OnDeck more than doubled its Q2 loan volume, according to statements made on Enova’s latest quarterly earnings call. OnDeck originated $148M in Q3 versus the $66M in originated in Q2.
For frame of reference, this is still down significantly from the $618M that the company originated in Q4 2019, well before covid became a factor.
But expect the numbers to ramp up.
“We have basically all of our marketing channels turned on across consumer and small business [lending],” said David Fisher, Enova’s CEO.
“OnDeck is probably a little bit ahead of where we are on the Enova side. We were a little bit more cautious in our re-acceleration of our lending kind of going into the 3rd quarter but we are totally comfortable with that decision. If the biggest mistake we make during all of covid is waiting an extra 60 days to re-accelerate lending, we think that’s a great position to be in. We think that extra conservatism makes sense and with the rate that we’re re-accelerating lending, it won’t hurt that much in the long run.”
And apparently demand and credit quality are looking quite normal, despite covid, according to Fisher.
“On the small business side, the makeup of the demand is surprisingly similar to a year ago. You would expect so many differences given what the economy has been through but there’s actually very very few. It’s pretty broad based. Credit quality look really really strong. If anything it’s stronger- I think it’s the stronger businesses that are trying to borrow at this point that are trying to lean into covid, not the ones that are just trying to survive so if anything on the demand there is a slight improvement on credit quality in small business.”
OnDeck’s annualized quarterly net charge-off rate for the third quarter was 23% and its 15 day+ delinquency rate decreased from 40% at June 30th to 27% at September 30th.
Enova reported monster quarterly earnings of $94M. CEO David Fisher and CFO Steve Cunningham said it was a record-breaking quarter for profitability.
Enova, the international lending conglomerate that recently acquired OnDeck, reported a Q3 profit of $93.67M, bringing the company to over $147M in profit for the year so far.
“We are pleased to report strong earnings as the credit quality of the portfolio continued to improve during the third quarter,” said David Fisher, Enova’s CEO in an official announcement. “Encouraged by the better than expected portfolio performance and the stable and predictable credit risk seen in our testing, we thoughtfully began reaccelerating lending in the third quarter.”
Speaking about OnDeck, Fisher said that “OnDeck experienced growth in originations, improving credit quality and solid profitability. Our integration plans and recognition of the expected synergies and financial benefits of the transaction remain on track. With the combination of Enova’s and OnDeck’s complementary, market-leading businesses and our extensive experience navigating changes in the operating environment, we believe we are well positioned to grow profitably and drive long-term shareholder value.”
Toronto-based Lendified has returned from the brink. The Canadian alternative small business lender has a new CEO and has resumed the origination of new loans.
In June, deBanked published a story that described the company’s impending doom after it was placed in default with its credit facilities, could no longer originate new loans, and had virtually no capital to continue its operations.
The company was since able to partially recapitalize and John Gillberry has come on as the new CEO. Gillberry is described as a “seasoned senior executive with nearly three decades of experience in areas of managing the finance and operations of special situations and venture capital backed enterprises.”
In an announcement, Gillberry expressed optimism for Lendified’s future. “I am excited about the opportunity that Lendified presents and it is uniquely positioned to take advantage of a very large and underserved market,” he said. “The credit underwriting foundation that we are starting from is distinct from any other in this market and we are pleased to be once again originating new loans to independent business owners.”
The company’s primary senior lenders have resumed financing new loans.
This week, Greenbox Capital, the Miami-based alternative finance company known for its MCA and SMB financing, announced they are serving as a Small Entity Representative (SER) to the Consumer Financial Protection Bureau (CFPB) as the organization proceeds with the rollout of Section 1071 of the Dodd-Frank Act.
“I am representing, and Greenbox Capital is essentially representing, the industry,” CEO Jordan Fein said. “There are some banks, there’s Funding Circle, but other than that, it’s Greenbox Capital serving in the industry.”
Fein, who founded Greenbox in 2012 and has since facilitated MCAs and business loans across America, Puerto Rico, and Canada, wrote in a press release that it was an honor to be selected to provide feedback on Section 1071.
“Over 2 million businesses across the U.S. are either women or minority-owned,” Fein wrote. “It is vital they can secure funding as easily as non-minority-owned businesses.”
Congress passed the Dodd-Frank Act in 2010 in response to the Great Recession. To further protect consumers, the CFPB was born. Section 1071, an amendment to the 1974 Equal Credit Opportunity Act, mandates financial institutions report demographic information to the CFPB. But much was left undefined about how to go about doing that and who would technically be subject to it.
Ultimately, the intent behind the law was to measure potential disparities among factors like the race and gender of applicants. Ten years later, the rollout is finally moving along.
As part of this, the CFPB created a board of firms representing the affected industry, on which Greenbox sits, to ensure the law works with the industry, not against it. The first panel was on October 15, in compliance with the 1996 Small Business Regulatory Enforcement Fairness Act (SBREFA.)
“They’re going through the SBREFA process, which is a structured process where they have a panel of industry representatives, and they share what they’re planning to do,” Fein said. “They run it by companies like us and we give our opinion and talk about how we think companies will be impacted.”
According to an invitation letter the firms received, they will have until November 9 to respond.
Fein said Greenbox would ensure any suggestions it made would positively impact the industry. Especially during a pandemic, Fein said it is essential to create regulation with firms in mind.
In response to regulatory bills in California and New York that will enforce APR disclosures on small business capital providers, the Small Business Finance Association (SBFA) funded a study by Kingsley-Kleimann to find out if APR is a good metric to use for business loans.
Steve Denis, the Executive director of the SBFA, said his group supported the study because the states should test concepts with actual small business owners before passing regulation. In the NY disclosure bill awaiting signature, Denis said there was no concept testing. Some of the companies that support the bill might not have even read what it stipulates.
“You have a group of companies that are pushing these types of disclosures, for no reason other than their own self-interest,” Denis said. “We’re fine with disclosure, we are all for transparency, but it needs to be done in a way that we believe is meaningful to small business owners.”
In qualitative testing of 24 small business owners and executives who have experience taking commercial loans, the study concluded participants did not understand what APR was. The study found that the total cost of financing model was a better way to understand and compare options for their use.
“As one participant, when asked to define APR, answered: ‘I feel like you are asking a kid, why is the sky blue?’ (Participant 3, NY).” The study concluded, “In other words, [APR] is ever-present yet also inscrutable.”
Kingsley-Kleimann is a research-based organization that studies communication and disclosure for government agencies like the FTC and private or public business. Participants were selected from Califonia and NY.
Denis said that the findings show what SMB lending companies have already known- Anual Percentage Rate is not a useful metric for short term loans. Many do not know that APR represents the annualized cost of funds for the loan term, with the fees and additional costs included.
“People don’t know what APR is; it confuses them,” Denis said. “They know it’s a metric they should use, but they don’t know why. The APR is such a marketing tool now, it’s not a valuable tool.”
The study showed most respondents thought APR was the same as an interest rate. It’s not.
Denis said using an annualized rate for shorter-term loans or SMB loans that have no ending date worsens the problems. In those cases, firms estimate an APR, and it is inaccurate.
“When you have a merchant cash advance, there’s no term,” Denis said. “So you have to estimate a term, and I mean that is just a recipe for fraud.”
Denis said that the firms supporting California SB1235 and the New York S 5470/A 10118-A disclosure bill and taking credit for writing the laws are the same companies that will suffer under the strict tolerance of an APR rule.
“The companies pushing this, the trade associations pushing it, they like to take credit for writing the bill in California and writing the bill in New York: I don’t even think they’ve read it,” Denis said. “It’s going to subject their own members to potentially millions if not hundreds of millions of dollars in potential liability [fines.]”
The SBFA is not against disclosure by any means, Denis said, but supported other avenues. The trade group believes knowing the total cost of a loan and the cost and timeline of payments will help protect and inform borrowers better than APR. Firms that support the disclosure bill are banking off the positive press, hoping to be seen as pro-consumer protections but forcing APR will make it harder to compare the actual value of loans, Denis said.
Denis is still optimistic that regulators will work with businesses affected by the incoming legislation. He said the NY legislature and governor’s office, as well as the California Department of Business Oversight, understand the problems of using APR.
“They’re receptive to these arguments, and they know what they’re doing,” Denis said. “The last thing they want to do is pass a bill that’s going to further confuse businesses, especially during a pandemic when businesses are relying on this capital to stay afloat.”
On Friday, American Express announced that it had completed its acquisition of Kabbage.
“Kabbage, An American Express Company will continue to provide quick and easy cash flow management solutions for small businesses, now backed by the trust, service, and security of a American Express,” American Express wrote on social media. “We’re excited to welcome Kabbage’s talented colleagues to American Express. Together we will combine our over 60 years of experience backing small businesses with Kabbage’s innovative technology to support our customers through this challenging time, and help them get back on their feet and thrive.”
Meanwhile, below is a copy of a Q&A deBanked had with Kabbage co-founder Kathryn Petralia that appeared in our magazine’s July/August issue.
Q: How specifically do you think the pandemic will change the way SMEs bank?
A: The pandemic will first change with whom they bank, and that choice will change the way they bank. For perspective, one hundred percent of Kabbage customers have a bank account, but very few of them can get a loan from their bank. We launched Kabbage Checking earlier this year to serve the smallest of businesses without sacrificing the features they expect and offering other products banks don’t. We’re focused on making cash flow tools accessible to the businesses traditionally underserved and overlooked, and the pandemic has been a catalyst for businesses to find new solutions.
Q: How might the dynamic of banking change after the crisis?
A: It was well-reported that businesses without an existing credit relationship with their bank were turned away from applying for PPP loans. We’ve heard directly from many of our PPP customers that this will compel them to change banks, and the demand for Kabbage Checking has reflected that sentiment since its launch. In the short term, businesses of all sizes and ages will seek out and sign up for new, tech-forward banking partners. In the long term, that shift will change customers’ expectations of what banks should offer. For example, prior to the PPP, Kabbage had issued well over a billion dollars to customers during non-banking hours. On-demand, 24/7 access to funding and cash flow insights, or faster settlements and money transfers will soon become commonplace, and large retail banks will need to adapt if they want to capture or reclaim these customers.
Q: How are these changes likely to impact alternative lenders and funders?
A: For starters, single-product lending companies will realize they must diversify their offerings in order to compete in the new financial-services marketplace. I would expect to see lenders launch new products to more resemble a bank. Conversely, traditional banks will need to begin adopting automated ways to serve customers with a tech-forward experience. Especially in the new normal where customers may be apprehensive about in-person banking meetings, they must adapt online to acquire and serve customers.
Q: What’s still needed to help Main Street recover?
A: The PPP was only the first phase; we’re not out of the woods yet. Businesses now need to restart and eventually grow. The crisis made business owners realize they need tighter controls over their cash flow, as many found themselves on the back foot and ill-equipped to withstand a long-term crisis such as the one through which we are all muddling.
They’ll need cash-flow tools to be more prudent and appropriately plan for similar events. Having said that, it’s not only on the shoulders of small businesses or tech solutions. They need customer demand, and local economies need to begin to reopen safely so consumers feel comfortable returning to normal commerce. That will take the support of cities and states encouraging consumers to shop local so small businesses have greater incentive to recall their employees and get back to work.
Q: How can alternative lenders and funders best play a role in this recovery?
A: Much of what we’re already doing is exactly what our economy needs. For the most part, fintech companies serve the customers banks won’t or can’t. That reality is unfortunately unchanged today. That’s why during the pandemic Kabbage made every effort possible to provide products that helped SMBs through this crisis. With respect to PPP, we helped nearly 300,000 small businesses access over $7 billion, helping preserve an estimated 945,000 jobs. Our payments product saw a near 4X spike in adoption as businesses sought contactless payment options. We built www.helpsmallbsuiness.com in three days to allow any small business to generate needed revenue by selling online gift certificates. We also launched Kabbage Checking, giving small businesses a new banking option, and Kabbage Insights remains available and free to access for any small business.
Q: What changes do you expect to see in the alternative lending and funding industry as a result of the pandemic?
A: Everyone will expand their services. Whether it’s larger companies expanding their solutions through acquisitions, or start-ups investing beyond their primary product, everyone will aim to enhance their offerings to give customers more data-driven products that help them rebuild.
Q: Kabbage just agreed to be purchased by American Express. Should we expect to see more consolidation in the alternative lending/funding space? If so, over what time frame and why do you expect this to happen?
A: I would not be surprised if we saw more deals announced before the end of the year.
Q: Tell us a little about why Kabbage decided to sell and why the timing was right?
A: For us, it has always been about finding the right company with the right mission and intentions. We just happened to be in the middle of a crisis when the conversations started, despite having the financial capacity to support operations for multiple years. American Express shares our vision to be an essential partner to small businesses, and we couldn’t be more excited at the opportunity to continue the important work of providing solutions and innovative capabilities that address a range of small business cash flow needs alongside AmEx.
DailyFunder, the small business finance forum founded by Sean Murray in 2012, continues to be the leading online community for the industry, according to a recent announcement. The forum recently surpassed 10,000 registered members, in addition to logging more than 2 million page views just in 2020 so far.
“The forum has attracted well over a million visitors since inception and users have historically spent longer than 10 minutes on the site in any given session on average,” Murray said.
deBanked’s parent company fully acquired DailyFunder earlier this year. The announcement was featured prominently in deBanked’s January/February 2020 magazine issue. In it, Murray renewed the website’s objective:
“The mission will be to create a great forum for those involved in day-to-day dealmaking,” he said in a Q&A. “How can we provide a platform that enables those in the industry to make more money? That’s the way I look at it. I think if we can provide that type of value, success will follow.”