Business Lending
Enrolling a Merchant’s “Debt” May Be Harmful… to the Merchant
March 29, 2017
How would you like to make $12,000 on a single referral?, a flyer directed at business finance brokers asks. This ad wasn’t offering a commission for brokering a loan or advance, but rather for enrolling a merchant’s debt into the company’s restructuring program. Debt restructuring, negotiation, or settlement is a booming cottage industry these days. Some of these debt restructuring companies promise ISOs that they will be completely discreet with referrals. Others offer them commission bonuses for achieving certain enrollment targets. It’s a way to monetize declined deals, they typically say.
For merchants, the allure of a restructuring company’s help might just be payment terms tied to their monthly budget. That’s allegedly what one NJ firm’s agreement says, in fact. “I hereby authorize [the company] to negotiate my unaffordable business debts and to enter into affordable repayment terms on my behalf based on my monthly budget,” reads a document submitted in a New York Supreme Court case involving Creditors Relief. And based on the marketing materials deBanked has reviewed from several similar companies, their definition of debt is so broad that it can even include things that aren’t debt, like merchant cash advances, for example.
Even if the restructuring company held a critical view of MCAs and believed them to be loans, treating them as such for the purpose of negotiation might actually cause harm to their customers. That’s because a well-formed MCA contract already offers payment adjustments at regular intervals to appropriately match a merchant’s sales activity. Depending on what the language says, a merchant might just have to call their funder and ask them to reduce the debits to reflect their current sales activity. And yes this goes for ACH-only deals. Even ones that could appear to have fixed payments do not actually have fixed payments. This is basically how all MCAs work by the way, so if you are a broker or funder and this all sounds foreign to you, you need to take this course ASAP.
The point is this: a merchant need not pay a fee to an outside company to restructure anything when sales drop because a free remedy already likely exists and is a key benefit to MCAs in the first place. And yes, I’m talking about MCAs with daily ACH debits. If you’re confused by this, you need to take this course ASAP.
The best advice a restructuring firm can give a merchant struggling with an MCA due to slow sales is to tell them to look for a reconciliation clause in their contract that explains how to get the payments reduced. Once the merchant finds it, have them call the funder and execute it. There’s no need to enroll anything, negotiate anything, risk breaching a contract, or pay a broker tens of thousands of dollars in commissions. The debt restructuring firm might not want merchants to simply take advantage of what they’re already entitled to however, because they stand to make no money that way. In this regard, mischaracterizing future receivable sales as loans only serves to carry out their agenda to confuse merchants about what their rights might be under those agreements.
I myself, am occasionally contacted by merchants who claim to be facing hardship and in one instance where a merchant had spoken to a negotiator, the negotiator didn’t tell him that the remedy he sought was already a natural provision of his contract. I helped him find it. He didn’t have to pay any fees which would’ve gone to pay someone a huge commission or end up in some crazy situation where he’s being sued for breach of contract. Think about this the next time you encounter a distressed merchant. Not everything is debt and that can be very much to the merchant’s benefit.
If you work for a debt restructuring, settlement, or negotiation company, you should probably take this course too. It will help you understand MCA agreements and what remedies merchants already have at their disposal.
Amazon Sure is Making a Lot of Small Business Loans
March 26, 2017
Amazon had $661 million in seller receivables at the end of 2016, according to their earnings report, nearly double from the year before. These receivables are from loans made to small businesses (primarily to purchase inventory) who are sellers on their platform.
Apparently the lending business is going well for them too, since they claim the allowance for loan losses is so small that it’s not even material enough to report. And similar to Square Capital, Amazon incurs virtually no cost to acquire these borrowers.
One year ago, company CEO Jeff Bezos said in a letter to shareholders that “there are over 70,000 entrepreneurs with sales of more than $100,000 a year selling on Amazon.” By then the company had already lent more than $1.5 billion to small businesses across the US, UK and Japan.
“We wanted to bring the same shopping experience that you have on amazon, which is the one-click shopping experience, to the lending program,” a spokesperson says in a 2014 video about the program. “Instead of going to a bank, having interviews, audited financial statements, a 3 week process and then only a small fraction of people getting approved, our process is literally 3 fields and 3 clicks.”
If Kabbage Wanted to Buy, Would OnDeck Sell?
March 24, 2017
A single line in a Reuters story was enough to cause OnDeck’s stock to jump by as much as 11% on Thursday. Industry blogs and news outlets had reacted pretty quickly to word of an unnamed source claiming that OnDeck is a potential acquisition target if Kabbage raises a new equity round. OnDeck closed for the day up only 6.5%.
BloombergGadfly columnist Gillian Tan, wrote that a deal was not very likely because of how much investors are already down since the IPO. “Assuming Kabbage were to propose a traditional takeover at a standard premium, it probably would be swiftly rejected by On Deck’s earliest investors, who still own a combined stake of more than 45 percent, according to data compiled by Bloomberg,” she wrote. “With the stock trading at less than a quarter of its 2014 initial public offering price, it would take a generous premium to get them interested.”
OnDeck also lent nearly twice as much as Kabbage last year and obviously still has faith in leadership considering that their pre-IPO CEO is still in charge. There’s little to suggest at this time that OnDeck would be willing to throw in the towel and sell out to a smaller, younger competitor and book a big loss for shareholders who have been with them since the beginning.
The day before the rumor started, OnDeck actually announced that it had increased its asset-backed revolving credit facility with Deutsche Bank by approximately $52 million to a total of up to approximately $214 million.
Citing Unnamed Sources, Reuters Reports Kabbage Possibly Looking to Acquire OnDeck
March 23, 2017
Reuters is reporting that Kabbage is in talks to raise equity capital to potentially use for acquisitions and that OnDeck is one of several targets under consideration. As Reuters attributed the OnDeck portion to just one of their multiple unnamed sources, it’s entirely speculative at this point.
From a theoretical perspective, would such a thing make sense?
Kabbage has momentum on their side right now. Their recent half billion dollar securitization that was finalized earlier this month was oversubscribed. Although they only originated about half the loan volume of OnDeck last year, Kabbage’s last private market valuation ($1 billion in Oct 2015) is nearly 3x as large as OnDeck’s current market cap.
Valuations in the industry have changed a lot over the last 18 months but there’s no doubt that Kabbage has become a unique competitor. At LendIt, company CEO Rob Frohwein revealed a bit of their secret sauce when he said that their customers borrow from them on average 20-25 times over the course of 4 years, whereas their competitors make only 2.2 loans to their customers on average.
There is a general view in this industry that acquiring a competitor adds little value other than more marketshare. Kabbage, however, may potentially believe that (1) OnDeck is too undervalued to pass up (2) That OnDeck could generate better margins using Kabbage’s strategy (3) That OnDeck’s partner relationships would add additional value (4) That the company cultures are compatible enough to make an acquisition work (5) that the combined entity would allow them to better align their political and regulatory agendas.
We mustn’t forget however that a single unnamed source is pretty weak to go off of. One possible reason that someone would want to report that OnDeck is an acquisition target is to cause a temporary spike in their stock price. (and I certainly do not have any position in the stock)
For now, it’s fun to think about such an acquisition scenario and we’ll report more, if and when we hear anything.
Managing Risk in Small Business Lending
March 16, 2017
Two years ago, I left a promising career at PayPal, a major technology giant, for what some considered a risky move: I joined BlueVine, a young fintech startup. My title: vice president of risk.
This year, I took on an even bigger role when I was named chief risk officer of the Silicon Valley company, which offers working capital financing to small and medium-sized businesses.
My promotion comes at a time when risk is becoming a bigger concern in fintech, which is ushering in big changes in banking and financial services.
Fintech revolutionizes financial services
Data science technology has dramatically improved access to financing and the way we manage our money. The fintech wave that began with my former company, PayPal, and the world of payments, has spread to other aspects of personal finance, from mortgages to student and auto loans to investing.
This expansion was accompanied by growing concern that the fintech boom is fraught with risks that, if left unchecked, could lead to a major bust in the financial services industry that could in turn cause harm to the broader economy.
In a speech in January, Mark Carney, the governor of the Bank of England, cited the need to “ensure that fintech develops in a way that maximises the opportunities and minimises the risks for society.” “After all, the history of financial innovation is littered with examples that led to early booms, growing unintended consequences, and eventual busts,” he said.
Risk management as key to success
Risk management certainly has been a focus area for BlueVine from the beginning.
BlueVine joined the revolution in small business financing in 2014 when it rolled out an innovative online invoice factoring platform.
Factoring is a 4,000-year old financing system that allows small businesses to get advances on their unpaid invoices by providing easy, convenient access to working capital. BlueVine transformed what had been a slow, clunky, paper-based solution into a flexible and convenient online financing system that enables entrepreneurs to plug cash flow gaps that often hamper business growth.
Because the BlueVine platform is based on cutting-edge data science technology that can process and analyze information to make quick funding decisions, managing risk inevitably became a major challenge in building our business. As Eyal Lifshiftz, our founder and CEO, recalled in a recent column, in BlueVine’s first month of operation, almost every other borrower defaulted.
In fact, that was partly the reason Eyal invited me to join his team. BlueVine serves small and medium-sized businesses seeking substantial working capital financing of up to $2 million. To succeed, we needed to build a robust data and risk infrastructure.
Small startup with big data needs
Joining BlueVine also posed a personal challenge.
At PayPal, where I started as a fraud analyst and then moved into the company’s data science division where I helped develop behavior-based risk models, I had enormous amounts of data to work with to do my job. Now, I was joining a young startup with very limited data history, but with big data needs.
This meant putting together exceptional and experienced teams of data scientists and underwriters and developing a technology that becomes progressively more precise and accurate as it draw lessons from our steadily expanding data and underwriting decisions. It was important for us to have a group of super smart, highly-motivated and technologically-strong people working closely with a team of experienced and sharp underwriters.
Here’s how the process works: Our underwriters develop a robust methodology which is then translated into detailed logic decision trees.
Each decision tree includes dozens, even hundreds of branches, made up of question sets on different underwriting situations.
For example, a decision tree could focus on approving new clients coming from a specific industry, such as transportation or construction, or on increasing the credit line for a client with a specific financial profile.
A typical decision tree would drill down on further financial questions: What’s the expected cash-flow of the business in three to six months? What’s the pace at which it has accumulated debt over the past year? Are the business sales seasonal in a material way?
The questions could also focus on non-financial areas: Does the company’s website look professional? How does it compare with major companies in its industry? Does the business actively maintain its Facebook and Twitter accounts?
The goal is to build a risk infrastructure that steadily becomes more efficient in answering questions in an automated, large-scale and highly accurate manner. Our data scientists leverage multiple external data sources and use dynamic advanced machine learning models to answer these questions pretty much in real-time and with a high degree of accuracy.
So it’s a combination of technology and human input. There will always be gray areas, questions and situations that cannot immediately be addressed by our computer models.
But as the models get better and more robust, the gray areas will shrink. Our models are constantly and automatically enhanced, re-trained and expanded by the most recent data and input from our underwriters.
Think of it as the fintech version of Deep Blue and AlphaGo, the powerful computer programs that famously outplayed topnotch chess grandmasters. Both programs were based on similar principles: the more they played, the more knowledge they absorbed and the more formidable they became at chess.
Technology and teamwork
An even better example is the self-driving car powered by Google’s artificial intelligence technology. Human input is still required, but the more driving the car does, the smarter and more autonomous it becomes.
Building our risk infrastructure is an ongoing process for BlueVine. But it already has helped us steadily expand our reach, making us stronger, smarter and even faster in financing small and medium-sized businesses.
In just a couple of years, the strides we’ve made in managing risk more effectively enabled us to increase our credit lines to $2 million for invoice factoring and $100,000 for business lines of credit, which means we’ve been able to serve bigger businesses with bigger financing needs.
While we initially focused mainly on small businesses with annual revenue of under $250,000, today we have an increasing number of clients with annual sales of more than $1 million and increasingly, we’ve been able to serve clients with revenue of more than $10 million a year.
By the end of 2016, BlueVine had funded roughly $200 million. We’re on track to fund half a billion dollars by the end of this year.
We’ve accomplished this in a time of heightened skepticism about fintech in general and alternative business lending in particular. But rather than scoff at this skepticism, I’d point out two things.
First, fear often accompanies the rise of a new technology. Second, in the wake of the 2009 financial crisis, it’s prudent to raise hard questions about the rapid emergence of new financial technologies.
While building technologies and companies that can provide financial services faster and easier is a laudable goal, It’s wise to move cautiously and with humility.
The BlueVine experience underscores this.
Risk is still a challenge we take on every day. But we have found ways to take it on confidently and effectively with a vigorous combination of technology and teamwork.
Ido Lustig is Chief Risk Officer of BlueVine.
Kabbage CEO Rob Frohwein Pokes Fun at “Alternative Lending”
March 14, 2017
At LendIt, Kabbage CEO Rob Frohwein poked fun at alternative lending, suggesting that it should just be called lending. His presentation, titled “Alternative Lending is Dead Long Live Data,” put the last few years of irrational exuberance into perspective. Below are some of his one-liners:
“You don’t disrupt banks by focusing on the advantages that banks have over you.”
“Most online lenders thought by calling themselves a technology company, they are one.”
“However, the biggest piece of technology that most of them promote is an online application.”
“There’s nothing special about an online application.”
Frohwein also revealed some interesting facts about Kabbage during the presentation, including that their customers borrow from them on average 20-25 times over the course of 4 years, whereas their competitors only make only 2.2 loans to their customers on average.
On The Line With BlueVine After a Big Year
March 13, 2017
Helping businesses get paid on their invoices faster is a big market. So big, in fact, that when I met up with BlueVine CEO Eyal Lifshitz at LendIt last week, his company had just recently secured a $75 million warehouse credit line with Fortress. BlueVine had also just come off of a big year in which they provided more than $200 million to small businesses, earning them a spot in our rankings.
BlueVine’s success comes at a time when some in the online lending space have lost their luster. Lifshitz feels his company, however, is positioned well. “The time of exuberance has disappeared,” Lifshitz says. “Investors are looking to create value.”
Part of what makes them different is that they not only factor invoices, but they also provide lines of credit to prime and near-prime customers. Factoring is still a bigger percentage of their overall business, Lifshitz says, but he asserts that their credit line segment is growing at a faster clip. And he insists that they are working on other products too, not just loans. It sounds like the beginnings of a bank, I tell him, while making references to SoFi and their ability to live on the threshold of banking without actually currently being one.
“People have been saying that PayPal would become a bank forever but they haven’t become one,” he points out.
Still, running a company as big as his does require prudent decisions. “We are very mindful of how we manage capital,” he says. I ask if he thinks his business model protects them from an economic downturn. “It doesn’t protect it,” he asserts. Instead, he explains, his model gives him the ability to make adjustments rapidly. Since BlueVine’s capital is typically repaid in a matter of months, they can react to economic changes quickly.
Big name backers aren’t afraid to show that they believe in this either since they have been funded by Lightspeed Venture Partners, 83NORTH, Correlation Ventures, Menlo Ventures, Rakuten Fintech Fund and other private investors. A recent announcement by BlueVine says that they are on track to fund approximately $500 million to small businesses in 2017.
New York’s State Government is Competing With Online Lenders on Pay-Per-Click and Misinforming Small Businesses
March 10, 2017Move over online lenders, New York’s financial regulator is apparently shelling out big bucks to steer away New York’s online small business loan searchers to THEMSELVES. As someone who has historically kept tabs on Google’s search results for lending related keywords, this new result is one of the more interesting developments I’ve seen yet.
From a New York IP, querying Google with the keyword small business loan produced not only an ad for Kabbage and other online lenders, but also prominent paid placement from New York State with a sitelink extension to the New York Department of Financial Service’s page about licensed lending requirements.
While there’s nothing that weird about marketing state-assisted development programs, the main Google ad link directs visitors to “Navigate the Lending Landscape” by clicking a “Learn More” button.
That takes you to Venturize.org, operated by Opportunity Finance Network, a Community Development Financial Institution (CDFI) that New York is apparently really doing the advertising for. And there’s a major problem with that.
The information across that site is wildly incorrect. It explains online marketplace loans as “designed to appeal to business owners who have lower credit scores, or who have been in business for a short time.” That’s a pretty broad statement especially when many online marketplace lenders are in fact designed to appeal to business owners who have higher credit scores and have been in business for a long time.
The description of merchant cash advances is even worse. Whoever wrote it has no understanding of them in the slightest. Good thing New York State is paying up to $100 a click with our tax dollars for premium keywords to teach businesses absolute nonsense! I quote what the website says below and my comments are in red next to them.
- “Usually, they require a minimum daily payment regardless of your sales.” – Um, no
- “After approval, the loan is repaid with a portion of your future credit card sales each day.” They’re not loans. This is mostly well settled in the New York Court system. Recently, see this and this
- “You’ll pay for this convenience in very high interest rates” – There are no interest rates
- “MCAs are probably the most expensive borrowing option, with APRs between 25% – 350%.” – Wrong. No APRs can be calculated on a purchase transaction
- “if you are desperate” – That’s a pretty unfair statement to say that a methodology is only for the desperate. New York State is insulting its small business constituency, private companies, and the jobs that have been maintained or created all at the same time
There are also typos and spelling errors throughout the page, as well as conflicting information. The very same page describes MCAs as having between 70% – 200% APR on one side and between 25% – 350% APR on the other side. You don’t need anymore proof that whoever wrote this stuff was just winging it on the fly to make it sound bad. These are the kinds of misleading figures that the CFPB sues financial institutions for and perhaps they should actually take a look at this.
It also says that businesses must accept credit cards. That’s not true either.
It’s strange that a CDFI would go to such great lengths to deliberately misinform small businesses, let alone have a state government foot the bill for them to do it.
Furthermore, as someone who recently used an online marketplace loan for my business, I’m personally offended that my state government would pay to market information that says it was designed to appeal to business owners who have lower credit scores. As my FICO score is over 800, the writer clearly does not understand the product, the market, or the appeal.
More troublesome of course, is that the NYDFS hopes to regulate these industries through language snuck in Governor Cuomo’s budget proposal. Given the above, what could possibly go wrong?
