Business Lending
Upstart Has Quietly Entered the Small Business Lending Market
August 9, 2022
Upstart, once known as the AI-fintech lender for student loans, has gradually added products over time. Today, the company has entered the small business lending market, making good on the plans it announced last year.
Launched shortly before the close of the 2nd quarter, Upstart CEO Dave Girouard said during the earnings call that “We’ve already seen some more than 40 small business loans originated, totaling more than $1 million in principal in just a few weeks.” He further added that the company is “well ahead of schedule” in terms of rolling the program out.
“That team is quickly ironing out operational issues with an eye toward rapidly expanding this product in the coming months and years,” Girouard stated.
Previously, Girouard acknowledged that small business lending is becoming a crowded field.
“While there is no shortage of credit options to business owners, we aim to deliver the zero-latency affordable credit solution that modern businesses require,” he said last year.
There is a lot on the line for Upstart with this new product. Its core consumer lending business experienced a setback in the 2nd quarter when revenues declined on weaker demand for loans originated through its marketplace.
“In the last few months, lenders and institutional credit investors reacted more quickly and abruptly than we anticipated,” Girouard said. “Despite the fact that our bank partners have seen consistently strong credit performance, meaning portfolios performing at or above plan across quarterly cohorts, several of them have paused or reduced originations due to fear about the future of the economy.”
Square Loans Originated $1.01B in Q2
August 4, 2022
Square Loans originated $1.01B in the second quarter, up from $756M in Q1. During the earnings call, Block (formerly Square) CFO Amrita Ahuja said that the company is using the discipline it maintained on risk with Square Loans with other growing segments of its business. The fact that its business loans are short duration has been key to that success, the company said.
“The unique structure of our products is really designing our products to simplify access to capital for customers and to make it easy to pay them back,” Ahuja explained. “These products are generally short duration, and they have a simplified repayment process, including, for some products, being first in that payback priority. And these generally are short-duration. Square Loans is well less than a year in terms of duration.”
The company trumpeted a loss rate on Square Loans that has remained under 3%.
PayPal, King of The Small Business Lenders?
August 3, 2022
PayPal didn’t offer precise quarterly origination figures for its “Working Capital” loan product on Tuesday, but it did reveal total originations since 2013. The number? 1.3M loans for a total of $25.6B across the US, UK, Australia, and Germany. Though there is an international component, the totals are higher than rivals OnDeck and Square Capital over the same time period.
“PayPal Working Capital (PayPal Funding Pro) expanded to France and the Netherlands,” PayPal said in its Q2 announcement, “providing SMBs with simple and flexible funding in minutes.”
The company’s small business lending operations draw little attention given that its payment business, which includes Venmo, is so massive. The size of it first became known in 2019 when it offhandedly claimed $4 billion in annual business loan origination volume for the year. That number shrank to $2.6B in 2020 during the pandemic, which was still more than all of its competitors.
In the US, its loans are actually made possible through WebBank.
Work With a Broker or Go Direct?
August 2, 2022“I believe that a merchant might be better off going to a broker so the broker can make available to the merchant several different offers,” said Pooja Nene, Broker Relations Manager at Balboa Capital. “And if they’re doing what they need to do correctly and if they’re really consulting the merchant correctly, I think that they would be providing the best offers to the merchant based on their needs.”
It’s the age-old question, are merchants better served by using a broker or going direct? Opinions vary and are usually colored by what role one has in the process.
“The advantages of working with a broker is it saves the merchants a lot of time, and in some cases saves them money in fees,” said Randy Guerrier, Senior Funding Executive at Banana Exchange, a company that provides capital to MCA providers. Guerrier’s vantage point makes him less biased. “A lot of brokers do have a lot of preexisting relationships and wholesale rates that they could get with their relationships,” he said.
Matthew Washington, Founder & CEO of Moneywell GRP, says there’s a bit more nuance to the whole thing.
“The reality is that when the merchants go direct with lenders, they’re essentially dealing with the lender’s broker shop, right?” he explained. “Any lender that gets directly contacted by a merchant usually gives them off to their sales team, which [is also able] to send [them] off to other lenders.”
Washington, whose company is a funder, was an advocate for what brokers can accomplish for their clients especially since he relies entirely on them for business. He emphasized that his company is one that doesn’t have a direct sales team to handle any direct inquiries.
“All my business comes from my ISO channel,” he explained. “So when I approve a deal, it’s up to me and the broker to win it if there’s competition, but if I declined the deal, my brokers take that deal to another lender that has an appetite for that particular scenario.”
“[Lenders] may not have the staff available to form that relationship with a merchant,” said Pooja Nene of Balboa about the debate on broker vs. direct. She also cautioned that sidestepping a broker in the process might not translate into an increased likelihood of approval.
“If it’s the first round of funding, if it’s their first loan schedule, we don’t know who this merchant is, and we may feel a little bit more comfortable with that file coming through the broker and the broker discussing the terms with the merchant,” she said.
Guerrier of Banana Exchange said, “It always comes down to working with the right type of broker, right? It comes down to the person that answers the phone that’s working with you, whether it’s at a big company or small company, I like to look at things from the individual working with the right people.”
And finding the “right people” isn’t automatic because they still have to be found, and once they’re found the lender has to decide if the customer is also right for them. Speaking about that in relation to all the economic uncertainty, Washington of Moneywell GRP said that a funding company should stick to what they’re comfortable with and not “chase deals” that they wouldn’t normally fund.
“But, also [on being found], I would market the heck out of my company and make sure that everyone in the world knows what I do, my product line, my branding, my logo, and make sure that anyone that is looking for capital that they know ‘hey, this company is always popping up,’ and I’d make sure that I stand out,” Washington said.
As Layoffs Hit Fintech Lenders, It’s Not All Roses
August 1, 2022Underneath all the good news about hiring sprees, loan volume surges, and profitability, is ironically just the opposite. Some fintech lending darlings of Wall Street have abruptly changed gears over the past few months and are now in a state of self-preservation. Is this a normal business cycle or is something else going on here?
4/19/22 – Better.com lays off 3,900+ workers, a figure that includes a round that began in December 2021.
5/24/22 – Klarna lays off 10% of workforce.
6/15/22 – Coinbase announced plans to layoff 18% of its workforce.
6/21/22 – NextPoint announces end of LoanMe business, citing “market conditions.”
6/27/22 – Amount lays off 18% of workforce.
7/13/22 – Kabbage confirms it is facing two DOJ investigations over its handling of PPP loans.
7/27/22 – Shopify Capital grew originations but Shopify’s parent company announced it was laying off 10% of employees due to lower than expected post-pandemic e-commerce sales.
7/29/22 – Clearco announces major layoffs (125 employees), citing inflation, interest rates, European challenges, and a slowdown in e-commerce growth.
7/29/22 – Amazon shrank its staff by 100,000 employees.
Clearco Announces Major Layoffs, Paints Gloomy Picture
July 29, 2022Clearco, the international small business funding company led by celebrity CEO Michele Romanow, announced it was laying off 125 employees on Friday. Romanow shared the news on social media in an overall gloomy message about the business’ state of affairs. For one, the company says that Clearco is currently “considering strategic options” for its international operations.
In a letter from Romanow and Executive Chairman Andrew D’Souza, they state:
The short answer is the current macroeconomic environment looks very different today than in 2021. We have rising interest rates not seen since the mid-90s, the highest inflation in four decades, one of the biggest swings in European currency since the founding of the Euro, all compounded with a slowdown in e-commerce growth that’s been well documented and continued supply chain issues for companies of all sizes.
We were building to match the growth of the economy and now face significant headwinds that simply didn’t exist six months ago. We grew our headcount too quickly in anticipation of continued economic growth and that decision rests on us alone.
After assessing the current market conditions and uncertainty we’re seeing across the e-commerce sector, this was the most prudent action to take and was necessary to:
1. Ensure we’re able to support as many founders as possible, today and in the future, in their growth journey and;
2. To come out of this economic downturn a sustainable and profitable company.
Enova Originated $679M in Small Business Loans in Q2
July 28, 2022
Enova announced another strong quarter on Thursday. Net income for the second quarter was $52M.
Business lending originations were up, increasing 3% quarter over quarter to $679M. During the earnings call, Enova CEO David Fisher spoke glowingly about the company’s marketing capabilities and overall loan growth.
“We are pleased to report continued strong loan growth and solid credit metrics across our portfolio,” he said. “We have successfully demonstrated our ability to quickly adapt to changes, including shifting macro-economic conditions. We continue to see strength in consumers and small businesses as high employment and rising wages provides an ideal backdrop for solid credit performance. Looking forward, we are confident that our highly flexible, online-only business model and well-diversified portfolio positions us well to continue to drive profitable growth while also effectively managing risk.”
Turning Businesses into Funding Warriors
July 27, 2022
The downside to offering any small business a loan to grow is that they might not necessarily know how to do the growing part. And so for years, that’s what a Tempe, AZ headquartered company called Business Warrior had been focused on, helping small businesses grow and become more profitable. If businesses needed funding, Business Warrior could certainly provide that too, but the key was in maximizing the value of that.
It all seemed a swell fit until the company became further intrigued by the value proposition of one of its vendors, Alchemy, an “embedded finance” company headquartered in nearby California. deBanked had interviewed Alchemy CEO Timothy Li via Zoom back in August 2020 and the tech company had only grown since then. After reconnecting in April of this year, Li described Alchemy as the “Salesforce of embedded finance.”
Embedded Finance sounds altogether buzz-wordy, but Business Warrior smelled opportunity. In June, Business Warrior announced that it had acquired Alchemy. Since then, Alchemy’s Li has become a warrior and he is working hard to roll out Business Warrior’s next generation of products.
Among the first on the horizon is an Alchemy specialty, giving small businesses the tools to become lenders themselves. It sounds like Buy-Now-Pay-Later, and to an extent it is, but the difference is that a furniture store, doctor’s office, or repair shop would be the one extending the credit, not a faceless third party on Wall Street hoping to win big.
Li explained the advantage of this by using a doctor’s office as an example. “So the creditors, the banks, don’t understand [the customer] just from reading the credit report, but the doctors understand them, they’re local people, they might have seen this patient before,” said Li. “Now [that patient] wants to do a $10,000 procedure and nobody under the sun will underwrite them.” When this happens, the doctor’s office might try to arrange some type of private financing arrangement, “but they don’t have the software to do it,” Li stated.
Business Warrior’s software solves this. The platform will be free for the business and Business Warrior will process the customer payments, which is where they’ll earn their revenue, on transactions fees.
In one respect it reduces two risks for the business: (a) A third party BNPL lender dictating future approval, supply, and cost of financing, and (b) credit card companies cutting the lines of their customers that they would otherwise normally use to pay for services. The downside, so to speak, is that the business itself is tasked with being its customers’ creditor.
But ultimately, just like BNPL, such a service is likely to lead to a boost in sales, which is what Business Warrior’s mission had always been from the start.
“This tool is a tool for the small business to do more business,” Li said.
The Alchemy name will remain as far as Li knows, because they still have a lot of customers using its original products. Day to day now, Alchemy is also working with Helix House, an online marketing company that Business Warrior also acquired. They’re all leveraging each other’s resources.
Li concluded the interview by sharing a recent real world experience, he himself going to a dental office to get some work done.
“They have every single imaginable technology, schedule appointments, all the tech,” he said. “They don’t have something that manages payments. It’s either a credit card, cash, or it’s nothing.”
Referring to the financing capabilities that Business Warrior can bring to the table in those very circumstances, “I feel like it should have been there already.”
