Business Lending
It’s Back to Business For Alternative Funding in Puerto Rico
June 15, 2018
Last year, alternative funding in Puerto Rico ground to a halt after the island was ravaged by two devastating hurricanes in close proximity. Now, however, the alternative funding business in Puerto Rico is getting its second wind, after a several-month hiatus.
Puerto Rico got lashed by high winds and rain from Hurricane Irma in early September 2017, causing large-scale power outages and damage. Then, about two weeks later, Hurricane Maria hit the island square on, causing even more catastrophic destruction. Millions were without power for months (thousands still are), homes were destroyed, multiple lives were lost, businesses were decimated and the island’s already shaky economy teetered on the brink of disaster.
More than half a year later, residents are still trying to pick up the pieces of the epic humanitarian crisis. Hurricane Maria caused an estimated $90 billion in damage, according to the National Hurricane Center, making it the costliest hurricane on record to strike Puerto Rico and the U.S. Virgin Islands. The hurricane knocked out 80 percent of Puerto Rico’s power lines and destroyed its generators. Even months later, the lives of many residents are still in disarray as they wait desperately for insurance payments to materialize and get back to a semblance of their former lives. The island faces additional challenge—and uncertainty— with another hurricane season just around the corner.
In the midst of this turmoil, however, there’s a glimmer of hope for the budding alternative funding sector. Some businesses are once again seeking funds to rebuild or expand, and alternative funders are once again dipping their toes into the Puerto Rican market—albeit somewhat slowly. While some funders have exited the Puerto Rican alternative lending market, other new entrants are starting to stake a claim, citing an expected uptick in economic development that tends to follow natural disasters. Some funders also see Puerto Rico as a sweet spot because the market isn’t as mature as the U.S. and competition from other alternative funders is scant. Banks on the island aren’t always willing to provide businesses there with much- needed funds, so opportunities for non-bank funders are considered plentiful.
Businesses struggling to rebuild from the storms need more help than ever before, says Sonia Alvelo, president of Latin Financial LLC, an ISO that has been arranging funding for business owners in Puerto Rico for three years. “There is no doubt that Puerto Rico has a long, hard road ahead,” she says. But “I can assure you the entrepreneurial spirit is alive and well,” she says.
Latin Financial and other ISOs and funders are back to business—courting merchants and trying to help them get back on their feet. In December, Latin Financial processed its first renewal since Maria; in January it funded its first new client since September. Latin Financial continues to arrange funding of between $500k and $1 million per month on average in Puerto Rico, after some hurricane-related downtime.
“The storm destroyed a lot, but it didn’t set the small business drive back. They’re still pushing hard and really trying to maintain and grow business,” says Brendan P. Lynch, business partner and fiancé to Latin Financial’s Alvelo.
Greenbox Capital in Miami Gardens, Fla., an early entrant to the Puerto Rican alternative funding market, has also returned to funding small businesses on the island after a few-month hiatus. The company put off new deals right before Maria hit, and as a goodwill measure suspended the payments of existing customers for 90 days. Given the extension, almost all customers were able to stay on track and the firm suffered very few losses, says Jordan Fein, the company’s chief executive. Greenbox began funding again in January, he says.
To be sure, it’s not exactly business as usual, since many businesses in Puerto Rico are still struggling, Fein says. While the situation should continue to improve, it will take time for the economy and businesses to fully recover, he says.
“They’ve come a long way since September, but they still aren’t fully back. We’re not seeing the same type of submissions that we saw before,” Fein says. Nonetheless, Fein remains positive about the market’s long-term prospects. “I think they are going to come back stronger, I really do,” he says.
To be sure, not all funders are interested the Puerto Rican market. Ripe with political uncertainty and economic instability, Puerto Rico already posed challenges that made many funders hesitant to do business there. The devastation wrought by Irma and Maria complicated matters further, and some funders pulled out of the market completely.
For others, however, the market’s still an opportune one, albeit not as stable as the U.S. market. Certainly, there are reasons for alternative funders to be optimistic. Despite its recent troubles, Puerto Rico is still considered a growth market. What’s more, with new businesses popping up in the wake of the storms, new infrastructure being instituted and businesses anxious to bounce back even bigger and better than before, some funders are striking while the iron is hot.
“This is the right time, as the island is growing,” says Paul Boxer, chief marketing officer and vice president of business development at Quicksilver Capital, a New York-based small business funder. Quicksilver funded its first deal in Puerto Rico in late April.
The company had been mulling over the possibility of doing business in Puerto Rico when an actual funding prospect arose. The company decided to give it a shot, sensing a potentially viable business opportunity. Existing businesses are rebuilding after the hurricane, there’s plenty of new business development and there’s a pressing need for new infrastructure as Puerto Rico continues to recover from the devastation, Boxer says.
Accordingly, Boxer says his company is in the process of vetting additional funding opportunities in Puerto Rico and hopes to continue growing this business in what he says is a largely untapped market. “I see it as a positive addition to what we offer, and I see a lot more opportunity in the future,” Boxer predicts.
Funding Circle Report Shows Demand for Alternative Financing
June 14, 2018
Funding Circle, together with Oxford Economics, released a report this week using data from its customers last year. Funding Circle is a business loan platform that matches small business borrowers with investors that want to lend. Some of these findings may be reflective of the broader alternative finance market.
Data from the report conveys that there is an increased appetite among small business merchants for online lending products. Of the small business customers surveyed, 70 percent did not attempt to get a bank loan before applying for an alternative loan from the Funding Circle platform. The main reason for this, cited by more than three-quarters of these customers, was a perception that the bank loan process would be too burdensome. Another nine percent skipped banks because they said they thought they would be rejected.
Of the businesses that had first approached a bank before seeking funding from Funding Circle, 50 percent said they didn’t obtain a bank loan because their application was rejected. Another 36 percent responded that the bank loan process took too long, and seven percent felt that the bank’s rates and fees were too high.
When asked about the impact of not receiving funding through Funding Circle (or we can imagine a different online funder), the most common response, given by 27 percent of respondents, was that they would have missed an opportunity. After this, 22 percent believed they would not be able to consolidate their debt and 16 percent thought that they would not have been able to achieve profit growth.
Loan volume in the U.S. rose significantly for Funding Circle last year. A total of $509 million in new loans were issued in the U.S. in 2017, an increase of 80 percent from $281 million issued the previous year.
“It has become evident that small businesses are underserved in every country we operate,” said Funding Circle co-founder and CEO Samir Desai. “From butchers and bakers, to IT consultants and accountants, these are the businesses that are creating jobs, boosting productivity and driving our economies forward. The economic impact that these businesses have had as a result of accessing finance through Funding Circle is hugely rewarding to see.”
Founded in 2010, Funding Circle has helped 40,000 small businesses find financing. The company operates in the U.S., U.K., Germany and the Netherlands.
Lending Express Opens Office in Silicon Valley
June 13, 2018
Tel Aviv-based Lending Express announced its entrance into the U.S. market yesterday. It opened an office in San Matteo, CA and has officially appointed Moshe Kazimirsky as VP of Strategic Partnerships and Business Development to support the new West Coast office.
“After the immense success we’ve had in the Australian market, we knew that our platform was ready to take on the U.S.,” said Lending Express CEO Eden Amirav.
Lending Express initially launched its business in Australia in October 2016. The company provides an online marketplace that connects merchants to alternative funders. After only a year and a half, Amirav told deBanked that Lending Express is now the largest business of its kind in Australia – even though they only set foot on the continent a month ago.
Meanwhile, Lending Express has also been operating in the U.S. for months and has already partnered with leading online lenders like OnDeck, Kabbage and Fundbox, according to Amirav. Given the company’s experience in both the Australian and American markets, deBanked asked Amirav what he thought the differences were.
“In general, they are much more similar than people think,” Amirav said. “But in the U.S., people like to look around more.”
Generally, if an Australian merchant is approved, they will move forward with the deal right away, Amirav said. Lending Express offers a myriad of products on its platform, including equipment financing, invoice funding, business line of credit and merchant cash advance.
So far, Kazimirsky, who has worked in business development for other Silicon Valley technology companies, will be the only one in the new California office. But Amirav anticipates that the office with grow. The Lending Express office in Tel Aviv has 25 employees, many of whom – namely the account managers – start their day at 3 a.m. in order to speak to their Australian and American customers in different time zones.
Lending Express uses an algorithmic system called MatchScore to pair borrowers with lenders.
Second Annual Alternative Finance Bar Association Conference Draws Lawyers from Afar
June 11, 2018
Attorneys who represent alternative finance companies congregated in New York on Friday for the second annual conference of the Alternative Finance Bar Association (AFBA.)
They came for a day of learning about the latest legal developments pertaining to alternative finance, and MCA in particular. Seminars at the conference had names like: “Credit Facilities 101: What an Alternative Finance Company Can Expect,” “Syndication Relationships: Partner? Participant? Investor?” and “Bankruptcy Developments: The Rise of the Adversary Proceeding.”
“I think it’s like heaven for a new attorney in the MCA world,” said Judith Ramos, who is Corporate Counsel at McKenzie Capital in the Miami area.
Another attorney somewhat new to the MCA space and eager to learn more was Alexis Shapiro, General Counsel at Forward Financing in Boston.
“This was one stop shopping to learn about the latest legal developments in the MCA industry,” Shapiro said.
In one seminar, called “Updates on Recent Case Law,” attorney panelists Steven Berkovitch of ABF Servicing and Adam Stein and Christopher Murray of Stein Adler Dabah and Zelkowitz, discussed the positive impact of the Pearl Beta Funding v Champion Auto Sales decision in New York. They spoke about how judges have dismissed lawsuits against their MCA clients by referencing this decision, which establishes that MCA deals are not loans.
Murray reviewed the current climate with regard to MCA cases in New York, California, Texas and Utah. And one panelist emphasized the importance of simply being knowledgeable about the industry by relating a story of an MCA defense lawyer who, when asked by a judge about the interest rate on a particular MCA deal, fumbled and gave a percentage. (MCA deals do not have interest rates given that payments are subject to change over time).
Later, Gregory Nowak, a partner at Pepper Hamilton, entertained the crowd with a few jokes before diving into the details and the risks of syndication. The conference was held at New York offices of Pepper Hamilton, with expansive views of the Hudson River.
“We are energized by the response of so many attorneys from different backgrounds in this emerging and evolving industry,” said one of founders of the AFBA, Lindsey Rohan, General Counsel at Platinum Rapid Funding Group in Long Island.
AFBA’s other founders are Kate Fisher, partner at Hudson Cook outside of Baltimore, Patrick Siegfried, Assistant General Counsel at Rapid Advance in Bethesda, MD, and Murray, attorney at Stein Adler outside of New York City.
Robert Cook, one of Hudson Cook’s founding partners, was at the conference. He told deBanked that he remembered back in 2006 when an investment bank client asked his firm to do due diligence on a merchant cash advance company.
“We didn’t know what that was,” Cook said. “The client looked around for a law firm that had experience with MCAs. They couldn’t find any. So they came back to us and said, ‘You’re going to have to learn.’”
More than a decade later, MCA is no longer so obscure and the AFBA has at least three more planned events in 2018. The next event will be a cocktail reception on October 24th.
For more information, contact: Tiffany@LRohanlaw.com
deBanked was also a sponsor of the second annual AFBA conference.
An Inside Look at Strategic Funding’s Portfolio
June 10, 2018A Kroll Bond Rating Agency report reveals interesting details about Strategic Funding Source’s $105 million securitization and also their business. Here are a few main takeaways:
Pool breakdown
60% MCA
40% Loans
Average original receivable balance per merchant: $40,705
Weighted Average FICO Score: 649
Weighted Average RTR Multiple: 1.35
Weighted Average Time in Business: 12.5 years
Weighted Average Gross Revenue: $1,729,709
Number of ISOs/referral partners: 1,300
In an earlier interview, Strategic Funding CEO Andrew Reiser said, “It’s certainly exciting to be able to meet the requirements of a securitization. Kroll is a very responsible agency and they put you through a lot of rigor to be able to meet [their] requirements and have a rated bond.”
US Business Funding Will Retain Name & Special Sauce in Wake of Fora Deal
June 8, 2018Fora Financial’s announcement yesterday that it acquired a sizable stake in US Business Funding (USBF) will create one of the “largest, broadest reaching direct sales organizations in the small business alternative lending space,” the company said in a statement.
USBF is a direct sales and marketing company of about 40 to 50 people. Fora Financial founder and CEO told deBanked that his company started working with USBF to obtain leads two years ago and that this acquisition has been in the works for between 12 to 18 months.
Jared Feldman, CEO, Fora Financial“We were looking for a team that does direct sales and marketing that complements what we do,” Feldman said. “And they’re one of the best at [direct marketing] in the business.”
USBF is based in Santa Ana, CA, and has connected customers to financing since 2008, with an emphasis originally on equipment financing. In 2012, they started facilitating working capital deals and that now makes up 85 percent of the company’s business, according to its CEO Peter Ribeiro.
They provide financing solutions ranging from $10,000 to $10 million. Fora Financial, also established in 2008, is a New York-based funding company that funds MCA deals and provides small business loans up to $500,000.
Consistent with yesterday’s announcement, Feldman said that with Fora Financial and USBF combined, they will likely originate $400 million year. Feldman told deBanked today that, of this amount, about $300 million should come from direct sales.
“We’re more heavily weighted towards direct sales,” Feldman said.
Formerly a company of 100, the new entity will now include about 150 employees and will share resources like capital, technology and access to help with compliance, Feldman said. USBF will retain its name, location and all of its employees.
“We wouldn’t have done this deal unless Peter [USBF founder and CEO] and his team agreed to stay on,” Feldman said. “They have a fantastic brand and we want to avoid getting in their way. We just want to help them to continue doing what they do.”
Feldman said that while USBF will retain its name, “we’re now a combined entity with an east and west coast operation.”
Fora Financial acquired USBF because it did something unique, and Feldman said that Fora is looking for opportunities to acquire other companies that do uniques things in the financing space.
PeerIQ Report Shows Mixed Signs for Non-Bank Lending
June 7, 2018PeerIQ released its 2Q2018 Lending Earnings Insight Report today, presenting forward-looking insights into the FinTech & non-bank space.
The report said that CEOs and CFOs see tax reform as increasing consumers’ disposable income. However, “an increasing supply for credit and demand for credit, as well as re-normalization trends and increased competition are leading to higher charge-offs.”
Credit performance this quarter is mixed, the report says. The analysts observe improvements, yet also record low delinquencies from OnDeck, OneMain Holdings and FinTechs in particular. At the same time, LendingClub expects 31 bps lower charge-offs moving forward due to tighter credit standards. At Discover – which is typically a bellwether for personal loan performance – the net charge-off rate jumped 92 basis points year over year to 3.62 percent. This is the largest increase in several years.
According to the report, card issuers are increasing loan loss reserves at a higher rate than loan growth, indicating expectations of higher losses moving forward. The report also notes that banks are either partnering with FinTechs or investing in ramping up their technology capabilities in payments, lending, digital banking and wealth management.
Lenders are taking actions to pass rising rates on to borrowers to protect margins and investor returns, the report says. Lenders are also trying to reduce all-in funding costs by reducing the credit spreads on their securitizations.
On the brighter side, the report said that “FinTech and Non-Banks overall posted good revenue growth [in Q1 2018] in the range of 7% to 25% and most expressed optimism about the exceedingly good credit environment we find ourselves in.” Enova, OneMain Holdings and OnDeck saw some of the lowest charge-offs, with Lending Club indicating that expected charge-offs across grades would be up to 31 bps lower, according to the report.
Report Demonstrates How Online Lenders Benefit Economy
May 31, 2018
A report on “The Economic Benefits of Online Lending to Small Businesses and the U.S. Economy” was released yesterday, using data from 180,000 U.S. small businesses that represented nearly $10 billion in funding from 2015 to 2017.
The report used data from five online lenders, including OnDeck, Kabbage and Lendio, and was sponsored by the Electronic Transactions Association (ETA), the Small Business Finance Association (SBFA) and the Innovative Lending Platform Association. The report was researched by three economists at NDP Analytics, an independent research firm.
One of the key findings was that the ten billion dollars funded from 2015 to 2017 by five of the top alternative small business lenders generated $37.7 billion in gross output and created 358,911 jobs and $12.6 billion in wages.
“I think the most important takeaway from this study is that small businesses are benefiting from a wide variety of choices in lending products,” said Jason Oxman, CEO of the ETA. “And, in particular, the online small business lenders have provided really a remarkable amount of working capital to small businesses in this country.”
Oxman told deBanked that he was surprised to learn from the report the percentage of borrowers that operate extremely small businesses. According to the report, 24 percent of online business borrowers operate businesses that have less than $100,000 in annual sales. And two-thirds of online business borrowers had less than $500,000 in annual sales.
“These are clearly small businesses,” Oxman said. “These are companies that obviously have capital needs and are getting those needs met by online small business lenders.”
New York State was a focus of part of the research. According to a press release for the report, data extracted from it indicated that “overall, the small business loans provided by online lenders [from 2015 to 2017] generated $2.5 billion in gross output and created 20,154 jobs with over $795 million in wages” for communities in New York State.
“We [organized the report] with New York in mind,” said Steve Denis, Executive Director at the SBFA. “We wanted to send a message to show how much of an impact the online lending industry had on the state.”
Other interesting data from the report include:
— 75 percent of U.S. businesses have less than 10 employees.
— 22 percent of small business owners use their personal savings to expand
— Online lenders offer loans to companies in all stages of their life cycle and the distribution of company age is relatively uniform.
“[Alternative small business lending] is creating a lot of economic activity,” Denis said. “We’re helping to create jobs, and we need to protect this tool. It’s a valuable resource for businesses…and this [report] demonstrates how important it is to the economy.”
