuals came up to me and congratulated me [on coming in 2nd].”
Bell, who at least took home a small prize, has worked for Tax Guard for 5 and a half years. For those not familiar, “Tax Guard is a 3rd party due diligence company who provides real-time insights into hidden tax debt of individuals and businesses by retrieving and analyzing IRS data directly from the source, the IRS,” she says.
The company’s services are primarily used by commercial lenders and financial institutions to assess tax-related risks associated with borrowers. Tax Guard is widely known throughout the industry and has been frequently referenced on deBanked. The company’s co-founder and CEO, Hansen Rada, even did a Zoom interview with deBanked during the early lockdown era of Covid.
The company’s value is pretty straightforward, a lot of tax debt is not easily discoverable, and they’ll get the info you don’t even know you’re missing straight from the source.
“By offering earlier visibility into potential tax issues, liabilities, liens, & levies, we help our customers make more informed lending decisions and mitigate financial risks,” Bell explains.
And if there is a hidden tax issue, Tax Guard can proactively work to resolve it and even negotiate a payment plan. One downside of ignoring tax debt as a lender is having to compete with the IRS when they ultimately move to enforce collection.
Clients can use the Tax Guard portal to run reports or integrate their API right into a CRM. Other critical information can be obtained as well including a wage and income transcript from the IRS. “This includes data from W-2s, 1099s, and other income forms, as well as withholding details,” Bell says. “This data provides a comprehensive view of a taxpayer’s reported income and can be critical when assessing financial risks, resolving discrepancies and verifying financial details.”
Obviously, Bell says that anyone interested in learning more can reach out to her directly.
“My role is highly dynamic, being sales, strategic partnership and relationship focused,” Bell says. “I really enjoy working with extremely talented people at Tax Guard, meeting new folks in the finance industry and learning from their perspectives.”
She’s also apparently planning to host her own upcoming friendly poker tournament so it’s safe to say she has no intention of letting her skills get rusty.
