Business Lending
What Happened to OnDeck? (ONDK)
June 29, 2015The lockup expiration came and went but the fall of OnDeck’s stock price started much before that. There were no insider stock sales reported to the SEC since shares became unrestricted anyway.
There’s very little trading volume on an average day and investors on the big message boards either ignore this stock or don’t understand it.
The trend started on May 4th when they released Q1 earnings. The direction wasn’t very much different than Q4. Loan volume went up, interest rates came down, and no profits were to be had, nor were any expected for the rest of the year.
The market interpreted decreasing interest rates as pressure from competitive forces however and down went the stock price.
OnDeck’s execs insisted that they had lowered rates as part of a deliberate strategy to create stickier customers and attract new borrowers. CEO Noah Breslow himself said during the previous 2014 Q4 earnings call that “there’s so much search cost associated with going out and looking at other places and so much uncertainty around that, they [small businesses] typically just take that offer that OnDeck has provided to them.”
His theory is supported by the results of Lending Tree’s recent survey that revealed nearly 60% of small businesses did not comparison shop business loans online during their loan application process.
It’s possible though that the drop had little to do with OnDeck’s actual performance. That same day, Goldman Sachs hinted that they would be joining the tech-based lending field when they announced the hire of Harit Talwar from Discover Financial Services.
But before they had a chance to recover, Barrons published a story that was highly critical of OnDeck just a month later on June 5th. “It’s a subprime lender in dot-com clothing,” the author wrote. It was a tough characterization for them to refute, what with their 50% interest rates and double digit percentage charge-offs and all.
And then the lockup expiration on June 15th coincided with the big reveal of Goldman’s intentions to compete in the marketplace. News sources that picked up the story predicted that the move would impact online lenders like Lending Club and OnDeck. OnDeck’s stock hit a record low that day.
OnDeck has been stuck in the 12s ever since. Can they dig themselves out?
If competition is a factor in the market’s perception, and it probably should be, then investors should keep an eye on the industry’s other top players. OnDeck is not alone in this space and Goldman Sachs will be in for a bigger fight than they probably expect.
Source: deBanked’s May/June Magazine issue
The CFPB is Pretty Busy With Actual Consumers
June 28, 2015
It’s often theorized by industry insiders that the Consumer Financial Protection Bureau (CFPB) will play a role in business to business transactions. But when you actually talk to those employed by the government agency, it seems very unlikely. The CFPB is already very busy playing the role of Better Business Bureau, albeit a nationalized version.
There is currently no categorical option to report business loan or merchant cash advances on their website and the complaints lodged by consumers pertain to very basic consumer problems, such as issues with their credit cards or student loans.
Here’s an example of a CFPB complaint:
2009 XXXX XXXX, XXXX XXXX Thursday of every month I got pulled from class to get a new loan for my living and tuition expenses. I was at XXXX for one year and if I didn’t go to sign the papers for my new loan every month I wouldn’t be able to continue my classes to XXXX. I missed out on important class information and had to make them up on my own time. Homework and other hands on tasks became more difficult to accomplish if I didn’t make up the lost time going to sign loan papers. I was told a rough amount that my school loan would be. About {$15000.00}. I started paying {$120.00} a month for my loan agreement then Genesis Lending increased it to {$190.00}. I called to ask why the increase in payment amount each month. I was told they saw i had a higher income so they adjusted the payment accordingly. Is that legal? I’ve been paying this amount for 6 years and still owe {$13000.00}. I called Genesis Lending and come to find out they have been rolling over all the interest I pay on the loan every year. So all I’m paying is interest basically for the last 6 years. I don’t think I ‘m being treated fairly or legally.
Many complaints are just like this, where consumers are not actually reporting illegal activity but instead using the CFPB to vent their frustration. In this situation, the victim was busy with homework and wasn’t sure how their student loan worked so they filed a complaint with the federal government…
The end result was that the lender responded by saying it wasn’t really their problem, the borrower didn’t dispute this response and the CFPB marked the case as closed. Seems like a great use of everybody’s time.
In the handful of presentations I’ve attended by the CFPB, they said they often find themselves redirecting complaints to the business that the consumer is complaining about much like the BBB would do.
The Challenges in Offering Financing to Latino Businesses
June 20, 2015
The number of minority-owned businesses jumped nearly 46% from 2002 to 2007, according to the Minority Business Development Agency. The growth rate is three times as much as for U.S. businesses as a whole. These businesses increased 55% in revenues over that five-year period. There are a number of minority groups within this category. Latino businesses are leading the way. Latinos are the fastest growing ethnic group in the United States today. Like it or not these numbers are likely to increase due to economic blocs. The U.S. has created a number of free trade agreements with Mexico, Central America and South America. Latinos are our next door neighbors.
The SBA is the largest guarantor in the U.S. and does not offer any specific minority business loan program to Latinos. The U.S. Hispanic Chamber of Commerce offers advice to Latino business owners, but does not offer any loans. Traditional banks continue to maintain stringent guidelines for all businesses. Alternative finance companies and online lenders have a long way to go to tap into this
niche market.
Alternative lenders, online lenders and peer-to-peer lenders can cater to this niche market, but it requires a lot of resources and knowledge. We can categorize Latino businesses into one broad category. However, as a Hispanic entrepreneur, my experience has been that the Latino business community is complex in nature.
Latino Businesses by Age Groups
There are two types of Latino entrepreneurs. The older generation tends to be within the age range of 45 to 70 years old. These business owners are not accustomed to doing business over the Internet, email, fax, or phone. Online lenders may have difficulties in retrieving information from these clients. This group has a high level of distrust in doing business via the Internet. The majority of our clients within this age group are accustomed to doing business face to face. This sales and marketing strategy can be very expensive for lenders, unless you have a team of field agents. The younger generation of this group is made up of Latino entrepreneurs in the age range of 25 to 45. This group is more accustomed to using online banking and online systems. Forbes recently reported that, “With a median age of 28 years old, the timing is ripe for organizations/brands to make a firm commitment to the Hispanic consumer.”
Family Decisions and Delayed Gratification
Despite the age category, many Latino businesses are family-based. Based on my experience, the decision making process is made among family members. You could offer a $50,000 loan at a cost of factor of 1.30 to the husband and he may need to consult with his wife and his children before he signs his John Hancock. This makes the decision-making
process challenging.
Manuel Cosme Jr., the chair of the National Federation of Independent Businesses (NFIB) Leadership Council in California and co-founder of Professional Small Business Services in Vacaville, California has said, “Family plays a big role in Hispanic culture, so naturally it plays a big role in Hispanic-run businesses.”
Trust Factors
Even if you have a Latino staff or bilingual staff, Latino business owners need to trust you in order to gain their business. You will need to build good rapport with these businesses to get them to fill out a loan application and send it via fax, email or online. Latinos are accustomed to traditional banking methods and brick and mortar businesses.
“When we looked at online US Hispanics in 2006, there were four main roadblocks to US Hispanic e-Commerce adoption: 48% of online Hispanics did not want to give out personal financial information; 46% wanted to be able to see things before buying; 26% had heard about bad experiences purchasing online; and 23% did not have access to a credit or debit card,” says Roxana Strohmenger, Director in charge of Data Insights Innovation at Forrester. These are some of the challenges that we face by conducting our business in a digital manner.
According to mediapost.com, only 32% of online Hispanics use the Internet for their banking needs. In order for online lenders to succeed with this marketplace, U.S. banks need to do more to market to Hispanics online. Alternative lenders need to understand that there are barriers to entry in this marketplace.
Social Media
The Pew Research Center conducted a study that clearly indicates the usage of social media by Hispanics. Accordingly, 80 percent of Hispanic adults in the U.S. use social media and the same study revealed that Latino Internet users admitted to using Facebook as the leading social platform. A lot of business owners love to show the storefront, their family working in their businesses, and other images. You should consider Facebook as part of your overall marketing strategy to tap into this marketplace.
Going overseas
Another option to consider is going overseas. CAN Capital set up an operation in Costa Rica mostly for their business processing services. In fact, we at Lendinero decided to do something different that no one else is doing. We set up the majority of our operations in Central America, consisting of outbound agents, digital marketers, programmers and loan analysts. There are great benefits to having a full bilingual staff overseas and the cost of personnel is less expensive. At the same time, there are huge challenges. Since I am of Hispanic descent, it was easier to set up our operation in a Latin American country. However, there are cultural differences and you have to take into account the economic and political conditions of each country. Setting up a corporation can take 1 to 3 months and it is more expensive than the U.S.
The labor pool is huge, but finding the right people can be a challenge. In addition, training agents, processors, and support staff can be time consuming and you may run for a few months before you begin to see a profit. If your staff did not live in the U.S., you need to train them on U.S. culture, the economy, and other topics.
Furthermore, Internet speed and Internet services can be a challenge. Be prepared to pay a high cost for Internet. And labor laws are not like the U.S. If you fire an employee, you will be forced to pay unpaid vacation and a severance. In addition, you have to take other costs into consideration such as travel costs, lodging, auto leasing, and more.
Lastly, if you don’t know people in the country you plan on setting up in, an outsourced business processing service will charge you more money for rent and other services knowing that you are coming from the U.S. It is highly recommended you pair up with a native or someone who has done business in the countries you consider.
In summary, the Latino business community continues to lack financing. This niche market needs to be educated on the revolutionary paradigm shifts in business lending and online lending. If you can obtain these clients, they are clients for life. Once you obtain them as a client, they are loyal. They will not leave you.
OnDeck Stock Pummeled in Run Up to Lockup Expiration
June 10, 2015
OnDeck (ONDK) hit a new low on Tuesday, bottoming out at $13.94 in intraday trading. It closed at $14.03. Absent any recent company news, the trend downward was likely a side effect of downward pressure on Lending Club (LC) as their lockup period expired. Lending Club closed at $16.97 near its all time low.
The OnDeck drop may have also been caused by the recent story that appeared in Barrons that labeled the company and the industry they operate in, risky, saturated, and overpriced.
On Deck is a different business. Its profits come from using its own balance sheet to make risky, high-interest rate loans to small businesses. With rivals as large as Goldman Sachs gathering around these companies’ shallow high-tech moats, the competition for quality borrowers will make it tougher for On Deck to keep growing loan originations near a triple-digit pace without loosening underwriting standards. Even in today’s benign conditions, On Deck charges off more than 12% of its loans annually, while its yields on those risky loans have declined for nine straight quarters. It’s a subprime lender in dot-com clothing.
Barrons laid out the case that OnDeck is a lender. OnDeck has always taken the position that they are a tech company. The conflicting market perceptions have made their stock price very chaotic.
OnDeck’s lockup period expires on June 15th.
Small Business Lending is King to Institutional Investors
June 2, 2015
Richards Kibbe & Orbe LLP and Wharton FinTech polled more than 300 institutional investors to gauge their thoughts on marketplace lending. They published their findings in a recently released report.
The surveyors seemed surprised that institutional investors indicated their interest in small business loans was greater than that of consumer, real estate, education, and everything else.
Securitizations ranked lowest on the list of investments worth pursuing and buying whole loans was second only to “multiple strategies.”
Regulatory risk and uncertainty was low on the list of concerns while borrower quality was the most concerning factor. Curiously, competition was the least concerning of all.
Speaking to the liquidity issues of the assets, institutional investors indicated that the development of a mature secondary trading market was more likely than anything else to lessen their concerns about marketplace lending.
Do any of these results surprise you?
Download the Key Findings report
Broker Business Planning – Selecting the Right Lenders
May 10, 2015Continuing The “Year of the Broker” Discussion
2015 is certainly the “Year of the Broker,” as the low barrier to entry into our space, in conjunction with various recruiting advertisements promising lucrative pastures, is attracting a variety of individuals with various levels of professional backgrounds. Some entrants have prior experience as a mortgage broker, insurance agent or banking specialist, while others are less familiar with professional sales and are under the belief that our space welcomes a lucrative introduction. Nevertheless, I believe that new broker entrants must be reminded that this is an entrepreneurial pursuit, rather than a get rich quick procedure, and efficient business planning will play a major part in the success or failure of your venture. A part of this efficient business planning, other than the basics of good resources for accounting, legal, marketing, market research, and financing, is the strategic selection of your lender partnerships. The right partnerships will grow, develop and sustain your business, but the wrong partnerships could add your entrepreneurial pursuit to the list of business startup failures.
The selection of your lender partnerships will depend on your unique value proposition (UVP). No entrepreneur should begin a pursuit without a well-defined UVP, for your UVP is the foundation of all of your business planning and return on investment forecasts. Your UVP should answer this question:
Understanding my market segment, what is it specifically that I will bring to the segment that isn’t already being provided by the current crop of solution providers?
The question includes three main components that must be addressed:
- The identification of a market segment
- The characteristics of all services within your industry, being sold to that market
- The services that you will uniquely provide to said market and their unique characteristics
Once your UVP is set, now it’s time to look into the selection of your Lender Partnerships.
To begin, let’s say that you decide to come into the industry and target start-up retail/restaurant businesses, that is, those with less than 1 year in operation. Because you are selling working capital solutions, you would research all available working capital options to this market segment which include sources such as nonprofit loans, business credit cards, personal savings, loans from retirement accounts, friends and family, equipment leasing, and merchant cash advances. To serve this market segment efficiently, you would choose to offer merchant cash advances and equipment leasing.
Next, you would scroll through all of the direct lending sources in the country that provide the working capital solution you have decided to lead with, but who also specialize or at least “serve” the target market you are seeking. Many equipment leasing companies do not fund businesses with less than 2 years in business, and many cash advance companies do not fund companies with less than 1 year in business. Your goal would be to find these lenders and create that network, negotiate pricing, workout your commission schedules, and verify all aspects of said partnership to make sure that it’s beneficial for your clients and your office. It should be a win-win-win partnership, a win for your clients as they find a source for working capital that they didn’t know existed, a win for your partner as they obtain “feet on the street (or telephone)” reps without having to pay their overhead, and a win for your office as you are allowed to serve your market and be paid well in doing so.
Due Diligence Is Key
When finalizing your lender selections, make sure all forms of due diligence are completed on the lender(s) to verify their credibility and competency. These forms of research include all of the following:
(( Structure and Legality ))
- The lender should be a licensed direct lender (in states where necessary).
- The lender shouldn’t be a start-up, but instead a proven entity with at least 2 years of operation.
- The lender should have at least directly funded volume in the eight digits (over $10,000,000).
- The lender should have a full staff of employees rather than just one person.
- The lender’s customer service and support departments should be easy to reach.
- The lender should have some sort of press or news media releases on its establishment.
- The lender should specify if they are going to do advances or loans or both.
- The lender’s funding agreements should specify if the transaction will be an advance or loan.
(( Online Presence ))
- The lender should have a fully functional business website, registered for at least two years.
- The lender should have a business email from their business website domain.
- The lender should be BBB Accredited (www.BBB.org) with at least an A rating.
- The lender should be a part of business associations with logo(s) displayed on their website.
- The lender should be included on basic online business directory listings.
(( Broker Respect ))
- The lender should provide a comprehensive Broker Agreement full of legal provisions.
- The lender’s Broker Agreement should spell out all provisions of the relationship.
- The lender’s Broker Agreement should spell out any quotas.
- The lender’s Broker Agreement should spell out new/renewal deal commission structure.
This is a rough introduction and surely there are other criterion that are important in selecting your lender partnerships. However, these recommendations will surely give you a head start as you head into one of the most competitive industries in financial services.
Merchant Cash Advance Stacking – Sidebar
April 17, 2015
A claim brought by a first-position MCA company or lender may not be the only legal concern for a company that engages in stacking. Regulators could become involved if they believe aggressive stacking unfairly harm merchants. The Federal Trade Commission (“FTC”) and most state attorneys general can enforce unfair and deceptive trade practice acts even in B2B transactions.
A merchant may be harmed because the stacker imposes so large an aggregate obligation on the merchant that the merchant’s business fails. Or, a merchant may be harmed if a first-position MCA company or lender declares a default under the first-position contract when the merchant accepts the stacker’s offer. Arguably, the merchant could have protected herself from such a default by refusing the offer that caused the harm. However, a regulatory agency may be sympathetic to the plight of an unsophisticated merchant that failed to understand that the stacker’s offer could harm her relationships with the prior MCA company or lender.
Read full article by Robert Cook, Cathy Brennan, and Kate Fisher of Hudson Cook, LLP
Stacking: Is it Tortious Interference?
Stacking: Is it Tortious Interference?
April 16, 2015
STACKING – the practice of entering into a cash advance transaction or loan knowing that the merchant already has one or more open cash advances or loans with a competitor – is causing a rift among merchant cash advance companies and small business lenders.
On one side are companies that only originate first-position deals. These companies generally include a clause in their contracts prohibiting the merchant from obtaining another merchant cash advance or loan until the company receives all of the future receivables it has purchased or is fully repaid. First-position companies view stacking as a threat to recovery of money advanced or loaned to merchants. On the other side are companies that routinely offer second or third-position deals. These companies argue that merchants with adequate cash flow to support additional advances should be free to obtain them.
In the last several months, at least two first-position companies have sued their stacking competitors, claiming that stacking constitutes tortious interference with contractual relations. These cases may ultimately result in a decision as to whether a stacker is liable for damages to a prior-position company when a merchant defaults. Although it varies by state, a claim of tortious interference with contractual relations claim generally includes all of the following elements:
1. The existence of its valid contract with
a third party;
2. The defendant’s knowledge of that contract;
3. The defendant’s intentional and improper procuring of a breach; and
4. Damages.
See White Plains Coat & Apron Co. v. Cintas Corp., 8 N.Y.3d 422, 425 (2007).
So when is advancing money to a willing merchant “improper” under the law?
No reported court decisions have tackled stacking, let alone discuss whether interfering with a prior merchant cash advance or loan contract is improper. In fact, few cases discuss this issue at all. According to Section 767 of the Restatement Second of Torts, the tort of tortious interference does not have hard-set rules. The issue in each case is whether the interference is improper under the circumstances and whether, upon a consideration of the relative significance of the factors involved, the court should permit the conduct without liability, despite its effect of harm to another. In other words, it is a fact-intensive analysis.
The New York Court of Appeals put it this way: “At bottom, as a matter of policy, courts are called upon to strike a balance between two valued interests: protection of enforceable contracts, which lends stability and predictability to parties’ dealings, and promotion of free and robust competition in the marketplace.” White Plains Coat & Apron Co. v. Cintas Corp., 8 N.Y.3d 422, 425, 867 N.E.2d 381, 383 (2007).
Because there are no reported court cases addressing stacking, we can only look to cases between other types of businesses to see what courts have said about “improper” interference. Maryland’s highest appellate court has held that inducing a breach of contract, even for competitive purposes, is improper. Macklin v. Robert Logan Associates, 334 Md. 287, 303 (1994). In contrast, New York courts have concluded that improper interference is conduct that goes beyond a minimum level of ethical behavior in the marketplace.
In the White Plains Coat & Apron case, a New York-based linen rental business sued a competitor in federal court for tortious interference with existing customer contracts. White Plains claimed that it had five-year exclusive service contracts with customers and that, knowing of these arrangements, Cintas induced dozens of White Plains’ customers to breach their contracts and enter into rental agreements with Cintas. White Plains alleged that Cintas trained its sales reps to convince its customers to abandon their contracts with White Plains even after the customers told Cintas that they had contracts with White Plains.
White Plains sent Cintas a letter demanding that Cintas stop soliciting and servicing White Plains’ contract customers, enclosing a list of customers allegedly solicited improperly. When Cintas refused to stop pursuing its customers, White Plains sued.
The court granted summary judgment for Cintas and dismissed the complaint. The court held that because Cintas and White Plains were business competitors, Cintas’ legitimate interest to make a profit was a defense to White Plains’ lawsuit. According to the trial court “the only answer … is to go out and do it also to the other guy.”
White Plains appealed to the Second Circuit Court of Appeals. Because there was an important open state law question regarding whether economic self-interest was a defense to a tortious interference claim, the Second Circuit certified the following question to the New York Court of Appeals, New York’s highest appellate court: “Does a generalized economic interest in soliciting business for profit constitute a defense to a claim of tortious interference with an existing contract for an alleged tortfeasor with no previous economic relationship with the breaching party?”
The New York Court of Appeals said no, holding that economic self-interest is not a defense. However, the court explained that business competition in and of itself is not a tort, stating that:
“[W]e note that protecting existing contractual relationships does not negate a competitor’s right to solicit business, where liability is limited to improper inducement of a third party to breach its contract. Sending regular advertising and soliciting business in the normal course does not constitute inducement of breach of contract. A competitor’s ultimate liability will depend on a showing that the inducement exceeded ‘a minimum level of ethical behavior in the marketplace.’”
In a Florida case, Azar v. Lehigh Corporation, 364 So.2d 860 (Fla. Dist. Ct. App. 1978), a Florida appellate court upheld a restraining order against a former salesman of a developer after he allegedly tortiously interfered with the developer’s contracts. Lehigh Corporation developed and sold real property in a large development project in Lee County, Florida. Part of Lehigh’s promotional campaign brought prospective purchasers to see the development and stay at the only local motel at Lehigh’s expense. Lehigh’s former salesman, Leroy Azar, would follow prospective customers to the motel and persuade them to rescind their contracts for the purchase of property and to purchase property from him at a lower price. Azar spotted customers by following people down the street and observing whether they were carrying big envelopes full of Lehigh sales literature. He then would then seek out the customers in their motel rooms and offer to handle the rescission of his contract if the customer would move out of the motel and buy a lot from him. Azar also equipped his car with a large sign advertising the sale of his lots and followed Lehigh’s tour bus full of prospective customers.
The trial court granted the restraining order against Azar. Azar appealed, arguing that customers had a legal right under federal law to rescind their contracts within three days and that he was merely providing them with an opportunity to be relieved of their contract and to obtain comparable property for lower prices.
In upholding the trial court’s restraining order against Azar, the appellate court explained that there is a narrow line between what constitutes vigorous competition in a free enterprise society and malicious interference with a favorable business relationship. The court also quoted the following passage from a well-known treatise:
Though trade warfare may be waged to the bitter end, there are certain rules of combat which must be observed. . . . W. Prosser, Law of Torts (4th ed. 1971) at 956.
The appellate court explained that the issue is whether the subject conduct is considered to be “unfair” according to contemporary business standards.
How courts will treat stacking among competing merchant cash advance companies and lenders remains to be seen. The analysis of what is “improper” interference versus vigorous, but acceptable, competition will be based on the specific facts of each case. In the meantime, merchant cash advance companies and lenders that engage in stacking should consider applicable state law, including case law, and whether their conduct could be considered improper under the circumstances.
Robert Cook, Cathy Brennan and Kate Fisher are partners in the Maryland office of Hudson Cook, LLP. Robert can be reached at 410-865-5401 or by email at rcook@hudco.com. Cathy can be reached at 410-865-5405 or by email at cbrennan@hudco.com. Kate can be reached at 410-782-2356 or by email at kfisher@hudco.com.
