NetSuite announced a series of new product innovations last week, including one named NetSuite Capital. NetSuite Capital is an embedded service that allows NetSuite customers to “accelerate payments and increase working capital by reviewing, pricing, and submitting invoices from accounts receivable for immediate payment.”
NetSuite’s market is large. Over 25,000 businesses use it to process $1 trillion in invoices annually.
The technology that makes NetSuite Capital possible is powered by Raistone, a b2b finance payments company that has landed big partnerships including Mastercard, SAP, C2FO, and more. According to Raistone, “4 million companies submit and receive $6 trillion in invoices annually.”
NetSuite is a cloud ERP system that was acquired by Oracle in 2016. Unlike Quickbooks which is mainly an accounting software for small-to-midsize businesses, NetSuite is primarily for larger businesses that are looking for an all-in-one ERP solution.
Meta has apparently exited the small business financing space in the US after a short stint. Meta’s original invoice factoring business, which debuted in 2021 as Facebook Invoice Fast Track, updated its landing page to say that the program has been “paused indefinitely.” Meta offered a pretty sweet deal, only a fee of 1% of the A/R. The condition was that it was only open to minorities, females, veterans, LGBTQ+ or someone with a certified disability. Meta sunset the program in March 2023 but did not elaborate as to why.
Facebook’s Small Business Loan Resource center has also been removed. At the time of its launch in 2021, it had partnered up with Connect2Capital.
The abandoned efforts were not exactly unchartered territory for Meta. In India, the company brokers business loans that carry interest rates from 16%-23%. When it launched this in 2021, it was suggested that this would expand to more countries when it said “India was the first country in which we launched this initiative.”
“We’re one of the good guys so of course we’ll comply and include the form with our contracts.”
Variations of the above phrase have been oft-repeated in the last few months by participants in the commercial finance industry when queried by deBanked about California’s new disclosure law. Several companies have shared that they are prepared for what’s to come, but are they? The regulations go into effect on December 9th and begin a new chapter of compliance for the industry.
Though one might be aware that California will require specific disclosures on commercial finance contracts (including purchases of future sales), Katherine C. Fisher, Partner at Hudson Cook, LLP, explained that the breadth of the state’s law will likely require changes to a funding company’s operational processes as well. Fisher told deBanked that there’s not just the matter of disclosing but also the matter of what triggers a disclosure having to be made. What might otherwise be considered the normal discourse between a funding provider and a customer prior to a deal being consummated is now an area requiring close examination.
“If a broker sends a text to a merchant with the offers, could it trigger this?” is one scenario she posed about the threshold for disclosure.
The funding provider needs to know the answer because once the disclosure requirement is triggered, the broker needs to relay back the details of the offers made, the specific disclosures provided, and the timestamp of when this took place. All of this data then needs be stored by the funding provider to maintain compliance.
And funding providers will need to be vigilant.
“The funder is responsible for broker compliance,” Fisher said.
The entire process of who-said-what, when, and how will suddenly become a realm requiring tight control it seems. And that all comes back to the form itself, which is not all that simple either.
California will require funding providers to estimate an APR on a purchase transaction using one of two methods: the Historical Method or the Underwriting Method. While the methodology selected is probably best left to qualified counsel to assist with, the likely deviation of a future estimated APR from a backwards-looking APR was a reality considered by state regulators. To bridge this gap, California requires that funding providers disclose reasonably anticipated true-up scenarios. A true-up in this instance refers to the already well-established option for a merchant to perform a monthly reconciliation of payments if the amount collected is above or below the purchased percentage specified in the contract.
Though the very nature of the reconciliation is a consequence of not being able to predict the future exactly, California’s law requires that funding providers disclose the dates and amounts of the true-ups that they reasonably anticipate. Such concepts and mathematics, once perhaps the subjective domain of a funding provider’s in-house underwriters will soon be subject to regulatory scrutiny for total accuracy. And this just scratches the surface.
The scope of this law is so unique and technical that the Hudson Cook law firm spent a considerable amount of time preparing a guide on this very subject. deBanked saw some of the pages of this guide during a call.
Fisher, meanwhile, insisted that compliance in California is different than compliance with the law recently enacted in Virginia and that if funding providers wait until December to begin preparing, it will probably be too late to be ready in time.
“This is more than just a form,” Fisher said. “You need to spread the word about it.”
“I know it might seem sudden for you, but we’ve been engaged in discussions since the Summer, and [BlueVine] has been in discussions internally for certainly longer than that.”
FundThrough announced their acquisition of the factoring division of BlueVine on Thursday. A deal that has been long in the works will make the Canadian factoring company’s American portfolio 80 percent of their business.
“From FundThrough’s perspective, we’ve always had BlueVine’s factoring business on our radar,” said FundThrough’s Co-founder and CEO Steven Uster, exclusively to deBanked. “We started around the same time, they grew their business nicely, and then they started to branch out to other products.”
Uster spoke about BlueVine outgrowing their factoring business, while FundThrough was growing enough to acquire it. “From the outside looking in, it looked like this might’ve been turning into a non-core asset for them, but yet very core for us.”
For FundThrough, the move is substantial. The company has acquired their largest competitor’s inaugural product. According to Uster, the move brings two companies together who are starkly similar in more ways than just the product they sell.
“We share similar cultures, we’re much smaller obviously as a whole, but our factoring business is bigger,” he said. “We share a similar mindset, we’re also a technology based business, our systems are quite similar, so the move [will] be an easier, elegant transition.”
“We determined that FundThrough is perfectly positioned to serve our factoring clients with the care and individual attention they need and deserve,” said Eyal Lifshitz, Co-founder and CEO of BlueVine. “Our factoring clients will be in great hands with FundThrough.”
Lifshitz spoke on his company’s growth, and how the move will allow the company to focus on better serving their existing customers. “Since launching BlueVine, we’ve been focused on the financial needs of small businesses and are very proud of what we’ve been able to accomplish. As we evolve our products and services, we continuously examine how we can better serve our customers at scale.”
According to Uster, fintech-inspired invoice factoring has sparked unprecedented interest in the financial world lately. While he is unsure of the reason, the engagement and inquiries FundThrough has received prior to the acquisition have been significantly higher than in the past.
“Something shifted over the last twelve months,” Uster said. “All of the sudden, without much branding, we have been getting a bunch of inquiries about partnering and providing this embedded invoice factoring solution.”
With their acquisition comes confidence, and it sounds like FundThrough is ready to be on the forefront of tech-infused financing. “[The acquisition] provides us the scale to be the partner of choice. We are now the players in the market,” Uster said.
“If you want to offer tech enabled instant funding on invoices in your B2B marketplace, FundThrough is now the solution.”
After Facebook announced Facebook Invoice Fastrack, a program that would allow the company to enter the invoice factoring business effective October 1st, few knew what to expect.
“My gut tells me here that Facebook is not all of the sudden getting into the lending business,” said James Cretella, Partner at Ottoburg LLC and guest speaker at the IFA conference last Spring. “Big tech is seeing the information symmetries, especially in small business lending. It’s very fragmented, and [tech] is trying to exploit that to bring down the cost, and to consolidate that industry,” he said.
Cretella expressed a positive outlook on Facebook’s entrance into the factoring sphere. “I think it’ll be a very good thing for small businesses when big tech gets involved.”
Others believe that big tech is doing pseudo-funding in an effort to break into the space and improve their public image. “There’s always a question when big tech or similar big anything’s get into factoring,” said Robert Zadek, Of Counsel for Buchalter and CEO of Lender’s Funding. “They might call that factoring, but it’s not. It’s a fake factoring product. Fake in the sense that it’s only part of what factoring is,” Zadek said.
The major component here is whether or not Facebook is doing the standard operating procedures of a factoring company, or just purchasing invoices owed. “They’re probably not filing a financing statement a UCC-1, because that takes a long time, and [tech] likes fast,” Zadek said. “Filing is slow and almost manual.”
Without going through the processes of a factoring company, Facebook may just be banking on the good faith of borrowers to pay and eating the costs of those who don’t. “[Facebook] is left with an earned 1% fee with no work, which would be profitable if they get back. If they don’t it’s like a write off,” said Zadek.
According to a Facebook announcement, the company has already practiced factoring with a handful of small businesses, claiming that the program has successfully helped these select businesses grow, even giving some businesses opportunities to just keep their doors open.
We wanted to make a commitment to building tools that made information and inclusive funding partners easy to find and understand,” said Ronnie Cameron, Product Manager, Social Impact at Facebook. “We’ve been able to engage with some amazing [organizations]. The pandemic brought to light the gaps in access to funding that have always existed for underrepresented business owners.”
Facebook is positioning itself in a way that appears that the company is providing an exclusive service to a community who had already been underserved prior to the pandemic, and now, according to them, needs help more than ever before. As the company has had a tough time maintaining a positive image to the public, this could also just be a slightly profitable way to fix their public perception.
Zadek compared tech’s entrance into funding to when MCAs began competing with Factoring Companies. “Instead of whining about MCAs, why don’t you give the client more money?,” he asked his predominately factoring audience when they would complain to him about MCAs. “The MCAs don’t have a death wish,” he told his audience. “They are giving money because they believe they are going to be paid back.”
Sticking to the notion that Facebook’s take on factoring is different from what his industry does, Zadek summed up his take on Facebook’s announcement.“They’re not doing factoring, they’re doing something that has little pieces of factoring in it.”
Ever since New York State Senator George Borrello famously questioned the meaning of “double dipping” in a commercial financing transaction, states have rushed to include the term in proposed laws despite no one knowing exactly what it means.
The latest state is Connecticut, which introduced SB 745 in February, an “Act Requiring Certain Financing Disclosures.” It is essentially a copy & paste of New York’s recent law which is slated to go into effect in June.
The Connecticut bill similarly applies to factoring, merchant cash advance, business lending and more. It was introduced by State Senator Saud Anwar (D).
A hearing held on March 2nd, drew testimony from the Commercial Finance Coalition, Small Business Finance Association, Electronic Transactions Association, Innovative Lending Platform Association, and Secured Finance Network.
If the bill passes, it is designed to go into effect in October of this year.
During the election, we heard candidates on both sides to toss around the phrase “small businesses are the backbone of the American economy.” A staple of exhausted political rhetoric, made trite despite its truth because for many politicians it’s a talking point, not a platform. We must move from rhetoric to action. To do so, America’s political leaders need a real understanding of what small businesses need—and what they don’t.
The struggle between understanding and posturing is on display right now in Albany. While small business owners struggle to open their doors, the legislature passed a so-called “truth in lending for small business” bill that claims to provide more disclosure to business owners seeking financing. Led by Senator Kevin Thomas and Assemblyman Ken Zebrowski the bill is currently pending before Governor Cuomo. The legislators recently authored an op-ed that further demonstrates their failure to recognize that the innocuously named bill is rife with faults and lacks a competent grasp of small business issues. The critical blind spots in the bill’s design threatens billions of dollars in capital leaving New York—a failing small businesses owners can scarcely afford at such a difficult time.
Yet, rather than incentivizing finance providers to stay in New York, the legislature is focused on complex disclosures that lack real meaning or understanding to small business owners. Senator Thomas opined on the Senate floor “… the reason I introduced this bill is because people don’t use standard terminology.” Interestingly, this bill creates several new terms and metrics that would be required to be disclosed that have never been used before in finance. Terms like “double-dipping” and new confusing metrics that even the CFPB under President Obama labeled as “confusing and misleading” to consumers. This bill’s fatal flaw is that it has confused information volume with transparency, somethings a recent study proved would harm small business owners.
Even Senator Thomas acknowledged the legislation’s myriad of problems while still encouraging its passage. In his colloquy with Senator George Borrello on the Senate floor, right before he called New York small business owners “unsophisticated,” he mentioned how his bill had “many issues” that he “hoped” would be worked out before implementation. Hope is not a strategy and it won’t help small business owners obtain the financing they need to stay in businesses. Advancing legislation that would limit options for entrepreneurs working to stay in businesses during a pandemic that has crippled the New York economy represents a reprehensible failure of leadership.
Minority-owned businesses have faced a disproportionate economic impact from the pandemic. According to the Fed, Black-owned businesses have declined by 41% since February, compared to only 17% of white owned businesses. Further, the Paycheck Protection Program (PPP), the federal government’s signature relief program for small businesses, has left significant coverage gaps: these loans reached only 20% of eligible firms in states with the highest densities of minority-owned firms, and in counties with the densest minority-owned business activity, coverage rates were typically lower than 20%. Specific to New York, only 7% of firms in the Bronx and 11% in Queens received PPP loans. Moreover, less than 10% of minority-owned businesses have a traditional banking relationship—something that was initially required to have access to the PPP.
The lack of cogency and lazy approach to this legislation is a disservice to the hard-working entrepreneurs who continue to open their businesses while facing daily economic uncertainty. Governor Cuomo has worked tirelessly to continue to provide economic relief to both businesses and consumers—removing billions in financing for small businesses will only hinder this effort. New York can do better.
Small Business Finance Association
After ten years of debate over when and how to roll out the CFPB’s mandate to collect data from small business lenders, the Bureau has initially proposed to exclude merchant cash advance providers, factors, and equipment leasing companies from the requirement, according to a recently published report.
The decision is not final. A panel of Small Entity Representatives (SERS) that consulted with the CFPB on the proposed rollout recommended that the “Bureau continue to explore the extent to which covering MCAs or other products, such as factoring, would further the statutory purposes of Section 1071, along with the benefits and costs of covering such products.”
The SERS included individuals from:
- AP Equipment Financing
- Artisans’ Bank
- Bippus State Bank
- CDC Small Business Finance
- City First Bank
- Floorplan Xpress LLC
- Fundation Group LLC
- Funding Circle
- Greenbox Capital
- Hope Credit Union
- InRoads Credit Union
- Kore Capital Corporation
- Lakota Funds
- MariSol Federal Credit Union
- Opportunity Fund
- Reading Co-Operative bank
- River City Federal Credit Union
- Security First Bank of North Dakota
- UT Federal Credit Union
- Virginia Community Capital
The panel discussed many issues including how elements of Section 1071 could inadvertently embarrass or deter borrowers from applying for business loans. That would run counter to the spirit of the law which aims to measure if there are disparities in the small business loan market for both women-owned and minority-owned businesses.
One potential snag that could complicate this endeavor is that the concept of gender has evolved since Dodd-Frank was passed in 2010. “One SER stated that the Bureau should consider revisiting the use of male and female as categories for sex because gender is not binary,” the CFPB report says.
But in any case, there was broad support for the applicants to self-report their own sex, race, and ethnicity, rather than to force loan underwriters to try and make those determinations on their own. The ironic twist, however, according to one SER, is that when applicants are asked to self-report this information on a business loan application, a high percentage refuse to answer the questions at all.
The CFPB will eventually roll the law out in some final fashion regardless. The full report can be viewed here.