Industry News
SmartBiz Loans Expands Its Footprint With a NorCal Bank
April 25, 2017Technology-based lending platform SmartBiz Loans, which is dedicated to facilitating SBA loans, has expanded its bank roster. SmartBiz announced today a new partnership with Sacramento-based Five Star Bank, bringing the tally of the number of banks on the startup’s platform to five and thrusting marketplace lending into the spotlight once again.
Five Star already delivers SBA loans to customers but through the SmartBiz platform will slash both the time and costs in the underwriting process while reaching new small business customers in the process.
Evan Singer, CEO of SmartBiz Loans, told deBanked that the mindset of the executive team at the Silicon Valley startup has always been to bring banks back into the fold and to incentivize them to fill a void in the market left by the financial crisis by originating smaller loans, in particular SBA loans.
“What we’ve seen in the market is that good businesses cannot get access to low-priced capital if they want to borrow $250,000. So sure, if they want to borrow $5 million they can get access. That’s why we came up with the idea to bring the banks back through fintech,” he said.
Five Star Bank, a privately held bank with $850 million in total assets, is pleased to be among those ranks. James Beckwith, president and CEO of Five Star Bank, was introduced to the SmartBiz technology about a year ago after which time the bank execs began the due diligence process.
“I was intrigued,” Beckwith told deBanked. “We felt the need to somehow play in the space. But we also knew it wasn’t practical for us to develop our own platform. So this was really right in our sweet spot of how we like to partner with people.”
As a result of the partnership Five Star Bank, which makes loans from its own balance sheet, is reaching small business clients the bank did not have access to before.
“Our market presence didn’t allow us to touch a lot of these businesses before, whether from Los Angeles, or Arizona, or San Jose. It’s really people we were unable to touch now being touched through the SmartBiz partnership,” said Beckwith, adding that the small businesses span industry verticals.
“At this point we’re looking at deals in the Western United States and we hope to expand that. The small businesses are really all types – construction companies, PR firms, consulting firms, — there’s no concentration in terms of industry type,” he noted.
The bank’s target customer is seeking a loan for $350,000 or less and the average loan size is $250,000 to $270,000. Terms of an SBA loan on this platform are comprised of a rate of Prime plus 2.75 over a 10-year period.
“The term is much longer and the rate is much lower than traditional loans. Small businesses can save thousands of dollars per month by getting an SBA loan through the SmartBiz and Five Star partnership,” said Singer. In fact, Five Star bank spends about one-tenth of the time on a file or customer originating from SmartBiz than it would on a customer coming from the traditional retail side of their business.
Industry Shakeout
Much of the fallout in the marketplace lending market segment has been tied to the stigma of subprime lending. Beckwith is quick to point out, however, that the underwriting standards for the loans on this platform, which are agreed upon by both Five Star and SmartBiz, are high.
“If you look at some of the average FICO scores we are doing, they are actually good deals. They’re SBA, they’re not subprime deals. I would not characterize them as subprime deals at all,” Beckwith said.
Meanwhile the marketplace lending segment has undoubtedly become more crowded in recent years, attracting the likes of lenders and non-lenders alike, evidenced by the participation of Amazon and Square Capital in this space, for instance.
According to Singer some industry shakeout can be expected in the near term. He expects over the next couple of years that those marketplace lenders and other alternative lenders unable to meet customer demands will either experience a wave of consolidation or they simply won’t be around any longer.
“We are already starting to see a number of our loan proceeds being used to refinance expensive shorter-term debt where they save thousands per month. Businesses are getting smarter with available options and folks that are able to best meet and deliver with small businesses on their minds first are going to come out on top,” said Singer.
SBA 7(a) Cap
As a technology platform dedicated to SBA loans, the issue of the program’s annual allotted cap is something that gets revisited on an ongoing basis. Nonetheless even when the SBA program has come close to suspension, Congress has stepped in to keep it afloat.
“The great thing about SBA is that it has support from both sides of the aisle in D.C. We’ll see what happens this year,” said Singer.
James agrees. “Every year that this becomes an issue the cap has been increased. I feel comfortable that what has happened in the past will happen again in the future because these programs are very viable. The small business space has very strong economic development activity.”
If they’re right this bodes well not only for the Smart Biz and Five Star partnership but also the new banks that the tech-based lender has in its pipeline.
“We are adding banks into the marketplace. And we’re selective about who we add,” Singer said.
FinTech Ventures Fund, LLLP Sheds More Than Half of its Shares in IOU Financial
April 22, 2017FinTech Ventures Fund, LLLP (“FinTech”), a major shareholder of IOU Financial, shed more than half of its holdings in the Canadian-listed company last week. The 7 million shares sold represented nearly 10% of IOU’s outstanding common shares.
According to a statement:
FinTech will review and monitor its options and alternatives with respect to additional acquisitions of Common Shares in light of all relevant factors from time to time, including general market conditions, prevailing market prices for the Common Shares, the business and prospects of IOU and alternative investment opportunities available to FinTech.
Marathon Partners Targets OnDeck Capital
April 17, 2017
Marathon Partners, which owns 1.25 million shares of OnDeck Capital, has drawn a line in sand on the shore of the online lender. The private investor is urging OnDeck, whose share price has shed approximately three-quarters of its value since its IPO, to lower its risk profile amid lofty overhead expenses, which Marathon believes are preventing the online lender from achieving real profitability. Marathon has given OnDeck until the company’s annual shareholder meeting in May to respond. Otherwise the investor has vowed to withhold its support for a trio of board members who are up for a vote.
“We’re talking about a stock that is down 75 percent to 80 percent from its IPO price. You’re not going to find a lot of happy campers in that situation. Shareholders are going to ask tough questions,” Mario Cibelli, Marathon Partners managing member, told deBanked.
OnDeck Capital, meanwhile, believes it is on the right path for creating greater shareholder value.
“OnDeck welcomes open communications with all stockholders and values constructive input. Members of our board and management team have met with Marathon on several occasions. We are committed to driving value for all OnDeck stockholders and will continue to take actions to achieve this important objective,” said OnDeck’s Jim Larkin.
Indeed Marathon and OnDeck executives have had their share of discussions in the past year, over which time Marathon has acquired its stake and during which time the company’s valuation has become more interesting.
While other institutional investors have been buying shares, evidenced by EJF Capital’s 13-D filing in recent weeks, Marathon — though it has the capital to increase its stake in OnDeck — would not consider doing so with the company’s current risk profile. Marathon Capital’s lack of support for the vote, however, is less a reflection on any one individual and more a protest against the actions or lack thereof of the board as a whole.
“The only way for shareholders to reflect any disappointment or criticism on the proxy is by withholding votes for directors. Instead of picking out one or two of them, we said we’re not going to vote for any of them. This is a clear protest vote for poor performance,” said Cibelli.
Chief among Marathon’s criticisms is an executive compensation structure, including that of CEO Noah Breslow, which omits detail for investors. “There is not a tremendous amount of detail on executive compensation in the proxy, so it’s hard for investors to know what the incentives are that drive the senior management team. The board needs to be very thoughtful around creating the right set of incentives to increase shareholder value,” said Cibelli.
For instance, OnDeck Capital in its quest for profitability points to adjusted EBITDA, which Cibelli said is a “terrible” metric to use to incentivize a management team of a lending business. “It excludes stock-based compensation and depreciation. It also ignores the risk level on the balance sheet. For OnDeck profitability ought to mean GAAP net income,” said Cibelli. “You don’t hear Chase, Wells Fargo or any specialty finance company talking about adjusted EBITDA. GAAP net income is the proper metric and that is what we want OnDeck Capital to achieve.”
The murkiness surrounding Breslow’s compensation incentives has been exacerbated by what Cibelli described as an “excessive” overhead structure at the company that amounts to approximately $200 million each year.
“Given the high level of overhead, they have a tremendous amount of pressure on them to maintain and grow the loan portfolio,” said Cibelli, pointing to the company’s lack of profitability. If the company were profitable, Cibelli said OnDeck would start from a very different place when making its loan decisions.
“They would focus more on the quality of loans and interest rates. If OnDeck was profitable today, they might choose to step back from certain types and durations of loans since they would be under far less pressure to grow. Instead they could let the market and their competitive positioning dictate the level of growth,” he said, adding that OnDeck Capital is very challenged to be both prudently leveraged and profitable with its current level of overhead at $200 million.
As for next steps, Marathon Partners, which also wants the online lender to consider a sale of the company, is watching and waiting to see what OnDeck Capital will do.
“The ball is in their court,” said Cibelli. “We will see what they have to say and what they tell shareholders in a couple of weeks on the first quarter call.”
Nulook Capital Has Filed Chapter 11
April 13, 2017NY-based merchant cash advance funding company Nulook Capital filed for Chapter 11 on April 4th, according to court records. They listed more than $2.6 million in creditor claims. The largest among them was a secured claim for $2 million by a specialty finance company.
Two other creditors in the bankruptcy proceeding are also involved in the merchant cash advance industry.
The voluntary petition was filed in the Eastern District of New York in the United States Bankruptcy Court.
81% of Online Business Lending Borrowers Report Being Satisfied or Neutral
April 12, 2017The latest Small Business Credit Survey published by the Federal Reserve shows that 81% of small business borrowers were either satisfied or neutral about their online loan experience. Online lenders were defined as nonbank alternative and marketplace lenders, including Lending Club, OnDeck, CAN Capital, and PayPal Working Capital.
Of the 19% that were dissatisfied, nearly half cited transparency as a root cause. But that’s to be expected given that businesses dissatisfied with their loan from a large or small bank also cited transparency just as often.
While these charts indicate that there is still room for online lenders to improve, the 2016 report paints a more honest narrative than last year. Last year’s report used net satisfaction scores, which measured the difference between satisfied and dissatisfied borrowers. That methodology resulted in 15% net satisfaction for online lenders in 2015, which unless you read the fine print, easily misled even the most sophisticated of readers to conclude that only 15% of borrowers were satisfied. (Those readers included experts testifying in congressional hearings, the media, and government agencies, all of whom relied on that report to argue that online borrowers were terribly dissatisfied).
The 2016 report shows that businesses borrowing from an online lender were only slightly more likely to be dissatisfied than those that borrowed from a large bank (19% vs. 15%). And it’s the high interest rates that stand out to those dissatisfied online borrowers. 33% said that a high interest rate was the reason for their dissatisfaction. This is to be expected since non-banks inherently suffer from a higher cost of capital than banks.
Cash Advances?
Unfortunately, all of their data on “cash advances” is tainted. If they meant “merchant cash advances” or sales of future receivables, they should’ve specified such in the survey that went out to small businesses. Instead, the survey repeatedly asked about cash advances, a term most commonly associated with borrowing money through an ATM with a credit card. Those surveyed were also asked if they used personal loans, auto loans or mortgages so the multiple choice context suggests a credit card cash advance. Similarly, a cash advance could also mean a payday loan. With so many interpretations, the consequence is that it’s impossible to tell what the Federal Reserve meant or what those being surveyed thought they were being asked.
Notably, one question asked businesses if “portions of future sales” were used as collateral for a debt, but since merchant cash advances do not collateralize future sales (the future sales are actually sold, they don’t serve as collateral for a loan), it’s difficult to understand what they meant or how a respondent might interpret that.
Statistically representative?
The 2016 report also spends more time defending the Fed’s sampling methodology. Perhaps they are aware that their data is being put under the microscope.
Read the full Fed report here
Sneak Peek at the Mar/Apr 2017 Issue of deBanked
April 11, 2017
In the March/April 2017 issue of deBanked magazine, we delve into the industry’s latest trend, the push back towards traditional banking. The featured story is titled accordingly as “Re-Banked” and our many sources lay out a compelling narrative. Our cover, a sketch of a young tech CEO shedding the hoodie to reveal the suit-and-tie attire of a banker underneath, was one of several pieces of art we commissioned for this issue.
And for you brokers out there, we’ve got something really special, the inside scoop on the latest way that reps are winning deals. Today’s broker is hanging up the phone and texting merchants instead and the merchants are responding in kind. Phone calls and emails are going the way of the fax machine when it comes to gathering documents and pitching offers. The lesson we learned from the several people we interviewed is that when merchants want to know what’s next, send a text.
There’s more of course, so if you haven’t already subscribed to our free print magazine, make sure you do so here. This issue has already printed and shipped so you’ll be getting it very soon.
We hope you enjoy it!
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Lights Out for New York’s Attempt to Impose Stricter Lending Rules
April 5, 2017
In a late night session on Tuesday, and days past the budget deadline, the New York State Senate voted 58-2 in favor of a key budget bill. Noticeably gone from it was Part EE, which would’ve imposed stricter licensing requirements on not only just lending, but also other forms of finance. Part EE was originally put there by the Governor’s office as an amendment to Section 340 of the State’s banking law.
Over the last two months, several trade groups used what little time they had to express concerns over the language. Their biggest frustration was that no one had consulted with them in advance. In February, Dan Gans, the executive director of the Commercial Finance Coalition (CFC) said, “They should allow all the stakeholders to have their voices heard.” The CFC, which represents many small business financing companies, did their best to do just that last month by actually making the trek to Albany.
Ultimately, the legislature did not support the Governor’s plan. Both the Senate and the Assembly removed Part EE from their versions of the budget and on Tuesday night, the Senate passed it. The Assembly passed it the day after.
This is the first time the budget deadline has been missed under Governor Andrew Cuomo. The last miss was in 2010 under Governor Paterson, which came in 125 days late.
Update in the Argon Credit Bankruptcy Case
March 31, 2017On March 28th, United States Bankruptcy Judge Deborah L. Thorne, ordered the trustee in the Argon Credit case to transfer the net proceeds and loan portfolio payments to the biggest creditor, Fund Recovery Services (FRS). That cash will be used to satisfy the approved secured claim of $37.3 million. FRS is an assignee of Princeton Alternative Income Fund, LP. Argon Credit was an online consumer lender that made loans between $2,000 and $35,000 with APRs ranging from 4.99% to 149%.
Initially, Argon Credit had applied for Chapter 11 bankruptcy after “experiencing financial difficulty,” though allegations of improprieties and mismanagement have come up in the legal filings. When FRS tried to stop their collateral from being spent, Argon argued in court that such a thing was unnecessary because they had more than enough collateral to pay off their debt to FRS, including $5.5 million worth of leads. By FRS’s calculations, the leads were worth as little as $1,500, not millions. Ultimately, the judge attributed no value to them.
The case was converted to Chapter 7 and FRS should be able to get repaid.
