Business Lending
Amex: Organic Growth of Small Businesses Has Slowed
July 25, 2023
“…when we look at small business, I think the biggest thing there from a small business perspective is really the organic growth. I think organic growth has slowed,” said Amex CEO Steve Squeri in the company’s Q2 earnings call. Squeri said that this wasn’t just something that Amex was seeing but more of an industry phenomenon.
“…what you saw through the pandemic, is you saw small businesses continue to add and add and add, and you got to remember small businesses use a card to run their entire business,” Squeri said, “and so, there was a lot of buying ahead from a goods and services perspective, from an inventory perspective.”
Delinquencies have been flat at Amex, however, and still remain below pre-covid levels, a feat attributed to the company having made proper adjustments from a risk management perspective.
Squeri said he believes the organic growth will eventually rebound.
“…after the slowdown comes the recovery,” he said.
Business Blueprint, the rebrand of the Kabbage business it acquired, was not mentioned by name in the company’s earnings presentation or 10-Q.
New York State Loan Initiative Takes on Fintech Type Pitch
July 24, 2023
If a business owner told you they had been approved for a 3-6 year loan up to $150,000 with no origination fees, no prepayment penalties, and interest rates ranging from 9.25 – 12.25%, would you believe it was a real offer?
The criteria, after all, is just a matter of:
– having been in business at least 1 year
– having strong previous cash flow and projected cash flow
Not only is this real but it’s being rolled out by New York’s “Forward Loan Fund 2” as a working capital loan that can be used for equipment, payroll, utilities, rent, supplies, marketing and advertising, building renovations, and other expenses. The state stops short of calling itself a fintech platform or online lending platform, instead referring to itself as a “virtual platorm” that is “accessible anywhere in the state.”
This is the second run of this program. The first distributed loans to 1,700 small businesses.
“It was a godsend,” one testimonial posted on the NY loan fund site says. “NDC made it so easy. It took two weeks and the money was in our account. Can you feel my joy?”
The program offers more than just capital, promising that there is a “network of Entrepreneurship Assistance Centers (EAC) available to provide free support before, during, and after the loan application process.”
The program is backed by participating lenders that include Accion Opportunity Fund, Ascendus, NDC, Pursuit, and TruFund Financial Services. There is about $150M available to be loaned out “with plans to recycle and lend additional funds over the life of the program.”
“Due to a limited amount of funding availability and the high volume of applications expected, it is anticipated that not all applicants will be able to receive a loan,” a disclaimer says.
At a minimum, the documents required to be considered are:
1. Most recently filed tax returns OR internal financial statements.
2. Schedule of ownership
3. Personal guarantee from each individual owner greater than 19%
4. Articles of organization
5. Credit report
Congressional Effort Underway to Reinstate the SBLC Moratorium
July 23, 2023
It only took 40 years for the SBA to lift the moratorium on licenses for Small Business Lending Companies. Now there’s a congressional effort underway to reinstate it. The “Community Advantage Loan Program Act” which had not been assigned its own individual bill number in the Senate at the time of this writing, nevertheless garnered 18-1 approval by the Senate’s Small Business and Entrepreneurship Committee last week.
First, the proposal concludes that the SBA does not have adequate resources to issue more than 3 new SBLC licenses. Second, it calls for a 5-year moratorium on new licensees having Delegated Authority which is the authority granted to a lender to process, close, service, and liquidate SBA loans without prior SBA review. Third, it imposes new annual stress tests that would enable the SBA to revoke the new licenses. All in all, it is effectively a rollback of the new SBA rules, and those are just some key components of it.
Senators Ben Cardin, D-Md. and Joni Ernst, R-Iowa, are the sponsors of the proposal.
Among the small business lending companies that would be impacted by this is Funding Circle. Ryan Metcalf, Head of U.S. Public Affairs at Funding Circle, told deBanked that “We estimate that the proposed Cardin/Ernst bill would reduce 7(a) Small Loans made by Funding Circle over the next three years by 26%, of which 33% is to SMB in LMI neighborhoods and 40% in rural areas.” That’s without considering the increased regulatory costs or the likely reduced borrower conversion rate as a result of having non-delegated authority, Metcalf added.
The initiative by Cardin and Ernst does not come as a surprise. The two had been critical of the the SBA’s plans to allow more SBLCs all along, arguing that new licensees were likely to be fintechs who were “the very entities responsible for issuing billions of dollars-worth of Paycheck Protection Program (PPP) fraud”
Federal Legislators Jump on Commercial Financing Disclosure Bandwagon, Renew Push to Give CFPB Authority Over Industry
June 16, 2023
Feel like there’s a lot of state-level disclosure going around lately? Well now some members of Congress believe another layer is needed at the federal level. In a bill titled the “Small Business Financing Disclosure Act of 2023,” the language looks awfully familiar. There’s a Double Dipping clause in it, for example, which was a term first seen in a New York State law.
The federal bill, which was introduced by US Senator Robert Menendez and Congresswoman Nydia M. Velázquez, seeks to place the small business finance industry under the authority of the Consumer Financial Protection Bureau (CFPB). As part of that, the Director (currently Rohit Chopra) would be responsible for devising all the rules and formulas, according to the bill. Furthermore, with regards to sales-based financing, the bill specifically states:
1. The provider must disclose an APR.
2. The estimated term of repayment and periodic payments based on projected sales volume must be disclosed.
“Small businesses are the lifeblood of the American economy,” said Congresswoman Velázquez. “But for too long, predatory lenders have taken advantage of businesses in need of capital by offering loans and similar products with unclear terms and exorbitant interest rates.”
Supporters of the bill, including Senator Sherrod Brown and Senator Ron Wyden, also stated that the bill is aimed at “predatory lenders.”
In Senator Menendez’s press statement for the bill, it cites Funding Circle, a small business lending company, as a supporter.
“We believe a free and fair market operates most efficiently when there is transparency in pricing, terms and conditions,” said Ryan Metcalf, Head of U.S. Public Affairs at Funding Circle U.S. When a small business has all of the necessary information up front including the annual percentage rate (APR), they can comparison shop and make informed decisions that are best for their business. Funding Circle supports one national uniform small business financing disclosure law because it is in the best interests of small businesses and interstate commerce.”
The push for a small business financing bill is not new. A similar bill introduced by Velázquez last year did not move forward, nor did the one from 2021, nor the one from 2019. The difference is that previous versions focused on Confessions of Judgment and fairness in small business lending. The latest version takes on the air of disclosure while attempting to subjugate the whole industry to CFPB regulatory authority.
Congressional Resolution Aims to Undo CFPB’s Small Business Lending Rules
June 12, 2023After 13 years of regulatory debate and 888-pages of official rules finally ready to go into effect, some members of Congress have decided that the whole thing is all wrong. At issue is a section of a 2010 federal law that requires the CFPB to collect data from companies engaged in small business financing. However, for more than a decade the statute became a political football, creating delays and sowing confusion over who it is that is supposed to be covered. Lawsuits filed against the CFPB finally prompted it to move forward with its mandate which culminated in an 888-page rulebook that was published in March.
On May 31, however, members of the House and Senate introduced a Joint Resolution to invalidate the rules.
“Resolved by the Senate and House of Representatives of the United States of America in Congress assembled, That Congress disapproves the rule submitted by the Consumer Financial Protection Bureau relating to “Small Business Lending Under the Equal Credit Opportunity Act (Regulation B)” (88 Fed. Reg. 35150), and such rule shall have no force or effect.”
A hearing on the matter is scheduled to be heard on June 14 at 10am. As part of it, CFPB Director Rohit Chopra is expected to testify.
Update: Hearing is here:
It remains to be seen whether the Resolution will carry weight. There are 23 Republican co-sponsors of the bill and 0 Democrats.
When Your Competitors Do Wrong, Do Right
June 1, 2023
“…no matter what industry you’re in there’s always going to be bad apples, and you kind of have to see which way they’re coming from,” said Heather Francis, CEO at Elevate Funding.
Competition within this industry will always exist, fueling the drive of professionals in the field. But how can one compete with a competitor who is actively deceiving the merchant? Furthermore, how can one advise that client to exercise due diligence without appearing to display dishonest intentions? Transparency has become a rising issue separating those in the field for the right reasons from those who are not.
“Companies should be dedicated to conducting their business consistent with the highest standards of ethics and integrity,” said Laura M. Marolla, VP ISO Relations at World Business Lenders (WBL). “We have an obligation to our colleagues, customers, business partners and investors, as well as the communities in which we operate to be honest and forthright in all our business practices and interactions.”
Funding and lending companies working with customers should be forthright about everything, from the amount the customer will receive, the total cost, and what they should expect throughout the relationship. Also they should be consistent with the terminology used so that the customer doesn’t become confused.
Francis explained that terms like “fee” could be interpreted in several different ways. Her company has developed an entire blog dedicated to terminology to help merchants weed out jargon.
“Terminology is very very important because I could understand fee to mean one thing and you could understand it to be different,” said Francis. “And that’s not transparent if we’re speaking a different language, that can be misconstrued.”
Case in point, Francis’s company Elevate offers Revenue-based financing while Marolla at WBL offers loans. On this basis alone, each company’s product works very differently.
“Ongoing education for all staff should be required, during which responsible lending practices should be emphasized and ingrained into the culture of the organization,” said Marolla. “While in the end, each merchant must take responsibility for its business decisions, informed decisions by merchants can be facilitated through transparency in disclosures and responsible business practices throughout the lending process.”
And if a competitor is not being transparent or responsible, Francis said that there is a delicate way to communicate that to the customer.
“From our team, what we do if a merchant says, ‘hey, so and so promised me X, Y, and Z,’ if there are reviews out there that show the other company can’t deliver that, we will send them the link. ‘You can see what previous customers have said, and it seems like they haven’t always been true to their word.’ We can also give the client something to look out for.”
One particular thing she said can be a red flag is if a company tells the customer at the last minute that they’re going to get a lot less than what they originally contracted for, which they have seen happen. Elevate hopes that when a customer recognizes a warning sign that they will remember Elevate’s polite manner of advising them what to have looked out for in the first place.
Francis explained it’s about making them feel free to come back to them, that there’s no hard feelings if it looks like they got a better deal. “‘If you have any questions. If you don’t feel that the person is being truthful with you, we’re happy to answer any questions, or you can bounce ideas off of us,'” is the message they try to leave them with. “We’re just trying to have a relationship so that we can curtail someone who’s lying about what they’re doing.”
Pending Florida Law Draws From DailyFunder’s Rulebook
May 17, 2023Florida’s impending disclosure law is not so unique after all. As one user pointed out, Florida’s plan to require that brokers disclose their actual address and phone number in any advertisement is actually a copy & paste of a rule on DailyFunder.
On October 24, 2015, for example, DailyFunder declared that any company soliciting business would have to disclose their physical address and phone number. The rule was stickied in the Promotions subforum and is the first thing shown to users visiting that area.
This phone number and address requirement did not appear in commercial financing disclosure laws passed by other states yet it reared its head in Florida’s bill, a state with a strong user base of DailyFunder users.
The bill is currently awaiting the signature of Governor DeSantis. If enacted, the DailyFunder rule as a legal statute would be the first of its kind.
Impact of ChatGPT Era Already Being Felt
May 16, 2023
Anyone that’s ever faced a coding hurdle has inevitably ended up on Stack Overflow, the go-to platform for developers to solicit answers from more experienced professionals about their challenges. Users typically explain what they’re trying to accomplish and paste a copy of the code that’s not achieving the desired result. That’s where the community chimes in, coming forth with their own solutions while other users upvote the best answers. The end result is not just a grateful user but an ever growing public database of questions and solutions available for public consumption. The sheer scope of what’s been compiled has opened up the door for other users to simply find a similar enough question that’s already been asked and copy the answer. It’s a very valuable tool.
Stack Overflow has been around for 15 years but from March to April of this year, traffic plummeted by 17.7%, according to SimilarWeb. Tech blog Gizmodo has suggested that a contributing cause is ChatGPT-4, the OpenAI chatbot technology that can write its own code, edit a user’s code, and even converse about what a user is trying to accomplish. A spokesperson for Stack Overflow confirmed to Gizmodo that ChatGPT was partially responsible for its loss of users. “However, our vision for community and AI coming together means the rise of GenAI is a big opportunity for Stack,” the spokesperson added.
But what’s a coding forum for nerds and brainiacs got to do with the lending industry? Well, for one thing borrowers were already flirting with asking virtual assistants for help with financial services products before ChatGPT even entered the ring. According to the most recent Smarter Loans survey, 16% of loan applicants surveyed said that they had at some point used Alexa, Siri, or other voice search tools to find information about financial services. None of those come even remotely close to what ChatGPT-4 is able to do. And AI is popular, so popular in fact that ChatGPT became the fastest growing app in history, crushing even the likes of TikTok in pace of growth. ChatGPT already had 100 million monthly users as of February, before its signature ChatGPT-4 model was released.
Therein lies the threat because not only is ChatGPT-4 incredibly adept at making coherent conversation but it is also ready to explain a concept or make a recommendation, just like a very knowledgeable friend would. For example, when asking it to make a list of the top small business funding companies, these were among the names it spit out:
- OnDeck
- American Express (Kabbage)
- Funding Circle
- Credibly
- Square Capital
- National Funding
- PayPal Working Capital
It’s not a vomit of names. ChatGPT-4 was familiar with their areas of expertise. When pressed further it said that OnDeck would help get the cash fast but working with Square Capital might work better if one is processing a high volume of credit card transactions. For strong credit and a large loan, it suggested Funding Circle. After expressing an interest in OnDeck, the AI provided instructions on how to apply via the OnDeck website and a phone # to call with questions. In this real-world example, the AI replaced both the online search and the role of a broker all in one and all within minutes. It can also read the contracts and alert borrowers to certain clauses. When pressed about an unusually high APR, for example, the AI even offers an encouraging explanation for how moving forward could still make sense.
“Be sure to also consider the potential return on investment from using the loan funds,” it said. “If the growth or savings you anticipate from using the loan funds exceeds the cost of the loan, it may still be a good decision despite a high APR.”
