Tech Founder Takes Online Business Loan, Grows Massively

February 2, 2024
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The founder of took to X to share his story about using a revenue based business loan from Stripe Capital. It worked very well for him. His posts about it are below:

Stripe Capital works similar to how other platforms work in that their product is a loan with MCA-esque features. For example, merchants apply a fixed percentage of their credit card sales toward their loan balance up until the loan is paid in full.

Financial Service Associations Urge Legislation on IRS Income Verification

January 25, 2024
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irs buildingThe IRS doesn’t want financial service companies to be able to verify the income of customers, at least not through official channels like the Income Verification Express Services (IVES) system. On January 2 and 3, the IRS announced it would only allow IVES transcripts to be made available “to mortgage lending firms for the sole purpose of obtaining a mortgage on residential or commercial real property (land and buildings).” Government agencies will also not be allowed to use IVES.

“The IRS is implementing the provisions of the Taxpayer First Act (P. Law 116-25) with increased privacy and security requirements for access to confidential tax information,” it announced. “If tax transcript information is required by your firm for other than securing a mortgage, we recommend requesting it directly from the taxpayer.”

But relying on getting the information directly from the taxpayer defeats the whole purpose in more ways than one, many financial service trade associations say. On Wednesday, a letter jointly signed by the American Bankers Association, America’s Credit Unions, American Fintech Council, Consumer Data Industry Association, Electronic Transactions Association, Financial Technology Association, Innovative Lending Platform Association, Independent Community Bankers Association, Mortgage Bankers Association, Responsible Business Lending Coalition, and Small Business Finance Association urged senior ranking members of Congress to pass H.R. 3335. Dubbed the IRS eIVES Modernization and Anti-Fraud Act, it would “ensure the IRS follows the original intent of Congress to modernize the system and prevent disruptions to the consumer and commercial lending industries.”

You can view the letter here.

Prosper Loan Originations down 50% YoY in Q3

January 17, 2024
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Prosper MarketplaceOnline consumer lending stalwart Prosper Marketplace originated $493.8M in loan originations in its last reported quarter. While it sounds like a lot, the company said that’s a decrease of 53% from the same period in 2022. Prosper originated $1.72B in loans for the first 9 months of 2023 vs $2.5B in loans for the first 9 months of 2022.

“…the mix of personal loan originations on the Prosper platform reflects a significant decrease in investor appetite for whole loan purchases under the current economic environment, specifically for personal loans not assigned Prosper ratings,” the company said in its financial reports. “These personal loans are sold only to institutional investors and based on specific underwriting criteria and custom risk models developed by these investors.”

Prosper Marketplace logged a cumulative net loss of $93M for the first three quarters of 2023.

Conversion Rates on Upstart’s Consumer Loans

November 7, 2023
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upstart websiteUpstart is having a tough time in the current interest rate environment.

“In the third quarter, rates were at an all-time high in our marketplace, higher than we expected them to be, reflecting both decades high interest rates and significantly elevated risk in the consumer economy,” said Upstart CEO David Girouard during the company’s Q3 earnings call. “This is not a path we would have chosen and is obviously not constructive to our growth, but it reflects the reality of operating responsibly in this environment.”

The company won’t offer loans above 36% APR which means if the risk models indicate a rate higher than that would be necessary to move forward, they just decline the loan altogether. Notably, this and other economic factors has had a negative impact on their conversion rates.

“I think our [conversion rate] for this quarter was around 8.5%,” said Upstart CFO Sanjay Datta. “So meaning, of all applicants to fill in an application and submit, about 8.5% of them become funded loans. I think at our peak, that number was closer to 24%.”

And of all loans that get approved, only 1/3rd of them fund.

It’s been a rough couple of years for Upstart. The stock is down 92% from its all time high in October 2021. At the time the company was planning to expand into the small business loan market, which it finally did in June 2022. In the subsequent quarter it originated $9M in small business loans. But earlier this year the company suspended it entirely. At the time Girouard said, “This was a necessary step to ensure we can adequately resource the rest of the roadmap. We look forward to the day when we can resume our pursuit of the world’s best AI-powered business loan.”

It has not resumed business lending though it continues to cite in its quarterly earnings presentations that the addressable small business loan market numbers $895B.

Fintech Hasn’t Stopped. There’s Still Room for Constant Improvement in Lending

October 31, 2023
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fintech“I think fintech is a broad term,” said Frank McKenna, Chief Fraud Strategist at Point Predictive. “It can apply primarily to technology that enables faster banking, and more digital banking that hasn’t been satisfied with kind of the traditional brick and mortar banks or finance companies. Fintech can be banks, it can be platforms that provide the backbone for that kind of streamline lending. Or it can even be considered companies like ours, technology that helps financial companies make better decisions.”

Fintech, which can take on any one of the forms McKenna described, has been causing transformations for over a decade and yet there are still processes in the lending world still ripe for improvement.

“[Fintech is] growing every day, it will be more because of timing,” said Richard Gusmano, CEO of BCCUSA. “I think we’re going to see more and more people doing it, especially with the SBA opening up lending to non-banks. You’re going to see more of it in many different fashions and derivatives and how they see it is going to continue to emerge.”

Gusmano’s company helps businesses secure bank lines and bank loans, a system that now includes its very own AI-powered solution. He’s already seeing how AI and machine learning technologies stand to disrupt processes in the small business finance ecosystem.

“There’s so many different ways to use it and it is not rocket science,” Gusmano said. “In the MCA space, it’s amount of deposits, it’s average daily balance, it’s business type, and other positions. AI can immediately pick up those things if programmed to do so. I would think that the MCA underwriters over time should be concerned because AI could likely do that and pick that up.”

But it’s not just about replacing manual processes, but also doing it in an efficient manner.

“Since most fintech is dealing in a non-face to face environment, you’re going to have a whole host of risk in fintech, more than you might have in a traditional bank,” said McKenna of Point Predictive, whose company collaborates with lenders to detect potential risks. “I can just name off five or six: you have higher rates of identity theft, use of fake IDs called synthetic identities, you have more falsified documentation, fake employers, people shot-gunning where they’ll go to multiple fintechs the same day and get as many loans as they can, as quick as they can. They call it shot gunning.”

McKenna added that if someone has no knowledge of how to navigate these types of strategies or does not have the right technology to handle it, they may fall victim to them.

The keyword there might be someone, as in a person

“The risks associated is that you still are going to need someone that can make human decisions, even with financial technology,” said Gusmano. “And if you don’t, you’re going to be keeping yourself away from businesses that you want to do business with. It can never be 100% tech.”

The Growth of IDIQ

September 7, 2023
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idiq homeIDIQ is no stranger to recognition. A leader in identity theft protection, the company has earned a spot on the Inc. 5000 list for four consecutive years. Founded in 2009, IDIQ began its journey with a handful of employees in a Southern California home before expanding to an office building in Temecula, CA. The Temecula location grew to seven buildings, opening additional offices in Illinois, Florida, and Arizona, along with hubs in Texas and New York.

“Yes, we’ve grown rapidly,” said Bryan Sullivan, Chief Operating and Financial Officer at IDIQ. “We’ve hired more than 150 employees in the last three years to facilitate our business growth. We currently have about 250 employees.”

According to Sullivan, the COVID-19 pandemic catalyzed two significant trends that contributed to IDIQ’s growth. First, there was a spike in online scams and identity theft. Second, there was an increase in consumer finance transactions, including credit card use, home purchases, and refinances.

Sullivan recalled one case in particular: “We had a member who received an alert that two companies, not accounts but companies, had been opened in a different state by an identity thief using their name and personal information and had applied for business loans,” said Sullivan. “We alerted the member to the fraud and helped them get the bogus companies eliminated.”

“Without these alerts it might have taken years for the victim to find out about the identity theft and bogus companies and loans in their name,” Sullivan explained. “And, once found out, it would take months if not years to recover their identity and credit and cost thousands of dollars in lost wages and other costs.”

An IDIQ customer can be pretty much anybody since they now have several brands. IdentityIQ, which focuses on identity theft and credit monitoring is their flagship. The others include MyScoreIQ, Resident-Link, Countrywide Pre-Paid Legal Services, and Credit & Debt.

In the small business finance industry, IDIQ is used several ways. In one example, brokers can offer merchants access to their credit reports and in turn use that data to help them figure out the best path to pursue for funding.

“Our strategy has been to continually expand our product offerings,” he said. “Adding features and benefits that protect and educate consumers as well as improve their financial wellness and help them meet their financial goals.”

Too Many Cash Flow Management Tools? Business Blueprint Looks to Address Inefficiencies

April 24, 2023
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Business Blueprint“One of the bigger things [small business owners] realize is, ‘Wow I spent so much time on the financial, the back office, and not what I love, not what initially drew me to starting a business,’” said Brett Sussman, VP of Marketing & Sales for Business Blueprint and Banking at American Express.

American Express recently conducted a survey with 1,100 small business owners that found that more than three quarters were looking to consolidate their cash flow management tools. That’s because they are often forced to rely on multiple tools to manage and project their cash flow, which uses up valuable time and impacts their ability to just focus on their business.

“What’s happening is in today’s uncertain economic climate small business owners are seeking this visibility and there used to be an expression that ‘cash is king,’ I now think it’s moved to ‘cash flow is king,’” said Sussman.

The survey participants included business owners with anywhere from fewer than 10 employees to 500 employees, spanning various industries. The survey revealed that 60% of SMBs use between two to three cash flow management products currently, with 62% spending 5 hours a week on various platforms and 18% spending even more time. It also showed that consolidating cash flow management products onto one platform would help build confidence among business owners and reduce the time they spend on these tasks.

The cost of tools themselves is also a concern. The data revealed that 36% want more affordable pricing.

“Price is certainly a consideration here and there are out there free cash flow management tools, and that’s something that we’re currently offering with Business Blueprint from American Express,” Sussman said.

Unsurprisingly, American Express is addressing their own findings through Business Blueprint. Among the key benefits of their cash flow management tool is ease-of-use, interoperability, and that it’s free.

SBA Lifts SBLC Moratorium

April 11, 2023
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Isabella Guzman, Administrator, SBA

It’s official. The SBA is lifting the moratorium on licenses for Small Business Lending Companies (SBLCs), ending the 40-year pause that began in 1982. The SBA is also adding a new type of lending entity called a Community Advantage SBLC while also removing the requirement for a Loan Authorization in the 7(a) and 504 Loan Programs.

The 37-page rule, which is slated to be published in the federal register on April 12th, included the SBA’s analysis of all the comments it had received, including the criticisms. Some argued, for example, that opening up the doors would allow the unscrupulous world of fintech to participate in the market. The SBA was unmoved by this, countering that existing participants already rely on fintech.

“SBA has for many years provided oversite to non-depository entities participating in the SBA business loan programs,” the SBA said. “This includes SBLCs, non-federally regulated lenders (NFRLs), 504 Certified Development Companies (CDCs), and Microloan Intermediaries. In fact, most all lending institutions incorporate the use of financial technology in their delivery of loans and other financial products.”

One such fintech that has been eager to become a participant, issued a prepared statement on the decision earlier today.

“Funding Circle applauds the Biden Administration for ending the SBA’s 40 year moratorium on licensing additional state and SBA licensed and regulated non-depository lenders thus ending its lender oligopoly in favor of competition and innovation,” said Funding Circle. “This is an opportunity for the more than 8,000 community banks and credit unions that don’t offer 7(a) loans to partner with Fintech lenders to offer affordable loans quickly in underserved communities. Congress should now focus on ensuring SBA has the resources necessary to license more than three new lenders in its SBLC program in order to increase competition and distribution of government guaranteed loans in underserved communities.”

The SBA also published new rules on April 10th that will amend various regulations governing the 7(a) and 504 loan programs.