Business Lending

Marketplace Lending and Investing Conference (Part 1)

November 5, 2015
Article by:

Source Media’s Marketplace Lending and Investing conference kicked off today with a bang. During the opening keynote, two VPs at Goldman Sachs predicted that the industry would shift to retaining loans on balance sheets instead of continuing with the gain-on-sale model. The irony is that OnDeck appears to be going in the opposite direction since their recent path to profitability is being made possible by their new reliance on gain-on-sales.

marketplace lending and investing source media new york

The available solutions presented to small business financing problems at the conference covered the entire gamut. Pango Financial president Candice Caruso for example, explained that small businesses can get funding by rolling over money from a qualified retirement plan. Pango’s model capitalizes on The Employee Retirement Income Security Act of 1974 (ERISA), a 40-year old law that can be streamlined with the help of technology. ERISA established the regulation that allows for a private company to use retirement funds as business capital through an Employee Stock Ownership Plan (ESOP).

marketplace lending and investing conferenceCompanies like Pango have found a clever way to scale the benefits out of old policies and it’s opportunities like these that have everybody excited. QED Partners founder Frank Rotman summed it up best when he recited his own Wall Street Journal quote, “It feels like the Internet in 2000. Everyone is chasing it, but they aren’t sure what ‘it’ is.”

Rotman also cautioned lenders who are trying to throw money at technology as a fix to scale their businesses. You can’t just throw money at technology, he argued. “Technology needs to be in your DNA.”

For marketplace lenders like QuarterSpot, they fit that bill well. Their CEO Adam Cohen was the Chief Software Developer for JetBlue Airways.

And among some of the other names in attendance, many are on the fast track for success. Expansion Capital Group for example just closed a $25 million credit facility with Northlight Financial and Bastion Management. And there’s also Pearl Capital who was recently acquired by Capital Z Partners. And Herio Capital, founded by one of OnDeck’s earliest employees, recently reached a new funding milestone.

At the end of the day, Anjan Mukherjee, the Counselor to the Secretary and Deputy Assistant Secretary for Financial Institutions of the U.S. Treasury Department told attendees not to bank on regulatory interest being forgotten about with a new presidential administration. Certain agendas can be “de-emphasized”, he said, but overall at least as far as the Treasury is concerned, enough important people will not transition away. They won’t forget everything, he explained.

Should Alternative Lenders Be Regulated? (Video)

November 4, 2015
Article by:

Funding Circle’s Sam Hodges went back on Bloomberg TV to answer questions about the rise of marketplace lending. On the subject of regulation, Hodges explains that their business model is already pretty heavily regulated.

Meanwhile, David Stockman, a former US Congressman and former director of the Office of Management and Budget, said the regulators should stay away from alternative lenders. Video below:

Treasury Official Discusses Responses to RFI, Offers Mixed Review of Alternative Small Business Lending

November 3, 2015
Article by:

Treasury DepartmentAntonio Weiss, Counselor to the Secretary of the US Treasury, recently spoke at the Information Management Network Conference on Marketplace Lenders. In his prepared remarks, Mr. Weiss discussed the comments Treasury had received in response to its Request for Information about marketplace lenders. Mr. Weiss highlighted a number of themes about alternative small business finance that he believed had emerged from the responses.

First, Mr. Weiss stated that alternative small business lenders have the potential to increase lending to a historically underserved market.

Structural challenges in the small business lending market often make it difficult for business owners to obtain affordable credit. While larger businesses typically rely on banks for 30 percent of their financing, small businesses receive fully 90 percent of financing from banks. However, small business lending has high fixed costs for banks– it costs about the same to underwrite a $5 million dollar loan as a $200,000 loan. And we know that many small business owners are unable to access the credit they need to grow their businesses. Marketplace lending has the potential to unlock access to the capital markets for these borrowers.

Second, he stated that many responses to the RFI had cautioned that the new underwriting models used by market entrants were still untested. Mr. Weiss stated that many commenters had “noted that new underwriting models have yet to be tested through a full credit cycle” and therefore it was too soon to tell if these alternatives were better than traditional models at predicting future performance.

Third, Mr. Weiss noted that many commenters had argued that protections provided to consumers should be extended to small business borrowers. “[M]any commenters highlighted the need to establish a level playing field. All borrowers—businesses as well as consumers—should have the same protections. Small businesses are run by people. Those people receive protection as individual consumers, but when they are called ‘small businesses’ they get no protection,” he stated.

Mr. Weiss also highlighted calls for increased disclosure requirements. “…[C]ommenters almost universally agreed on the need for, and benefits of, greater transparency. To my mind, this means clear, simple terms that borrowers and investors can understand. For small businesses, transparency requires standardized all-in pricing metrics, so that a business understands a loan’s true cost and can make like-to-like comparisons across different loan products,” he stated.

In closing, Mr. Weiss noted that while Treasury will continue to monitor developments in the marketplace it is not a regulator in the space. Instead, Mr. Weiss stated that Treasury would work to inform those state and federal agencies that do have regulatory authority about developments in the market so that they could take any necessary actions.

Jimmy Kimmel on Shark Tank (Video)

November 3, 2015
Article by:

Jimmy Kimmel and his sidekick Guillermo decided to walk a mile in the shoes of a small business and raise capital from the experts. As you can imagine, it was beautifully done.

Can’t see the video? Click here

OnDeck Q3 Earnings Report Shows Positive Signs (ONDK)

November 2, 2015
Article by:

bullishBack when OnDeck was telling analysts that they were focusing on growth, critics said they should be focusing on profitability. Now that they’ve had their second straight profitable quarter, critics are pointing out that loan origination growth has slowed. OnDeck can’t win with them, but this quarter’s results were the closest they’ve come to proving themselves.

They originated a little over $482 million worth of loans and reported a profit of $3.7 million. Selling loans through their marketplace to institutional investors is generating immediate income and creating the profits they lacked before.

The reliance on funding advisors (ISOs/brokers) shrank from 20.6% in Q2 to 18.6% in Q3. During the Q&A session, OnDeck CEO Noah Breslow hinted that they may have reached a floor in that ratio. That channel could stabilize and even grow a little bit, he said.

When one analyst asked whether or not loan aggregation platforms were counted under funding advisors or strategic partners, Breslow said they are counted as strategic partners. Only 4% of OnDeck’s loans come from these loan aggregation platforms, the company’s execs admitted, putting to bed any notion that loan aggregators had leverage over OnDeck’s business.

In Q2, analysts became alarmed over the competitiveness of the direct mail channel. This time around, Breslow said the environment hasn’t gotten more or less competitive, that it was about the same. Competition is stabilizing and the advantage goes to the scaled players, he argued after describing their ability to target, analyze, underwrite and fund faster than others. Breslow added that they are not banking on relief from the competition to carry out their long term objectives.

A sentiment discussed on the call but not exactly argued by anyone is that it’s become pretty late in the game for new lenders to start entering the field, the implication being that the long-term competition is already in business, instead of it being some new companies that have yet to form.

The regulatory environment was described by OnDeck as “stable.”

All in all, the results of Q3 were optimistic.

Listen to OnDeck’s Q3 Earnings Call

November 1, 2015
Article by:

earnings callAnyone can listen in to OnDeck’s Q3 Earnings call on Monday, November 2nd by dialing into (877) 201-0168 and using conference ID 55963420.

OnDeck closed sunday at $9.52 and has been relatively stable since August 6th, but has not been able to gain any ground back toward its IPO price of $20.

In their Q2 earnings call, the company admitted that they were up against competition in the direct mail channel. CEO Noah Breslow argued their strategy was to “break through the clutter” and “better communicate our value proposition.” He later added that “competition for customer response remains elevated.”

Back in August, Compass Point analyst Isaac Boltansky wrote to subscribers that the Madden v Midland ruling would hang over the heads of OnDeck and other marketplace lenders.

In an article by Deborah Festa, Robert C. Hora, Douglas Landy and Albert A. Pisa of Milbank, Tweed, Hadley & McCloy LLP, they wrote that one thing that could be done is to simply avoid Second Circuit jurisdiction. “Madden is directly binding if a defendant to a usury claim is sued in and subject to personal jurisdiction in the Second Circuit,” they wrote. “Excluding loans to borrowers located in the Second Circuit may reduce the risk of a usury lawsuit being filed in that circuit,” but added that it wasn’t a foolproof fix.

Meanwhile, Manatt, Phelps & Phillips, LLP attorney Brian Korn said at an invite-only event hosted by Herio Capital on October 8th, that the Madden v. Midland ruling was a non-event for business lenders.

And in Lending Club’s Q3 earnings report, they said, “In regards to our loan issuance framework, we continue to see no measurable impact from the Madden decision that was rendered in May this year by the second circuit Court of Appeals.”

OnDeck is therefore likely to be evaluated on their ability to scale originations as well as keep marketing costs and bad debt down. Analysts may also consider whether or not the lender can defend its relatively high costs and collection practices in an age where the mainstream media is scrutinizing alternative lenders with a closer eye.

The company responded to a front-page NY Times article that put them in an unflattering light earlier this month.

Money2020 Photos

November 1, 2015
Article by:

Below are some of the shots we got at the 2015 Money2020 Conference in Las Vegas!

Kabbage

Kabbage Money2020

National Funding

National Funding

CAN Capital

Can Capital

Ben Gold of Quick Bridge Funding reading a deBanked Magazine
Quick Bridge Funding

This speaks for itself…

Fraud Free Zone

So…Many…People…

Money2020 Crowd

Small Business Lending and Credit Panel

Small Business Lending

Meeting the guys at Slap

Meeting the guys at Slap

Money2020 Extravaganza

Money2020

Mastercard doesn’t mess around when it comes to booths

MasterCard Money2020

OnDeck

OnDeck Money2020

Did you go to money2020? Feel free to send us some of your photos 🙂

Blurring Small Business: A Troubling Narrative is Gaining Steam

October 30, 2015
Article by:

A version of this article is from deBanked’s September/October magazine issue.

Almost 18 months ago at LendIt’s 2014 conference, Brendan Carroll, a partner and co-founder of Victory Park Capital said that in regards to business lending, “the government doesn’t have the same scrutiny on this sector as it does in the consumer space.”

This double standard is the crux of American capitalism. In business you can win or lose, be smart or foolish, risk it all or play it safe. Government regulations don’t let the average consumer be subjected to the same stakes. They are viewed to be at a natural disadvantage against businesses and thus there are laws to protect them, and perhaps rightly so.

Since entrepreneurship is a choice, businesses and the people that own businesses are held to a higher standard of acceptable risk taking. In the free market, the pursuit of profit holds the system together.

This economic worldview is part of the reason why entrepreneurial TV shows such as Shark Tank are so popular. In the Tank, contestants can just as easily walk away with a terrible deal as they can a good one. And when bad deals get made, and they do, I’ve yet to see regulators descend on the set to fine or arrest Daymond John, Kevin O’Leary, or Barbara Corcoran.

Regulator Tank

But Shark Tank features entrepreneurs on a remote stage detached from their daily environment, giving it the look and feel of a game show. If you want to see cold hard dealmaking with mom-and-pop shops on an up close and personal level, just watch CNBC’s The Profit. On the show, small business expert Marcus Lemonis does not sugarcoat what he is. “I’m not a bank. I’m not a consultant. And I’m not the fairy godmother,” he bluntly told one small business owner. It doesn’t matter if it’s a family owned store or a full fledged corporation, Lemonis is looking to make a deal and make some money. When it comes to business, he is well… all business.

Just as the CFPB hasn’t shut down Shark Tank, (which one has to wonder if they’ll be subject to Reg B of Dodd Frank’s Section 1071) none of Lemonis’ deals have been scrutinized by a Federal Reserve study, nor has the Treasury Department issued an RFI to better understand why entrepreneurs go on the show in the first place.

It’s no wonder then at LendIt 2014, Carroll also said that there wasn’t the same sort of moral hurdle when it came to institutional capital investing in business lenders as opposed to consumer lenders.

Moral was a telling word choice because the morality of certain commercial transactions have recently come under fire by groups claiming to represent small businesses. The premise of their argument is that commercial entities are no more sophisticated than consumers, that a corporation and the average joe are equal in their ability to take risks and make decisions for themselves.

Their evidence is that sometimes in business-to-business transactions, particularly in lending, one side accepts terms that would be considered far outside the norm for consumers, terms that violate a moral threshold. One has to wonder where a loan with an infinity percent interest rate ranks on this morality scale, a deal that’s actually been made and accepted several times on a TV show. Referred to as a “Kevin deal” since they are Kevin O’Leary’s favorite, the borrower is obligated to pay a perpetual royalty on top of repaying the loan itself. In simple terms, it’s a loan that can never be paid off.

cupcakesIn the case of Wicked Good Cupcakes, a business that appeared on Shark Tank in 2012, a mother-daughter team struck a deal that would cost them 45 cents per cupcake in perpetuity to Kevin O’Leary. Many fans criticized them for it and yet the two have said that they have no regrets.

The fact that Wicked Good Cupcakes decided what made sense for them and was happy about it, damages the storyline that businesses need to be saved from their own decisions. But there’s another problem, government entities themselves may be inadvertently effectuating this false narrative by inferring incorrect conclusions from their own research.

Nowhere is this more evident than in a report recently published by the Federal Reserve Bank of Cleveland that analyzed small businesses and their understanding of “alternative lending.” The report shared the results of two focus groups that had been shown terms for three hypothetical products that supposedly represented actual products in the real world.

Unsurprisingly, the report concedes “when comparing the products, participants initially reported the three were easy to compare and that they had all the information to make a borrowing decision.” But the researchers pressed on until they got an answer that fit their expectations, that small businesses are confused when it comes to money and finance.

In a hypothetical scenario where a commercial entity sold $52,000 of future receivables for $40,000 today, it stated that the “lender” would withhold 10% of each debit/credit card transaction until satisfied. Participants were then asked to guess the interest rate on this loan if they paid it back in one year. That caused a lot of folks to scratch their heads and that’s because it was a trick question.

The question itself introduced conflicting facts and lacked crucial variables to make an intelligent guess. Nevermind that respondents prior to that question said that there was “nothing confusing” about the products presented as is. The original feedback should’ve been enough. Below are some of the responses offered before they were deliberately tricked.

  • “Nothing Confusing.”
  • “No, it’s pretty straight-forward.”
  • “I can’t think of anything more I would need to see, really.”
  • “This is enough info for me to make a decision.”

The researchers concluded however that the answers to their trick question suggested there were “significant gaps in their understanding of the repayment repercussions of some online credit products and the true costs of borrowing.”

And while it might be true that they semi-admit to what they did when they wrote, “using only this information, calculating a true effective interest rate would not have been possible without making some assumptions,” the headline that spread thereafter was that small business owners are confused by alternative lenders.

But even if that was the case, at what point does confusion become unfair in a purely commercial transaction? And what would be an appropriate remedy?

We’ve been down this road before where federal regulators have set mandatory disclosures in order to bring transparency to a lending environment believed to be obscure. And just recently on September 17th, 2015, the House Committee on Small Business Subcommittee on Economic Growth, Tax and Capital Access pressed community bankers on the impact of such measures dictated by Dodd-Frank.

Congressman Trent Kelly asked if all the added new pages to loan agreements make it easier for their borrowers to understand. “Do they understand what they’re signing?” he asked.

B. Doyle Mitchell Jr., the CEO of Industrial Bank that was speaking on behalf of the Independent Community Bankers of America responded that they do not. “It is not any more clear,” he answered. “In fact it is even more cumbersome for them now.”

If anything, the Federal Reserve study offered compelling evidence that small businesses are happy with the way alternative lenders are currently disclosing their terms. It is only when government researchers tricked them that they became confused. That should say it all.

One consequence of entrepreneurship is that businesses are not created equal in their ability to assess financial transactions and no amount of disclosures or intervention can save them. There must be losers in order for there to be winners.

Case in point, there are lenders out there doing deals so lopsided that they actually turn to each other and say, “I can’t believe she took that.” Such is the case of RuffleButts, a children’s fashion line that appeared on Shark Tank in 2013.

“When they wake up, they’ll realize they messed up,” said Mark Cuban in reference to the deal Lori Greiner proposed and closed. An article on BusinessInsider.com covered the episode and unabashedly concluded, “Shark Tank isn’t a charity. The investors are putting in their own money, so they have every incentive to push to get the best deal possible for themselves.”

Shark Tank has risen in popularity because it is a reflection of a culture that believes dealmaking, both good and bad, is inherent to the endeavor of entrepreneurship. When a bad deal is made, regulators don’t come on the show to urge a do-over.

wrong conclusionBut what’s dealmaking got to do with the local pizza joint seeking $20,000 that doesn’t have the time to mess around on TV shows? Unlike lenders who refer to their transactions as loans or units, merchant cash advance companies and the agents who negotiate the transactions appropriately refer to their agreements as deals. How else would one label an agreement in which a commercial entity sells future receivables for a mutually agreed upon price?

And if the Federal Reserve study indicated anything, it’s that business owners feel there’s nothing confusing about these deals.

So it would seem that everything as Americans know it, watch it and understand it, is business as usual.

Even Brendan Ross, the president of Direct Lending Investments, was quoted by the BanklessTimes as saying, “I want to emphasize there’s absolutely nothing novel about lending money to businesses. This isn’t some phenomenon we are rediscovering. There isn’t going to be increased regulation because this isn’t new.”

Perhaps the only thing that could be considered new is that loan sizes have gotten smaller and the types of products small businesses can access has diversified. Along the way, some of these new startups have decided to offer products in line with a self-professed moral code, which is to deliberately lend money at a loss and lash out at lenders who seek profit.

There’s a term for lending startups that don’t make money. They’re called “failed startups.” By casting small businesses as being no different from unsophisticated consumers, it’s quite possible that shows like Shark Tank and The Profit would become illegal in the process. Disclosures meant to help make things more transparent could actually make things less clear and more cumbersome, just as they have in the past.

I don’t think anybody is in favor of small business failure or an environment where confusion prevails, including the guys making infinity percent interest loans like Kevin O’Leary. But if the goal is to increase transparency, it should be in a way that businesses on both sides are content with.

The Federal Reserve study showed the system is working well as is and that prescribing mandatory changes to fit some universal standard would only serve to usher in an era of confusion that everyone is trying to avoid. Lenders can always do better to serve their clients, but the free market must prevail. As Mitchell, Industrial Bank’s CEO said when he testified in front of the Small Business Committee, “the problem with Dodd-Frank is you cannot outlaw and you cannot regulate a corporation’s motivation to drive profit at all costs so while it has a lot of great intentions in over a thousand pages, it has not helped us serve our customers any better.”

A version of this article is from deBanked’s September/October magazine issue. To receive copies in print, SUBSCRIBE FREE