Nearly three years after California became the first state to pass a business loan and merchant cash advance disclosure law (SB 1235), the actual disclosure rules themselves are finally nearing completion. The public has until April 26th to submit any comments on the amended portions of the proposed rules.
The 52-page document is the result of years of negotiations between various parties that all have a stake in its implementation. Among the finer details are the characteristics of the fonts permitted in the disclosures, what column a certain disclosure can be placed in, and the aspect ratio of the columns themselves.
But that’s the easy part. Here’s the hard part, according to a brief published in Manatt’s newsletter yesterday.
“The modified regulations continue to require use of the annual percentage rate (APR) metric, rather than annualized cost of capital (ACC), to disclose the total cost of financing as an annualized rate. This appears to be a final decision, which will make it difficult if not impossible for many commercial finance companies to comply given the significant challenges of calculating APR on products with substantial variance in the amounts and timing of payments or remittances.”
Manatt highlights other issues, including that all the necessary disclosures be provided “whenever a payment amount, rate, or price is quoted based on information provided by the proposed recipient of financing…”
This requirement, the firm says, is not even required under Federal Regulation Z for consumer loans.
“Many companies will not be able to comply with this requirement absent radical changes to their California application and underwriting procedures, as it is common today for companies to have preliminary discussions with applicants about potentially available financing terms before full underwriting has been completed.”
Any interested person may submit written comments regarding SB 1235’s modifications by written communication addressed as follows:
Commissioner of Financial Protection and Innovation
Attn: Sandra Sandoval, Regulations Coordinator
300 South Spring Street, 15th Floor
Los Angeles, CA 90013
The last day to submit comments is April 26, 2021
This week, lockdown returned to Ontario, Canada, due to the third wave of Covid cases. On April 3rd, the Premier issued a stay-at-home order, putting 14 million Canadians back behind closed doors. Based in Ontario, Canadian Financial is a one-stop alternative and traditional funding shop that still champions door-to-door sales and the lockdown has sidelined them for the third time.
“We just went back into lockdown. The whole province, everything just shut down,” CEO Patrick Labreche said. “We were getting 20 to 30 new cases a day, and then it jumped to like 200 a day.”
Meanwhile, 110 miles down south at deBanked, de Blasio announced NYC public beaches would be opening up by Memorial Day. Because of the wide range of government shutdowns this past year, Labreche said it is hard to admit to some that his business is booming.
“I was having a conversation with a guy who does payment processing, he makes residuals on his customers, and so his book of business was not making any money right now; he’s hurting,” Labreche said. “So it’s kind of hard to tell a guy like that that we’re flourishing, and maybe you should come work with us.”
Labreche said that the processor was actually going to work with Canadian Financial. Success this past year came from leveraging the interpersonal skills that make an excellent door-to-door salesperson thrive, Labreche said.
“I started in the door-to-door and b2b at 19 years old, completely broke. I dropped out of school, and I started knocking on doors, and you know, that business model has changed my entire life,” Labreche said. “When you get into door-to-door sales, you understand how to sell yourself first. You get a sense of how to communicate with people, how to understand their needs, their pain points: How to leverage the service or product that you have.”
With a team of salespeople connected through weekly department meetings and messaging groups to keep the energy up, the deals kept rolling in throughout covid. Labreche said his firm is set apart from a good portion of Canadian alt finance: they offer a smorgasbord of financial products directly to the borrower instead of using lead generators.
While most fintechs think all business owners want a one-button final product, Labreche attests to the opposite- his firm sends out salespeople to make sure businesses know they have a rep to rely on.
“I have nothing bad to say about aggregators; that’s their business model, not ours,” Labreche said. “Our business model is going into a business that didn’t even know that the solution was available. When you’re looking online, you’re looking for a solution that you already know is available.”
Labreche favors traditional finance. His firm offers MCAs and other alternative forms of funding but said those are mostly band-aid solutions and he regularly sees MCA deals taking advantage of merchants. For example, Labreche said he walked into an ESCO gas station last month, and through talking to the owner, discovered an opportunity. The owner had taken an MCA from a big Canadian firm but was confused about the cost of capital- he thought he was paying 17%, but Labreche read a recent statement and discovered the rate was really 50%.
“Right there and then he was like, ‘oh my God, that’s crazy I didn’t know,’ he was misled, and it’s like that across the board. So I ended up getting him a quarter-million dollars at four and a half percent on a term loan,” Labreche said. “Nobody’s ever walked into his business or called him, offering him traditional money. We feel like there’s a huge underserved, undereducated market.”
This week, walk-ins have become less of a possibility, with a lockdown banning all non-essential travel. Still, business development manager Julian Hulan looked forward to when things would open back up. He had masked up and gone out on sales calls throughout the year when the government wasn’t in shutdown mode. Recently he traveled to 20 car dealerships to offer financing in a two-day period and said he found merchants excited to see him in person instead of over email.
“They were like ‘oh, I can actually sit down and talk to this guy?’ and that’s when they eat it up,” Hulan said. “They know because they’ve already made that connection face to face, they can call me directly. We don’t do this whole 1-800 Number. You’re going to call me directly and if I don’t answer, you leave me a voicemail, I call you back, it’s that personal relationship between me and that client.”
It’s a concept that’s been thrown around the industry for years- swapped like business cards at meetups, conventions, and chatrooms. Shouldn’t there be a broker certification, database, or even blacklist for known bad actors?
As deBanked petitioned the question, the industry responded with its naturally diverse responses. The problem: bad actors can keep getting away with shenanigans. The solution? Well, no one size fits all approach could work in the alternative finance industry, but a certification source may do the trick.
CEO of FundFi, Efraim “Brian” G. Kandinov, recently brought up the idea of a “Datamerch for Brokers.” Like a DNC list, Kandinov said there has got to be a way to sort out the known bad actors, scam artists, and even the brokers that play the funding houses by training merchants.
“I think opposed to a blacklist: a list that notes bait and switches, where the merchant was coached by the broker,” Kandinov said. “This way can go around a lawsuit or any fear of that, and the funder is free to choose once reading others’ notes.”
Kandinov said that most of his “problem files” show signs of brokers coaching merchants to start protesting deals after the clawback period ends. Get paid, pass the smell test during a 30-60 day waiting period, and then tell the merchant to jump ship on the deal or argue to lower the payments.
“If they were not [suddenly going out of business], they were calling in like a schedule to lower their payments. No way it can be that uniform unless they were being coached. The broker comes off as the good guy that he played the funding houses,” Kandinov said. “I think harsh means are necessary to expel these guys from the industry.”
Other funding side members of the industry have voiced their support for some type of broker record database. Kristen Ferrara, Director of Underwriting at The LCF Group based in New York, said that LCF pays a high expense to select ISOs. A vetting platform could be a great resource.
“I think it would be a good resource for funders,” Ferrara said. “We turn down about 50% of the ISOs who try to sign up with us. This resource could save funders millions of dollars in deals going bad from ISOs over-promising or committing fraud.”
On the other side of the country in San Diego, CEO David Leibowitz from Mulligan Funding said he is all for a way to help funders vet brokers. Mulligan is lucky to work with a trusted brokers network and drops a client like a broken elevator at the first sign of fraud or unethical behavior, he said.
“We are extremely careful about which brokers we do business with. If we see any kind of practice that we think is unethical, we’ll cut a broker loose in a heartbeat,” Leibowitz said. “Is there value in the sort of thing you’re talking about? I think there probably is because I think it makes vetting brokers for [funders] a lot easier, and it also allows brokers to differentiate themselves against their competition by their ethics.”
Leibowitz is a proponent of ethics as an indicator of value and said a certification could help members of the public tell the difference between good and bad funders and let funders spot good ISOs and bad ISOs.
A worry for some is that whatever company, organization, or site that hosts a broker ledger could face lawsuits for liability, could accept payments to make bad reviews go away, list competitors to hurt them, or be outright ignored by an industry always hungry for deals.
But industry lawyers seem to agree that a broker certification or blacklist would ultimately benefit the industry if provided from the right source. Patrick Siegfried, the Deputy General Counsel at Rapid Finance, said that whatever agency would be rating brokers would need its own trusted reputation.
“To have a legitimate background or rating system, it needs to be done by an independent third-party that has its own credentials,” Siegfried said. “I think that’s a big reason you don’t see many third-party or private rating systems.”
Siegfried said one option that ensures a true third-party point of view is a government agency taking care of a broker tracking system. Another option would be an industry coalition, but then it’s a question of cost- Who is paying to staff and maintain a complaint system?
“At the end of the day, having a good industry regulator is a benefit for the industry,” Siegfried said. “It will allow a third-party, government entity to vet brokers in terms of licensing and then maintenance, looking into valid complaints.”
As conversations across the country point toward a licensing regime, Siegfried said it’s a sign the industry is maturing and that one day there will be a government agency to lodge complaints with and to actually vet brokers in the space.
Steve Denis from the Small Business Finance Association (SBFA) proposed a solution to the issue. He said that in the works right now is an SBFA-sponsored certification program.
“We started just looking at brokers and thinking about how to certify them,” Denis said. “We think that it’s the time, from the feedback we’ve gotten from regulators, that we launch a true industry-wide certification.”
In the coming months, brokers may be able to apply for certification when the program rolls out. Instead of a ‘blacklist,’ Denis said brokers could set themselves apart as trusted providers by going through a basic background test or industry knowledge checks.
“If you’re a broker and you can’t get certified, then there’s probably some issues,” He said. “So our hope is if you carry a certification, that’s sort of a message that you are a good broker.”
When it comes to government regulation, Denis said he is still cautious. While he 100% expects certification programs to crop up for state licenses, he thinks no government agency can achieve what an industry coalition can do.
Funding Circle US revealed originations of £581M in 2020, equivalent to about $800M at current exchange rates. More than 90% of the company’s American borrowers were making full regular payments on their loans, Funding Circle reported. Approximately 7% were on a “payment holiday” at year-end or were not paying.
Funding Circle’s US loans generate low annual returns, its highest being a projected return of 4.1% to 4.9% for its 2016 cohort. Its 2020 cohort is projected to generate an annual return of between 1 – 3%.
Overall, Funding Circle reported a total net loss of £108.1M (approx $150M US) on just £103.7M in revenue, a massive loss that stemmed entirely from the first half of the year, attributed mostly to a write-down in “fair value.”
Funding Circle’s primary market is the UK. When comparing the market with the US, the company said that the US is in an earlier stage of development even though the market is 5x larger.
deBanked is hosting a livestream broadcast tomorrow beginning at 10:30 AM from a venue in Midtown Manhattan with guest speakers from two broker shops and a business funding company. There is no need to register for anything. Anyone can tune in live at deBanked.com/tv to watch it. The broadcast will run for 2.5 hours and end at 1 PM. This is an-person event being broadcast with no Zoom or virtual conversation. The event will also be recorded and made available free.
deBanked’s massive in-person conference, Broker Fair, will return to NYC later in the year on December 6th at Convene at Brookfield Place in lower Manhattan.
With tax season upon us, the events of 2020 will soon be reviewed and evaluated by everyone’s best friend, the IRS. Lenders that offered debt forgiveness might have done a favor to distressed borrowers in 2020, but a consequence of that courtesy is that the borrowers’ forgiven debt might be taxable.
This is as good a time as ever to review a report prepared by Grassi Advisors & Accountants whether you are a lender that forgave debt or a borrower that had debt forgiven.
“This issue was noticed early last year,” said deBanked President Sean Murray, “but at the time everyone was so focused on PPP forgiveness, the EIDL program, and government stimulus, that I think the potential consequences of lenders forgiving non-PPP debt for their borrowers were lost in the shuffle. Imagine you’re a borrower that had $100,000 of non-PPP debt forgiven last year and you’re only now about to learn that the IRS may classify that as income. Or worse yet, you don’t even realize it and are told that later on during an audit.”
In May 2020, deBanked labelled this as a hidden tax time bomb that was set to detonate in 2021. And now here we are.
Square launched its own industrial bank Monday, after receiving a charter from the FDIC. The Salt Lake City, Utah-based bank will begin underwriting business loans under the Square Financial Services title.
“Bringing banking capability in-house enables us to operate more nimbly,” CFO and Chair of the new bank Amrita Ahuja said, “which will serve Square and our customers as we continue the work to create financial tools that serve the underserved.”
Square had previously offered credit products through a partnership with Utah-based Celtic bank. The move answers the questions “buy or build” when it comes to fintech banking. Many fintech firms, some of who even claimed to be anti-bank alternatives, have made the switch to either partnering with a nationally chartered bank or outright becoming a bank themselves.
“We thank the FDIC and Utah DFI for their partnership enabling us to reach this milestone, and look forward to continuing to expand access to financial services at this critical time for small businesses,” Ahuja said.
The ODX brand from OnDeck is splitting off to combine with Fundation, forming a new SMB digital banking company called Linear Financial Technologies.
The news follows the recent disclosure from Enova that it was looking to divest ODX in addition to OnDeck Canada and OnDeck Australia.
The new firm, headed by the current CEO of Fundation, Sam Graziano, will be an online banking service provider. Linear will take on Fundation’s service of processing loans for big and small banks, reportedly processing a total of $13 billion.
“Over the years, our combined platforms have served hundreds of thousands of business customers through many of the leading business banking providers in the market, deploying modern banking experiences that their customers and front-line colleagues expect in the digital era,” said Graziano in the published announcement. “Together as Linear, we’ll have the resources to more rapidly expand the breadth of our solutions to bring more value to our clients.”
Enova will retain a minority stake in the new firm.