Industry News
Letter From the Editor – July/August 2015
July 1, 2015
G’day mates,
Merchant cash advance and similar financial solutions have expanded beyond the United States. Canada was always the next logical option but it’s made its way far beyond that, all the way to Australia. And in the land down under, Australian natives are competing with American-based companies for market share. There’s not a lot of information available about the landscape there so we went out and got the inside scoop, fair dinkum!
Speaking of international, the race is on here at home to obtain a national or state bank charter. Loans allow for much more customization than is possible with merchant cash advances, noted Glenn Goldman, CEO of Credibly. But is the industry setting itself up for a stable future or are some companies betraying their roots as a bank alternative by in essence becoming banks themselves?
And even while the crowd cheers for charters, a baffling appellate court ruling in New York State threatens to undermine that strategy completely. If you haven’t heard of Madden v. Midland Funding, we’ve got some information about it inside.
I must note that deBanked celebrated its 5-year anniversary this past July. The world was much simpler when I started it. In 2010, I was able to quantify the industry’s size with ease, but today it’s a challenge to define what the industry even is, let alone calculate how big it is.
Everything is evolving and quickly, but some things still say the same, like when a broker’s commission is pulled back because a deal defaulted. Shouldn’t lenders take full responsibility for their own underwriting decisions? Not all brokers thought so apparently when we asked them. It appears that today’s broker is thinking more like a lender and if long-term growth is one of their goals, they’re probably thinking about becoming a lender themselves. That of course brings us right back to bank charters and court rulings to make that possible.
And if those topics are exhausting to think about, then sit back, relax and let us guide you through the beautiful Australian Outback. From Uluru to a kangaroo, alternative lending is never out of reach.
–Sean Murray
Letter From the Editor – May/June 2015
May 1, 2015Alternative lending is full of bubbles. I’m referring to the inefficient exchange of information, not runaway valuations, though that’s something to explore in a future issue.
New financial products can be just as intimidating to the professionals working within the wider industry as they are to the customers they’re being offered to. I’ve blogged often of my experience investing in Lending Club and Prosper notes, something I assumed everyone in the business finance world could relate to. Alas, I find that usually raises more questions with readers than it does answers.
Are you just nodding your head and smiling when your peers talk about their alternative lending portfolios? There’s no better way to understand today’s loan marketplaces than being an investor in them, even if it’s just a small amount. Whether it’s merchant cash advances, real estate loans, student loans, or credit card debt, there are plenty of opportunities and worlds to explore. You should conduct research, diversify, and be smart of course. You don’t want to be trapped in a bubble.
Outside the knowledge bubbles, we have regional enclaves. There are entire city neighborhoods being overrun by small business financing startups. In New York City, it had long been Midtown, but some shops started moving south and before anyone realized what was happening, Wall Street had been overrun by a new breed of broker. The culture in lower Manhattan is different than you might find in Midtown or in the next two largest industry hubs, Miami and San Francisco.
In this issue, we’ll begin to explore the industry’s bubbles, both geographically and structurally.
–Sean Murray
Ready to Trade ONDK and LC?
November 16, 2014
On November 10th, OnDeck Capital finally made their S-1 public. Immediate reactions from inside the industry were mixed. The bears criticized the years of losses while the bulls pointed out that the tide is turning. With a profitable 3rd quarter, OnDeck’s bet on the long game might finally be proving itself.
And without delving into their S-1 for now, the industry should be bracing itself for change. The mysterious world of daily funders (financial companies that deal in daily payments) is about to come under the scrutiny from another body, stock analysts.
Unlike journalists which have bruised the industry with sensational headlines and surface level criticism (high costs, light regulation), analysts will be tasked with truly understanding the fundamentals of nonbank business lending. Not to mention that everyday retail investors looking for an edge will want to learn more about the industry than what a single company’s quarterly financials will tell them.
Daytraders might make decisions based on melodramatic stories but those buying and holding for the long run will be conducting something that’s rarely taken place in this industry, research. Expect these questions to be asked and deeply considered:
- Who are OnDeck’s competitors? (and not just the top 3, but the hundreds that follow them)
- What are ISOs/brokers and how do they operate?
- How do they generate deal flow?
- What is Merchant Cash Advance and how is it similar or different to OnDeck?
- What is the real regulatory environment? (Because there are actually applicable regulations despite articles that say there aren’t any)
- Why does OnDeck collect payments daily?
- Why is OnDeck’s model so much different than Lending Club’s?
Look for the last bullet point to be explored greatly. If OnDeck and Lending Club are both innovative small business lenders broadly targeting the same market, why is OnDeck charging an average of 50% APR paid daily over 6 months and Lending Club charging as low as 5.9% APR paid monthly up to 5 years?
Their products couldn’t possibly be more different. And while Lending Club’s IPO path has curiously stalled, there is nothing to indicate that it will not proceed. That means we should expect comparisons between the two upcoming tickers LC and ONDK, a lot of them.
Details about commissions, closing fees, marketing practices, and transparency will be talked about in open forums by the general public. If it’s controversial, it will be debated. If it’s unique, it will be scrutinized. To an extent, OnDeck, Lending Club, and many of their competitors will cede control of their destiny to the general investing public.
There are folks in the industry giddy over the chance to buy and sell stock in both companies. They have years of experience on the front lines. But just as they’re gearing up to trade ONDK and LC, so too is everyone else.
Get ready for major change…
Rapid Capital Funding Acquires American Finance Solutions
October 8, 2014
Miami, Florida-based Rapid Capital Funding will acquire Anaheim, California-based American Finance Solutions today in perhaps one of the most significant deals in merchant cash advance history.
Rapid Capital Funding, not to be confused with RapidAdvance, is led by the company’s founder Craig Hecker. Hecker and AFS’s CEO Scott Griest broke the news to me on a call together. “It’s a roll-up,” Griest said. AFS will continue to operate under their brand name for the time being and Griest will remain a leader in the company.
Meanwhile, the operations of the two companies will begin to merge, with Hecker confirming already that their head underwriter, Andrew Hernandez, was in California getting up to speed on AFS’s operations.
The news comes less than five months after American Finance Solutions struck an equity deal with CapFin partners. I am unsure if CapFin is still involved in the company.
Griest and Hecker were both excited about working together. “Griest has done a great job managing the sales partner channel,” Hecker said. Griest will continue to develop those relationships for the company.
This is the first major merger in the industry. Historically, just about all of the equity deals in merchant cash advance have been acquisitions by institutional investment groups. This is a consolidation.
RCF, while based in Miami, has an office in New York City. The AFS deal puts them on the ground in the 3rd major industry hub.
The two executives hinted that this deal was just the beginning.
OnDeck Already Filed Form S-1
September 27, 2014
Back on August 14th, the Wall Street Journal reported that OnDeck was preparing to file for an initial public offering. Since then, industry insiders have been bustling with anticipation to see the S-1 filing, the document that would reveal once and for all their true financial standing.
Update 11/18/14: Click to see OnDeck’s Public S-1 Filing
In between then and now, Lending Club, their rival in the business loan market, filed their S-1 on August 27th. The peer-to-peer lending world went nuts and merchant cash advance veterans such as AmeriMerchant’s David Goldin were asked to comment on BloombergTV.
And then… things quieted down. OnDeck went radio silent on August 14th, despite the SEC requiring such only after the S-1 form had actually been filed. Speculation began to build as to whether or not the WSJ report in August was a false alarm or misinformation. And with no word from the industry’s beloved charismatic superstar Noah Breslow, something seemed to be amiss.
And then the Financial Times dropped the bombshell that the registration documents had already been filed… last month… confidentially.
Admittedly, I didn’t even know a company could file confidentially, a process done offline so that it is not recorded electronically. Thanks to the JOBS Act, companies with less than a billion dollars in revenue can submit draft versions of their registration documents to the SEC, allowing the SEC to review, revise, and agree on a final version that will ultimately have to be made public. The takeaway here is that an OnDeck IPO is in the process and the registration documents will eventually be released. The law states that OnDeck must make the documents public at least 21 days prior to pitching investors.
The New Yorker walked readers through confidential registrations back when Twitter was planning their IPO, noting that it was not uncommon to choose this method, “Twitter is much like its peers: most small companies that have gone public since the passage of the JOBS Act have filed their S-1s confidentially,” the New Yorker said.
So why be secretive? The New Yorker continues to explain:
From the perspective of companies, the new rule has a couple of virtues. First, it allows companies that are thinking about going public to test the waters—they can gauge investor reaction, get feedback from the S.E.C. on their filings, and so on—before deciding if they want to go ahead with an I.P.O. If a company goes through that process publicly, and then decides to abandon the offering, its reputation gets damaged, even though it often makes sense for a company not to go public. Do it privately, and no one gets hurt.
-Source: http://www.newyorker.com/business/currency/the-virtues-of-twitters-confidential-i-p-o-filing
OnDeck’s biggest critics are their competitors, naysayers convinced that they are recklessly undercutting pricing to acquire market share. Indeed FT reported that OnDeck posted annual losses of $16.8m and $24.4m in 2012 and 2013, and losses of $14.4m in the first half of 2014.
With $1.3 billion funded since 2006, an independent report cited in the registration by Oliver Wyman estimates the untapped market to be between $80 billion and $120 billion.
There’s plenty of runway left, but OnDeck has yet to turn a profit. In An Insider’s Perspective, I wrote, “What scares their competitors though, is that this strategy has been intentional. Very few if any players in the industry have had the luxury, guts, or the purse to lose money for seven years as part of a coup to conquer the market.”
If the IPO goes through, we can all place actual monetary bets on the company’s future. What a trip that will be. I expect the stadium of insiders to get loud once the public documents are released. Good luck OnDeck.
Lend360: The Industry Event of the Year
September 5, 2014It’s being called the full circle of lending. Non-bank business lenders, merchant cash advance companies, peer-to-peer lenders, consumer lenders, lead generators, and Wall Street tycoons are descending on New Orleans from October 14th to 17th to attend Lend360. I’ve partnered up with the event through the DailyFunder name.
From the governmental arena, Governor Bobby Jindal (left) and U.S. Senator David Vitter (right) are speaking at the conference.
On the business side, here are some speakers you might recognize that are definitely confirmed.
- Brendan Carroll, Victory Park Capital
- Brendan Ross, Direct Lending Investments
- Scott Termini, Direct Media Power
- Bob Coleman, Coleman Report
- Heather Francis, Merchant Cash Group
- Nick Owens, Magnolia Strategic Partners
- Sean Murray, DailyFunder (myself)
- Ken Rees, Elevate
- Mark Curry, Sol Partners
- Sasha Grutman, MiddleMarch advisors
- Al Wild, Crest Financial
- Mark Doman, eBureau
- Tim Madsen, PartnerWeekly
- Dickson Chu, Ingo
- John Hecht, Jeffries
If you’re involved in MCA or business lending, you NEED to be there.
Here’s the most recent version of the agenda:
October 14-17, 2014 New Orleans, LA
In Partnership with
| REGISTER TODAY |
IFA Tells Merchant Cash Advance Companies to Get Lost
August 22, 2014On June 27, 2014, the International Factoring Association (IFA) and the American Factoring Association (AMA) publicly announced their decision to ban merchant cash advance companies from obtaining memberships. The nature of just how public that announcement was is questionable since nobody in the industry seemed to be aware of it, including a dozen plus merchant cash advance companies who have been longtime members of the IFA.
The timing of the ban is leaving a few companies unsettled since it was announced immediately following the IFA’s annual factoring conference in which merchant cash advance companies not only exhibited but were also amongst some of the event’s featured speakers.
To illustrate just how awkward the timing was, the IFA had just begun to thank everyone for attending the conference in the May/June issue of their magazine and in practically the same breath revealed that all merchant cash advance companies were banned going forward:
The IFA annual conference has grown to become the number one industry event for the factoring and receivable finance industry. The IFA convention is now the largest and most relevant event of the year, and as the attendees of San Francisco conference can attest to, it has become the must attend event of the year. Thank you to everyone that attended and helped the IFA achieve this unprecedented growth.
… … …
Due to the number of complaints that have been received, both the IFA and the AFA have voted to bar Merchant Cash Advance companies from membership in each organization. The boards of both associations felt that the model for this type of financing has changed and that there are a number of MCA companies that are not operating in an upfront manner. Given that the goal of both organizations is to assist the factoring community, we found it best to dissociate ourselves from this type of financing.
It is unclear if the IFA’s current merchant cash advance members were immediately terminated or if the rule only applies to new applications going forward. This is especially confusing since the feedback we’ve gotten from their members so far is that nobody knew this had even taken place.
Hopes for a peaceful breakup between the two industries has possibly weakened after a story was spotted in the July/August issue of the IFA’s Commercial Factor magazine aimed at attacking and discrediting merchant cash advance companies.
The article by factoring attorney Steven N. Kurtz alleged that tortious interference, regulatory scrutiny, and rampant disorder were reasons to steer clear of merchant cash advance companies. A more detailed breakdown of his arguments can be found on dailyfunder, but it fails to mention the way he concludes the story:
At the moment, there seems to be too many new players in the merchant cash advance industry, with no experience and loose underwriting standards. There is likely going to be a shakeout because the industry segment has a high default rate and investors who lose money will lose their appetite for the deals. Before the market corrects itself, the factoring industry will have to ride out the storm by adjusting their business practices to effectively compete.
Did you catch his last sentence about riding out the storm? He’s saying to adjust, hold on, wait for a shakeout, and hopefully business for factoring companies will go back to normal. The reason it’s not normal now is because merchant cash advance companies are killing them competitively.
I guess if you can’t beat ’em, ban ’em? They should’ve just said that was the reason from the beginning…
