Business Lending
Do Borrowers of a Feather Flock Together?
August 6, 2015Facebook believes that you might be the company you keep, at least according to a patent it has.
“When an individual applies for a loan, the lender examines the credit ratings of members of the individual’s social network who are connected to the individual through authorized nodes,” reads an explanation of the technology. “If the average credit rating of these members is at least a minimum credit score, the lender continues to process the loan application. Otherwise, the loan application is rejected.”
Diagram below:
This is one of those concepts that if ever used, is likely to end up prohibited under an amendment to the Equal Credit Opportunity Act or similar.
What are your thoughts on this?
And also, you might want to check out similar patents that Kabbage has in its arsenal.
MCC and BizFi Founder Stephen Sheinbaum on Bloomberg
August 4, 2015Earlier today on Bloomberg TV:
“Automation doesn’t mean no underwriting,” said Stephen Sheinbaum, the founder of Merchant Cash and Capital and BizFi.
Sheinbaum also said that they have never raised an equity round from an institution.
“We do want to go public,” he added. If they can obtain an equity investor, he put their timeline to go public at 12 to 18 months.
Watch the video below:
First Comments to Treasury’s RFI Highlight the Importance of Marketplace Lenders Despite Higher Rates
August 4, 2015
The first responses to Treasury’s request for information about marketplace lenders were posted online yesterday. While only 3 responses have so far been posted, comments from a number of alternative finance providers are expected.
The first response, however, came from Patrick Fitzsimmons, the executive director of Mountain BizWorks, a North Carolina-based community development financial institution. Mr. Fitzsimmons submitted an article published last month in The Citizen Times of Asheville, NC. The article details one small business owner’s efforts to obtain a business loan. After being turned down by banks numerous times, the owner was finally able to obtain financing from an online marketplace lender.
The article quotes a number of employees of CDFIs who criticized the rates charged by some online lenders. One CDFI employee went as far as to characterize the rates charged as “predatory”. In contrast, however, the business owner was—if not enthusiastic about—grateful for the assistance his business received from the online lender.
“It’s not deceiving. I knew what I was getting into,” he said of the loan. “I can’t say that OnDeck didn’t help my business because it did. To say it was great, though, would be an overstatement. For me, it was like getting a root canal: This is not going to be fun, but it’s what I need to do.”
Though the article is somewhat critical of rates charged, it highlights how important alternative marketplace lenders have become to the survival of many small businesses. As the quote above shows, marketplace lenders are, in many cases, the last lifeline available to businesses in need of working capital.
I expect the comments from industry participants to continue to emphasize the need for alternative sources of business capital. At the same time, the industry would be well served to take this opportunity to explain, in greater detail, why alternative product rates are higher than traditional bank financing as some community organizations do not fully appreciate the increased costs and risks associated with offering small business funding.
Have Your Marketing Response Rates Changed?
August 4, 2015
Notice anything different with your marketing response rates lately? OnDeck has…
During the OnDeck Q2 earnings call yesterday, company CEO Noah Breslow said, “there are no two or three competitors dominating this trend (direct marketing), but we know the sheer number of marketing solicitations targeted to small businesses has grown meaningfully over the last six months which impacts our response rates.”
The comments were interesting because while they opposed any correlation between the increased competition and their continuously declining interesting rates, it was an acknowledgement that they are not alone in their marketing efforts, nor are their marketing methodologies proprietary.
The comment was focused mainly on direct mail campaigns and Breslow argued their strategy was to “break through the clutter” and “better communicate our value proposition.”
“Competition for customer response remains elevated,” he later added.
OnDeck still managed to fund $419 million for the quarter, up only $3 million from the previous quarter, but a 69% increase over the same time period a year ago.
During the Q&A which was unfortunately not part of the recorded transcript so I will paraphrase as best I can from memory, a few analysts inquired deeper about the competition.
One wondered if their competitors’ marketing efforts were sustainable or if they were simply on a market share binge and would eventually go away. Breslow said there would probably be a combination of both, that some would continue to stick around long term and others might fall off. It was a safe answer because while some of their competitors may indeed have high acquisition costs, there are still profits being made and nobody should expect the competition to subside any time soon, if ever.
Breslow also shared that the competition was bidding up the price online, talking at least in part about Pay-Per-Click marketing.
OnDeck shed more Funding Advisors (brokers) in Q2 than they expected to because of their “re-certification program.” Brokers either didn’t make the cut or would not go through the program. Only 20.6% of their loans were originated by brokers in Q2 of this year as opposed to 30.8% during this time last year. Brokers brought in bigger loans though on average because they made up 28.4% of the dollar volume of loans originated this year. Last year at this time they made up 42.9% of the volume.
OnDeck has managed to grow despite their dwindling reliance on brokers and a marked increase in competition.
Have your direct mail and online advertising response rates changed recently? If OnDeck has taken notice, surely you must have too…
Update: You can read the full transcript of the call here, including the Q&A
deBanked’s Next Issue Shipping Soon
August 3, 2015Are you ready for another issue of deBanked Magazine?!
In this edition, we explore the Australian market, the commission chargeback debate here at home, the quest for national bank charters, a deeper look at the Midden v. Midland case and MORE!
Haven’t been receiving the print edition in the mail? You need to SUBSCRIBE for that. It’s free.
We distribute thousands of copies to ISOs, brokers, lenders, funders, and other players in the alternative business lending ecosystem. Want to be included in future issues? Drop me a line at sean@debanked.com
New Funding Brokers Struggle As Industry Grows
August 3, 2015
Here’s a few things that will have you scratching your head.
1. A new sales agent recently took to an industry forum to ask for help with ACH processing. According to him, he charged a closing fee on a loan that closed and then realized that he had no idea how to collect the fee. His problem was perplexing because he had the merchant sign an agreement that authorized him to debit the funds out despite not having an ACH processing account.
Some sympathetic veterans advised him to have the merchant write him a check, but others were too dumbfounded by his use of an ACH agreement when he did not know anything about ACH. The agreed fee was probably too large to write off as a mistake so hopefully the merchant will understand and write him a check for services rendered.
The lesson: If you don’t know how to do something, don’t guess. The agent would’ve been in a much better situation if he had asked how to collect fees prior to drawing up an agreement that referred to a methodology he had no familiarity with.
2. A semi-seasoned sales agent griped about a recent experience on an online message board about a business lender that stole his deals and turned out to be a repeat felon. The broker community was not sympathetic when they learned that the “lender” used a gmail address to communicate. What’s worse is that a perfunctory Google search revealed a record of violent crime.
The lesson: At the very least, do not send deals to anyone using a free email address. This was item #3 on my Advice to New Brokers list, published back in February. This also violated item #4 on my list, which says, don’t send your deal to some random company just because they went around posting on the web. A simple Google search for this broker would’ve showed that the “lender” was a serial criminal.
3. One broker e-mailed me to say that a lender had stolen his syndication money and disappeared. Another told me that they had stopped receiving their syndication deposits for their entire portfolio and wasn’t sure what was going on. This situation often doesn’t make the public forums because the aggrieved parties are sometimes too embarrassed to tell others that they got hustled. I recommended a lawyer to one of them.
The lesson: Refer to #4 on my Advice to New Brokers list. Even if others claim to be having a positive experience, there are a few red flags to look out for when it comes to syndication:
- Were they too eager to accept your money?
- Did they have an Anti-Money Laundering process in place?
- Would your funds be co-mingled with their operating funds or isolated in a separate account?
- How is their system structured? Will you get paid even if they declare bankruptcy?
- Was the owner of the company ever charged or convicted with fraud? This is probably the most important and for some reason the most overlooked. If the owner was previously charged with fraud and your money eventually gets stolen, you can only blame yourself. And if you don’t know if someone has a past criminal history, you should probably ask around in addition to conducting a formal background check.
Syndicating brings me to item #1 on my Advice list, hire a lawyer. If you can’t afford a lawyer, you definitely can’t afford to syndicate.
OnDeck to Announce to Q2 Earnings
August 3, 2015
OnDeck will announce their second quarter earnings today at 5:00 PM EST. Anyone can dial in by calling (877) 201-0168 and using conference ID 80861672.
The company’s executives may have to endure more questions than in previous calls because of the low stock price and the curious guidance reversal issued two weeks ago. After Q1, OnDeck projected Adjusted EBITDA for Q2 to be a loss of $3 million to $4 million. But on July 15th, they revised that to a GAAP net income of between $4 million and $5 million.
The sudden change was attributed to a one-time sale of loans in which the proceeds were booked as revenue.
Compass Point analysts Michael Tarkan and Andrew Eskelsen wrote in a note to clients, “if we exclude the one-time gains, core revenues came in well below our expectations, suggesting a meaningful deceleration in loan origination growth and/or another decline in yields.”
OnDeck closed Friday at $13.37, down 33% from its IPO price, though it’s higher than its all time low of $11.15.
The depressed value has invited a slew of ominous sounding press releases from law firms that questioned whether or not previous statements about the company’s prospects were false or misleading.
The distractions may have been compounded by the false rumor picked up by most of the web that claimed OnDeck was scheduled to release earnings last month on July 6th.
Notably, most analysts have issued Buy recommendations for the stock. Deutsche Bank analyst Ross Sandler set a price target of $18 and Stifel Nicolaus has it at $22. For now, Wall Street is still bullish about OnDeck.
Double Factoring Puts Business Owners in Jail
July 29, 2015
It’s a case of receivables being sold to two parties at the same time. According to the FBI, Brian Newton and Victoria Snow were convicted last week on 1 count of conspiracy, 13 counts of mail fraud, and 11 counts of wire fraud. They face a combined 40 years in prison.
The pair owned a company called Dataforce International in Clearwater, FL and began factoring their invoices in 2003 through a firm called Amerifactors. “As part of their scheme, Newton and Snow submitted a series of invoices for factoring to Amerifactors that were inflated and that did not reflect work that had been performed by Dataforce,” the report says. “In addition, the two engaged in ‘double factoring,’ which involved submitting the same Dataforce invoices for factoring to both Amerifactors and Prestige Funding.”
That aspect of the crime is significant because of how closely it relates to a questionable practice in the merchant cash advance industry known as stacking. Traditional merchant cash advances are purchases of future receivables and stacking is the instance of when a merchant allegedly sells those receivables to more than one party.
The practice is part of the reason the International Factoring Association actually voted to ban merchant cash advance companies from their trade association last year. “The merchant cash advance financing arrangement often leads to breaches of factoring agreements, because the factor client granted junior liens against the factor’s collateral or took on additional debt without the factor’s consent and knowledge,” wrote Steven N. Kurtz, Esq. last year in The Commercial Factor.”
Notably, Newton and Snow did more than just double factor invoices. Newton was secretly a partner in Prestige Funding, one of the factoring companies. Prestige Funding had raised more than $8 million from over 50 investors according to the FBI’s report and the scheme allowed Newton to divert more than $3 million into his personal bank account.
Sentencing has been set for October 9, 2015.
