Business Lending
Upstart is Heading into Small Business Lending
November 10, 2021
Upstart, the fintech AI consumer lender originally known for its student loan platform, is heading into small business lending.
“…we believe there is an unmet need to provide fast, easy access to affordable installment loans to business owners across the country,” said Upstart CEO David Girouard during the earnings call. “Every small business is different and they operate across a crazy wide spectrum of industries.”
Girouard explained that there are “significant challenges to delivering a compelling loan product that is useful to business owners,” in which there is also reliable value for the lender itself.
“This challenge is tailor-made for Upstart,” Girouard said. “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. This is another product in high demand from our bank and credit union partners, and we hope to bring it to market during 2022 as well.”
Upstart is no small player. The company’s market cap is currently around $20B and it is putting out about 1.5M loans a year for a total of more than $16B.
PayPal’s Lending Increases
November 8, 2021
PayPal was mum about its working capital loan products in the latest quarterly earnings report, but clues lie in an important line item, Loans and interest receivable. The figure has historically been closely correlated with originations. PayPal reported $3.7B in those receivables at the end of Q3, up from $3.2B in Q2 and up from $2.77B at the end of Q4 2020.
The number was close to $4B at the end of 2019 so the figures represent a return to previous levels.
In the earnings call, PayPal CFO John Rainey said “growth in our short-term installment pay portfolio was the primary driver of this increase.” Rainey appeared to be referring to its Buy-Now-Pay-Later product.
Separately, PayPal announced that Venmo users should be able to pay for purchases on Amazon beginning next year.
This page has been updated to reflect the CFO’s statements that the increase was driven by short-term installment lending.
It’s Time to Check That ISO Agreement and Balance the Broker/Funder Relationship
November 8, 2021
The fine print of ISO Agreements, long a thorn in the side of brokers when it’s worked against them, is an area that is ripe for change. All too often the price of a referral relationship is a take-it-or-leave-it contract that is not up for negotiation. So says Jared Weitz, CEO of United Capital Source and Co-Chairman of the Broker Division at the SBFA. He told deBanked that he’s gotten major pushback from some funders for redlining deals prior to inking them.
Aware that he is not alone in dealing with this, Weitz is looking to push out uniform agreements to the industry that would align both sides, creating a fair arrangement and providing for mutual indemnifications.
“I want to explain the importance of it on a broker’s side because I think that what is happening is that there are funders who solicit business [by saying] that they are broker and customer-centric, us being the customer, and [then] we get handed an agreement that literally signs [our] business away,” said Weitz.
“If you don’t know any better, you’re totally screwed.”
Weitz spoke in detail about how the concept of redlining an agreement is a part of doing business with large financial institutions, but when it comes to funders, it’s an entirely different situation.
“In most industries, it’s such a normal thing to redline an agreement. We were [working] with AMEX, a huge company, and it was understood like ‘hey, shoot this over to your lawyer, let us know,’ it was already understood that we were going to redline it. In [small business lending] if you want to redline something, it’s almost like the funder gets offended.”
When it comes to mutual indemnification, Weitz talked about how this is the biggest issue in these types of deals, especially as new laws are creeping into certain states that are going to change the way many funders do business. In response to some of these new laws, funders are not only trying to put all of the legal responsibility on the brokers, but forcing them to give up their book of business in order to get deals done.
“Now that there are new laws popping up in different states and being enforced differently, funders have come out with new agreements, and look, that’s okay to do right, any broker worth their salt is going to say ‘hey, we agree to not lie and mislead, we agree to follow the TCPA laws, to follow the CAN-SPAM email laws,’ that stuff is easy. What is with these agreements is that you have funders that say to a broker in the [contract], we want the right to come and fully audit your books.”
After the implementation of his own mutual agreement, Weitz claims that a quarter of the funders he worked with prior to his agreement no longer want to do business with him.
“There is a large 25 percent, and were talking about big name funders that I have stopped working with over the last twelve to eighteen months because they have literally tried to hit me with the most onerous agreement you could ever see, and when I spoke to them about it, they said ‘you know what Jared, most people just sign this and send it back.’ And that made me afraid for the broker industry.”
Although a positive relationship with a funder is imperative to being a successful broker, Weitz believes that some type of mutual agreement will protect people like him from being taken advantage of when things don’t go as planned for the funder.
“The guy that doesn’t let you redline his agreement, you should run away from that guy, because I have been in that scenario, where I’ve hugged, I’ve eaten at a man’s house with his family, and I’ve had that same man when things are down do what he has to do.”
Weitz talked about how the relationship with a funder can start a business relationship, but stressed that a fair agreement keeps it going. “Everyone’s friends when they’re making an agreement. Everyone’s [all] smiles, everyone is handshakes and hugs, but when things are bad in the world, and those smiles turn into straight faces, people look to that agreement, and say ‘okay what can I do?’”
When asked about losing deals to brokers who are willing to sign their lives away to get a deal done, Weitz said that those types of brokers are the ones that even if they do make a quick deal, they will never survive long enough to make a legitimate impact on the industry.
“I think funders will say ‘listen, you sign this agreement we will give you XYZ,’ and let me tell you, that’s the funder that is going to take your lunch from you, and that’s real,” said Weitz.
“The guy that offers you everything to just sign without a redline, is the guy that will crush your business, mark my words.”
Square Loans Originated $594M in Business Funding in Q3
November 5, 2021
Square Loans, formerly known as Square Capital, originated $594M in small business funding in Q3, bringing the company to $1.6B originated YTD. Square had already been recognized among the largest small business lenders this year so far.
The Q3 figure boils down to 83,000 individual loans.
Overall, Square Loans was mentioned very little in the company’s quarterly earnings call. Company CEO Jack Dorsey said “…there’s still a lot of opportunity for us to open more of our products in more of the markets that we’re already in, such as Square Loans in more of the places that we already exist.”
The coming of Hyperinflation, a prediction made by Dorsey on Twitter just weeks prior, went completely unmentioned in Square’s official reports.
On October 22, he tweeted, “Hyperinflation is going to change everything. It’s happening.”
Mississippi Fintech is Innovating Small Business Lending with Brokers in Mind
November 3, 2021
Vergent, a loan management software, is creating a space where brokers and lenders alike can manage all aspects of a deal in one place. Based in Ridgefield, Mississippi, Vergent is trying to innovate the industry with brokers in mind, pairing the small town values of interpersonal engagement and getting to know your customer with the big city ideas of fintech and automation.
“Really what we provide is the technology infrastructure for lenders to reach their end user,” said Bradley Tompkins, Chief Information Officer at Vergent. “Whether that be a small business looking for a loan, we facilitate that acquisition, the origination of that loan, and the servicing of that loan. That could mean recurring payment setups, based upon the lender’s requirements, communication with that customer via email, text, however that is facilitated, and all the different payment options.”
Tompkins talked about how his software is one of the few that brokers in his area are already utilizing to start making deals smoother. With access to all aspects of the deal, Vergent provides an all-in-one suite of options that can turn the process of analyzing a deal or checking out a deal post-funding into a couple of clicks.
“We actually have brokers who use our software to accept applications, originate loans, and then we can either transfer that to a separate portfolio that the lender then manages for servicing, or sometimes we have brokers that service the loans themselves,” Tompkins said. “So there are really a lot of options on how to set that up in the platform, so the lender can have a separate site where they accept applications from multiple brokers, or really any combination of those things.”
The value of a direct relationship with the customer is top-tier according to Tompkins, as he spoke about the next great innovations in fintech not being how to weed the human interaction out, but finding its role that will find the balance between human touch and AI power. “Once you know your customer, you can give them the option to pay you back in the easiest way possible. Understanding how they get paid, their pay cycles, when they have money and being flexible to accept that money when they have it, and giving them those repayment options is the next great innovation.”
When talking about the ability to market his product to a wide audience, Tompkins acknowledged the difficulty due to the size of the industry itself, but touched on the value of networking events like Money 20/20, where Tompkins was pitching Vergent to an international audience.
“We’ve been pleasantly surprised by the amount of lenders we’ve seen, and the amount of opportunities that have come our way from [Money 20/20]. We came here pretty open minded, maybe talk to some payment processors and other vendors that may be able to integrate to us and kind of help expand our network, but really it’s just getting our name out, seeing a little bit of a different segment than what we normally see, and looking at other market opportunities.”
Appalachian Crowdfunder Gives Take on Business Lending
November 2, 2021
View from outside of Pittsburgh, PAGeorge Cook, whose family has been running a small community bank in rural Appalachia for over 130 years, has grown up in a world surrounded by banking in some of the most rural parts of America. Now the CEO of Honeycomb Credit, Cook has taken to a crowdfunding platform to start lending to businesses in his area. Cook shared his thoughts with deBanked about the state of lending, and how his product competes with ones already available on the lending market.
Cook spoke about how when he growing up, he always had a fascination with the relationship between the consumer and their banks combined with the difficulties for those consumers to get access to capital. “I spent a lot of time thinking about community banking, especially local capital,” said Cook.
When discussing competing products in the lending space, Cook thinks that his product will innovate his area with a style of lending that benefits both the borrower and investor. It appears that he thinks products like MCAs have become partially antiquated.
“I think the downside of [MCA] is inherently when your value proposition is fast money, you’re going to have a negative selection,” said Cook, when asked about fintech’s role in innovating small business lending. “You’re going to have a lot of desperate businesses who need money fast, which means you inherently have to charge a high interest rate and that has [deterred] a lot of business owners.”
George Cook, CEO, Honeycomb CreditCook referenced how the complexity of some MCA deals prevent small businesses from using them. “We talk to a lot of business owners who really don’t understand what a merchant cash advance is, they get caught in a debt trap, and it’s not a good situation. For me, I think the next evolution is, not saying merchant cash advances are going away, but I think they’ve been over extended. I think they’ve been overapplied in places where they don’t make sense.”
Cook hinted at new fintech loan products that have elements of MCA popping up in the lending world, as fintech innovates the industry.
“I think now we’re going to see the fintech space start to right the issue, come up with other capital solutions that make sense for small businesses for longer term capital. I think we’re going to see a lot of term loan products that act with different data and different attributes coming to bear, [thus] being able to bank these businesses.”
After working in fintech building big data credit analytics products prior to starting Honeycomb, Cook claims he saw a major issue with small businesses having access to capital long ago. He saw that the qualifications needed for business loans were the same as ones needed for consumer loans, and many small businesses just didn’t qualify for the capital they needed.
“[The system] didn’t work as well for small business lending because you know, small businesses don’t have as much operating history, they don’t have clean data sets, they’re not keeping their books really well, there’s not really a good data aggregator of small business data.”
Cook continued to speak about the issues with banks evaluating a small businesses’ credit and how this was causing a low approval rating. “A coffee shop looks a lot different than a fitness studio and those look a lot different than a manufacturing plant,” he said. “We were actually seeing a really large decrease in small business lending across the country.”
According to Cook, his company allows investors to take their money and put it right back into the community. He also claims that each one of his customers can expect returns ranging from six to twelve percent on an investment.
Honeycomb makes money on success fees, which are the closing costs on the loan. There’s also an investor fee to get a foot in the door.
“One of the things we’ve found is whenever you have retail investors, you have local people in the community voting with their wallets on these small business loans,” said Cook. “So we’re able to do small business loans in a way that no one else has been able to.”
OnDeck originated $462M in Small Business Loans in Q3
October 28, 2021
Enova, through OnDeck, originated $462M in small business loans in Q3, according to the company’s earnings call. That was up from $400M the quarter before.
“…as we’ve been predicting, small businesses have been beneficiaries of the pent-up consumer demand and the resulting increased spending,” said Enova CEO David Fisher.
Fisher also touched upon the CFPB regulatory inquiry disclosed in the earnings release, downplaying it somewhat as “routine.”
“I want to touch on the CID that we announced in our press release,” he said. “The CFPB is investigating a handful of issues several which were self reported by Enova. We have been cooperating fully with the CFPB as we always do. This is a routine process with the CFPB, particularly in our industry. We’ve been through it with them in the past. As a result, we anticipate being able to work with the CFPB to expeditiously complete this investigation.”
This story has been updated to fix typos
Shopify Capital Originated $393.6M in MCAs and Business Loans in Q3
October 28, 2021Shopify Capital, the funding arm of e-commerce giant Shopify, originated $393.6M in merchant cash advances and business loans in Q3, the company reported. That’s up from the $363M in the previous quarter.
Covid was a boon to Shopify Capital given its dependence on e-commerce businesses. Its 2020 funding volume was almost double that of 2019.
“Shopify Capital has grown to approximately $2.7 billion in cumulative capital funded since its launch in April 2016,” the company announced. The large volume and continued success has landed the Shopify Capital division in the company’s “core” bucket of “near-term initiatives” that will build the company for the long term, according to a presentation accompanying Q3 earnings.
