Business Lending
Online Lenders Square Off, Offer The Kabbage In Brooklyn Food Court
April 10, 2019
In a fast gentrifying section of Downtown Brooklyn, online lenders are waging a silent turf war. Each day, hungry consumers flock to DeKalb Market, a subterranean hipster food court where lunch and a drink can cost $17. The maze-like space with retro neon signs and rustic wood countertops offers a dizzying array of cuisines, and with it, the opportunity to indulge in one’s own individual preferences. But if you’re looking for the vendor’s payment machines, you’ll notice an eerie sameness amidst a cacophony of color.
Square processed $85 billion in payments in 2018 and here in DeKalb Market, 75% of the vendors deBanked surveyed relied on Square’s Point-Of-Sale technology. The publicly traded company generated $2.5 billion in payment transaction fees last year alone, but it’s the add-on products like Instant Deposit, Cash Card, Caviar, and Square Capital that are propelling the growth. 244,000 businesses received a loan from Square in 2018 for a total of $1.6 billion. Borrowing is as simple as clicking a few buttons on the POS dashboard, making Square the presumptive lender of choice for businesses in the food court.
But the rankings on a national level say that Square trails behind Kabbage, an online lender with no reliance on a POS system. Kabbage’s growth trajectory has been epic, once a lending service for eBay merchants, the company is now one of the largest online small business lending companies in the United States.
Undeterred by the sea of Square dashboards, billboard advertisements for Kabbage once blanketed the periphery. The ads, which few consumers seemed to gaze at, were clearly meant for the business owners in between the food court and the mall above it. There was also a competitive feel to it, as if Kabbage was subconsciously communicating to Square that they were not alone.
Nowhere to be found was OnDeck, an online lender headquartered a short distance away in Manhattan that does more in loan volume each year than Square and Kabbage. But just because they can’t be seen doesn’t mean they’re not there. Blending into the crowd of consumers, deBanked spots business loan brokers, ones reputed to refer business to alternative capital sources and online lenders, OnDeck among them. 29% of OnDeck’s business in 2018 was attributed to Funding Advisors, an army of independent sales professionals across the country.
But they’re here for lunch just like everybody else, or are they? Their in-person presence may complicate their rivals’ efforts. Can a face and a handshake trump familiar software and the Internet? OnDeck’s $2.5 billion in 2018 loan volume suggests that their diverse sales strategy, including the use of Funding Advisors, has an impact.
Some vendors in DeKalb Market fail and go out of business. Others, like Cuzin’s Duzin, a homemade donut vendor made semi-famous by its feature on a Vice Media TV Show, The Hustle, recently completed renovations and further expanded its business into the nearby Barclay’s Center. Public records show the company just received financing from an equipment leasing company based in Washington State, a possible missed opportunity for the online lenders canvassing the space. Not for long, perhaps, as OnDeck announced it would be entering the equipment finance market this year.
As for Square, the love for the POS product presents a perceived edge. A general manager of Two Tablespoons, another food vendor, told deBanked that he thinks the Square system they rely upon is very easy to use. He said it also creates promotions that allow businesses like them to track customer spending and text a customer (with their permission) if they’ve earned, say, $5 off at a store.
But converting these vendors into borrowers is not guaranteed. Kabbage’s ads could not be found on a recent trip to the food court. And one shop selling burgers there told deBanked that they were aware of the loan product through Square because they use the POS for payments, but that they had no interest in using it to borrow money.
“It’s like a credit card,” she said. “What you take out, you owe. And we choose not to owe.”
Kabbage Could Be Neck and Neck with OnDeck for Originations This Year
April 8, 2019Kabbage funded $600 million in the first quarter of the year, putting it on pace to potentially overtake OnDeck in originations for 2019. OnDeck reported $658 million in originations just a quarter earlier to finish 2018.
The two companies have been among the top three funders by origination volume on deBanked’s leaderboard since 2014. OnDeck has consistently been on top with Kabbage and Square solidly in the #2 and #3 slots.
In 2018, OnDeck funded $2.48 billion, while Kabbage CEO Robert Frohwein told deBanked that the company originated “north of $2 billion.”
Both companies are expanding.
“We solidified our position as the leading online lender to small businesses in the US, launched ODX, our platform-as-a-service business, and announced plans to scale our international operations and enter the equipment finance market,” said OnDeck CEO Noah Breslow in a 2018 Q4 report statement.
Meanwhile, Kabbage announced in January of this year that it will be powering a program that offers financing to U.S. customers of the Chinese e-commerce giant Alibaba.
“Financing at the point of sale requires a fully automated solution that can handle the immense volume of daily transactions that occur on Alibaba.com,” said Kabbage CEO Rob Frohwein. “We are incredibly impressed with the service and value that Alibaba.com delivers to American businesses and want to do all we can to support their important mission.”
| Company Name | 2018 Originations | 2017 | 2016 | 2015 | 2014 |
| OnDeck | $2,484,000,000 | $2,114,663,000 | $2,400,000,000 | $1,900,000,000 | $1,200,000,000 |
| Kabbage | $2,000,000,000 | $1,500,000,000 | $1,220,000,000 | $900,000,000 | $350,000,000 |
| Square Capital | $1,600,000,000 | $1,177,000,000 | $798,000,000 | $400,000,000 | $100,000,000 |
deBanked’s leaderboard omits companies that have not disclosed their small business origination volumes.
Kabbage’s $700 million securitization that was announced today will be used to pay down a previous securitization.
Funding Circle SME Income Fund to Consider Winding Down
April 6, 2019The Funding Circle SME Income Fund (FCIF), a fund whose objective is to provide shareholders with a sustainable and attractive level of dividend income by lending, both directly and indirectly, to small businesses through Funding Circle’s platform, may soon be winding down. Earlier this week, the fund’s major shareholders expressed a desire to withdraw their capital and a vote will be scheduled to put this plan in motion.
The decision is not a surprise. The fund suffered a sharp decline in Net Asset Value late last year in part due to increasing business loan defaults.
Funding Circle Holdings (FCH), which trades on the London Stock Exchange, announced that a windup of FCIF would not affect the overall company’s 2019 guidance.
FCH CEO Samir Desai said of the news, “A global income fund providing access to a diversified portfolio of Funding Circle small business loans was the right strategy for investors and Funding Circle in 2015. However, there are now more appropriate and varied ways for investors to participate on the platform. We’re pleased to soon introduce two new investor products to the UK market. They will further expand the universe of investors that can access loans on our platform and continue to diversify our sources of funding, in line with the strategy we set out at IPO.”
Indicted Loan Brokers Out On Bond, 1 Still in Custody
April 5, 2019
Four of the five loan brokers indicted in a fake business loan scam that tricked an Ohio resident out of hundreds of thousands of dollars in upfront fees, have been released on bond. Only one, a defendant by the name of Haki Toplica, remains in custody. All of the defendants have entered pleas of not guilty.
In addition to the victim being asked for hundreds of thousands of dollars in upfront fees to apply for phony loans, he also signed over the title of 55 vehicles to the defendants to serve as the collateral. The vehicles included a Ford Mustang, several dump trucks, several tractors, several restored classic vehicles, a Freightliner motor home, and trailers.
Toplica was arrested in December and his co-conspirators in March. All of them are New York residents. The condition of one defendant’s release was that she remain working with her present employer. deBanked determined that her most recent employment was ironically that of a business loan broker.
Online Lender Offering “Incredible” Returns to Investors is Recording Massive Losses
March 29, 2019
StreetShares continues to rack up astronomical losses, according to the company’s recently filed unaudited financial statements. The company recorded a $6.4 million loss for the second half of 2018 on only $1.88 million in operating revenue. As in previous periods, payroll continues to be the largest expense.
StreetShares’ funding comes in part from mom & pop investors that are offered a fixed annual return of 5% regardless of how the company’s underlying loans perform. Advertisements on the website call it “incredible” and trumpet that you can “grow your money like a 2x World War champ” and that “your balance will grow every day.” The offering is called a veteran business bond but it has no government backing and can suffer a total risk of loss, all while the underlying loans may not even be made to veteran-owned businesses.
A simple explanation on the site for how it works is that you just open an account, transfer funds from your bank and then just “watch the interest start piling up.” You can withdraw your money anytime but large withdrawals over $50,000 can take up to 30 days to process, the company states. The attractive terms have allowed StreetShares to take in millions of dollars from everyday people with amounts as small as $25.
Institutional investors can earn even higher returns. Lendit Co-founder Peter Renton recently called StreetShares his “top performing investment by a long way,” beating his investments in Lending Club, Prosper, P2Binvestor, Peerstreet, Yieldstreet, Money360, Fundrise, and even the returns previously and erroneously reported by Direct Lending Investments.
deBanked previously reported that on January 1st, Jesse Cushman, the company’s Chief Business Officer and Principal Financial & Accounting Officer, resigned. However, his name continues to remain on the website’s Leadership page a full 3 months later. The company still has not named a permanent successor. deBanked emailed StreetShares earlier in the week about Cushman’s departure and was told that he left to pursue another opportunity. “Steve Vickrey, has been in place since before he left,” President Mickey Konson responded. Konson has been filling in as acting Principal Accounting Officer in the meantime.
In a press release published by StreetShares on Tuesday about a new credit card offering, StreetShares CEO/co-Founder & Iraq War Veteran Mark L. Rockefeller, said, “Veterans love to help other veterans. StreetShares is a veteran-run company, and the goal of the card is not only to provide a veteran focused payments tool, but also to benefit the veteran community as a whole by funding programs that benefit veteran entrepreneurship.”
Tiny Small Businesses Struggle More Than the Rest
March 28, 2019
The average credit score of the owner of a “mom and pop” shop (a business with four or fewer employees) is 30 points lower than the owner of a larger business, according to a recent study conducted by Lendio. (Lendio defined a “mom and pop” business and having four or fewer employees). Furthermore, the study says that, on average, mom and pop businesses require twice as many interactions with a lending expert, compared to larger small businesses. This is likely because of problems with credit and other financial challenges.
Smaller mom and pop businesses are in greater need of capital, according to the study. These businesses represent 53% of the customers funded through Lendio’s online marketplace. And their loans account for 34% of the total loan volume funded, even though the average size of their loans is smaller. The average loan amount for a “mom and pop” business is less than half that of larger businesses. Specifically, the average loan amount for “mom and pop” businesses is $23,081, while the average loan amount for larger small businesses is $54,188. Of course, a larger company with greater sales can afford to borrow more. But the $54,188 average loan size for larger companies may be a smaller percentage of revenue for those larger companies.
Speaking of revenue, mom and pop businesses’ monthly revenues are on average $35,000 less than their non-mom and pop small business counterparts. The smaller mom and pop shops are also generally younger, according to the Lendio study. Their average time in business is 5.6 years compared to 7.4 years for the larger small businesses.
Undercover in the Underwriting Room
March 22, 2019
Think of the stereotype of a high energy, high testosterone sales floor of men practically shouting on the phone. And then scale it down to a level of about 2 out of 10. That was the environment I stepped into on a recent visit to a room of small business finance underwriters. They let me shadow one for a day so long as I didn’t reveal who they were.
In the glass room where almost 10 underwriters sat, some spoke on the phone, but the conversations were measured. No shouting. No arguing. Sometimes there was near silence. More than anything, there was an air of focus. After all, when you’re evaluating dozens of documents, just a single oversight can cost the company a lot of money.
“You don’t want to be the guy who loses the company money because you didn’t see a red flag,” said the underwriter.
He asked me to sit beside his desk and watch the funding decisions he was making based on what he saw in the file. He surely didn’t take the merchant’s monthly sales numbers at face value. For instance, in one file, in addition to subtracting a $2,000 transfer from the owner’s personal account into their business account, he also noticed a $4.18 refund from Walmart that was being counted as sales.
“That’s not sales,” he said, and he subtracted $4.18 from the monthly sales number. In one instance, $103,000 in reported sales became $75,000, according to the underwriter.
While you could certainly feel the concentration in the room, it wasn’t quite a library either.
“His FICO sucks,” one of the underwriters said to the others. “His FICO went down and he’s stacked. No.”
When an underwriter is uncertain about a decision, he’ll ask for everyone’s two cents. He said they call these impromptu discussions the “underwriters’ den.”
All the deals we looked at got declined, but I’m told that one underwriter can fund as many as five deals in a day, and then go a few days without funding any.
While the underwriting criteria is taken seriously, sometimes you can be a little more aggressive and push the boundaries a bit if it’s a deal you really like. That takes considerable thought and reasoning. But when the answer is going to be no, it can come at light speed. A few of them happened in under three minutes while I was there. And that was with him slowing down to narrate for me what he was thinking.
“I give a look at [most of] the documents in the file first,” he said, “so that if there’s an obvious red flag, I don’t want to spend time on it.”
In his cursory glance, he’ll look at the business owner’s FICO score, years in business, if the company has other financing, and if so, how they’ve been able to handle those payments. He’ll also count the number of negative days (when the company owes money and has none) and note how consistently the company makes sales.
“Consistency gives me comfort,” he said. “I can give them a stronger offer when they show consistent sales.”
Of course, funding a file takes a good bit longer because you have to continue to vet the business and the business owner, almost as if you suspect there’s something wrong. Has the owner ever been convicted of fraud? Have they owned any other businesses? Did the owner ever default on a loan? It can seem hard for small businesses to pass all these background checks. But the funder has to protect itself and the underwriter’s job is to do just that.
“We’re in the business of giving out money, but within limits.”
LinkedIn Posts Are Turning Into Deals & Dollars
March 14, 2019
On average, I sign up one ISO every time I post a message on LinkedIn, says Jennie Villano, VP of Business Development at Kalamata Capital Group. They don’t all end up submitting business, she adds, but overall it works. It costs her nothing more than her time and it produces results.
Villano is among the growing crowd of industry insiders attempting to convert social media posts into measurable business. With more than 600 million users on LinkedIn, there is no question about the potential to reach clients. The prevailing wisdom is that you need to be on social media and sharing, but share what exactly?
New Hampshire-based Everlasting Capital is building a window into the business lives of co-founders Josh Feinberg and Will Murphy. One of their recent social media posts focused on their search for a new office lease, while another was a video stream of Feinberg making a real live cold call. The rewards span the gamut, from merchants seeking funding to offers to speak professionally in front of large audiences. And it’s not just about them. “We have worked with our employees to get confident on camera which is making them a lot more comfortable on the phone,” Feinberg said.
Anthony Collin, CEO of New York-based Smart Business Funding, also attests to LinkedIn. “We definitely generate sales from posting online,” Collin shared, explaining that it was a mix of ISOs and merchants who reach out. Collin said that he and two others in the company meet weekly to generate ideas for the daily posts. They try to make the posts timely, either related to something going on in the industry or to current events, like national elections.
For Jennie Villano, it’s not always a sales pitch. She has posted about being a single mom and about how to keep an upbeat attitude. “Your co-workers, your friends. Are they positive, or are they always complaining?” Villano asks in the video. “Try to surround yourself with positive people who see the best in everything.” She’ll typically extend the offer to do business in the videos that she makes and shares, but not all of them. She shares 2-3 videos a week and her posts typically receive thousands of views.
Sometimes a video needs a little bit of priming to draw the viewer in. Everlasting Capital, for example, filmed an executive making a sales pitch in their conference room to company CEO Josh Feinberg. But it’s something you must watch, or so the title of the post suggests, because they say the executive drove 10 hours to the office for the opportunity.
Though other social networks are being used in full force by many industry players, LinkedIn is definitely a platform to consider. “We’ve gotten tremendous value from posting to LinkedIn,” Smart Business Funding’s Collin said.
