Business Lending

Square Capital Resumes Business Lending

August 4, 2020
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Square in San FranciscoSquare Capital, the small business lending division of Square, resumed offers for its “core flex loans” in late July, the company announced. However, there will be “stricter eligibility criteria.”

Square Capital made no core flex loans in Q2, having paused in mid-March on news of the impending crisis.

The company pivoted to PPP lending in Q2 in the interim and through this program managed to fund over 80,000 small businesses for a grand total of $873 million. The average came out to approximately $11,000 per loan.

Square says that in PPP they “expanded awareness of Square Capital as 60% of [their] PPP borrowers had never before received a loan through Square.”

Loss rates during Q2 were about 2.5x prev-COVID levels, a range they accurately predicted might happen at the end of Q1.

IN DEFAULT OR ABOVE WATER: How PPP Saved or Didn’t Save America

July 31, 2020
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This story will appear in deBanked’s Jul/Aug 2020 magazine issue. To receive copies in print, SUBSCRIBE FREE

rearviewKristy Kowal, a silver medalist in the 200-meter breast stroke at the 2000 Olympic games in Australia, had recently relocated to Southern California and embarked on a new career when the pandemic shutdown hit in March.

After nearly two decades as a third-grade teacher in Pennsylvania, Kowal was able to take early retirement in 2019 and pursue her dream job. At last, she was self-employed and living in Long Beach where she could now devote herself to putting on swim clinics, training top athletes, and accepting speaking engagements. “I’ve been building up to this for twenty years,” she says.

But fate had a different idea. The coronavirus not only grounded her from travel but closed down most swimming pools. At first, she tried to collect unemployment compensation. But after two months of calling the unemployment office every day, her claim was denied. “‘Have a great day,’ the lady said, and then she hung up,” Kowal reports. “She wasn’t rude; she just hung up.”

“I WAS DOWN TO 10 CENTS IN MY CHECKING ACCOUNT”

Then, in June, the former Olympian heard from friends about Kabbage and the Paycheck Protection Program. Using an app on her smart phone, Kowal says, she was able to upload documents and complete the initial application in fewer than 20 minutes. A subsequent application with a bank followed and within a week she had her money.

“I was down to ten cents in my checking account,” says Kowal, who declined to disclose the amount of PPP money for which she qualified, “and I’d begun dipping into my savings. This gives me the confidence that I need to go back to my fulltime work.”

kristy kowalKowal is one of 4.9 million small business owners and sole proprietors who, according to the U.S. Small Business Administration, has received potentially forgivable loans under the Paycheck Protection Program. The PPP, a safety-net program designed to pay the wages of employees for small businesses affected by the coronavirus pandemic, is a key component of the $1.76 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Since the U.S. Congress enacted the law on March 27, the PPP has been renewed and amended twice. It’s now in its third round of funding and Congress is weighing what to do next.

Kowal’s experience, meanwhile, is also a wake-up call for the country on the prominent role that both fintechs like Kabbage as well as community and independent banks, credit unions, non-banks and other alternatives to the country’s biggest banks play in supporting small business. Before many in this cohort were deputized by the SBA as full-fledged PPA lenders, a significant chunk of U.S. microbusinesses – especially sole proprietorships — were largely disdained by the brand-name banks.

“After the first round,” notes Karen Mills, former administrator of the U.S. Small Business Administration and a senior fellow at the Harvard Business School, “more institutions were approved that focused on smaller borrowers. These included fintechs and I have to say I’ve been very impressed.”

Among the cadre of fintechs making PPP loans – including Funding Circle, Intuit Quickbooks, OnDeck, PayPal, and Sabre — Kabbage stands out. The Atlanta-based fintech ranked third among all U.S. financial institutions in the number of PPP credits issued, its 209,000 loans trailing only Bank of America’s 335,000 credits and J.P. Morgan Chase’s 260,000, according to the SBA and company data. Kabbage also reports processing more than $5.8 billion in PPP loans to small businesses ranging from restaurants, gyms, and retail stores to zoos, shrimp boats, beekeepers, and toy factories.

To reach businesses in rural communities and small towns, Kabbage collaborated with MountainSeed, an Atlanta-based data-services provider, to process claims for 135 independent banks and credit unions around the U.S. The proof of the pudding: Eighty-nine percent of Kabbage’s PPP loans, says Paul Bernardini, director of communications at Atlanta-based Kabbage, were under $50,000, and half were for less than $13,500.

The figures illustrate not only that Kabbage’s PPP customers were mainly composed of the country’s smaller, “most vulnerable” businesses, Bernardini asserts, but the numbers serve as a reminder that “fintechs play a very important, vital role in small business lending,” he says.

“BANK OF AMERICA WOULDN’T EVEN TAKE MY APPLICATION”

The helpfulness of such financial institutions contrasts sharply with what many small businesses have reported as imperious indifference by the megabanks. Gerri Detweiler, education director at Nav, Inc., a Utah-based online company that aggregates data and acts as a financial matchmaker for small businesses, steered deBanked toward critical comments about the big banks made on Nav’s Facebook page. Bank of America, especially, comes in for withering criticism.

“Bank of America wouldn’t even take my application,” one man wrote in a comment edited for brevity. “I have three accounts there. They are always sending me stuff about what an important client I am. But when the going got tough, they wouldn’t even take my application. I’m moving all my business from Bank of America.”

Lamented another Bank of America customer: “I was denied (PPP funding) from Bank of America (where) I have an individual retirement account, personal checking and savings account, two credit cards, a line of credit for $20.000, and a home mortgage. Add in business checking and a business credit card. Yesterday I pulled out my IRA. In the next few days I’m going to change to a credit union.”

Many PPP borrowers who initially got the cold shoulder from multi-billion-dollar conglomerate banks have found refuge with local — often small-town — bankers and financial institutions. Natasha Crosby, a realtor in Richmond, Va., reports that her bank, Capital One, “didn’t have the applications available when the Paycheck Protection Program started” on April 6. And when she finally was able to apply, she notes, “the money ran out.”

Crosby, who is president of Richmond’s LGBTQ Chamber of Commerce, is media savvy and was able to publicize her predicament through television appearances on CNN and CBS, as well as in interviews with such publications as Mother Jones and Huffington Post. A “friendly acquaintance,” she says, referred her to Atlantic Union Bank, a Richmond-based regional bank, where she eventually received a PPP loan “in the high five figures” for her sole proprietorship.

“It took almost two months,” Crosby says. “I was totally frozen out of the program at first.”

Talibah Bayles heads her own firm, TMB Tax and Financial Services, in Birmingham, Ala. where she serves on that city’s Small Business Council and the state’s Black Chamber of Commerce. She told deBanked that she’s seen clients who have similarly been decamping to smaller, less impersonal financial institutions. “I have one client who just left Bank of America and another who’s absolutely done with Wells Fargo,” she says. “They’re going to places like America First Credit Union (based in Ogden, Utah) and Hope Credit Union (headquartered in Jackson, Miss.). I myself,” she adds, “shifted my business from Iberia Bank.”

Bank of Southern CaliforniaMain Street bankers acknowledge that they are benefiting from the phenomenon. “In speaking to our industry colleagues,” says Tony DiVita, chief operating officer at Bank of Southern California, an $830 million-asset community bank based in San Diego, “we’ve seen that many of the big banks have slowed down or stopped lending small-dollar amounts that were too low for them to expend resources to process.”

At the same time, DiVita says, his bank had made 2,634 PPP loans through July 17, roughly 80% of which went to non-clients. Of that number, some 30% have either switched accounts or are in the process of doing so. And, he notes, the bank will get a second crack at conversion when the PPP loan-forgiveness process commences in earnest. “Our guiding spirit is to help these businesses for the continuation of their livelihoods,” he says.

Noah Wilcox, chief executive and chairman of two Minnesota banks, reports that both of his financial institutions have been working with non-customers neglected by bigger banks where many had been longtime customers. At Grand Rapids State Bank, he says, 26% of the 198 PPP applicants who were successfully funded were non-customers. Minnesota Lakes Bank in Delano, handled PPP credits for 274 applicants, of whom 66% were non-customers.

“People who had been customers forever at big banks told us that they had been applying for weeks and were flabbergasted that we were turning those applications around in an hour,” says Wilcox, who is also the current chairman of the Independent Community Bankers of America, a Washington, D.C.-based trade group representing community banks.

“IT’S BEEN RELENTLESS”

Noting that one of his Gopher State banks had successfully secured funding for an elderly PPP borrower “who said he had been at another bank for 69 years and could not get a telephone call returned,” Wilcox added: “We’ve had quite a number of those individuals moving their relationships to us.”

For Chris Hurn, executive director at Fountainhead Commercial Capital, a non-bank SBA lender in Lake Mary, Fla., the psychic rewards have helped compensate for the sometimes 16-hour days he and his staff endured processing and funding PPP applications. “It’s been relentless,” he says of the regimen required to funnel loans to more than 1,300 PPP applicants, “but we’ve gotten glowing e-mails and cards telling us that we’ve saved people’s livelihoods.”

Yet even as the Paycheck Protection Program – which only provides funding for two-and-a-half months – is proving to be immensely helpful, albeit temporarily, there is much trepidation among small businesses over what happens when the government’s spigots run dry. The hastily contrived design of the program, which has relied heavily on the country’s largest financial institutions, has contributed mightily to the program’s flaws.

“The underbanked and those who don’t have banking relationships were frozen out in the first round,” says Sarah Crozier, director of communications at Main Street Alliance, a Washington D.C.-based advocacy organization comprising some 100,000 small businesses. “The new updates were incredibly necessary and long overdue,” she adds, “but the changes didn’t solve the problem of equity in access to the program and whom money is flowing to in the community.”

“IT WAS NOT WELL-THOUGHT-OUT AND A LOT OF MONEY WENT TO THE WRONG PEOPLE”

Professor David Audretsch, an economist at Indiana University’s O’Neill School of Public and Environmental Affairs and an expert on small business, says of PPP: “It’s a short-term fix to keep businesses afloat, but it missed in a lot of ways. It was not well-thought-out and a lot of money went to the wrong people.”

The U.S. unemployment rate stood at 11.1% in June, according to the most recent figures released by the Bureau of Labor Statistics, about three times the rate of February, just before the pandemic hit. The BLS also reported that 47.2% of the U.S. population – nearly half –was jobless in June. Against this backdrop, SBA data on PPP lending released in early July showed that a stunning array of cosseted elite enterprises and organizations, many with close connections to rich and powerful Washington power brokers, have been feasting on the PPP program.

In a stunning number of cases, the program’s recipients have been tony Washington, D.C. law firms, influential lobbyists and think tanks, and even members of Congress. Many businesses with ties to President Trump and Trump donors have also figured prominently on the SBA list of those receiving largesse from the SBA.

Wall StreetBusinesses owned by private equity firms, for which the definition of “small business” strains credulity, were also showered with PPP dollars. Bloomberg News reported that upscale health-care businesses in which leveraged-buyout firms held a controlling interest, were impressively adept at accessing PPP money. Among this group were Abry Partners, Silver Oak Service Partners, Gauge Capital, and Heron Capital. (Small businesses are generally defined as enterprises with fewer than 500 employees. The SBA reports that there are 30.7 million small businesses in the U.S. and that they account for roughly 47% of U.S. employment.)

Boston-based Abry Partners, which currently manages more than $5 billion in capital across its active funds, merits special mention. Among other properties, Abry holds the largest stake in Oliver Street Dermatology Management, recipient of between $5 million and $10 million in potentially forgivable PPP loans. Based in Dallas, Oliver Street ranks among the largest dermatology management practices in the U.S. and, according to a company statement, boasts the most extensive such network in Texas, Kansas and Missouri. 

Meanwhile, the design of the program and the formula for the looming forgiveness process is proving impractical. As it currently stands, loan forgiveness depends on businesses spending 60% of PPP money on employees’ wages and health insurance with the remaining 40% earmarked for rent, mortgage or utilities.

closed for businessMany businesses such as restaurants and bars, storefront retailers and boutiques – particularly those that have shut down — are preferring to let their employees collect unemployment compensation. “Business owners had a hard time wrapping their heads around the requirement of keeping employees on the payroll while they’re closed,” notes Detweiler, the education director at Nav. “They have other bills that have to be paid.”

The forgiveness formula remains vexing for businesses where real estate costs are exorbitant, particularly in high-rent cities such as New York, Boston, Washington, D.C., San Francisco, and Chicago. Tyler Balliet, the founder and owner of Rose Mansion, a midtown Manhattan wine-bar promising an extravagant, theme-park experience for wine enthusiasts, says that it took him a month and a half to receive almost $500,000 from Chase Bank. Unfortunately, though, the money isn’t doing him much good.

“I HAVEN’T PAID RENT SINCE MARCH AND I’M IN DEFAULT”

“I have 100 employees on staff, most of whom are actors,” he says. “We shut down on March 13. I laid off 95 employees and kept just a few people to keep the lights on.”

At the same time, his annual rent tops $1 million and the forgivable amount in the PPP loans won’t even cover a month’s rent. “I haven’t paid rent since March and I’m in default,” Balliet says. “Now I’m just waiting to see what the landlord wants to do.”

Like many business owners, Balliet financed much of his venture with credit card debt, which creates an additional liability concern, notes Crozier of the Main Street Alliance. “It’s very common for borrowers to have signed personal guarantees in their loans using their credit cards,” she says. “As we get closer to the funding cliff and as rent moratoriums end,” she adds, “creditors are coming after borrowers and putting their personal homes at risk.”

Mark Frier is the owner of three restaurants in Vermont ski towns, including The Reservoir — his flagship — in Waterbury. In toto, his eateries chalked up $6.5 million in combined sales in 2019. But 2020 is far different: the restaurants have not been open since mid-March and he’s missed out on the lucrative, end-of-season ski rush.

Consequently, Frier has been reluctant to draw down much of the $750,000 in PPP money he’d secured through local financial institutions. “We could end up with $600,000 in debt even with the new rules,” Frier says, adding: “We live off very thin margins. We need grants not loans.”

As the country recorded 3.7 million confirmed cases of coronavirus and more than 141,000 deaths as of mid-July, PPP money earmarked by businesses for health-related spending was not deemed forgivable. Yet in order to comply with regulations promulgated by the Occupational Safety and Health Administration and mandates and ordinances imposed by state and local governments, many establishments will be unable to avoid such expenditures.

“What we really needed was a grant program for companies to pivot to a business environment in a pandemic,” says Crozier. She cites the necessity businesspeople face of “retrofitting their businesses, buying masks, gloves and sanitizers and cleaning supplies, restaurants’ taking out tables and knocking down walls, installing Plexiglass shields, and improving air filtration systems.”

Covid-19Meanwhile, as Covid-19 was taking its toll in sickness and death, the economic outlook for small business has been looking dire as well. The recent U.S. Census’s “Pulse Survey” of some 885,000 businesses updated on July 2 found that roughly 83% reported that Covid-19 pandemic had a “negative effect on their business. Fully 38% of all small business respondents, moreover, reported a “large negative effect.”

Amid the unabated spikes in the number of coronavirus cases and the country’s grave economic distress, PPP recipients are faced with the unsettling approach of the PPP forgiveness process. As Congress, the SBA, and the U.S. Treasury Department continue to remake and revise the rules and regulations governing the program, businesses are operating in a climate of uncertainty as well. Currently, the law states that the amount of the PPP loan that fails to be forgiven will convert to a five-year, one-percent loan — a relaxation in terms from the original two-year loan which is not necessarily cheering recipients.

“One of the biggest problems with PPP is that the rule book has been unclear,” frets Vermont restaurateur Frier, glumly adding: “This is not even a good loan program.”

Ashley Harrington, senior counsel at the Center for Responsible Lending, a research and policy group based in Durham, N.C., argued in House committee testimony on June 17, that there ought to be automatic forgiveness for PPP loans under $100,000. Such a policy, she declared, “would likely exempt firms with, on average, 13 or fewer employees and save 71 million hours of small business staff time.”

She also said, “The smallest PPP loans are being provided to microbusinesses and sole proprietors that have the least capacity and resources to engage in a complex (forgiveness) process with their financial institution and the SBA.”

William Phelan, president of Skokie (Ill.)-based PayNet, a credit-data services company for small businesses which recently merged with Equifax, sounded a similar note. Observing that there are some 23 million “non-employer” small businesses in the U.S. with fewer than three employees for whom the forgiveness process will likely be burdensome, he says: “Estimates are that it will cost businesses a few thousand dollars just to get a $100,000 loan forgiven. It’s going to involve mounds of paper work.”

The country’s major challenge now will be to re-boot the economy, Phelan adds, which will require massive financing for small businesses. “The fact is that access to capital for small businesses is still behind the times,” Phelan says. “At the end of the day, it took a massive government program to insure that there’s enough capital available for half of the U.S. economy” during the pandemic.

For his part, Professor Audretsch fervently hopes that the country has learned some profound lessons about the need to prepare for not just a rainy day, but a rainy season. The pandemic, he says, has exposed how decades of political attacks on government spending for disaster-preparedness and safety-net programs have left the U.S. exposed to unforeseen emergencies.

“We’re seeing the consequence of not investing in our infrastructure,” he says. “That’s a vague word but we need a policy apparatus in place so that the calvary can come riding in. This pandemic reminds me a lot of when Hurricane Katrina hit New Orleans,’ he adds. “The city paid a heavy price because we didn’t have the infrastructure to deal with it.”

Shopify Originates $153M in MCAs and Loans in Q2

July 29, 2020
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shopify glyphShopify had a monster 2nd quarter. The e-commerce giant generated $36M in profit on $714.3M in revenue. As part of that the company originated $153 million worth of loans and merchant cash advances, only slightly down from the $162.4M in Q1. Still that figure was up by 65% year-over-year (and was more than 2x the volume originated by OnDeck).

The company has offered capital to its US merchants since 2016 and recently begun doing the same with its UK and Canadian merchants starting this past March and April respectively, the company revealed.

Shopify CFO Amy Shapero said that company had maintained loss ratios “in line with historical periods,” despite COVID. “Access to capital is even tougher in times like these, which makes it even more important to continue lowering this barrier by making it quick and easy so merchants can focus on growing their business,” Shapero stated.

BlueVine Partners with DoorDash to Fund $6 Million in PPP

July 29, 2020
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DoordashThis week BlueVine announced that since partnering with the food delivery service DoorDash in late April, over 180 businesses have received funds from the Paycheck Protection Program via said partnership. Totaling over $6 million, the partnership exclusively served restaurants on DoorDash’s platform, offering them a PPP pathway through BlueVine in email correspondence as well as the DoorDash merchant portal.

“DoorDash saw a need within their merchant partner base to be able to quickly apply for and receive a PPP loan – something many were not able to do through traditional banking services – and was looking to solve the accessibility factor with a partnership,” BlueVine CCO Brad Brodigan said in an email. “Small restaurants in particular were unable to access funds they needed to stay in business and navigate through this uncertain time, and the hope was that information from a trusted source like DoorDash would help them look for solutions if their bank was unable to help them.”

The $6 million funded is part of the larger $3.5 billion in PPP money that BlueVine claims to have funded to +100,000 businesses. According to Brodigan, the median loan size for the DoorDash deals was $16,000; with the median employees on payroll being five. DoorDash will be donating all referral fees from the program to the CRA Restaurants Care Covid-19 Grant as well as the Small Business Relief Fund.

Enova & OnDeck: Behind The Biggest Deal of 2020

July 29, 2020
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enovaEnova CEO David Fisher kicked off his company’s 2nd quarter earnings call on Tuesday and one could tell from the pitch in his voice that he was excited. And why shouldn’t he be? Despite the catastrophe that gripped the nation over the months of April, May and June, Enova still manages to report a consolidated net PROFIT of $48 million.

But that’s not even it. After a long introduction about a major acquisition, a rather familiar voice is asked to deliver some prepared remarks.

“Thanks David, I am equally excited…”

It’s Noah Breslow, the CEO of OnDeck. Less than an hour earlier it was revealed that Enova had bought 100% of OnDeck’s outstanding shares for $90 million in a deal paid for almost entirely with stock. And now suddenly he’s here on this call talking about how great it is that the companies are combining forces.

“Following an extensive review of our strategic options, we believe this is the right path forward for our customers, employees, and shareholders,” Breslow says.

That OnDeck has been acquired is no surprise. The devastating impact of COVID in Q1 reveals weaknesses in the company’s business model and the share price drops by 80% from the period of February to July. This all while two of their competitors in the small business lending space, Square and PayPal, experience enormous gains of more than 40%.

OnDeckIn May, Forbes reported grim news, that OnDeck is being shopped around in “what amounts to a fire sale.”

The rumor creates further despair in an industry that is preoccupied with survival. If this can happen to OnDeck, then…?

The truth is, OnDeck’s momentum had stalled long before COVID. The company walked away from a sale to Wonga in 2012 that had valued them at $250 million and they went on to have a successful IPO in 2014 at a value of $1.32 billion on the selling point that they were a tech company.

But by mid-February of this year, the company’s market cap is down to less than $250 million, turning the clock backwards by about eight years. After losing the partnership with Chase in 2019, OnDeck seemed to have lost its swagger and direction. They planned to pursue a bank charter and do a stock buyback. Then the news pretty much stops.

COVID happens and it hits them hard. The company stopped lending entirely, although they still recorded originations of $66 million in Q2.

As a standalone entity, OnDeck’s upside had greatly diminished. Getting back to where it was pre-COVID may not have been an entirely enticing prospect for investors. Its market cap recently plummeted to less than $50 million and so by the time the Enova price of $90 million is announced, it sounds almost generous. (Knight Capital sold for $27.8M in November).

Enova says that the acquisition increases their concentration in small business lending from 15% to 60%. That puts consumer lending, their historical core business, now in the minority. This is not by accident. On the earnings call, Enova executives say that they believe that “there will be strong demand for capital from small businesses as the economy begins to open back up.” They even believe the opportunity is better than the consumer lending market right now, particularly from a regulatory perspective, they say. Therefore it makes sense to “double down or triple down” on the small business side, they contend.

Enova’s small business lending business was largely spared by COVID. Unlike OnDeck’s brutal Q1, Enova had reported something “very much manageable” thanks to not having “large exposures to entertainment, hospitality and restaurants.”

“Our portfolio has been extremely stable,” Enova says on the call. With the acquisition of OnDeck, the company appears to be gearing up for the opportunity they believe awaits in small business lending right around the corner.

“Our Model Disclosure Legislation”: ILPA’s CEO on New York’s APR disclosure bill

July 28, 2020
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Albany at DuskLate last week the New York State legislature voted to pass A10118A/S5470B, a bill that might lead to greater clarity and consumer knowledge according to Scott Stewart, CEO of the Innovative Lending Platform Association, a trade association of small business lenders.

Referring to it as “our model disclosure legislation,” Stewart explained in a phone call the work that the ILPA put in to help the bill through as well as what sort of impacts can be expected from S5470B.

“The implications are that small businesses, certainly in New York to begin with, but we think throughout the country, will have the opportunity to really see, understand, and compare various different sources and products for financing their small businesses in terms of their expansion and success. That’s something we’re very proud of and I think that’s something the small business borrower really deserves to see. They deserve to see and understand exactly what they’re doing and when they’re taking out financing products for their businesses.”

What exactly these business owners will understand better relates to the details of the bill, which requires small business financing contracts to disclose the annual percentage rate as well as other uniform disclosures. If signed by New York Governor Cuomo, the bill could have ramifications on small business lenders, MCA, and factoring providers.

Scott Stewart
Scott Stewart, CEO | ILPA

ILPA, founded in 2016 and comprised by the likes of Kabbage, OnDeck, and BlueVine; worked alongside legislators to help with the drafting of the bill, assisting with the wording so that it reflects their own SMART Box initiative. This being a form offered by ILPA which lists a number of metrics worth considering when seeking small business financing.

“In January 2019, our team came together and decided that it made sense in the wake of 1235 in California to take a proactive approach to codify SMART Box as legislation in a state, and we selected New York because we felt we had a favorable legislature there,” Stewart said. “I think it’s an incredible achievement. You see the big margins that it passed by in both the Assembly and the Senate and we’re very, very proud of that. I think it really speaks to our cooperative approach to building legislation. And now, as we move toward the implementation phase, we’re going to be in a place where, hopefully in the next six months or so, small businesses will begin receiving really clear disclosures on the capital and credit that they’re trying to take out.”

As noted though, the bill must be signed by Governor Cuomo before becoming law, and then it will affect New York only. Beyond the Empire State though, Stewart is hopeful that ILPA will be able to implement the terms of S5470B in other states.

“Now that we have hopefully harmonized the legislative landscape between California, with 1235, and New York; hopefully we’ll be able to export that to other states. We don’t have any accurate plans at this time to do that, but we feel like if two of the larger states in the nation have very similar disclosure regimes then we’re on the track toward seeing this nationwide.”

Interview With Chad Otar, CEO of Lending Valley

July 28, 2020
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I recently spoke with Lending Valley CEO Chad Otar, who told us that not only is his funding company still working remotely, but that he’ll probably never return to an office ever again. Watch below:

Clearbanc Launches Valuation Service for Founders

July 16, 2020
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Clearbanc

Today Clearbanc, the Toronto-based alternative finance company, has launched its latest service, Valuation, allowing founders to gauge their company’s value. Being an extension to Clearbanc’s platform, the service will be free to everyone and promises an estimation within 24 hours that can be checked weekly.

Valuation also offers three options to founders upon receiving their company’s value: the chance to access capital via Clearbanc’s funding channels, connect with investors in order to raise an equity round, and investigate possible acquisition opportunities. For the last two of these options, Clearbanc makes introductions to a selection of venture capital investors that have connected with the program.

As per the requirements, founders will have to connect a selection of private data points. Their business accounts, payment processor, accounting platform, and their admin account will all be required. As well as this, public data is also used to arrive at a valuation, basing the estimations on information specific to the company as well as the industry it is in.

“We think this could be as revolutionary as what Credit Karma did when they launched free credit scores for everyone and gave consumers access to their own information,” explained Clearbanc CEO Michele Romanow. “We’re really excited about this as it represents our first non-capital launch, and we think that it’s part of a much bigger vision of how we help founders win in this environment.”

The Shakeup’s Impact on Stock Prices

July 15, 2020
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This appeared in deBanked’s May/June 2020 magazine issue. To receive copies in print, SUBSCRIBE FREE

The Shakeup

The Underwriter’s Song of 2020

July 15, 2020
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This appeared in deBanked’s May/June 2020 magazine issue. To receive copies in print, SUBSCRIBE FREE

Underwriter's Song

It was just a day in February when my broker sent a deal
I remember feeling ordinary because COVID wasn’t real

Another ruse, just more fake news, I went and pulled the credit
A sterling score, I said please send more, but the broker said forget it

The lender just next door to you, he offered to pay me double
Plus they need less docs for their wider box, saving me the trouble

It was on that day that I said “hey!” I’m sick of being small
I called that broker back and swore I would fund them all

So he sent the files, several piles, of paper good and bad
And I did what I should not have, so the broker would not be mad

Hot damn my port was a big ‘ol fort of terrifying risk
But I checked deBanked’s top funders and we were up there on the list

I pulled up my chair, said a prayer, “so long as things remain”
On an upward track, in the black, there won’t be any pain

But then came March and things looked dark, I couldn’t believe my eyes
They said stay indoors and close your stores, we’re really sorry guys

America is shutting down, we hope you were prepared
If you were very careful then you’ll probably be spared

Of course I freaked when our financials leaked, I tried to rationalize
That we had to fund those files to compete with the other guys

It was no no no and then fund fund fund, I tell you it was grand
I made my case on Daily Funder but the contents got me banned

It wasn’t me, it was the broker you see, it all started with a deal
His spiel about getting double, turns out it wasn’t real

So jolly hot damn, I’m in a jam, of the sort that’s budgetary
How I wish, nay I pray! That it was February

Funding Circle US Lays Off 120 Employees

July 9, 2020
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Funding Circle US laid off 120 employees yesterday, according to a post shared by Ryan Metcalf, Head of U.S. Regulatory Affairs and Social Impact.

Reuters reported that the company will also centralize its technology development in the UK rather than have a separate US team going forward.

The US operation had largely been focusing on PPP lending and SBA 7(a) loans since the shutdowns occurred.

The announcement coincided with its UK business being approved to participate in the Bounce Back Loan Scheme.

Breakout Capital Weathered The Storm And Came Out With Expanded Access to Credit

July 8, 2020
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Breakout CapitalBreakout Capital never stopped funding. That’s what CEO & President McLean Wilson recently shared with deBanked. The company not only weathered the storm but has come out with expanded access to credit totalling $20MM with Medalist Partners, one a current term loan facility and the other a new term loan facility with “attractive” forward flow features.

The company said in its announcement that these facilities will allow Breakout to increase loan originations across all of its product offerings, including its term-loan product, FactorAdvantage®, and its newest factor product, FactorBridge.

“Small businesses are at the core of our economy and they were, as we were, largely blindsided by recent economic interruptions,” Wilson told deBanked. “We adapted quickly and rolled with the punches and never stopped funding. It is a testament to the resiliency, loyalty and borrower first mentality that Breakout Capital has not only weathered the storm, but has strengthened our company throughout the past few months. We quickly adapted to a new way of thinking, which helped us serve our clients in real time and forge ever closer relationships with our factor partners, lenders, online marketplaces, ISOs and borrowers.”

John Slonieski, Director of Private Credit for Medalist Partners, said in the announcement that “We are pleased to enhance our relationship with Breakout Capital in our asset-based lending strategy. Their high-quality underwriting and SMB-friendly lending solutions, coupled with their talented credit and management team, provide us confidence as we continue working closely with them to successfully scale their lending program.”

Every Business That Got $150,000 or More in PPP Funds (The List)

July 7, 2020
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In the interest of transparency, the SBA dumped a list of more than 660,000 businesses that got $150,000 or more in PPP funding.

You can download the entire thing right here.

CARES Act

Canadian Small Business Lender Looks Doomed In Wake of COVID-19

June 29, 2020
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LendifiedAs well-known (1, 2) small business lenders in the United States continue to negotiate COVID-19 era workouts with their creditors, another in Canada appears to be falling off the cliff.

On Thursday, Lendified’s President & Director Kevin Clark tendered his resignation effective July 3rd. He follows other board members Edward Kelterborn and Benjy Katchen whose resignations went into effect on June 25th. Company CFO Norman Tan previously resigned on June 9th and no replacement has been named.

COVID-19’s arrival came at a difficult time for Lendified. Before COVID, the company had never turned a profit or reported positive cashflow in its entire history.

“Lendified is in default in respect of credit facilities with its secured lenders. Forbearance and standstill agreements are being discussed with these senior lenders, with none indicating to date that any enforcement action is expected although each is in a position to do so,” the company said. “However, no formal agreements in this regard have been concluded as of the date hereof.”

The company expressed that it would not be able to continue operations if it was not able to finalize a forbearance on its defaults AND simultaneously obtain an immediate infusion of capital to fund its operations.

Lendified’s board of directors is presently considering selling its assets or its entire business in order to raise revenue.

A wholly owned subsidiary of Lendified, Judi.ai, an automated loan underwriting platform, is poised to cease operations as a result of a cashflow shortfall. “[Judi.ai] requires cash infusions in the amount of approximately $100,000 per month in order to maintain operations,” Lendified reported. “Its cash reserves at this time are approximately $80,000. At this time, the Company is not in a position to continue to fund the Business and there can be no assurances that it will be able to do so in the future.”

The company went public on the Toronto Stock Exchange on May 26th via a reverse merger and has since experienced a 95% drop in its share price. The company’s market cap on Monday hovered around $700,000 USD.

OnDeck Update 6/23

June 24, 2020
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On June 23rd, OnDeck filed the following statement with the SEC:

On June 23, 2020, we obtained a limited consent (“Consent”) for our corporate debt facility (“Corporate Facility”). Under the Consent, the lenders consented to delay the effectiveness of the increased monthly principal repayments until July 14, 2020 (or such later date as may be agreed by the Administrative Agent), which were triggered by an Asset Performance Payout Event (Level 2) (“APPE”) that occurred on June 17, 2020. In consideration for the Consent, the Company agreed to make a $5 million principal repayment (“Repayment”) substantially concurrent with the execution of the Consent. Under the Consent, the lenders also agreed that, at the Company’s option, the Repayment will either (i) reduce the amount of the monthly principal repayment due on July 17, 2020 by the amount of the Repayment or (ii) if the parties enter into an amendment on or prior to July 17, 2020, be credited towards any principal repayment required under that amendment. The Company entered into the Consent in contemplation of entering into a broader amendment to the Corporate Facility to address impacts stemming from the COVID-19 pandemic. If such an amendment is not entered into, the APPE triggers $21 million monthly principal repayments which, if not cured, would commence on July 17, 2020 and continue until the Corporate Facility is repaid in full. The Company made a payment of approximately $13 million on June 17, 2020 as a result of the previously disclosed Asset Performance Payout Event (Level 1), bringing the total balance outstanding as of that date to approximately $92 million. The Revolving Commitment Termination Date occurred as a result of such Level 1 event. Certain capitalized terms not defined in this section of the report are used with the meanings ascribed to them in the Corporate Facility as amended by prior amendments thereto and the Consent.

Shares of OnDeck closed at 86 cents yesterday. The company was previously warned that long-term pricing below $1/share would result in delisting from the New York Stock Exchange.

IOU Financial Affected By COVID-19

June 23, 2020
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IOU Financial approved the re-appointment of all of its current directors and auditors yesterday. The company, however, is currently experiencing challenges similar to other online lenders.

In late May, the company filed its Q1 financials and revealed that the COVID-19 pandemic had put them in an “over-advance position with its financing credit facilities.” At the time, the issue remained “uncured” and “the company received default notices subsequent to quarter end.”

“The Company and the financing credit facilities are working together to remedy the situation,” IOU reported. “Nevertheless, there is no assurance that these initiatives will be successful.”

IOU had furloughed 40% of its full-time employees and implemented a temporary 20% reduction in salary for all remaining employees commencing on April 1, 2020.

The company’s market cap has plummeted to CAD$7 million, down from $18 million in February. The company had previously been on a fairly positive trajectory until Q1 when they cranked up their provision for loan losses in anticipation of the fallout caused by the pandemic.

Kabbage and Uber Partner for PPP

June 18, 2020
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UberTwo months after its first round, Kabbage and Uber have partnered to offer a streamlined PPP application process for the latter’s drivers. In a surprise move, the companies have come together to offer Uber drivers a fast-tracked and automated option to apply for the Payment Protection Program. According to a Kabbage press release, the specialized application will be sped up by prepopulating relevant information, outlining eligibility, and automated decision-making.

“They basically will go through a totally separate path that’s purpose-built for Uber drivers,” said Kabbage CEO Rob Frohwein in the statement. “With more than $100 billion left in the PPP, there is a meaningful opportunity for the self-employed to still apply and receive funding. With Uber, we aim to provide hundreds of thousands of more independent contractors access to federal funding.”

With Uber defining its drivers as independent contractors rather than employees, these drivers were initially ineligible for certain unemployment benefits. However the CARES Act expanded these benefits to include independent contractors from various industries.

This is not Uber’s first foray into providing some sort of assistance for its drivers. Following the signing of the CARES Act in March, the ride-hailing company released a detailed guide for its drivers explaining how to apply for these benefits. As well as this, in France the company has offered drivers emergency grants during the pandemic as well as a stipend to cover sterilizing and safety products.

For Kabbage, this marks a step away from the dark days of late March which saw the company close its offices in Bangalore, India; cut executives’ pay; and furlough an unspecified but “significant” amount of its previously 500-person United States staff, according to a company memo.

The PPP program, which ran out of money within two weeks of its first round, had more than $130 billion left to give to business owners by June 9, just three weeks before the SBA is scheduled to close the application process on June 30.

Good Internet Connection: A Recap of Broker Fair Virtual’s Debut

June 17, 2020
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Broker Fair 2020 VirtualLast week’s Broker Fair Virtual was the first of its kind for the industry. The day-long event offered talks and networking, just like the in-person event, albeit without the catering service and open bar. Offering a digital space that included a virtual auditorium, networking lounge, expo hall, and individual company booths, the event attempted to recreate the experience of connecting and mingling with the rest of the industry, as much as was possible.

Kicking off with a Matrix-inspired introduction to the virtual space led by alternative finance’s version of Neo’s mentor, Mur-pheus (Murray as Morpheus), the show then went in numerous directions, with panels and talks covering a variety of topics and sectors.

Funding Metrics’ David Frascella took to the virtual stage to talk about how his company and the industry at large have been getting through the pandemic; what’s to come for America was up for discussion with Scott Rasmussen, the veteran pollster, who elaborated on how business could be effected by the upcoming presidential election; the future of combining people with data was debated by figures from Become, Elevate Funding, and Ocrolus; Canada’s lending situation and prospects were talked through in Covid and Canadian Credit;The new normal was discussed by NYC’s Fintech Women; and John Henry, an entrepreneur and star of VICELAND’s ‘Hustle,’ spoke of his experience running businesses and what made his story a success.

As well as this selection of talks, another standout was the cannabis panel. Led by a number of industry veterans, which broke down the difference in funding marijuana-based companies compared to other deals, and what could be down the road for the industry as more states consider legalization.

National Funding’s CRO, Justin Thompson, held an extended Q&A session, fielding queries about how National has been faring through these times and what its approaches are as the economy begins to open back up.

How long-term is long-term for the coronavirus’s impact? Are SBA deals the way to go? Does the industry need to go further with its adaption to this new normal? All these questions were asked and answered in The Great Debate, a panel made up of industry figures from various backgrounds.

And brokers’ futures were considered by Lendio’s Brock Blake, United Capital Source’s Jared Weitz, National Business Capital & Service’s James Webster, and The Watson Group’s Gerald Watson. Here, the idea of a recovery, how each struggled through March and April, and PPP were all debated by the panelists, with perspectives of what’s to come leaning both ways.

There’ll be an evolution of new industries and how we do business,” Gerald Watson noted in his closing words, “just look at this conference for example.”

There was no lobby to find brokers and funders hashing out deals in relative privacy away from the expo hall, instead this was replaced by private messages exchanged. Rather than line up for some chicken wings, people chowed down to whatever was in their home on that day. And instead of gathering around a bar and finishing the day after the final talk, attendees cracked something at their desk and chatted it up in the networking lounge, recalling previous events and what was once taken for granted: the ability to connect effortlessly.

The coronavirus continues to physically keep people apart, but for one day last week the industry was able to come together and network, make deals, and gain insight; albeit in a different way, internet connections providing.

Broker Fair Has Completed A Historic Milestone

June 12, 2020
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Broker Fair reached a milestone yesterday by successfully completing the industry’s first-ever virtual conference. The experimental concept was a response to this year’s restrictions and precautions on large gatherings.

We hope that the hundreds of attendees found the event fun, educational, and productive! The in-person show is still happening at Convene at Brookfield Place in Lower Manhattan on March 22, 2021.

Yesterday’s show included live sessions, a networking chat, and a virtual exhibit hall. Attendees will have formal access to the recorded sessions very soon (There were a lot of them).

What's Ahead for Brokers

NYC Fintech Women

The Great Debate

deBanked Booth

The Funders Are Coming Back

June 10, 2020
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ComebackNearly three months on from the beginning of the United States’ lockdown, the alternative finance industry is starting to feel a recovery. As states look to ease lockdowns, businesses seek to start back up, and offices are reopening, an element of normalcy, if it can be called that, appears to be returning. deBanked reached out to a number of businesses in the industry to find out how they were plotting their recovery, as well as what they thought of the future for the space and the American economy.

One such company was Everest Business Funding. After experiencing a strong start to 2020 in January and February, covid-19 and the economic shutdown that accompanied it came as a shock to Everest, CEO Scott Crocket explained.

“It’s difficult to imagine an exogenous event outside of our control that could more squarely impact an industry like this,” Crockett stated. “I mean, after all, we provide capital to small and medium-sized businesses all across the United States, all 50 states, every type of small business you can imagine. And we’re cruising along, we had a record 2019, we’re off to a great start with January, February, even the beginning of March … and we really saw it come on in the third week of March, the week that started with Monday the 16th. It started as a kind of a trickle in, but by the end of the week it was more of a tidal wave in terms of the number of small businesses in our portfolio that were calling in looking for some type of relief as a result of what was happening.”

Crockett said that they paused all new funding the following week, out of concern for the company’s ability to generate business while there was a national economic shutdown in place. Since then however, Everest has been slowly getting back to what it was, with employees now returning to the office in waves and discussions being had over when exactly to start funding again, be it late June or early July.

“IT’S GOOD TO SEE THAT THE OLD-SCHOOL APPROACH IS BACK AND WORKING AGAIN”

Another firm that halted its funding operations was the New York-based PIRS Capital. Similarly, it was mid-March when the pressure was first felt, and PIRS didn’t return to funding until May 15th. PIRS COO Andrew Mallinger chalked this up to the company’s lack of reliance on automated underwriting processes, saying that although “the industry was leaning towards automatic funding and all these models and 20-second approvals, we weren’t fully invested in that yet. So it was good to see that the old-school approach is back and working again, interfacing with these brokers and really understanding their deals and what they’re bringing to the table.”

Mallinger is also confident going into the rest of 2020. Saying that while the company is maintaining a cautiously optimistic outlook, PIRS is working off the assumption that there will eventually be growth this year and that it is set to continue working from home for however long that may be, on the basis that New York may be one of the last states to return to offices.

“ANYONE WHO CAN WEATHER THIS STORM IS GOING TO COME OUT 10 TIMES BETTER THAN THEY DID GOING IN”

Also looking forward is Velocity Group USA’s Trace Feinstein, who believes there will tough times ahead for many in the industry, but who also holds that there are opportunities for those who can make it through.

“Anyone who can weather this storm is going to come out 10 times better than they did going in.” The Chief Syndication Officer said in a call. “It’s an adjustment for our economy, it’s an adjustment for our country, and I think it’s an adjustment for our industry on top of that. So there’s a lot of different changes and things are going to be happening, but I think it’s going to be very good for the ones who make it out of it.”

Feinstein, who said that most of Velocity’s workers are back in its offices, noted that it approached underwriting during the pandemic with thoroughness. Daily underwriting meetings entailed going through each state, looking at what was happening there with infection rates, and discussing how various industries could be affected.

Reporting that applications following the lockdown were actually cleaner than before, with average credit scores going up to be between 650 and 750, Feinstein explained that he pushed underwriters to rely on common sense rather than overthinking their decisions and to treat these deals like they would any MCA application.

And while many funders have struggled through the lockdown period, another part of the industry, collection agencies, have been doing well after an initially tough stretch.

Shawn Smith of Minneapolis’ Dedicated Commercial Recovery has claimed to have grown the company’s portfolio by 100% in 60 days despite a particularly trying period in mid-April. Explaining that the company was two weeks away from having to bring in strict measures to keep things going, Dedicated began getting calls again just in time, with its clients mostly phoning in about MCA deals.

Looking ahead, Smith is anticipating a busy summer and fall as businesses, funders, and the courts come back, but he is worried about a second wave and the alternative finance industry not putting in the precautions needed to stave off the economic impacts this next time around.

“WHEN IT GOT STRESS TESTED, THE PAIN CAME BACK REAL QUICK”

“Anyone can lend out a lot of money or put out a lot of money on the street, but your ability to get it back is going to be very important, and you want the fire extinguisher in place before the house is on fire … what you’re seeing in the MCA industry is because it’s just not as aged as the equipment leasing and banking industries … the MCA companies just didn’t have 20-30 year veterans in collections and legal … we’re so concerned with how to write more deals and get more money out there, and not about how to get it back and not about having strong enough underwriting standards and things like that. So when it got stress tested, the pain came back real quick.”

Likewise, Kearns Brinen & Monaghan’s Mark LeFevre claimed that after having a rocky road during the earlier stages of the pandemic and switching to a “plan B” for the year, the collections company is optimistic about going forward. Having weathered what may be the worst stretch without having had to furlough or lay-off anyone, KBM now has brought most of its workers back after a reworking of the office space. A pre-return fumigation, sneeze guards, and temperature-taking upon re-entry to the office building have all been employed after KBM’s employees asked to return to the workplace.

“The industry is changing literally day to day,” explained the President and CEO. “Some of the laws that are passed by the House and by the Senate are changing quicker than I’ve ever seen. I’ve just never seen it before. But I think it’s for the better and we’re starting to see the comeback of the economy, the stock market, employment. The unemployment numbers are really good and, in my opinion, [the numbers will] continue to go down from what we’re seeing in our industry.”