Business Lending
Closing Loans and MCAs — From the Bedroom to the Office
December 8, 2017
The merchant cash advance industry has gone mainstream so quickly that it has become more difficult to identify potential customers.
Market saturation and industry consolidation have caused the cost of sales leads to increase sharply. Yet a New York business loan broker is finding success by applying lead generation and online marketing strategies to merchant cash advance, or MCA, while expanding the number of services he offers prospects. Funding is just the foot in the door.
Philip Smith, founder and CEO of PJP Marketing Inc., told deBanked the MCA industry’s acceptance has made it more difficult for sales lead generators to produce profits. But expanding the number of services that independent sales organizations (ISOs) offer can offset the contraction. Smith’s life as a stay-at-home-dad, was recently featured in Innovate Long Island, a regional newspaper.
An ISO can’t just be a broker anymore. It needs to change, identify new revenue streams to excel. In doing so, a lead generator transforms itself into a business consultant that prospective customers turn to for additional services they often didn’t even know existed, Smith said.
For example, business loans and MCA is Smith’s largest business generator. But his most popular add-on services with such sales leads are credit repair and credit monitoring.
“The market is relatively easy,” Smith said. “The hard part is monetizing. The ISOs are going out of business because they refuse to monetize the other, non-cash advance leads.”
Smith, armed with a degree in business/e-business from the University of Phoenix, is also an advocate for entrepreneurs who want to work from home. It’s a viable model for lead generators because low overhead costs provide entrepreneurs an opportunity to capitalize on aggressive business strategies.
As such, Smith markets his pajama-centric business model with IWorkInMyJams.com. But he acknowledges that working from home presents its own challenges. Entrepreneurs need to be extra focused and tough to distract. No watching Dr. Phil during work hours.
Since they don’t work with more experienced managers, work-from-home entrepreneurs also need to seek their own sources of business advice and strategies. They deal with the reality that some lenders may deem them too small to do business. “Not everyone will work with you,” he said.
Working from home also requires a entrepreneur to set office hour limits and parameters to prevent burnout, Smith said.
“Do you know when to turn it off?” he asked. “That’s my problem. I’m up until 1 o’clock in the morning because I can.”
Smith now brokers sales leads in several verticals such as credit repair, tax relief, mortgage and solar energy. He claims revenue of $1.6 million last year and plans to reach $2 million this year.
When he was just 23, Smith launched his first company, We Link You Internet Services, a business that evolved into a web hosting concern.
He later worked for New York-based Canrock Ventures to launch a search-engine optimization platform called SEOPledge that was acquired in 2013. The following year, he founded what is now called PJP Marketing to broker leads amid the rapidly rising MCA space using the digital marketing skills he’d learned from the previous positions.
In October, deBanked reported that several factors have contributed to several changes in the MCA industry, including consolidation, making it more difficult for alternative-funding business lead generators.
ISOs and brokers have gotten pickier about the types of leads they’ll accept as MCA evolves from a niche business to one that’s more commonplace. Also, a stricter application of the Telephone Consumer Protection Act (TCPA) has chilled soliciting and hamstrung the ability to connect with business owners who are prospective clients.
Last year’s LendingClub Corp. scandal ousted several senior managers, including the company’s then-CEO. Last summer, Bizfi laid off workers and sold the servicing rights to its $250 million loan portfolio to rival Credibly.
The result has been a consolidation of the alternative funding business.
“There are still roughly 75,000 business owners every week who meet the criteria for an [MCA],” California-based Lenders Marketing partner Justin Benton told deBanked. “Now instead of there being 5,000 options in the space, there are 2,000, so those 2,000 are gobbling it all up.”
David Ross, a 12-year veteran of the MCA industry and owner of Pro Leads NYC, said MCAs higher profile has been a game changer for lead generators.
“MCA is beyond saturation,” he said. “All of the merchants know about it and understand it. Now, [funders] want exclusive leads.”
Working from home is a possible option for ISOs that are wizards at online marketing. But it’s less attractive for the conventional lead generator who relies on backing from a marketing team, Ross said.
“Realistically, if you’re a broker and want to make money you have to be on someone’s floor,” he said. “You need marketing.”
Last year, a Bryant Park Capital report estimated the MCA market to be worth about $12.8 billion. It’s projected to top $15 billion this year. Smith expects the continued strong demand for MCAs regardless of all the industry consolidation and costlier lead generation.
“I think they will always be fine because they can live through the storm,” he said. “It’s now a mainstream service so more people know about it.”
Smith told Donna Drake during an appearance on the Live It Up television program that going it alone as entrepreneur takes a “do-not-quit attitude” that has served him well so far.
“Any business is pretty much a numbers game,” he said. “I live and breathe it every single day.”
Originations Since Inception
December 8, 2017After several company announcements recently, we’ve compiled a milestone chart to plot where they rank. Originations may indicate business loans or MCAs funded on balance sheet, brokered, or placed through a marketplace. These rankings are a work in progress. This chart may not include companies for which public data is not available. If you’d like your figures to be listed here, e-mail sean@debanked.com.
| Company | Origination Volume Since Inception | Year Founded |
| OnDeck | $8 Billion | 2007 |
| Kabbage | $4 Billion | 2009 |
| Yellowstone Capital | $2 Billion | 2009 |
| BFS Capital | $1.7 Billion | 2002 |
| Funding Circle | $1 Billion (US only) | 2010 |
| IOU Financial | $500 Million | |
| Lending Club | $500 Million (SMB loans only) | 2006 |
| SmartBiz Loans | > $500 Million (SBA loans) | 2009 |
| Lendio | > $500 Milllion | |
| Forward Financing | $275 Million | 2012 |
| Blue Bridge Financial | $200 Million | 2009 |
Kabbage Crosses $4 Billion in Loans, Taps C-Suite Exec for Intl Expansion
December 6, 2017
Alternative lender Kabbage is exiting 2017 with a bang, having just crossed the $4 billion threshold for loans deployed across more than 130,000 small businesses so far. The latest milestone represents a 30% spike in both total funding and the number of merchants on its platform since April 2017, which is when they celebrated their previous new threshold. Victoria Treyger, chief revenue officer for Kabbage, took some time to talk with deBanked about the latest milestone, international expansion and mobile strategy.
“Our lines of credit and amounts taken continue to increase as we begin serving more and larger small businesses. We see great momentum across all industries in all 50 U.S. states,” Treyger said, adding that the momentum is particularly evident among the restaurant, construction, professional services and automotive industries for funding strategic investments such as new locations, specialty equipment, business expansion, etc. The $4 billion milestone is the result of the company’s direct business in America only.
According to recently released data by Kabbage cited in CrowdFund Insider, nearly three-quarters of 400 small business owners polled are forecasting higher revenues by year-end. More than 50% of those merchants are targeting a jump of at least 10%. Kabbage certainly appears to be benefiting from this optimism and an economy that is functioning on all cylinders. Treyger points to the lender’s “fully automated lending process and unique, live data connections with our customers.”
Fintechs & Banks
The relationship between alternative lenders and banks has been at the forefront, and Kabbage has been involved in some of the most high-profile pairings, evidenced by SoftBank’s famous investment. And while there’s no crystal ball, fintech and bank partnerships are one of the trends that will likely persist in 2018.
“Data will be at the heart of everything, how it’s shared, accessed, applied, protected and given back. Expect to hear more about the personalization of lending and to see stronger partnerships between fintechs and banks,” said Treyger. Consumer data, of course, is the Holy Grail for lenders, with banks having a tendency to keep that information close to the vest. And with the Equifax breach so recent in the rearview mirror, the importance of data security is certainly paramount.
“The CFPB recently published data-sharing guidelines between banks, their customers and financial services they choose to permission their data. Kabbage applauds the CFPB guidelines, small business owners should control how, where and with whom their data is shared to best serve their needs. Security is the primary concern, as it should when handling customers’ data. All entities, from fintechs to data aggregators should be held accountable to the same security standards as banks,” Treyger said.
She also pointed to a mobile push in yet another sign that the industry has turned a corner. “Anticipate greater adoption in mobile lending. Today, approximately 20% of Kabbage’s originations come from mobile. We’re the only provider that allows its customers to apply, qualify and draw funding from a mobile app; we have seen growth and expect to see more in 2018,” she said.
Kabbage’s Global Ambitions
Meanwhile, as Kabbage sets its sights on global expansion, they’ve tapped a C-Suite executive from the consumer goods industry who has held leadership roles across North America, Europe and Asia. Robert Sharpe was tapped for the newly created position of COO at Kabbage. Most recently, Sharpe served as president and COO at National DCP, LLC, a supply chain management company. He has also led CSM Bakery Solutions and Spain’s Campofrio Food Group, serving as chief executive at both companies.
According to the press release: “Sharpe will be responsible for Kabbage’s continued growth and operational oversight as the company expands internationally and scales its services to serve more and larger small businesses.”
As Kabbage readies its 2018 roadmap, notwithstanding its $200 million revolving credit facility with Credit Suisse in November, don’t be surprised to see them revisit the capital markets.
“Continuing to diversify our funding options for small business lending is certainly of interest,” noted Treyger.
Institutions Like American Express Are Mainstreaming Daily ACH Payments
November 30, 2017A takeover-style ad on CNN’s website rang very familiar earlier today. The ad, paid for by American Express, preached merchant financing with a fixed fee.
The ad brought me to a page that offered a fixed fee business loan between $5,000 and $2 million with daily ACH repayment and no interest rate. Terms were 6 months, 12 months, or 24 months.
While this is more similar to an OnDeck loan, than say perhaps, a merchant cash advance, the concept of fixed fee business financing is becoming a standard even among institutional finance providers.
Square, as I experienced firsthand, is another company mainstreaming the fixed fee model. The difference there is that the payments are monthly rather than daily.
The good news for many online lenders and MCA companies of course, is that merchants that may not qualify with some major financial companies, are at least being introduced to the concept of fixed-fee short-term capital and even daily payments.
SBA Loans Go Online: A Q&A With SmartBiz
November 28, 2017
A while back, a merchant deBanked interviewed told us they had obtained what sounded like impossibly good terms from an online lender not known for low rates. When I requested a fact check of it, we learned that the online lender had actually referred the borrower to SmartBiz and that SmartBiz had secured an SBA loan for them. It was so seamless that the borrower had hardly noticed.
Curious, I caught up with Sean O’Malley, president and co-founder of SmartBiz last month at Money2020. Below is a modified excerpt of our conversation:
deBanked: [tells the above story about the merchant who got an SBA loan] – So you actually have other alternative lenders and online lenders going through you too. What is really the biggest channel that you tap into to get small business owners to you? Is it other online lenders or do you go direct to merchants?
O’Malley: Well, there are three different areas where customers come to us. The first is through our marketing efforts. We have our own online presence and marketing initiatives that go on, where small business owners are interested in the SBA loan product. The second area lies in our strategic relationships. These are partnerships with companies like Sam’s Club where we’re actually on their lending center; we have been doing that for a number of years. Another channel would be partnerships with companies like Fundera who bring customers to us through their online channels.
deBanked: How about like Lendio?
O’Malley: Yes. We’ve built a relationship with them over the years. Lastly, the third area is the independent financial consultant channel, like our partnerships with accountants.
deBanked: Okay. Didn’t SmartBiz recently celebrate a major milestone?
O’Malley: Yes! We recently passed the $500 million threshold of originated capital on the platform.
deBanked: All SBA loans?
O’Malley: Correct, all the originated capital is a result from SBA 7(a) loans. Today, we have six bank partners on our platform who are doing SBA loan origination. It’s all been facilitated through our platform. There are really four major components to what we do. The first part is we provide an online presence and origination solution for small businesses. They come through our technology solution and then they go through an application process where we’re able to pre-qualify them. So, that’s the first piece. The second piece is really the technology platform around packaging of the loan.
deBanked: What do you mean by packaging?
O’Malley: After a business pre-qualifies, there are still documents that need to be captured and some of the specific analysis also needs to be done. A large piece of that is automated through our platform. Some of it does require sort of a white glove experience for small business. We provide that as well. Then the third piece is the bank’s underwriting platform, where we digitize the bank’s underwriting and provide them with an underwriting platform that they license from us. Leaving us with the fourth part, the marketplace.
deBanked: Can you explain the fourth piece, marketplace?
O’Malley: The core of what we do is we connect small business owners with banks. And the interesting part of that is that because we’re the marketplace, we’re able to say yes more to the small business than any single bank because they all have their own different credit boxes. In effect, we’re able to get more customers approved because we’re able to fit more use cases for that small business owner. If you combine all these, the ultimate value prop is that we’ve reduced the time to originate a loan. It traditionally takes about 120 days for a bank to originate an SBA loan. We’ve reduced that to as little as seven days. And on the bank side, we’ve reduced their costs up to 90%. As a result, we’ve made these loans more profitable for banks. And they’re then more willing to originate as part of their standard business. Whereas you know, in the small business space, banks have not been super eager to be making smaller sized loans because it costs as much for them to originate that type of loan as it does for them to originate a $5 million loan. So, we’ve made it super efficient.
deBanked: So you’re kind of filtering out applicants on your own that they would normally have to deal with.
O’Malley: That’s right. Our platform allows us to filter out all the applications and only feed a bank the deals that they can do. When we provide a deal to a bank, they’re funding it anywhere between 90-95 percent of the time. They’re funding the deals that come from us because we have the knowledge of how the bank looks at their deals.
deBanked: Is there a world in which you move outside of SBA loans and potentially offer other types of bank loans or maybe even non-bank loans or facilitate them? Not necessarily make them, but facilitate them?
O’Malley: We recently just launched a conventional bank loan. So, yes, we are expanding on our product line, and we did this as a result of really looking at that type of product and filling a gap in the marketplace as well. We’re trying to help the customers out and support their needs.
deBanked: Are you noticing a trend with maybe borrowers applying for loans on like a mobile phone? I mean, any loan is a pretty big commitment, right? They go online and apply for $5,000, you know what I mean, for a personal expense or whatever and that’s not such a huge deal because it’s a small loan. I think an SBA loan is a much bigger commitment, you know, it’s long term. Are you seeing borrowers apply for the loans you offer from a mobile device?
O’Malley: About a quarter of our small businesses start the applications over a mobile device. And they are able to get pre-qualified through a mobile device. That said, the majority of borrowers still want to talk to someone. There are still a lot of traditional relation-based elements to a small business lender. When somebody is taking out a couple hundred thousand dollars, like you said, there needs to be some white glove experience for that. And it can’t just be 100% automated. In fact, small businesses a lot of times don’t want 100% automation.
deBanked: Because it’s such a big commitment.
O’Malley: That’s right. And that’s where the market is today. In the future, we look to certainly automate as much as possible, but we hyper-target where we interact with the customer so that we provide the most unique customer-centric solution so that they feel comfortable about the process. If you look at our TrustPilot customer reviews that we use on our site, you will note that people really speak very highly about their experience. We’re super proud of that because we’ve been able to match up technology with people in the right way so that we can hyper-target where human interaction is needed to make sure that the customer feels at ease with the process. We’ve been able to become the trusted source for them getting the loan that they’re looking for.
deBanked: Do you think in the future borrowers will apply for SBA loans entirely online? Will there be an age where they’re not necessarily going to the bank to meet somebody to talk about an SBA loan? Do you think it’s all going to kind of become like an online digitized process or will it always be a layer of I wanna go and sit and talk with somebody in the bank office?
O’Malley: Well, we’re proving small businesses want to do it primarily online. In fact, you know, the point too is that if you just consider the small dollar amount category, we are now the largest provider of SBA loans in the country for loans under $350,000.
deBanked: Anything else I should know about SmartBiz?
O’Malley: We really seek to be an advocate for small businesses. We have gone beyond SBA in supporting our customers with the more conventional product, but we’re always trying to get businesses into SBA loans because it’s the best product out there. And so, our focus is always first and foremost trying to get our businesses SBA loans if at all possible. And it appears to be working. Recently, we were named as one of the fastest growing companies in the Bay area. We’re looking at certainly scaling this solution with as many small businesses as possible.
Canadian Merchants Show An Appetite For Capital
November 25, 2017In Canada, the average deal size for a merchant is anywhere between $20,000 and $30,000 in funding, depending on who you ask. That’s why when one startup recently funded a $300,000 CAD advance from its balance sheet to a Canadian merchant, the deal turned some heads. While it’s unclear whether this amount could be indicative of a trend unfolding at our neighbors to the North, Canadian small businesses are preparing for some changes in the industry landscape in 2018.
SharpShooter Funding, whose name depicts the famous wrestling move of the WWE’s Bret “The Hitman” Hart, was behind the $300,000 deal with an Eastern Canadian grocer.
If you’re wondering how a merchant funder and WWE legend became partners, chalk it up to a combination of fate and timing. Paul Pitcher, SharpShooter Funding managing partner, has been Hart’s biggest fan since he was a kid. Pitcher got the opportunity to meet his hero when was just 10 years old. It was then that the green shoots of friendship formed, and today the WWE’s Hart is acting commissioner of SharpShooter Funding, having helped to launch the business.
Canadian Merchant Landscape
To get a taste of the Canadian merchant financing landscape, consider that the three top Canadian funders deploy $20 million and $25 million per month combined, explained David Gens, president and chief executive of Merchant Advance Capital, which is included among the top three funders. That’s up from a range of $15 million to $20 million earlier this year.
And while a $300,000 advance may not seem like something to write home about for U.S. funders, it’s a big deal in the Canadian market. The culture among small businesses in the Great White North is different and more conservative than their US counterparts.
“It’s a function of the size of the merchant,” Gens explained. “The typical single-location storefront merchant is going to qualify for $30,000 to $50,000. It takes a larger and more established business, whether it’s a multi-location merchant or a business that is in the B-to-B space, a manufacturer, distributor or wholesaler to be large enough to qualify for large financing.”
Meanwhile there are some changes to small business taxation that are coming down the pike that may influence demand for credit, Gens noted, though the precise shape any changes to the tax law will take remains unclear.
“They will reduce the small business taxation rate on the face of it. But for businesses where they hold cash or need to hold cash, it’s a gray zone as to whether or not they will be able to hold financial assets in those businesses. The government is going after companies that are holding investments. But there’s a gray line as to what is a holding company that is holding an investment and an operating company holding a buffer because of seasonality or cyclical demand. We have yet to see what the rules end up being exactly,” Gens said.
Anatomy of the Deal
In the case of SharpShooter Funding, the grocer merchant originally came to the funder for less than $300,000 but qualified for more, bringing the funder’s tally for a single day’s deals to more than $500,000.
“We never thought we’d hit this milestone in the Canadian market. But the file was right, and the timing was great,” Pitcher told deBanked. Now that they’ve gotten a taste of it, SharpShooter Funding hopes to do more deals of this nature. “For a small funder like us to double the size of a big funder was a big moment for us, especially in the Canadian market,” Pitcher said.
Merchant Advance Capital’s Gens said his company is prepared to take on the risk for deals at even a higher threshold. “Our average is $35,000 to $40,000, and the largest deal we’ve ever done was $600,000. I don’t want to steal their thunder, but there have been larger deals,” said Gens. “A few funders may syndicate when deals get that big, but it’s not an inconceivable size.”
OnDeck, which similarly has Canadian operations, lends up to $250,000 CAD in Canada. OnDeck has extended more than $7 billion in online loans across 70,000-plus customers across the United States, Canada and Australia.
As for SharpShooter Funding, Pitcher said the funder has been on the sidelines for larger deals because they don’t want to grow too fast. He’s been turned off by other funders doing deals within a couple of months of launching and then being forced to close their doors.
“Our capital has always been strong. It’s not that we can’t afford to lend larger amounts. It’s because we want to make sure we’re doing it right from the start,” Pitcher said, adding that SharpShooter Funding has only had its doors open in Canada since June 2015, though its corresponding U.S. business, First Down Funding, has been around since 2012. “It’s been a work in progress, and I love every day of it! We’re only getting started, and I am 100% excited for the future,” he said.
The Canadian grocer reached out to SharpShooter Funding in response to Google advertising. The affiliation with the Bret Hart association didn’t hurt. Pitcher explained there is a seasonality tied to the merchant’s business, evidenced by a couple of months or more each year in which revenue is spotty, that made the grocer unattractive for banks to fund. “That’s why those sized deals are difficult to put out and banks won’t put out, because of seasonality,” Pitcher said.
SharpShooter Funding was not deterred by that. “We were really able to gain in-depth trust and visibility into this merchant from the first call to the last call. There was never a problem with him mixing up stories. Just the honest truth. From his references to his landlord, everyone involved made it clear he was here to work with us and not to play games,” Pitcher said.
Pitcher was impressed by the business owner’s work ethic. “He’s a roll-up-your-sleeves entrepreneur who didn’t borrow $1 million from his father. No bank loans. Six years ago, he rolled up his sleeves and made it work. Now he’s in a situation where banks won’t lend to him. But we will,” he said.
The merchant’s bank statements also made sense to the funder given their consistency, predictability and transparency. “Whenever we ask for finances from someone and that merchant can get them to us in an organized fashion in less than an hour, it speaks wonders. It means they’re honest and ready to play ball. And that’s what we want,” Pitcher exclaimed.
The merchant plans to use the capital for an expansion into a new food product line. If he pays off the advance early the funder will lower the rate.
Take a Break From Funding This Thanksgiving
November 21, 2017This Thanksgiving…
Step back from the daily grind
Those merchants eager for your cold calls can wait
There’s no need to start worrying about next year just yet
It’s Thanksgiving
So hug an underwriter
Kiss a broker
Think about your favorite merchant
And pay no attention to the algorithms automating your job
Give thanks
Because nobody wants to hear you recap your holiday like this
Or this
Or this
Enjoy the Holiday!
You should also check out our 2016 Thanksgiving Day post and 2012 Thanksgiving Day post.
Kabbage Taps Debt Capital Markets for a Cool $200 Mil
November 16, 2017
Kabbage has been accessing the capital markets fast and furiously, most recently on the debt side. Today they’ve announced a new $200 million asset backed revolving credit facility with Credit Suisse. Just a couple of months ago, Kabbage attracted $250 million in equity to its coffers from SoftBank, which the alternative funder will direct toward ongoing operational expenses and expansion.
With the Credit Suisse deal, the tally for Kabbage’s debt funding capacity reaches $750 million. “The new revolving credit facility will be issued by Kabbage Asset Funding 2017-A LLC, a wholly owned subsidiary of Kabbage Inc,” according to a press release.
Kabbage expects the credit facility will help them to scale faster. They plan to use the credit to add bigger small businesses to its client roster as well as extend higher lines of credit with longer durations.
“The new revolving credit facility with Credit Suisse is a debt round. Those funds are for our small business customers, and will be used to continue to provide them with easy access to working capital,” Deepesh Jain, Kabbage Head of Capital Markets, told deBanked.
It’s Kabbage’s maiden credit facility to be rated by credit rating agency DBRS. “The top two classes of the multi-class transaction earned investment-grade ratings of ‘A’ and ‘BBB’ and are collateralized entirely with assets originated through Kabbage’s fully-automated underwriting technology,” according to the press release.
Jain told deBanked the DRBS rating is highly significant. “It strongly demonstrates the proven success of Kabbage’s fully-automated platform and its data-driven risk analysis for small business lending. It speaks to the company’s leading position in the SMB-lending marketplace and Wall Street’s confidence in Kabbage,” he noted.
As Jain pointed out, Credit Suisse has been an early supporter of fintech. Indeed, the Swiss bank a year ago similarly provided a $200 million asset-backed revolving credit facility to another alternative funder, OnDeck.
Alternative Funders and Bank Partnerships in the Spotlight
Jain declined to comment on whether Credit Suisse might be interested in Kabbage’s lending platform for its own use. Alternative funder and banking partnerships were recently thrust into the spotlight with a lawsuit filed by a Massachusetts-based small business owner against Kabbage and Celtic Bank, which have had a partnership for at least several years.
The lawsuit alleges that the funding model of the defendants “was designed to evade usury laws,” according to The National Law Review. Apparently, the plaintiffs, which are listed in the public filing as Alice Indelicato and NRO Boston, had several small business loans and now accuse Kabbage of “renting” Celtic’s bank charter. Jain declined to comment on the lawsuit and the plaintiffs couldn’t be reached.
Capital Markets Pipeline
Meanwhile, at the rate they are going, we could see Kabbage tap the capital markets again in 2018. “Capital markets are something we will continue to explore to further diversify our funding options,” said Jain.
