Business Lending
Small Businesses More Understanding, Looking for LOCs
December 4, 2023
“The ISO channel is an important part of our business and we remain committed to it,” said Jay Shaw, Head of Sales at Enova SMB. Enova, which operates OnDeck and Headway Capital, is one of the largest small business lenders in the United States. The company has originated more than $2.2B in loans in the first three quarters of this year, a lot of which comes through “highly compliant ISOs.” The relationship works, especially in times like these when banks are reducing their exposure to small business lending.
But officially we’re not in a recession. The S&P 500 is up 20% YTD, for example, unemployment is low, and inflation has backed off from its previous peak. Shaw says that a positive sentiment among small businesses is something they’re seeing along with this, that when they actually talk to small business owners one-on-one, many of them are feeling pretty good right now.
While most observers would point out that elevated interest rates have shaken up the game, there’s actually been a silver lining to how it’s played out.
“There’s a lot more education and understanding of cost of capital,” said Shaw.
Business owners, for example, who were used to a perpetual low interest rate environment, have watched banks dramatically increase interest rates over the last year or so and it’s actually brought attention and awareness to the fact that lenders have a cost of a capital to contend with as well, that rates come from somewhere. It’s made them more understanding, according to Shaw, when they’re presented with terms now from online lenders. That understanding is compounded by a greater openness to doing it all online in the first place, which businesses are now more accustomed with after having to do so much online during the covid years. In essence it’s a strong environment to be working in right now. Still, many businesses are coming in with a certain expectation of how online lending should work especially if they worked with a bank previously.
“More and more businesses are looking for a line of credit product,” Shaw said, which Enova offers in addition to term loans. Businesses tend to appreciate this product not only because of the control it gives them but also because “they have continuous access to capital after every payment they’ve made,” Shaw said.
According to the Intuit Small Business Index Annual Report, 22% of small businesses applied for a loan or line of credit last year. Although this didn’t distinguish term loans from lines of credit, the demand for a revolving product is evident by an even more sought after type of financing, credit cards, which 30% of small business owners applied for. MCAs, by comparison, were a distant fifth, with only 6% of businesses applying for one.
Perhaps an all important measure is not only what businesses want but how they’re using it in the end.
“A lot of [our customer’s] borrowing is growth borrowing with a significant ROI,” Shaw said.
When Funding Gets Personal
November 16, 2023
“We’re excited to have the opportunity to fund within the community, and then go visit, help them grow their business and everything like that…” said Benjamin Lieff, Chief Revenue Officer of Capital Gurus.
For an industry that has a reputation for being online, funding relationships can become quite personal. Lieff, for example, previously helped a couple with securing a lease to open a barcade in North Hollywood, California and then also did whatever he could to get them through to their grand opening including work to get their liquor license. Now, they’re actually friends.
“Not only was I able to go visit during the construction process and them opening this location but whenever I’m back in Los Angeles, I always go spend some time with him and his wife,” said Lieff. “I went to the opening party and anybody who talks to me, and they’re looking for that type of business, I always lead them there and they’re actually really blowing up. And I’m really happy to see them. I’m constantly cheering them on.”
For Funding Circle US, having an office in the big city of Denver means that some of their borrowers are coincidentally located right in their neighborhood. It’s fairly common for them to be customers of these businesses as well and they’ve actually used some for in-office catering.
“One of our favorites in Denver is called Whittier cafe. And it’s Denver’s only African espresso bar,” said Kristal Bergfield, General Manager of Strategic Partnerships at Funding Circle. The store has even been featured on Funding Circle’s TikTok.
As for Claude Darmony, President at WeFund in the Fort Lauderdale area, he knew one business quite well before the funding started.
“He was just a mechanic shop, I gave him the funds to start building gas stations next to it,” said Darmony. “It was a good friend of mine.”
While still having to go through the normal underwiting process, Darmony got to attend the grand opening after the deal went through. “It was nice,” he said.
Big Lines of Credit for Canadian Merchants?
November 15, 2023
Business loan brokers in Canada typically do not fit the same mold as brokers in the United States. Most business loan brokers in Canada are actually mortgage brokers working with mortgage clients that happen to own a business. Such has been the case for Kingsmen Capital Investments, a Canadian small business lender that gets roughly half of its deal flow from mortgage brokers. It’s a nice relationship, but Kingsmen Capital believed that something was missing between a bank loan and merchant cash advances/small unsecured loans.
“We’ve started to come out of the MCA space,” said Kingsmen Managing Partner Roger Dusanj.
The company’s idea was lines of credit that start as low as $250,000 and go up to $2 million (or even higher). Although it can be a little more expensive than a bank, the true LOC can also be easier to obtain. Dusanj, for example, said that they’ll evaluate a business’s ebitda versus looking at their total net income. Covid, he added, has also made businesses across Canada more receptive to non-bank products and so it’s taking off.
“In 18 months, we paid out $100 million,” Dusanj said of the loans they’ve made already. The progress so far has made them confident that they’re on to something big. The company will also do term loans and equipment financing.
Although the Canadian mortage broker community works well, Kingsmen says that they would work with US-residing business loan brokers. The company was founded in 2015.
BHG Financial Tightening Its Credit Box, Dealing With Tough Environment
November 13, 2023BHG Financial (formerly Bankers Healthcare Group) originated $1 billion in loans in Q3, according to recently filed disclosures about the company. That was down from $1.1B in Q2. BHG mainly provides business loans and unsecured loans to healthcare practitioners. Although the company considered it to be a stronger quarter than anticipated, it predicts that Q4 will not be as strong and that originations will actually drop significantly to between $600M to $800M.
“As we look to the fourth quarter, BHG believes origination volumes will likely be less than Q3 as they continue to shrink their credit box,” said Terry Turner, CEO of Pinnacle Financial Partners, which owns 49% of BHG.
While originations start to slow, loan loss reserves have also increased.
“The decrease in income from BHG during the three and nine months ended September 30, 2023 as compared to the same periods in the prior year is largely the result of increases in (i) the liability for estimated future inherent losses for the outstanding core portfolio of loans sold to banks through the auction platform that may be subject to future substitution due to payment default or prepayment and (ii) the allowance for loan losses for loans BHG has retained on its balance sheet due to the uncertain economic environment.”
BHG is also exiting its “merchant financing business,” according to Pinnacle CFO Harold Carpenter. Carpenter was referring to NaluPay, BHG’s Point of Sale financing division. NaluPay launched a little over a year ago to great fanfare, claiming it would enable merchants “to offer their customers large credit lines, a suite of promotional and non-promotional financing options, and instant credit decisions within seconds.”
Nevertheless, Pinnacle says that BHG is feeling good about the direction things are heading.”BHG is optimistic about credit at the end of the third quarter,” Turner said.
Back to Business Lending in Canada
November 2, 2023
“There’s a need for products and services like ours across all cycles,” said Cato Pastoll, CEO of Loop, on the small business lending panel held at the Lenders Summit this week in Toronto.
It’s unclear what cycle the industry is in exactly. The Lenders Summit, put on every year by the Canadian Lenders Association, was not only sold out but packed wall to wall with more than 500 attendees. The tone was relatively upbeat despite Canada’s key interest rate holding steady at 5% and economic headwinds blowing in the background.
OnDeck Canada COO Harley Greenspoon said that his company just had their best October in four years and that they’ve returned back to pre-pandemic growth. “Demand is actually not the issue at all,” Greenspoon said.
Not only is the demand for business loans there but OnDeck Canada has not had to pass on the rising costs of capital thanks to greater efficiencies unlocked by reducing headcount and increasing automation.
Lauren Thompson, VP of Specialty Finance for Peoples Group, whose organization partners with fintechs and lenders, said that from a bird’s-eye view banks would probably continue to restrict capital being loaned to small businesses for the foreseeable future. “I don’t think that small businesses are best served through the traditional banking system,” said Thompson.
Pastoll of Loop pointed out an irony with this, that banks tend to under serve the underserved when they actually need it most. “90% of the private sector workforce is employed by small businesses so if you want to stimulate the economy, we as fintechs can do it faster…” Pastoll said.
Thompson explained that the traditional financial system can be hamstrung by reviewing data that is already stale such as financial reports that reflect a moment in time six months ago while a fintech lender has more of a live pulse on what’s going on.
Greenspoon of OnDeck Canada, for example, could rattle off the top of his head industries that are experiencing challenges, the most notable being transportation.
Finally, Pastoll was asked if Loop had contemplated ever having to deal with a high interest rate environment back when he founded the company almost nine years ago. Pastoll explained that his whole inspiration for founding Loop in the first place was to help small business owners precisely during difficult times. Both of his parents were small business owners and he had watched firsthand how hard it was to find financing.
“Again, I just think about what my parents had to go through,” he said.
Square: Business Loan Originations, Loss Rates Steady in Q3
November 2, 2023Block’s Square Loan division chugged along in Q3, originating 120,000 loans for a total of $1.17B. The company’s origination figures in the first nine months of this year are basically on par with the origination figures of the last nine months of 2022. This suggests that Block is being cautious and conservative.
Block also said that loss rates on Square Loans “remained consistent with historical ranges.”
Square loan originations for the past six quarters:
Q2 2022: $1.01B
Q3 2022: $1.14B
Q4 2022: $1.16B
Q1 2023: $1.10B
Q2 2023: $1.10B
Q3 2023: $1.17B
Block did not talk about Square Loans on its earnings call except to say that it’s among a number of products it offers that serves as a retention tool and that in the future it will become more of an acquisition channel as well.
Enova Discussed Its Q3 Performance, Its View on the Small Business Loan Market
October 24, 2023
Enova originated $783M in small business loans in Q3, which is up from $770M in Q1 and $712M in Q2. Overall company profitability was slightly down but mainly because they increased marketing spend later in the quarter in which there was not enough time to also experience the corresponding revenue increase.
Enova also recorded some slightly higher-than-expected chargeoffs that came from their 2nd half 2022 smb loan vintages.
“As you would expect, our underwriting models adjusted based on this data and vintages since January of this year are back in line with our expectations,” said Enova CEO David Fisher on the earnings call. “But since there is a 9 to 12-month emergence period for charge-offs in our small business products, charge-offs from those second half 2022 vintages were at their peak in Q3 of this year.”
Given the current interest rate environment, the call drew out some insightful information about the small business loan market. Bullet points below:
- “…while prime and super prime borrowers are facing higher interest expense due to the increase in the Fed funds rate, we have not raised our pricing.” – Fisher
- “I think the competitive environment is still pretty benign, like we’ve been talking about for a while. Nothing new on the small business side. I think we’ve seen, as we talked about, competitors struggle with liquidity, also a couple move more towards the prime space in SMB.” – Fisher
- “On the small business side, still a lot coming through the wholesale channel through ISOs, but we continue to grow our direct channel. It’s a very fast-growing channel for us” – Fisher
- “So if the consumer falls on their face, small businesses are in big trouble. We saw that during COVID, but if the consumer is still spending and doing well, the small businesses tend to be a big beneficiary of that incremental spend.” – Fisher
- “While there’s a lot of uncertainty in the economy today, both internal and external data lead us to believe that both our consumer and small business customers are navigating it well.” – Fisher
- “Inflation continues to moderate, while the labor market and wage growth continue to be very strong.” – Fisher
- “To be clear, Enova overall is in great shape, and we’re feeling good about Q4 and next year.” – Fisher
Whoa, That’s a Lot of Bad EIDL Loans
October 19, 2023
When the SBA revealed it had charged off $220M worth of covid-related EIDL funds before the first payment on any of those loans was even due, it suggested that things were not going to go well. Payments on just the earliest issued loans started at the end of last year and by March the SBA made a shocking disclosure. $62 billion worth of loans were already delinquent. This number is all the more alarming when put into the perspective that there were only $380B in EIDL funds loaned total. That means that 16% went bad straight out of the gate.
Oh, and this number is growing and the SBA is feeling overwhelmed to the point where they’re not even trying to collect on many loans.
“…the SBA had already decided that it would not take the most aggressive actions possible to pursue borrowers who received loans worth $100,000 or less,” the Washington Post reported.
This strategy has not been well received by Office of Inspector General Hannibal Ware. In a letter Ware wrote to SBA Administrator Isabella Guzman on September 29, he said, “SBA’s decision to cease collections risks violating the Debt Collection Improvement Act of 1996, which prohibits ending collections on fraudulent, false, or misrepresented claims, because SBA OIG and other oversight agencies are continuing to work on identifying COVID-19 EIDL fraud that may not have been identified by the agency. It is also unclear whether SBA plans to end active collections on loans for borrowers who received multiple COVID-19 EIDLs of $100,000 or less that, when combined, exceed $100,000.”
Unlike PPP loans, which if not forgiven had to be repaid in full within two years, the EIDL program extended very generous terms with a 30 year repayment schedule.
The OIG has asked the SBA to evaluate the possibility of selling a portion of its EIDL debt to maximize the return to taxpayers.
