Business Lending
Shopify Capital Originated $416.4M in MCAs and Loans in Q2
July 27, 2022
Shopify Capital originated $416.4M in funding to small businesses in Q2, the company announced. That was spread across the US, Canada, and the UK. The figure represented a large increase over the $346.7M in Q1.
Although its funding business grew, the overall parent company announced that it was laying off 10% of its employees. The CEO explained that this was a correction to its expectations that pandemic-driven e-commerce sales would continue to soar for a long time, but that they have instead slowed.
DailyFunder Marks 10 Year Anniversary
July 26, 2022
The DailyFunder.com domain was registered ten years and 1 month ago. Formed two years after the debut of deBanked, DailyFunder went on to become the most active small business finance community in North America. The forum has generated more than 160,000 posts and has more than 12,000 members. It has regularly surpassed two million page views per year.
“There is no doubt that the DF has impacted the trajectory of the industry over the last decade,” said Sean Murray, who founded it. “The site receives thousands of visitors per day. In the early years it ushered in an era of broker commission transparency.”
Murray recalled a time when sales agents were not always aware that there were even commissions being paid at all.
“There were reps who thought that they had to charge merchants a separate fee in order to earn anything at all,” Murray said. “And their bosses were taking 50% of that. When I would bring up commissions, they’d be like ‘wait, the funders are paying my boss for these deals too?’ and I’d be like ‘how do you not know this?’ Widespread communication via the forum eliminated a lot of the secrets.”
One of the most popular categories on the forum in more recent times has been the Deal Bin, where brokers try to find placement for deals. It’s recorded more than 41,000 posts.
“Ten years is a lifetime as far as I’m concerned,” Murray said. “Love it or hate it, everybody knows the DF. If you’re a lender or funder, your brokers are lurking on there whether they admit it or not.”
Merchant Loses Whole EIDL After Attempting to Earn High Yield On It
July 25, 2022
It’s a tale of Covid EIDL relief gone wrong. A small business owner in Colorado Springs, CO is begging for his funds back after taking the entire lump sum of his EIDL funds ($525,000) and depositing them with a high-yield non-FDIC insured cryptocurrency tech company. The tech company, Celsius, declared bankruptcy less than two months later, yanking the merchant’s EIDL funds with it. Celsius was not a bank, the arrangement not a true deposit account, and the funds not FDIC-insured.
In a letter submitted by the merchant to the bankruptcy court, he says that he deposited the funds there to “earn an APY to help pay back the 3.9% on the loan…” He further added that he believed his account to be safe because of the site’s Terms of Use.
“The funds in my Celsius Custodial account are not mine, they are the US Governments and I my entire business is secured and backed by these funds,” he wrote. “If they are not returned, my business would go bankrupt, my 15 employees would be let go, and 14 years of my life’s work lost and at the age of 49 years old, I would have to start over with nothing.”
Prior to the bankruptcy, Alex Mashinsky, Celsius’ CEO, oft touted the phrase: “banks are not your friend.”
deBanked Happy Hour is SOLD OUT
July 17, 2022The deBanked happy hour scheduled for July 28th in NYC has hit its registration limit.
Missed out? Register for Broker Fair 2022 taking place on October 24 at the New York Marriott Marquis in Times Square. This is one event that small business finance brokers won’t want to miss!
The Highway to Quality Leads and Closing Deals
July 13, 2022
In the early months of 2020, twenty-two year-old Gary Parker found himself on a nature walk along a stretch of highway in Canada. As a savvy marketer in the medical spa field, the wide grip of Canadian pandemic lockdowns had quickly turned his thriving business into dust.
Swept off of his feet by the suddenness of his predicament, he turned to nature to clear his mind and found his next venture in the unlikeliest of ways.
“I went for a walk outside, and so I saw these trucks,” Parker said, “just like trucks on the road just driving. I was like, ‘everything is shut down but there’s trucks just moving things across the country.'”
Parker’s verbal description of the moment was enhanced by his scenic Zoom background when he was interviewed for the story. Parking his laptop on the hood of his car next to a real life mountain range along a Canadian highway, he explained that he didn’t have to tell me how that walk felt because he could show me. Moving his laptop camera around to show off tractor-trailers behind him in the distance, the inspiration that had come to him in 2020 was still present.
Though the country was supposedly closed for business back then, he couldn’t help but notice how many trucks were still on the highways shuttling supplies around.
“I’m a bit of a curious guy,” Parker said, “so I started Googling, like, ‘How much for a truck this big?’ and you know, they were like 70,000 bucks, 100,000 bucks. And I was like, ‘how do people even purchase these trucks?'”
Parker went on a research mission and discovered that few people, if any, were buying large trucks outright with cash, that so much of it was done through financing.
“And so I look up ‘what’s financing? How do people get truck financing?’ And then I recognized that other than truck-sales groups, there’s a section of people where their job is just to help people find the right financing methods.”
Parker thought he might be able to work with the latter group, given his marketing background, to help connect truckers with financing, but discovered the market in Canada was relatively small.
“Things really started to boom when I met my first USA client,” Parker said, because the demand in the US for truck financing seemed endless. “…in one day you could generate 100 inquiries of people who wanted financing for trucks,” he said.
Parker soon figured out that trucks were just one market in a wider industry of equipment financing, a rabbit hole of endless opportunity that led him to other big name entrepreneurs in the space like Josh Feinberg and Cheryl Tibbs. Feinberg, coincidentally, was a featured cast member in deBanked‘s recently produced equipment finance sales reality show.
Parker found common synergy with both and with their help was further introduced to the entire gamut of small business financing solutions.
“And that’s when I got fully immersed,” he said.
He didn’t want to be a broker or a lender, however, so instead he set out to focus on one very particular area of the process, lead generation. First, he built a system to help others, and then he gravitated towards creating a matchmaking system where brokers could connect with businesses that came to his company for help. The end result is his current company that many brokers have now become aware of, Fundly.
“So Fundly is an online marketplace,” he said, “where we have two things. Right now we have real-time matches, so [merchants] who are looking for funding every single day can come in free-of-charge and submit their inquiries, and we have funding members who can join for $1 a month who can see all these inquiries come in and then decide whether or not they want to pitch or share their profile with someone for five bucks.”
Parker explained it as a Tinder-style system where brokers can see the inquiries but can’t talk to the merchants unless the merchants also choose to engage with them. The upside is that when merchants say ‘yes,’ the brokers get to speak to someone that is interested right at that moment and with them specifically.
But Parker is a marketing guy, not a developer, and the execution of this required additional people to put the vision together.
“So we have a team now. Before when we just started, it was just me,” he explained. “If you’re going to write anything, let them know [about the team], because I have a hard working team who is behind every single thing and it wouldn’t have been possible, the technology wouldn’t have been possible without the team.”
Despite the business being born in Canada, Fundly is only targeting the US market because of its scope. Finding interested business owners is not even the hard part of his job, he explained, but rather the hard part is about educating brokers about how to communicate with businesses.
“I’m trying to teach our community members as they come into our orientation, what they think small business owners care about,” he said.
A big mistake for a broker, he explained, is starting off with a pitch about how many lenders they work with.
“Small business owners do not care about how many lenders you have in your back pocket,” he stated. “We’ve come to recognize a small business cares about one thing, what can you do for them? speak in terms of them.”
He imbues them with this marketing wisdom not just because he wants to improve their success rate, but also because he is adamant about making sure the businesses that come to his company get access to the right people with the right programs and prices. He doesn’t want to see these customers get a bad deal.
That Parker is a 24-year old former medical spa marketer hardly matters to brokers who recognize talent when they see it. When deBanked asked a senior executive of one reputable broker shop off the record what they thought about Parker, they responded by saying “he’s a genius.”
And besides, he’s not exactly that far off from where he started.
“The machines that some of the brokers finance, like laser therapy machines, stuff like that, I was working on the flip side, from the consumer perspective, having people sign up for high ticket packages from these machines,” he said.
And yet he’s very appreciative of how far he’s come since he went for that walk to reflect on his loss.
“God helped me. It was, it was rough, man. Yeah, not going to lie,” he said. “It was really rough.”
Toward the end of the interview, Parker had already shifted into marketing teacher mode.
“What really sets us apart is psychology,” he said. “Most people think that to get a business owner, you have to hit them and say, ‘Are you looking for the lowest terms? And you know, X, Y and Z??'”
The better approach, he explained, is to tell them that you will get them answers quickly.
“That results in a lot more funding,” he said, “because it’s not making a promise upfront, saying ‘let’s get you funds in 24 hours,’ it’s saying ‘let’s get you answers. And here’s someone to help you find these answers.'”
Lendio Achieves SOC 2 Compliance
July 12, 2022
Lendio recently achieved SOC 2 compliance. Short for Service Organization Control 2 and pronounced “sock two,” the voluntary designation for Lendio, which focuses on data security, is not commonly sought by its peers.
SOC 2 is defined by American Institute of Certified Public Accountants (AICPA) guidelines and issued by outside auditors. The AICPA itself is an association that provides educational guidance materials, develops and grades the Uniform CPA Examination, and monitors and enforces compliance within the profession.
“We focus on small and medium sized business owners and their businesses,” said Ethan Hanson, SVP, General Counsel at Lendio, “and they benefit because they know they’re dealing with a company that is secure and takes their information seriously and handles that information with care.”
The process in obtaining this certification takes months of preparation and covers data security, data privacy, HR and accounting functions, making this an all-encompassing certification.
“The process is you engage with an audit party, they come in, and they review all of your policies, all of your systems, how our database is set up and the framework that you have and ensure that all those policies cover our business operations, and that they are also in line with the standards of the AICPA,” said Hanson.
Fintech Lender Signals That Capital Markets Are Worried
July 11, 2022
Concern about the economy is real. Upstart, the publicly traded online consumer lending marketplace, is noticing such a shift that it felt compelled to publish a sneak peek of its Q2 earnings. And it’s not good.
“Inflation and recession fears have driven interest rates up and put banks and capital markets on cautious footing,” said Dave Girouard, co-founder and CEO of Upstart. Girouard followed that by saying that its marketplace is “funding constrained,” a challenge “largely driven by concerns about the macroeconomy among lenders and capital market participants.”
Originations in Q2 were down as a result.
Though the company is still optimistic that its risk models will perform, the economic headwinds come just as it was beginning to roll out its new small business lending product.
In May, Girouard said that their small business loan pricing model would include more than 500 variables about both the applicant and business.
“It will also feature our loan month modeling framework, which is one of the most impactful innovations added to our personal loan product a few years back,” Girouard said. “Our initial testing suggests that version 1 of our SMB model will deliver higher accuracy, as measured by Area Under the Curve, or AUC, than peer models that have been in the market for years.”
Upstart plans to publish its official Q2 earnings on August 8th. The price of its stock is down 93% since its all time high reached last October.
Thoughts on Inflation, a Recession, and Regulation From Someone Who’s Seen ‘This Movie’ Before
July 7, 2022
“I can tell you that in the US that originators are starting to adjust their underwriting policies,” said David Goldin, CEO of Capify and Head of Originations at Lender Capital Partners, “I don’t know about pricing. I haven’t heard that yet.”
Goldin, who has been a small business finance chief executive for 20 years, believes that the economy, inflation, and interest rates are front-and-center issues that the industry should be thinking about right now. In the UK, one region that Capify operates in, Goldin said that several small business finance executives there are already talking about raising margin and doing shorter term deals to prepare for the increased risk.
“Some originators are smart enough to be proactive and others are saying, ‘oh we’ll just watch it.’ So it’s either going to take trickling down through the economy globally or defaults to go up for these adjustment to happen,” he said.
During the Great Recession of ’08/’09, Goldin was right in the thick of it as the CEO of AmeriMerchant, one of the first MCA companies in the US. He explained that there’s a notable difference between now versus then.
“One of the things that didn’t exist back then, someone doing a second [position] was like unheard of in 2008,” he said. “Now, what is it now? first, 2nd, 3rd, 4th, 5th? 6, 7, 8, 9. It’s like a horse race. Ten horses in the race in some cases. […] You have to be careful, right? You have to make sure you’re covering your margin by charging enough and going shorter.”
But in a competitive environment where nobody wants to reveal their cards or risk losing business, not every funder is keen to start making changes right now. Goldin said that many funding companies will wait to see if their competitors start tightening up first especially if they’re driven by their ISOs and brokers. The downside of becoming more conservative is that brokers might just decide to take all of their business elsewhere.
But a looming recession isn’t all bad. “There are some positives,” he said. “The positives are the banks do tighten up. It’s just a question of when not if. So, you may get applicants that come to alternative financing that may have never taken or considered these types of products because they got bank financing.”
Complicating the landscape now, however, is that funding companies are wrangling with new state regulations. Goldin is aware of several originators that have temporarily paused business in Virginia, for example, where a disclosure requirement went into effect just last week. The soon-to-be implemented New York and California laws are also causing rumblings about funding suspensions respectively. In each of those states it was “sales-based financing” products that were specifically targeted, a trend that looks sure to continue as states like Maryland, Connecticut, and others are determined to reintroduce disclosure legislation next year.
“I think more and more originators will eventually get away from the MCA model,” Goldin said, “and go more towards the business loan model by partnering with a bank. I think you’re going to see more companies trying to implement bank programs to become full business loans and not deal with all the nuances of a state by state and MCA program.”
Goldin’s point of view, wisdom, and predictions are aggressively sobering. Only three months ago, industry sources were telling deBanked that their outlook for 2022 was optimistic and that the end of covid-era government stimulus suggested that there would be growth for non-bank finance companies. Suddenly the tone has shifted, the stock market has plummeted, and interest rates are rising.
“I think if you resurveyed originators now, I think you’d get a different response than you did eight weeks ago or even four weeks ago,” Goldin said. “I can tell you right now that capital providers are asking their originators about how they’re making adjusments in this environment…”
Indeed, deBanked did speak with several players just last week and did notice that the general sentiment had shifted to one of concern and caution.
“I think funders should be thinking about redundancy,” Goldin said. “More than ever the best time to raise capital is when you don’t need it. And I don’t know if [funding sources] will pull lines, yes if defaults go up, but they may not be as inclined to enter into new relationships in this environment.” Because of that, now might be the last best opportunity to secure additional credit sources even they’re not necessarily needed, he suggested.
With that, he said that funders should be thinking about tightening up the bottom of their credit profile, increasing their margins, doing shorter term deals, looking for more mature businesses, and working with businesses with higher credit scores.
“I think that those that don’t make credit adjustments, raise margin, and go shorter are going to have their you-know-what handed to them,” he said. “I’ve seen this movie too many times. It doesn’t have to be called a recession. […] It’s all about affordability to repay, and the more debt [the customers] have, and the more their margins are squeezed, or the more their sales go down. That’s when problems begin. You’re less likely to have a problem if you’re only out six months instead of eighteen months. I’ve used this saying a million times: ‘When the ships are too far out to sea and it’s a tidal wave, you can’t get them back.'”
