Business Lending

How An Online Lending Hedge Fund Manager Became “Unwound”

August 12, 2020
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Unwound bookIn 2017, Ethan Senturia, the founder of a defunct online lending company, published a tell-all book about his startup’s rise and fall. He called it Unwound. It’s the fall that stood out. Senturia’s poorly modeled business had been heavily financed by an up-and-coming online lending hedge fund manager named Brendan Ross.

I first encountered Ross in 2014 on the alternative finance conference circuit. Ross’s major theory was that small businesses overpay for credit and that the padded cost served as a hedge against defaults and economic downturns.

“The asset class works even when the collection process doesn’t,” Ross said during a Short Term Business Lending panel at a conference in May 2014. “The model works with no legal recovery.”

Brendan Ross InterviewAs an editor, I helped secure a lengthy interview with Ross that Fall. In it, he placed a special emphasis on building “trust.” It’s a word he used seventeen times over the course of the recorded conversation. “Everything is about trust and eliminating the need for it whenever possible,” he proclaimed.

Ross stressed that his fund invested in the underlying loans of online lenders, not in the online lenders themselves. “I need to be the owner of the loan. I need it sold to me in a way that is completely clean.”

Ross would eventually connect with Senturia at Dealstruck, an online small business lender whose philosophy seemed to contradict Ross’s mantra of small businesses overpaying for credit. Dealstruck, it would turn out, had a tendency to have them underpay…

Senturia told the New York Times that year that Dealstruck’s mission was “not about disintermediating the banks but the very high-yield lenders.”

It’s a concept that failed pretty miserably. Senturia recalled in his book that “We had taken to the time-honored Silicon Valley tradition of not making money. Fintech lenders had made a bad habit of covering out-of-pocket costs, waiving fees, and reducing prices to uphold the perception that borrowers loved owing money to us, but hated owing money to our predecessors.”

As the loans underperformed, Senturia became aware that the hedge fund backing them, Ross’s Direct Lending Investments, might also be doomed. Senturia recalled an exchange with Ross in 2016 in which Ross allegedly said of their mutually assured destruction, “I am like, literally staring over the edge. My life is over.”

One would expect that in light of that conversation being made public through a book, that investors would question Ross’s report that his fund delivered a double digit annual return (10.61%) the same year his life was over.

Direct Lending Investments’ Reported Annual Returns

Some actually did question it. deBanked received tidbits of information in the ensuing years, always seemingly off the record, that something was not right at Ross’s fund. There was little to go off other than the unlikelihood of his consistently stable stellar returns. Ross had been an especially popular investment manager with the peer-to-peer lending crowd and a regular face and speaker at fintech events. CNBC also had him on their network several times as a featured expert.

All told, Ross managed to amass nearly $1 billion worth of capital under management before his demise.

In 2019, Ross suddenly resigned. His fund, Direct Lending Investments, LLC, was then charged by the SEC with running a “multi-year fraud that resulted in approximately $11 million in over-charges of management and performance fees to its private funds, as well as the inflation of the private funds’ returns.”

Entrance to FBI Building in Washington DCYesterday, the FBI arrested Ross at his residence outside Los Angeles. A grand jury indicted him “with 10 counts of wire fraud based on a scheme he executed between late 2013 and early 2019 to defraud investors…” An announcement made by the US Attorney’s Office in Central California revealed that the charges had been under seal for approximately two weeks prior.

The SEC simultaneously filed civil charges against him.

No reference is made to Dealstruck in any of it. The Dealstruck brand was later sold to another company that has no connection to Ross or Senturia where it is still in use to this day. Instead, the SEC and US Attorney focus on Ross’s actions allegedly undertaken with another online lender named Quarterspot. Quartersport stopped originating loans in January of this year.

Ross allegedly directed the online lender to make “rebate” payments on more than 1,000 delinquent loans to create the impression that they were current. Quarterspot has not been accused of any civil or criminal wrongdoing.

The SEC included in its complaint that Ross expressed concern about the scale of loan delinquencies.

“…more loans are going late each month than I can afford and still have normal returns, so that the can we are kicking down the road is growing in size,” he wrote in an email. It was dated February 8, 2015.

It’s a sentiment that seems to disprove his early premise that “the asset class works even when the collection process doesn’t.”

Ross is innocent until proven guilty, but an excerpt of an interview with him in 2014 is now somewhat ironic.

“I [understand] that people end up sometimes in the [industry] who have had colorful careers in the securities space. It doesn’t make it impossible for me to work with them,” he said. “But if they had been in the big house for white collar crime, then that is probably a non-starter.”

Real Estate and Funding Deals With Chris Pepe

August 10, 2020
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I recently spoke with Christopher Pepe, Head of ISO Relations at World Business Lenders. Pepe explained why WBL’s practice of securing loans against real estate has enabled their business to keep lending and to do deals unsecured lenders and MCA providers are not equipped to handle.

You can watch the full interview here:

“A Bad Solution in Search of a Problem”: SBFA’s Response to the New York Disclosure Bill

August 6, 2020
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One Commerce Plaza, Albany, NY“It’s actually shocking to me how tone deaf those who claim to represent our industry are when it comes to policy,” is how Steve Denis, Executive Director of the Small Business Finance Association, described the Innovative Lending Platform Association’s response to and influence over the drafting of bill A10118A/S5470B. Known as New York’s APR disclosure bill, S5470B has been passed by the state legislature, and if signed by Governor Cuomo, will require small business financing contracts to disclose the annual percentage rate as well as other uniform disclosures.

Speaking to deBanked over the phone, Denis expressed disappointment with both the bill as well as comments made by ILPA’s CEO, Scott Stewart, in a recent article.

“Small businesses in New York are struggling right now,” the Director noted. “They’re waking up every single day wondering if they should even stay open or close permanently, and companies and organizations in our space are using their resources to push a disclosure bill that nobody has asked for. There’s no widespread issue with disclosure. There’s been no outpouring of complaints to regulators. No bad reviews on Trustpilot. This is a really bad solution in search of a problem. We have real problems right now, we should be coming together as an industry to help solve them. We want to make sure that capital is available to small businesses on the other side of this pandemic, and this group of tone deaf companies are spending resources trying to push a meaningless disclosure bill that’s just going to hurt the access to capital for real small businesses who are grinding and trying to figure out how to stay open. It’s unbelievable.”

“I THINK THAT COMPANIES AND ORGANIZATIONS THAT SUPPORT THIS LEGISLATION DON’T FULLY UNDERSTAND WHAT’S ACTUALLY IN THE BILL”

The SBFA showed deBanked a list of issues and complaints made to the New York legislature regarding S5470B. According to the trade group, these were largely ignored and the bill was pushed through with the issues left in. Among these were problems relating to definitions and terms. No definition for the application process is included, nor is there one for a finance charge. As well as this, one senator was quoted using the term “double dipping” to refer to consumers refinancing debts that have prepayment penalties; which Denis said was “creating a whole new term that’s never been used or defined before, and applying it to commercial finance, something that’s never been done.”

Accompanying these complaints was one regarding how APR is calculated, as S5470B includes two different calculations for this, producing different results while not clearly defining when to use each.

NY State CapitolWhen asked why he believes these issues were allowed to remain in the language of the bill, Denis was baffled.

“I think that the companies and organizations that support this legislation don’t fully understand what’s actually in the bill. […] They have no problem pounding the table and taking credit for its passage, but I guess they don’t realize it will subject them and the rest of the alternative finance industry to massive liability, massive fines—upwards of billions of dollars worth of fines.”

Denis’s fear going forward is that funders in New York will tighten up their channels going forward or cease funding entirely, given the increased riskiness of funding under the terms of S5470B if Cuomo signs it into law. Before that happens though, the Director mentioned that he believes there will be legal challenges to the bill in the future, saying that its wording is just too unclear and poorly drafted. Adding to this, Denis said that he believes many members of New York’s state government are aware that this bill is imperfect and were comfortable with the thought of it being edited once passed. Looking forward, Denis wants the SBFA to be deeply involved in those edits, saying that they’re willing to work with the Governor, the state assembly, and the New York Department of Financial Services.

“We’re for disclosure, we think there should be standard disclosure. … Our message to the Governor’s office is ‘Let’s take a step back.’ The Department of Financial Services needs to look at our industry, they need to get to know our industry. They are the experts that understand the space, they understand disclosure, and they understand what they need to do to bring responsible lending to New Yorkers. And we would like to work with the NYDFS and a broader industry to put forward a bill that’s led by the Governor and the Governor’s office that brings meaningful disclosure and meaningful safeguards to this industry.”

LendingPoint Partners with eBay to Fund Online Sellers

August 6, 2020
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eBayLendingPoint announced this week that it is partnering with the online marketplace eBay to provide funding to sellers on its platform. Titled eBay Seller Capital, the program will offer terms of up to 48 months, with no origination or early payback fees, and which will be capped at $25,000 during its pilot program.

“We’re committed to empowering entrepreneurs to make their dreams a reality, and we are continuing to partner with our sellers to provide them with the tools they need to thrive, eBay’s VP of Global Payments Alyssa Cutright said in a statement. “We’re excited to make flexible financing options available that are integrated with our new payments experience. The program with LendingPoint will enable critical funding opportunities for eBay sellers, especially during this time of economic uncertainty.”

In its early stages now, eBay Seller Capital will only be available for selected sellers, with the plan being for it to be made available to all eligible sellers in the US later this year. Beyond the program, LendingPoint has made clear in its statement that it aims to “expand their offering to provide eBay sellers with more tools to help run their businesses,” however, when asked, CEO and Co-Founder Tom Burnside did not give details of these future plans.

“I don’t want to leave the proverbial cat out of the bag yet with that,” Burnside commented in a call, “but what I will tell you is that I think when we are done eBay will be able to offer best-of-class seller financing.”

Square Capital Resumes Business Lending

August 4, 2020
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Square in San FranciscoSquare Capital, the small business lending division of Square, resumed offers for its “core flex loans” in late July, the company announced. However, there will be “stricter eligibility criteria.”

Square Capital made no core flex loans in Q2, having paused in mid-March on news of the impending crisis.

The company pivoted to PPP lending in Q2 in the interim and through this program managed to fund over 80,000 small businesses for a grand total of $873 million. The average came out to approximately $11,000 per loan.

Square says that in PPP they “expanded awareness of Square Capital as 60% of [their] PPP borrowers had never before received a loan through Square.”

Loss rates during Q2 were about 2.5x prev-COVID levels, a range they accurately predicted might happen at the end of Q1.

IN DEFAULT OR ABOVE WATER: How PPP Saved or Didn’t Save America

July 31, 2020
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This story will appear in deBanked’s Jul/Aug 2020 magazine issue. To receive copies in print, SUBSCRIBE FREE

rearviewKristy Kowal, a silver medalist in the 200-meter breast stroke at the 2000 Olympic games in Australia, had recently relocated to Southern California and embarked on a new career when the pandemic shutdown hit in March.

After nearly two decades as a third-grade teacher in Pennsylvania, Kowal was able to take early retirement in 2019 and pursue her dream job. At last, she was self-employed and living in Long Beach where she could now devote herself to putting on swim clinics, training top athletes, and accepting speaking engagements. “I’ve been building up to this for twenty years,” she says.

But fate had a different idea. The coronavirus not only grounded her from travel but closed down most swimming pools. At first, she tried to collect unemployment compensation. But after two months of calling the unemployment office every day, her claim was denied. “‘Have a great day,’ the lady said, and then she hung up,” Kowal reports. “She wasn’t rude; she just hung up.”

“I WAS DOWN TO 10 CENTS IN MY CHECKING ACCOUNT”

Then, in June, the former Olympian heard from friends about Kabbage and the Paycheck Protection Program. Using an app on her smart phone, Kowal says, she was able to upload documents and complete the initial application in fewer than 20 minutes. A subsequent application with a bank followed and within a week she had her money.

“I was down to ten cents in my checking account,” says Kowal, who declined to disclose the amount of PPP money for which she qualified, “and I’d begun dipping into my savings. This gives me the confidence that I need to go back to my fulltime work.”

kristy kowalKowal is one of 4.9 million small business owners and sole proprietors who, according to the U.S. Small Business Administration, has received potentially forgivable loans under the Paycheck Protection Program. The PPP, a safety-net program designed to pay the wages of employees for small businesses affected by the coronavirus pandemic, is a key component of the $1.76 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Since the U.S. Congress enacted the law on March 27, the PPP has been renewed and amended twice. It’s now in its third round of funding and Congress is weighing what to do next.

Kowal’s experience, meanwhile, is also a wake-up call for the country on the prominent role that both fintechs like Kabbage as well as community and independent banks, credit unions, non-banks and other alternatives to the country’s biggest banks play in supporting small business. Before many in this cohort were deputized by the SBA as full-fledged PPA lenders, a significant chunk of U.S. microbusinesses – especially sole proprietorships — were largely disdained by the brand-name banks.

“After the first round,” notes Karen Mills, former administrator of the U.S. Small Business Administration and a senior fellow at the Harvard Business School, “more institutions were approved that focused on smaller borrowers. These included fintechs and I have to say I’ve been very impressed.”

Among the cadre of fintechs making PPP loans – including Funding Circle, Intuit Quickbooks, OnDeck, PayPal, and Sabre — Kabbage stands out. The Atlanta-based fintech ranked third among all U.S. financial institutions in the number of PPP credits issued, its 209,000 loans trailing only Bank of America’s 335,000 credits and J.P. Morgan Chase’s 260,000, according to the SBA and company data. Kabbage also reports processing more than $5.8 billion in PPP loans to small businesses ranging from restaurants, gyms, and retail stores to zoos, shrimp boats, beekeepers, and toy factories.

To reach businesses in rural communities and small towns, Kabbage collaborated with MountainSeed, an Atlanta-based data-services provider, to process claims for 135 independent banks and credit unions around the U.S. The proof of the pudding: Eighty-nine percent of Kabbage’s PPP loans, says Paul Bernardini, director of communications at Atlanta-based Kabbage, were under $50,000, and half were for less than $13,500.

The figures illustrate not only that Kabbage’s PPP customers were mainly composed of the country’s smaller, “most vulnerable” businesses, Bernardini asserts, but the numbers serve as a reminder that “fintechs play a very important, vital role in small business lending,” he says.

“BANK OF AMERICA WOULDN’T EVEN TAKE MY APPLICATION”

The helpfulness of such financial institutions contrasts sharply with what many small businesses have reported as imperious indifference by the megabanks. Gerri Detweiler, education director at Nav, Inc., a Utah-based online company that aggregates data and acts as a financial matchmaker for small businesses, steered deBanked toward critical comments about the big banks made on Nav’s Facebook page. Bank of America, especially, comes in for withering criticism.

“Bank of America wouldn’t even take my application,” one man wrote in a comment edited for brevity. “I have three accounts there. They are always sending me stuff about what an important client I am. But when the going got tough, they wouldn’t even take my application. I’m moving all my business from Bank of America.”

Lamented another Bank of America customer: “I was denied (PPP funding) from Bank of America (where) I have an individual retirement account, personal checking and savings account, two credit cards, a line of credit for $20.000, and a home mortgage. Add in business checking and a business credit card. Yesterday I pulled out my IRA. In the next few days I’m going to change to a credit union.”

Many PPP borrowers who initially got the cold shoulder from multi-billion-dollar conglomerate banks have found refuge with local — often small-town — bankers and financial institutions. Natasha Crosby, a realtor in Richmond, Va., reports that her bank, Capital One, “didn’t have the applications available when the Paycheck Protection Program started” on April 6. And when she finally was able to apply, she notes, “the money ran out.”

Crosby, who is president of Richmond’s LGBTQ Chamber of Commerce, is media savvy and was able to publicize her predicament through television appearances on CNN and CBS, as well as in interviews with such publications as Mother Jones and Huffington Post. A “friendly acquaintance,” she says, referred her to Atlantic Union Bank, a Richmond-based regional bank, where she eventually received a PPP loan “in the high five figures” for her sole proprietorship.

“It took almost two months,” Crosby says. “I was totally frozen out of the program at first.”

Talibah Bayles heads her own firm, TMB Tax and Financial Services, in Birmingham, Ala. where she serves on that city’s Small Business Council and the state’s Black Chamber of Commerce. She told deBanked that she’s seen clients who have similarly been decamping to smaller, less impersonal financial institutions. “I have one client who just left Bank of America and another who’s absolutely done with Wells Fargo,” she says. “They’re going to places like America First Credit Union (based in Ogden, Utah) and Hope Credit Union (headquartered in Jackson, Miss.). I myself,” she adds, “shifted my business from Iberia Bank.”

Bank of Southern CaliforniaMain Street bankers acknowledge that they are benefiting from the phenomenon. “In speaking to our industry colleagues,” says Tony DiVita, chief operating officer at Bank of Southern California, an $830 million-asset community bank based in San Diego, “we’ve seen that many of the big banks have slowed down or stopped lending small-dollar amounts that were too low for them to expend resources to process.”

At the same time, DiVita says, his bank had made 2,634 PPP loans through July 17, roughly 80% of which went to non-clients. Of that number, some 30% have either switched accounts or are in the process of doing so. And, he notes, the bank will get a second crack at conversion when the PPP loan-forgiveness process commences in earnest. “Our guiding spirit is to help these businesses for the continuation of their livelihoods,” he says.

Noah Wilcox, chief executive and chairman of two Minnesota banks, reports that both of his financial institutions have been working with non-customers neglected by bigger banks where many had been longtime customers. At Grand Rapids State Bank, he says, 26% of the 198 PPP applicants who were successfully funded were non-customers. Minnesota Lakes Bank in Delano, handled PPP credits for 274 applicants, of whom 66% were non-customers.

“People who had been customers forever at big banks told us that they had been applying for weeks and were flabbergasted that we were turning those applications around in an hour,” says Wilcox, who is also the current chairman of the Independent Community Bankers of America, a Washington, D.C.-based trade group representing community banks.

“IT’S BEEN RELENTLESS”

Noting that one of his Gopher State banks had successfully secured funding for an elderly PPP borrower “who said he had been at another bank for 69 years and could not get a telephone call returned,” Wilcox added: “We’ve had quite a number of those individuals moving their relationships to us.”

For Chris Hurn, executive director at Fountainhead Commercial Capital, a non-bank SBA lender in Lake Mary, Fla., the psychic rewards have helped compensate for the sometimes 16-hour days he and his staff endured processing and funding PPP applications. “It’s been relentless,” he says of the regimen required to funnel loans to more than 1,300 PPP applicants, “but we’ve gotten glowing e-mails and cards telling us that we’ve saved people’s livelihoods.”

Yet even as the Paycheck Protection Program – which only provides funding for two-and-a-half months – is proving to be immensely helpful, albeit temporarily, there is much trepidation among small businesses over what happens when the government’s spigots run dry. The hastily contrived design of the program, which has relied heavily on the country’s largest financial institutions, has contributed mightily to the program’s flaws.

“The underbanked and those who don’t have banking relationships were frozen out in the first round,” says Sarah Crozier, director of communications at Main Street Alliance, a Washington D.C.-based advocacy organization comprising some 100,000 small businesses. “The new updates were incredibly necessary and long overdue,” she adds, “but the changes didn’t solve the problem of equity in access to the program and whom money is flowing to in the community.”

“IT WAS NOT WELL-THOUGHT-OUT AND A LOT OF MONEY WENT TO THE WRONG PEOPLE”

Professor David Audretsch, an economist at Indiana University’s O’Neill School of Public and Environmental Affairs and an expert on small business, says of PPP: “It’s a short-term fix to keep businesses afloat, but it missed in a lot of ways. It was not well-thought-out and a lot of money went to the wrong people.”

The U.S. unemployment rate stood at 11.1% in June, according to the most recent figures released by the Bureau of Labor Statistics, about three times the rate of February, just before the pandemic hit. The BLS also reported that 47.2% of the U.S. population – nearly half –was jobless in June. Against this backdrop, SBA data on PPP lending released in early July showed that a stunning array of cosseted elite enterprises and organizations, many with close connections to rich and powerful Washington power brokers, have been feasting on the PPP program.

In a stunning number of cases, the program’s recipients have been tony Washington, D.C. law firms, influential lobbyists and think tanks, and even members of Congress. Many businesses with ties to President Trump and Trump donors have also figured prominently on the SBA list of those receiving largesse from the SBA.

Wall StreetBusinesses owned by private equity firms, for which the definition of “small business” strains credulity, were also showered with PPP dollars. Bloomberg News reported that upscale health-care businesses in which leveraged-buyout firms held a controlling interest, were impressively adept at accessing PPP money. Among this group were Abry Partners, Silver Oak Service Partners, Gauge Capital, and Heron Capital. (Small businesses are generally defined as enterprises with fewer than 500 employees. The SBA reports that there are 30.7 million small businesses in the U.S. and that they account for roughly 47% of U.S. employment.)

Boston-based Abry Partners, which currently manages more than $5 billion in capital across its active funds, merits special mention. Among other properties, Abry holds the largest stake in Oliver Street Dermatology Management, recipient of between $5 million and $10 million in potentially forgivable PPP loans. Based in Dallas, Oliver Street ranks among the largest dermatology management practices in the U.S. and, according to a company statement, boasts the most extensive such network in Texas, Kansas and Missouri. 

Meanwhile, the design of the program and the formula for the looming forgiveness process is proving impractical. As it currently stands, loan forgiveness depends on businesses spending 60% of PPP money on employees’ wages and health insurance with the remaining 40% earmarked for rent, mortgage or utilities.

closed for businessMany businesses such as restaurants and bars, storefront retailers and boutiques – particularly those that have shut down — are preferring to let their employees collect unemployment compensation. “Business owners had a hard time wrapping their heads around the requirement of keeping employees on the payroll while they’re closed,” notes Detweiler, the education director at Nav. “They have other bills that have to be paid.”

The forgiveness formula remains vexing for businesses where real estate costs are exorbitant, particularly in high-rent cities such as New York, Boston, Washington, D.C., San Francisco, and Chicago. Tyler Balliet, the founder and owner of Rose Mansion, a midtown Manhattan wine-bar promising an extravagant, theme-park experience for wine enthusiasts, says that it took him a month and a half to receive almost $500,000 from Chase Bank. Unfortunately, though, the money isn’t doing him much good.

“I HAVEN’T PAID RENT SINCE MARCH AND I’M IN DEFAULT”

“I have 100 employees on staff, most of whom are actors,” he says. “We shut down on March 13. I laid off 95 employees and kept just a few people to keep the lights on.”

At the same time, his annual rent tops $1 million and the forgivable amount in the PPP loans won’t even cover a month’s rent. “I haven’t paid rent since March and I’m in default,” Balliet says. “Now I’m just waiting to see what the landlord wants to do.”

Like many business owners, Balliet financed much of his venture with credit card debt, which creates an additional liability concern, notes Crozier of the Main Street Alliance. “It’s very common for borrowers to have signed personal guarantees in their loans using their credit cards,” she says. “As we get closer to the funding cliff and as rent moratoriums end,” she adds, “creditors are coming after borrowers and putting their personal homes at risk.”

Mark Frier is the owner of three restaurants in Vermont ski towns, including The Reservoir — his flagship — in Waterbury. In toto, his eateries chalked up $6.5 million in combined sales in 2019. But 2020 is far different: the restaurants have not been open since mid-March and he’s missed out on the lucrative, end-of-season ski rush.

Consequently, Frier has been reluctant to draw down much of the $750,000 in PPP money he’d secured through local financial institutions. “We could end up with $600,000 in debt even with the new rules,” Frier says, adding: “We live off very thin margins. We need grants not loans.”

As the country recorded 3.7 million confirmed cases of coronavirus and more than 141,000 deaths as of mid-July, PPP money earmarked by businesses for health-related spending was not deemed forgivable. Yet in order to comply with regulations promulgated by the Occupational Safety and Health Administration and mandates and ordinances imposed by state and local governments, many establishments will be unable to avoid such expenditures.

“What we really needed was a grant program for companies to pivot to a business environment in a pandemic,” says Crozier. She cites the necessity businesspeople face of “retrofitting their businesses, buying masks, gloves and sanitizers and cleaning supplies, restaurants’ taking out tables and knocking down walls, installing Plexiglass shields, and improving air filtration systems.”

Covid-19Meanwhile, as Covid-19 was taking its toll in sickness and death, the economic outlook for small business has been looking dire as well. The recent U.S. Census’s “Pulse Survey” of some 885,000 businesses updated on July 2 found that roughly 83% reported that Covid-19 pandemic had a “negative effect on their business. Fully 38% of all small business respondents, moreover, reported a “large negative effect.”

Amid the unabated spikes in the number of coronavirus cases and the country’s grave economic distress, PPP recipients are faced with the unsettling approach of the PPP forgiveness process. As Congress, the SBA, and the U.S. Treasury Department continue to remake and revise the rules and regulations governing the program, businesses are operating in a climate of uncertainty as well. Currently, the law states that the amount of the PPP loan that fails to be forgiven will convert to a five-year, one-percent loan — a relaxation in terms from the original two-year loan which is not necessarily cheering recipients.

“One of the biggest problems with PPP is that the rule book has been unclear,” frets Vermont restaurateur Frier, glumly adding: “This is not even a good loan program.”

Ashley Harrington, senior counsel at the Center for Responsible Lending, a research and policy group based in Durham, N.C., argued in House committee testimony on June 17, that there ought to be automatic forgiveness for PPP loans under $100,000. Such a policy, she declared, “would likely exempt firms with, on average, 13 or fewer employees and save 71 million hours of small business staff time.”

She also said, “The smallest PPP loans are being provided to microbusinesses and sole proprietors that have the least capacity and resources to engage in a complex (forgiveness) process with their financial institution and the SBA.”

William Phelan, president of Skokie (Ill.)-based PayNet, a credit-data services company for small businesses which recently merged with Equifax, sounded a similar note. Observing that there are some 23 million “non-employer” small businesses in the U.S. with fewer than three employees for whom the forgiveness process will likely be burdensome, he says: “Estimates are that it will cost businesses a few thousand dollars just to get a $100,000 loan forgiven. It’s going to involve mounds of paper work.”

The country’s major challenge now will be to re-boot the economy, Phelan adds, which will require massive financing for small businesses. “The fact is that access to capital for small businesses is still behind the times,” Phelan says. “At the end of the day, it took a massive government program to insure that there’s enough capital available for half of the U.S. economy” during the pandemic.

For his part, Professor Audretsch fervently hopes that the country has learned some profound lessons about the need to prepare for not just a rainy day, but a rainy season. The pandemic, he says, has exposed how decades of political attacks on government spending for disaster-preparedness and safety-net programs have left the U.S. exposed to unforeseen emergencies.

“We’re seeing the consequence of not investing in our infrastructure,” he says. “That’s a vague word but we need a policy apparatus in place so that the calvary can come riding in. This pandemic reminds me a lot of when Hurricane Katrina hit New Orleans,’ he adds. “The city paid a heavy price because we didn’t have the infrastructure to deal with it.”

Shopify Originates $153M in MCAs and Loans in Q2

July 29, 2020
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shopify glyphShopify had a monster 2nd quarter. The e-commerce giant generated $36M in profit on $714.3M in revenue. As part of that the company originated $153 million worth of loans and merchant cash advances, only slightly down from the $162.4M in Q1. Still that figure was up by 65% year-over-year (and was more than 2x the volume originated by OnDeck).

The company has offered capital to its US merchants since 2016 and recently begun doing the same with its UK and Canadian merchants starting this past March and April respectively, the company revealed.

Shopify CFO Amy Shapero said that company had maintained loss ratios “in line with historical periods,” despite COVID. “Access to capital is even tougher in times like these, which makes it even more important to continue lowering this barrier by making it quick and easy so merchants can focus on growing their business,” Shapero stated.

BlueVine Partners with DoorDash to Fund $6 Million in PPP

July 29, 2020
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DoordashThis week BlueVine announced that since partnering with the food delivery service DoorDash in late April, over 180 businesses have received funds from the Paycheck Protection Program via said partnership. Totaling over $6 million, the partnership exclusively served restaurants on DoorDash’s platform, offering them a PPP pathway through BlueVine in email correspondence as well as the DoorDash merchant portal.

“DoorDash saw a need within their merchant partner base to be able to quickly apply for and receive a PPP loan – something many were not able to do through traditional banking services – and was looking to solve the accessibility factor with a partnership,” BlueVine CCO Brad Brodigan said in an email. “Small restaurants in particular were unable to access funds they needed to stay in business and navigate through this uncertain time, and the hope was that information from a trusted source like DoorDash would help them look for solutions if their bank was unable to help them.”

The $6 million funded is part of the larger $3.5 billion in PPP money that BlueVine claims to have funded to +100,000 businesses. According to Brodigan, the median loan size for the DoorDash deals was $16,000; with the median employees on payroll being five. DoorDash will be donating all referral fees from the program to the CRA Restaurants Care Covid-19 Grant as well as the Small Business Relief Fund.

Enova & OnDeck: Behind The Biggest Deal of 2020

July 29, 2020
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enovaEnova CEO David Fisher kicked off his company’s 2nd quarter earnings call on Tuesday and one could tell from the pitch in his voice that he was excited. And why shouldn’t he be? Despite the catastrophe that gripped the nation over the months of April, May and June, Enova still manages to report a consolidated net PROFIT of $48 million.

But that’s not even it. After a long introduction about a major acquisition, a rather familiar voice is asked to deliver some prepared remarks.

“Thanks David, I am equally excited…”

It’s Noah Breslow, the CEO of OnDeck. Less than an hour earlier it was revealed that Enova had bought 100% of OnDeck’s outstanding shares for $90 million in a deal paid for almost entirely with stock. And now suddenly he’s here on this call talking about how great it is that the companies are combining forces.

“Following an extensive review of our strategic options, we believe this is the right path forward for our customers, employees, and shareholders,” Breslow says.

That OnDeck has been acquired is no surprise. The devastating impact of COVID in Q1 reveals weaknesses in the company’s business model and the share price drops by 80% from the period of February to July. This all while two of their competitors in the small business lending space, Square and PayPal, experience enormous gains of more than 40%.

OnDeckIn May, Forbes reported grim news, that OnDeck is being shopped around in “what amounts to a fire sale.”

The rumor creates further despair in an industry that is preoccupied with survival. If this can happen to OnDeck, then…?

The truth is, OnDeck’s momentum had stalled long before COVID. The company walked away from a sale to Wonga in 2012 that had valued them at $250 million and they went on to have a successful IPO in 2014 at a value of $1.32 billion on the selling point that they were a tech company.

But by mid-February of this year, the company’s market cap is down to less than $250 million, turning the clock backwards by about eight years. After losing the partnership with Chase in 2019, OnDeck seemed to have lost its swagger and direction. They planned to pursue a bank charter and do a stock buyback. Then the news pretty much stops.

COVID happens and it hits them hard. The company stopped lending entirely, although they still recorded originations of $66 million in Q2.

As a standalone entity, OnDeck’s upside had greatly diminished. Getting back to where it was pre-COVID may not have been an entirely enticing prospect for investors. Its market cap recently plummeted to less than $50 million and so by the time the Enova price of $90 million is announced, it sounds almost generous. (Knight Capital sold for $27.8M in November).

Enova says that the acquisition increases their concentration in small business lending from 15% to 60%. That puts consumer lending, their historical core business, now in the minority. This is not by accident. On the earnings call, Enova executives say that they believe that “there will be strong demand for capital from small businesses as the economy begins to open back up.” They even believe the opportunity is better than the consumer lending market right now, particularly from a regulatory perspective, they say. Therefore it makes sense to “double down or triple down” on the small business side, they contend.

Enova’s small business lending business was largely spared by COVID. Unlike OnDeck’s brutal Q1, Enova had reported something “very much manageable” thanks to not having “large exposures to entertainment, hospitality and restaurants.”

“Our portfolio has been extremely stable,” Enova says on the call. With the acquisition of OnDeck, the company appears to be gearing up for the opportunity they believe awaits in small business lending right around the corner.

“Our Model Disclosure Legislation”: ILPA’s CEO on New York’s APR disclosure bill

July 28, 2020
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Albany at DuskLate last week the New York State legislature voted to pass A10118A/S5470B, a bill that might lead to greater clarity and consumer knowledge according to Scott Stewart, CEO of the Innovative Lending Platform Association, a trade association of small business lenders.

Referring to it as “our model disclosure legislation,” Stewart explained in a phone call the work that the ILPA put in to help the bill through as well as what sort of impacts can be expected from S5470B.

“The implications are that small businesses, certainly in New York to begin with, but we think throughout the country, will have the opportunity to really see, understand, and compare various different sources and products for financing their small businesses in terms of their expansion and success. That’s something we’re very proud of and I think that’s something the small business borrower really deserves to see. They deserve to see and understand exactly what they’re doing and when they’re taking out financing products for their businesses.”

What exactly these business owners will understand better relates to the details of the bill, which requires small business financing contracts to disclose the annual percentage rate as well as other uniform disclosures. If signed by New York Governor Cuomo, the bill could have ramifications on small business lenders, MCA, and factoring providers.

Scott Stewart
Scott Stewart, CEO | ILPA

ILPA, founded in 2016 and comprised by the likes of Kabbage, OnDeck, and BlueVine; worked alongside legislators to help with the drafting of the bill, assisting with the wording so that it reflects their own SMART Box initiative. This being a form offered by ILPA which lists a number of metrics worth considering when seeking small business financing.

“In January 2019, our team came together and decided that it made sense in the wake of 1235 in California to take a proactive approach to codify SMART Box as legislation in a state, and we selected New York because we felt we had a favorable legislature there,” Stewart said. “I think it’s an incredible achievement. You see the big margins that it passed by in both the Assembly and the Senate and we’re very, very proud of that. I think it really speaks to our cooperative approach to building legislation. And now, as we move toward the implementation phase, we’re going to be in a place where, hopefully in the next six months or so, small businesses will begin receiving really clear disclosures on the capital and credit that they’re trying to take out.”

As noted though, the bill must be signed by Governor Cuomo before becoming law, and then it will affect New York only. Beyond the Empire State though, Stewart is hopeful that ILPA will be able to implement the terms of S5470B in other states.

“Now that we have hopefully harmonized the legislative landscape between California, with 1235, and New York; hopefully we’ll be able to export that to other states. We don’t have any accurate plans at this time to do that, but we feel like if two of the larger states in the nation have very similar disclosure regimes then we’re on the track toward seeing this nationwide.”

Interview With Chad Otar, CEO of Lending Valley

July 28, 2020
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I recently spoke with Lending Valley CEO Chad Otar, who told us that not only is his funding company still working remotely, but that he’ll probably never return to an office ever again. Watch below:

Clearbanc Launches Valuation Service for Founders

July 16, 2020
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Clearbanc

Today Clearbanc, the Toronto-based alternative finance company, has launched its latest service, Valuation, allowing founders to gauge their company’s value. Being an extension to Clearbanc’s platform, the service will be free to everyone and promises an estimation within 24 hours that can be checked weekly.

Valuation also offers three options to founders upon receiving their company’s value: the chance to access capital via Clearbanc’s funding channels, connect with investors in order to raise an equity round, and investigate possible acquisition opportunities. For the last two of these options, Clearbanc makes introductions to a selection of venture capital investors that have connected with the program.

As per the requirements, founders will have to connect a selection of private data points. Their business accounts, payment processor, accounting platform, and their admin account will all be required. As well as this, public data is also used to arrive at a valuation, basing the estimations on information specific to the company as well as the industry it is in.

“We think this could be as revolutionary as what Credit Karma did when they launched free credit scores for everyone and gave consumers access to their own information,” explained Clearbanc CEO Michele Romanow. “We’re really excited about this as it represents our first non-capital launch, and we think that it’s part of a much bigger vision of how we help founders win in this environment.”

The Shakeup’s Impact on Stock Prices

July 15, 2020
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This appeared in deBanked’s May/June 2020 magazine issue. To receive copies in print, SUBSCRIBE FREE

The Shakeup

The Underwriter’s Song of 2020

July 15, 2020
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This appeared in deBanked’s May/June 2020 magazine issue. To receive copies in print, SUBSCRIBE FREE

Underwriter's Song

It was just a day in February when my broker sent a deal
I remember feeling ordinary because COVID wasn’t real

Another ruse, just more fake news, I went and pulled the credit
A sterling score, I said please send more, but the broker said forget it

The lender just next door to you, he offered to pay me double
Plus they need less docs for their wider box, saving me the trouble

It was on that day that I said “hey!” I’m sick of being small
I called that broker back and swore I would fund them all

So he sent the files, several piles, of paper good and bad
And I did what I should not have, so the broker would not be mad

Hot damn my port was a big ‘ol fort of terrifying risk
But I checked deBanked’s top funders and we were up there on the list

I pulled up my chair, said a prayer, “so long as things remain”
On an upward track, in the black, there won’t be any pain

But then came March and things looked dark, I couldn’t believe my eyes
They said stay indoors and close your stores, we’re really sorry guys

America is shutting down, we hope you were prepared
If you were very careful then you’ll probably be spared

Of course I freaked when our financials leaked, I tried to rationalize
That we had to fund those files to compete with the other guys

It was no no no and then fund fund fund, I tell you it was grand
I made my case on Daily Funder but the contents got me banned

It wasn’t me, it was the broker you see, it all started with a deal
His spiel about getting double, turns out it wasn’t real

So jolly hot damn, I’m in a jam, of the sort that’s budgetary
How I wish, nay I pray! That it was February

Funding Circle US Lays Off 120 Employees

July 9, 2020
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Funding Circle US laid off 120 employees yesterday, according to a post shared by Ryan Metcalf, Head of U.S. Regulatory Affairs and Social Impact.

Reuters reported that the company will also centralize its technology development in the UK rather than have a separate US team going forward.

The US operation had largely been focusing on PPP lending and SBA 7(a) loans since the shutdowns occurred.

The announcement coincided with its UK business being approved to participate in the Bounce Back Loan Scheme.

Breakout Capital Weathered The Storm And Came Out With Expanded Access to Credit

July 8, 2020
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Breakout CapitalBreakout Capital never stopped funding. That’s what CEO & President McLean Wilson recently shared with deBanked. The company not only weathered the storm but has come out with expanded access to credit totalling $20MM with Medalist Partners, one a current term loan facility and the other a new term loan facility with “attractive” forward flow features.

The company said in its announcement that these facilities will allow Breakout to increase loan originations across all of its product offerings, including its term-loan product, FactorAdvantage®, and its newest factor product, FactorBridge.

“Small businesses are at the core of our economy and they were, as we were, largely blindsided by recent economic interruptions,” Wilson told deBanked. “We adapted quickly and rolled with the punches and never stopped funding. It is a testament to the resiliency, loyalty and borrower first mentality that Breakout Capital has not only weathered the storm, but has strengthened our company throughout the past few months. We quickly adapted to a new way of thinking, which helped us serve our clients in real time and forge ever closer relationships with our factor partners, lenders, online marketplaces, ISOs and borrowers.”

John Slonieski, Director of Private Credit for Medalist Partners, said in the announcement that “We are pleased to enhance our relationship with Breakout Capital in our asset-based lending strategy. Their high-quality underwriting and SMB-friendly lending solutions, coupled with their talented credit and management team, provide us confidence as we continue working closely with them to successfully scale their lending program.”

Every Business That Got $150,000 or More in PPP Funds (The List)

July 7, 2020
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In the interest of transparency, the SBA dumped a list of more than 660,000 businesses that got $150,000 or more in PPP funding.

You can download the entire thing right here.

CARES Act

Canadian Small Business Lender Looks Doomed In Wake of COVID-19

June 29, 2020
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LendifiedAs well-known (1, 2) small business lenders in the United States continue to negotiate COVID-19 era workouts with their creditors, another in Canada appears to be falling off the cliff.

On Thursday, Lendified’s President & Director Kevin Clark tendered his resignation effective July 3rd. He follows other board members Edward Kelterborn and Benjy Katchen whose resignations went into effect on June 25th. Company CFO Norman Tan previously resigned on June 9th and no replacement has been named.

COVID-19’s arrival came at a difficult time for Lendified. Before COVID, the company had never turned a profit or reported positive cashflow in its entire history.

“Lendified is in default in respect of credit facilities with its secured lenders. Forbearance and standstill agreements are being discussed with these senior lenders, with none indicating to date that any enforcement action is expected although each is in a position to do so,” the company said. “However, no formal agreements in this regard have been concluded as of the date hereof.”

The company expressed that it would not be able to continue operations if it was not able to finalize a forbearance on its defaults AND simultaneously obtain an immediate infusion of capital to fund its operations.

Lendified’s board of directors is presently considering selling its assets or its entire business in order to raise revenue.

A wholly owned subsidiary of Lendified, Judi.ai, an automated loan underwriting platform, is poised to cease operations as a result of a cashflow shortfall. “[Judi.ai] requires cash infusions in the amount of approximately $100,000 per month in order to maintain operations,” Lendified reported. “Its cash reserves at this time are approximately $80,000. At this time, the Company is not in a position to continue to fund the Business and there can be no assurances that it will be able to do so in the future.”

The company went public on the Toronto Stock Exchange on May 26th via a reverse merger and has since experienced a 95% drop in its share price. The company’s market cap on Monday hovered around $700,000 USD.

OnDeck Update 6/23

June 24, 2020
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On June 23rd, OnDeck filed the following statement with the SEC:

On June 23, 2020, we obtained a limited consent (“Consent”) for our corporate debt facility (“Corporate Facility”). Under the Consent, the lenders consented to delay the effectiveness of the increased monthly principal repayments until July 14, 2020 (or such later date as may be agreed by the Administrative Agent), which were triggered by an Asset Performance Payout Event (Level 2) (“APPE”) that occurred on June 17, 2020. In consideration for the Consent, the Company agreed to make a $5 million principal repayment (“Repayment”) substantially concurrent with the execution of the Consent. Under the Consent, the lenders also agreed that, at the Company’s option, the Repayment will either (i) reduce the amount of the monthly principal repayment due on July 17, 2020 by the amount of the Repayment or (ii) if the parties enter into an amendment on or prior to July 17, 2020, be credited towards any principal repayment required under that amendment. The Company entered into the Consent in contemplation of entering into a broader amendment to the Corporate Facility to address impacts stemming from the COVID-19 pandemic. If such an amendment is not entered into, the APPE triggers $21 million monthly principal repayments which, if not cured, would commence on July 17, 2020 and continue until the Corporate Facility is repaid in full. The Company made a payment of approximately $13 million on June 17, 2020 as a result of the previously disclosed Asset Performance Payout Event (Level 1), bringing the total balance outstanding as of that date to approximately $92 million. The Revolving Commitment Termination Date occurred as a result of such Level 1 event. Certain capitalized terms not defined in this section of the report are used with the meanings ascribed to them in the Corporate Facility as amended by prior amendments thereto and the Consent.

Shares of OnDeck closed at 86 cents yesterday. The company was previously warned that long-term pricing below $1/share would result in delisting from the New York Stock Exchange.

IOU Financial Affected By COVID-19

June 23, 2020
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IOU Financial approved the re-appointment of all of its current directors and auditors yesterday. The company, however, is currently experiencing challenges similar to other online lenders.

In late May, the company filed its Q1 financials and revealed that the COVID-19 pandemic had put them in an “over-advance position with its financing credit facilities.” At the time, the issue remained “uncured” and “the company received default notices subsequent to quarter end.”

“The Company and the financing credit facilities are working together to remedy the situation,” IOU reported. “Nevertheless, there is no assurance that these initiatives will be successful.”

IOU had furloughed 40% of its full-time employees and implemented a temporary 20% reduction in salary for all remaining employees commencing on April 1, 2020.

The company’s market cap has plummeted to CAD$7 million, down from $18 million in February. The company had previously been on a fairly positive trajectory until Q1 when they cranked up their provision for loan losses in anticipation of the fallout caused by the pandemic.