deBanked reporter Johny Fernandez visited the storefront office of Horizon Funding Group, a commercial finance brokerage located in Brooklyn. The company is owned by brothers James and John Celifarco.
This week, Greenbox Capital, the Miami-based alternative finance company known for its MCA and SMB financing, announced they are serving as a Small Entity Representative (SER) to the Consumer Financial Protection Bureau (CFPB) as the organization proceeds with the rollout of Section 1071 of the Dodd-Frank Act.
“I am representing, and Greenbox Capital is essentially representing, the industry,” CEO Jordan Fein said. “There are some banks, there’s Funding Circle, but other than that, it’s Greenbox Capital serving in the industry.”
Fein, who founded Greenbox in 2012 and has since facilitated MCAs and business loans across America, Puerto Rico, and Canada, wrote in a press release that it was an honor to be selected to provide feedback on Section 1071.
“Over 2 million businesses across the U.S. are either women or minority-owned,” Fein wrote. “It is vital they can secure funding as easily as non-minority-owned businesses.”
Congress passed the Dodd-Frank Act in 2010 in response to the Great Recession. To further protect consumers, the CFPB was born. Section 1071, an amendment to the 1974 Equal Credit Opportunity Act, mandates financial institutions report demographic information to the CFPB. But much was left undefined about how to go about doing that and who would technically be subject to it.
Ultimately, the intent behind the law was to measure potential disparities among factors like the race and gender of applicants. Ten years later, the rollout is finally moving along.
As part of this, the CFPB created a board of firms representing the affected industry, on which Greenbox sits, to ensure the law works with the industry, not against it. The first panel was on October 15, in compliance with the 1996 Small Business Regulatory Enforcement Fairness Act (SBREFA.)
“They’re going through the SBREFA process, which is a structured process where they have a panel of industry representatives, and they share what they’re planning to do,” Fein said. “They run it by companies like us and we give our opinion and talk about how we think companies will be impacted.”
According to an invitation letter the firms received, they will have until November 9 to respond.
Fein said Greenbox would ensure any suggestions it made would positively impact the industry. Especially during a pandemic, Fein said it is essential to create regulation with firms in mind.
In response to regulatory bills in California and New York that will enforce APR disclosures on small business capital providers, the Small Business Finance Association (SBFA) funded a study by Kingsley-Kleimann to find out if APR is a good metric to use for business loans.
Steve Denis, the Executive director of the SBFA, said his group supported the study because the states should test concepts with actual small business owners before passing regulation. In the NY disclosure bill awaiting signature, Denis said there was no concept testing. Some of the companies that support the bill might not have even read what it stipulates.
“You have a group of companies that are pushing these types of disclosures, for no reason other than their own self-interest,” Denis said. “We’re fine with disclosure, we are all for transparency, but it needs to be done in a way that we believe is meaningful to small business owners.”
In qualitative testing of 24 small business owners and executives who have experience taking commercial loans, the study concluded participants did not understand what APR was. The study found that the total cost of financing model was a better way to understand and compare options for their use.
“As one participant, when asked to define APR, answered: ‘I feel like you are asking a kid, why is the sky blue?’ (Participant 3, NY).” The study concluded, “In other words, [APR] is ever-present yet also inscrutable.”
Kingsley-Kleimann is a research-based organization that studies communication and disclosure for government agencies like the FTC and private or public business. Participants were selected from Califonia and NY.
Denis said that the findings show what SMB lending companies have already known- Anual Percentage Rate is not a useful metric for short term loans. Many do not know that APR represents the annualized cost of funds for the loan term, with the fees and additional costs included.
“People don’t know what APR is; it confuses them,” Denis said. “They know it’s a metric they should use, but they don’t know why. The APR is such a marketing tool now, it’s not a valuable tool.”
The study showed most respondents thought APR was the same as an interest rate. It’s not.
Denis said using an annualized rate for shorter-term loans or SMB loans that have no ending date worsens the problems. In those cases, firms estimate an APR, and it is inaccurate.
“When you have a merchant cash advance, there’s no term,” Denis said. “So you have to estimate a term, and I mean that is just a recipe for fraud.”
Denis said that the firms supporting California SB1235 and the New York S 5470/A 10118-A disclosure bill and taking credit for writing the laws are the same companies that will suffer under the strict tolerance of an APR rule.
“The companies pushing this, the trade associations pushing it, they like to take credit for writing the bill in California and writing the bill in New York: I don’t even think they’ve read it,” Denis said. “It’s going to subject their own members to potentially millions if not hundreds of millions of dollars in potential liability [fines.]”
The SBFA is not against disclosure by any means, Denis said, but supported other avenues. The trade group believes knowing the total cost of a loan and the cost and timeline of payments will help protect and inform borrowers better than APR. Firms that support the disclosure bill are banking off the positive press, hoping to be seen as pro-consumer protections but forcing APR will make it harder to compare the actual value of loans, Denis said.
Denis is still optimistic that regulators will work with businesses affected by the incoming legislation. He said the NY legislature and governor’s office, as well as the California Department of Business Oversight, understand the problems of using APR.
“They’re receptive to these arguments, and they know what they’re doing,” Denis said. “The last thing they want to do is pass a bill that’s going to further confuse businesses, especially during a pandemic when businesses are relying on this capital to stay afloat.”
DailyFunder, the small business finance forum founded by Sean Murray in 2012, continues to be the leading online community for the industry, according to a recent announcement. The forum recently surpassed 10,000 registered members, in addition to logging more than 2 million page views just in 2020 so far.
“The forum has attracted well over a million visitors since inception and users have historically spent longer than 10 minutes on the site in any given session on average,” Murray said.
deBanked’s parent company fully acquired DailyFunder earlier this year. The announcement was featured prominently in deBanked’s January/February 2020 magazine issue. In it, Murray renewed the website’s objective:
“The mission will be to create a great forum for those involved in day-to-day dealmaking,” he said in a Q&A. “How can we provide a platform that enables those in the industry to make more money? That’s the way I look at it. I think if we can provide that type of value, success will follow.”
As the FTC contemplates how to “wipe out” entire industries, federal courts around the country have recently ruled that the regulator can’t accomplish such a goal under Section 13(b) of the FTC act. That’s the statute the FTC relied on to bring its most recent actions against merchant cash advance companies. It might not have bite.
Under 13(b), the FTC is empowered to bring a lawsuit to obtain an injunction against unlawful activity that is currently occurring or is about to occur. It’s powerful, but very limited. However, for the last several decades, the FTC, with the help of federal courts, has interpreted the statute to mean that it can also force the defendants to “disgorge” with illegally obtained funds.
That’s how the FTC wiped out Scott Tucker and his payday lending empire. In a lawsuit the FTC brought against his companies under 13(b) in 2012, the Court entered a judgment of $1.3 billion against him.
Not so fast, modern legal analysis says. Tucker’s case is being brought before the Supreme Court of the United States to settle once and for all what 13(b) allows for and what it doesn’t.
The momentum does not weigh in the FTC’s favor.
On September 30, the Third Circuit ruled in FTC v AbbVie that the FTC is not entitled to seek disgorgement under 13(b). The Seventh Circuit arrived at a similar conclusion last year in FTC v Credit Bureau Center.
In an interview with NBC, FTC Commissioner Rohit Chopra said in August “We’ve started suing some [merchant cash advance companies] and I’m looking for a systemic solution that makes sure they can all be wiped out before they do more damage.”
As the FTC attempts to be more proactive in the area of small business finance, it will be important to monitor what the Supreme Court ultimately decides it can actually accomplish.
When lending companies faced the tightest squeeze on capital since the great recession, many ran into trouble. Kapitus, having survived 08′, met 20′ with the same discipline that helped them navigate the pandemic.
“Our whole industry was put on a credit watch downgrade, and it’s very exciting that we were upgraded, reaffirmed to the original rating,” Kapitus CEO and founder Andy Reiser said. “Most of the companies, our peers defaulted and went into what’s called rapid amortization and did not make it through to keep their securitization.”
Reiser was happy to report that Kapitus received a rating affirmation from Kroll Bond Rating Agency (KBRA) on Friday. KBRA has removed the Kapitus securities from a Watch Downgrade.
Back in March, the businesses that Kapitus and their competitors funded across the country, faced state mandated shutdowns. Many customers were suddenly unable to make the loan, MCA, or equipment payments that they had been able to make for years.
For lenders that bundled and securitized the loans they made, the value of those loans was called into question.
On March 30, KBRA placed the ratings of 29 securitizations representing $2.1 billion from 10 SMB lending firms on a “Watch Downgrade” due to the economic downturn.
To overcome the warning, Kapitus reigned in and focused on helping their customers. Reiser cited the addition of Jeff Newman from Citigroup to manage the risk team as an example of how the firm has been focused on funding responsibly for years.
“We focused on strong business practices and keeping the portfolio strong, and it paid off,” Reiser said. “We never stopped, we were not lending at the same velocity that we did pre COVID, but we never had a day that we didn’t fund a new deal.”
Reiser said that during the pandemic’s height, the team took a lot of long nights working on new products. One was a “step renewal” that allowed clients to pay installments and build up to the full payment, to make sure they were not overwhelmed. Kapitus also offered extended periods for their healthcare loans, up to 36 months, Reiser said.
For companies like Kapitus, a questionable rating could lead to a rapid amortization event: a sudden call to liquefy the bonds and give back investor money. For some, an event like this will spell the end: most firms don’t keep hundreds of millions or even billions on hand to give back principals in a moment’s notice.
Reiser said out of the ten securities on credit watch, only one other was reaffirmed, due to a renegotiation of terms that bond investors had to agree on. Kapitus made no negation but was reaffirmed due to the success of their business practice, Reiser said.
The securitization was initially issued for $105 million in June 2018, and expanded to $160 million last December, in three classes with a senior class rating of “A.”
Reiser believes that the pandemic, like the ’08 recessions, will see some consolidation and strong companies prospering in a displaced environment.
“I think COVID will teach a lot of other players that were very aggressive in coming down to this market that it’s not so easy,” Reiser said. “I think some of the banks and the alternative lenders that were more eager to come into this market may not be so aggressive at least for a while.”
Capify, a leading international small business lending platform, announced a $10 million equity round this week from a new investment group with vast experience in the alternative lending industry.
“[investors were] diligent seeing Capify, the management team, and the opportunity,” Goldin said. “They thought it was a very good investment, particularly how Capify’s portfolio performed during the pandemic.”
Goldin said the capital is a great “restart of the engine” after the cautious approach the company took to lending at the height of the pandemic. The money is not an equity round from current investors, but rather new capital joining the team.
The funding will be directed toward ramping lending back up and extending business partnerships with firms that serve small businesses, as well as direct and indirect lenders.
“So, hindsight is actually better than 2020 vision; no one in our lifetime has experienced the pandemic,” Goldin said. “No one knew what to expect from a risk profile, so we took the conservative approach.”
That approach was to shut down new loans and focus on servicing its current customers. It was a difficult time for the alternative lending industry veteran, but now Goldin said he sees a great demand for capital.
“This was one of the toughest challenges that I’ve experienced ever as an entrepreneur,” Goldin said. “The result really speaks to Capify as a company. People are willing to make that investment, believing in opportunity ahead and not the current times or the past during the pandemic.”
Goldin said that Capify has always been known for its well-performing portfolio, one of the reasons that in 2019 the firm received a $95 million credit facility from Goldman Sachs’ Merchant Banking Division.
Goldin began working in the fintech industry before the word fintech was even coined; in the early 2000s, he started one of the first MCA companies. Amerimerchant started selling loans and MCAs internationally in the UK and Australia in 2008, then rebranded to Capify in 2015. After leaving the US market in 2017 gained Goldman’s attention last year.
“So now that we have the firepower, we believe there’ll be opportunities in these markets as demand picks up for small business lending,” Goldin said.
The largest merchant cash advance in history (at $40 million), first publicly disclosed in 2018, has been outdone. On Tuesday, the Receiver in the Par Funding SEC case revealed that its largest customer had outstanding purchased receivables of $91.3 million. The customer is an office and cleaning supply company based on Long Island. The amount is now the largest known merchant cash advance deal in history.
Par’s second largest customer had outstanding purchased receivables of $35 million.
Par’s total receivables are estimated to be $420 million. $228.8 million of it stems from just 10 customers including the two referenced above, according to a recently filed report.
At some point in this century, small business finance companies will be expected to comply with Section 1071 of the Wall Street Reform and Consumer Protection Act that was passed in 2010.
In the wake of the ’08-’09 financial crisis (remember that?!), lawmakers passed the above act that has become colloquially known as Dodd-Frank. Section 1071 gave the Consumer Financial Protection Bureau the authority and the mandate to collect data from small business lenders (and similar companies).
The costs, risks, and challenges with rolling out this law have been discussed on deBanked for 5 years, yet little progress has been made to finally implement it. But it’s starting to move along and the CFPB would now like to know how expensive it will be for businesses to comply.
If you are engaged in small business finance, you should seriously consider submitting a response to their survey. The CFPB is specifically cataloging responses from merchant cash advance companies, fintech lenders, and equipment financiers.
“It’s actually shocking to me how tone deaf those who claim to represent our industry are when it comes to policy,” is how Steve Denis, Executive Director of the Small Business Finance Association, described the Innovative Lending Platform Association’s response to and influence over the drafting of bill A10118A/S5470B. Known as New York’s APR disclosure bill, S5470B has been passed by the state legislature, and if signed by Governor Cuomo, will require small business financing contracts to disclose the annual percentage rate as well as other uniform disclosures.
Speaking to deBanked over the phone, Denis expressed disappointment with both the bill as well as comments made by ILPA’s CEO, Scott Stewart, in a recent article.
“Small businesses in New York are struggling right now,” the Director noted. “They’re waking up every single day wondering if they should even stay open or close permanently, and companies and organizations in our space are using their resources to push a disclosure bill that nobody has asked for. There’s no widespread issue with disclosure. There’s been no outpouring of complaints to regulators. No bad reviews on Trustpilot. This is a really bad solution in search of a problem. We have real problems right now, we should be coming together as an industry to help solve them. We want to make sure that capital is available to small businesses on the other side of this pandemic, and this group of tone deaf companies are spending resources trying to push a meaningless disclosure bill that’s just going to hurt the access to capital for real small businesses who are grinding and trying to figure out how to stay open. It’s unbelievable.”
The SBFA showed deBanked a list of issues and complaints made to the New York legislature regarding S5470B. According to the trade group, these were largely ignored and the bill was pushed through with the issues left in. Among these were problems relating to definitions and terms. No definition for the application process is included, nor is there one for a finance charge. As well as this, one senator was quoted using the term “double dipping” to refer to consumers refinancing debts that have prepayment penalties; which Denis said was “creating a whole new term that’s never been used or defined before, and applying it to commercial finance, something that’s never been done.”
Accompanying these complaints was one regarding how APR is calculated, as S5470B includes two different calculations for this, producing different results while not clearly defining when to use each.
When asked why he believes these issues were allowed to remain in the language of the bill, Denis was baffled.
“I think that the companies and organizations that support this legislation don’t fully understand what’s actually in the bill. […] They have no problem pounding the table and taking credit for its passage, but I guess they don’t realize it will subject them and the rest of the alternative finance industry to massive liability, massive fines—upwards of billions of dollars worth of fines.”
Denis’s fear going forward is that funders in New York will tighten up their channels going forward or cease funding entirely, given the increased riskiness of funding under the terms of S5470B if Cuomo signs it into law. Before that happens though, the Director mentioned that he believes there will be legal challenges to the bill in the future, saying that its wording is just too unclear and poorly drafted. Adding to this, Denis said that he believes many members of New York’s state government are aware that this bill is imperfect and were comfortable with the thought of it being edited once passed. Looking forward, Denis wants the SBFA to be deeply involved in those edits, saying that they’re willing to work with the Governor, the state assembly, and the New York Department of Financial Services.
“We’re for disclosure, we think there should be standard disclosure. … Our message to the Governor’s office is ‘Let’s take a step back.’ The Department of Financial Services needs to look at our industry, they need to get to know our industry. They are the experts that understand the space, they understand disclosure, and they understand what they need to do to bring responsible lending to New Yorkers. And we would like to work with the NYDFS and a broader industry to put forward a bill that’s led by the Governor and the Governor’s office that brings meaningful disclosure and meaningful safeguards to this industry.”
Following recent lawsuits filed by the FTC, Commissioner Rohit Chopra made the following statements earlier today in an announcement about merchant cash advances:
As the Commission proceeds into litigation in these matters and further studies this market, I hope that we will uncover additional information about business practices in this opaque industry. In particular, we should closely scrutinize the marketing claim that these payday-style products are “flexible,” with payments contingent on the credit card receivables of a small business. In reality, this structure may be a sham, since many of these products require fixed daily payments, and lenders can file “confessions of judgment” upon any slowdown in payments, with no notice or due process for borrowers.
This raises serious questions as to whether these “merchant cash advance” products are actually closed-end installment loans, subject to federal and state protections including anti-discrimination laws, such as the Equal Credit Opportunity Act, and usury caps. The stakes are high for millions of small businesses.
Shopify had a monster 2nd quarter. The e-commerce giant generated $36M in profit on $714.3M in revenue. As part of that the company originated $153 million worth of loans and merchant cash advances, only slightly down from the $162.4M in Q1. Still that figure was up by 65% year-over-year (and was more than 2x the volume originated by OnDeck).
The company has offered capital to its US merchants since 2016 and recently begun doing the same with its UK and Canadian merchants starting this past March and April respectively, the company revealed.
Shopify CFO Amy Shapero said that company had maintained loss ratios “in line with historical periods,” despite COVID. “Access to capital is even tougher in times like these, which makes it even more important to continue lowering this barrier by making it quick and easy so merchants can focus on growing their business,” Shapero stated.
Late last week the New York State legislature voted to pass A10118A/S5470B, a bill that might lead to greater clarity and consumer knowledge according to Scott Stewart, CEO of the Innovative Lending Platform Association, a trade association of small business lenders.
Referring to it as “our model disclosure legislation,” Stewart explained in a phone call the work that the ILPA put in to help the bill through as well as what sort of impacts can be expected from S5470B.
“The implications are that small businesses, certainly in New York to begin with, but we think throughout the country, will have the opportunity to really see, understand, and compare various different sources and products for financing their small businesses in terms of their expansion and success. That’s something we’re very proud of and I think that’s something the small business borrower really deserves to see. They deserve to see and understand exactly what they’re doing and when they’re taking out financing products for their businesses.”
What exactly these business owners will understand better relates to the details of the bill, which requires small business financing contracts to disclose the annual percentage rate as well as other uniform disclosures. If signed by New York Governor Cuomo, the bill could have ramifications on small business lenders, MCA, and factoring providers.
ILPA, founded in 2016 and comprised by the likes of Kabbage, OnDeck, and BlueVine; worked alongside legislators to help with the drafting of the bill, assisting with the wording so that it reflects their own SMART Box initiative. This being a form offered by ILPA which lists a number of metrics worth considering when seeking small business financing.
“In January 2019, our team came together and decided that it made sense in the wake of 1235 in California to take a proactive approach to codify SMART Box as legislation in a state, and we selected New York because we felt we had a favorable legislature there,” Stewart said. “I think it’s an incredible achievement. You see the big margins that it passed by in both the Assembly and the Senate and we’re very, very proud of that. I think it really speaks to our cooperative approach to building legislation. And now, as we move toward the implementation phase, we’re going to be in a place where, hopefully in the next six months or so, small businesses will begin receiving really clear disclosures on the capital and credit that they’re trying to take out.”
As noted though, the bill must be signed by Governor Cuomo before becoming law, and then it will affect New York only. Beyond the Empire State though, Stewart is hopeful that ILPA will be able to implement the terms of S5470B in other states.
“Now that we have hopefully harmonized the legislative landscape between California, with 1235, and New York; hopefully we’ll be able to export that to other states. We don’t have any accurate plans at this time to do that, but we feel like if two of the larger states in the nation have very similar disclosure regimes then we’re on the track toward seeing this nationwide.”
I recently spoke with Lending Valley CEO Chad Otar, who told us that not only is his funding company still working remotely, but that he’ll probably never return to an office ever again. Watch below:
DeBanked Magazine recently posted the “Underwriter’s Song” to highlight an entire industry’s yearning for simpler times, claiming it was the MCA soundtrack for 2020. But I disagree and nominate a different song. You see, growing up in the south with a close-knit family gave way to a childhood filled with generations worth of entertainment. Many of my summers and holiday vacations were spent with the Turner Classic Movie channel playing in the background, and songs from the Oldies Country station on the radio. I tell you this to explain how I am reminded of a song I’ve heard countless times before, and is more applicable today than ever before. That song is “If We Make It Through to December” by the venerable Merle Haggard, a tune whose message resonates with not only the merchant cash advance industry, but our entire country.
The Expectations and Reality
Way back in March and April, the consensus appeared to be an expected return to “normal” by June, while areas hit hardest by COVID-19 would return by July. Yet here we are, teeter-tottering on the fence of moving forward. Now, our country is faced with the possibility of a second wave of shutdowns, rising crime, riots, a fourth stimulus, and funders whose workforce remains remote or have yet to resume funding. The proverbial “goal post” has moved yet again, and with it the expectations of many of us in the industry. Over the past few weeks, I had the opportunity to speak with a number of our referral partners to gauge their thoughts on the current state of our industry. A common theme in our discussions was the desire for validation. Not just as a business owner, but as an employer. They wanted to be reassured that they were taking the best steps forward and not alone in their decision making. To help those seeking the same validation, here is what the majority had to say:
- Yes, all had to terminate or furlough staff on various levels.
- Yes, all adjusted marketing budgets.
- Yes, all are struggling with managing remote employees.
- Yes, all are finding it harder to place files.
- Yes, all are seeing interruptions in relationships with funders and merchants alike.
- Yes, all are competing against the Government’s low-cost products.
- Yes, all are having files killed in late stages of funding or having offers adjusted.
- Yes, all are struggling to predict what comes next.
- Yes, all are managing unrealistic expectations from clients.
- Yes, all are having merchants walk away from fair and just offers.
- Yes, all are struggling to remain motivated.
- And yes, all of you are doing the best you can!
The New Normal
The Word Cloud below describes the state of the MCA industry using our partners’ own words. I find that the overall thoughts are best visualized by taking a step back to see which stand out the most. Our conversation was focused on the industry as a whole, then a discussion specific to Elevate Funding and how we’ve pivoted during these unprecedented times. As you can see, some of the keywords that stand out the most are; merchants, PPP, offers, funders, and marketing.
Much of the conversations focused around merchants and their new funding expectations. Each partner I spoke with agreed the demand for money is there, but the willingness to move forward on offers was very low. This reluctance is driven in part by low cost expectations based on PPP and SBA product rates, as well as uncertainty over increased debt in an unstable market. We’re also seeing a change in merchant demographics, where the mid-sized small businesses who previously did not qualify for SBA loans, now have access to these products. As a result, the remaining merchants whose best option is an MCA are now located on the opposite extreme ends of the spectrum; either those who did not qualify for PPP or SBA EIDL, and the large-scale businesses whose lines were revoked by their bank. Our response as a company has been to adjust our offers to better suit merchant’s expectations, and to shift from underwriting a business owner’s activity to underwriting the consumers’ activity. Monitoring government restrictions down to a county level countrywide and understanding consumer trends has enabled us to further mitigate risk during a time of uncertainty, and not only fund deals, but fund deals that will perform.
Meanwhile, our industry is seeing credit profiles and business profiles that have never applied in our space before, as a decreasing number of providers are available to service current merchants. During our conversations, some expressed a concern over lack of A-paper funders. Many of whom have either paused funding or entirely moved over to servicing PPP products. Another concern was the mental toll of having deals fall apart at the eleventh hour due to fast changing qualifications, variations in merchant revenue, or funders deciding to pause funding at inopportune times. These factors combined with the increasingly common “bait-and-switch” technique of funders providing a large offer, only to change to a much lower offer in the final stages of funding, has left many broker shops and ISOs feeling very discouraged.
The Path Upward and Onward
The conversations were not entirely negative, as new marketing opportunities have opened up with the goliaths of the industry such as Kabbage, OnDeck, Lendio, and Square shifting their marketing dollars towards PPP and SBA products. Many folks are finding their advertising dollars across marketing platforms are stretching further, particularly with search engine optimization. While this opens up an increased likelihood of fraud and in applicants who fall below qualifications, it has enabled many shops to operate on an even playing field with inbound marketing. Many small funders, including Elevate Funding, have already created new products to cater to lower revenue merchants and those directly affected by COVID-19. We’ve already received tremendous response on this change from partners and merchants alike. As merchants slowly shift back towards alternative financing solutions once the government runs out of money for its loan products, we remain optimistic there will be increased opportunities in terms of both volume and quality.
While the Word Cloud highlighted a number of topics, it also highlighted important topics that were not discussed; Expectations, Renewals, Commission, Aggression, and Repositioning.
Expectations in particular, is of note as it is different from opinions. Everyone has an opinion, but there is a tremendous sense of uncertainty going forward and it’s very difficult to create expectations or goals when forecasting is not possible. Many companies are doing away with forecasting models altogether, and switching to a dashboard for production goals and expectations based on real time data.
The drastic change we’re seeing now should demonstrate the importance of renewals and customer retention. Neither of which were brought up during all of my partner discussions. Over time, the industry has moved away from a “residual mindset” to seeking instant gratification of new fundings in the quest for market share supremacy. As funders, we have to ask ourselves; Are we inadvertently throwing out the baby with the bathwater with new deal bonus structures and monthly promotional campaigns to drive new deal growth? Or perhaps, renewals were scarce in discussions because when funders said when funding stopped, they meant all funding? While I can’t speak to each funder’s operations, Elevate has continued to fund throughout the pandemic with established merchants and renewals being a saving grace to drive our momentum forward. In my opinion, client retention has never been more important during an ever-changing landscape.
I was shocked to see commission taking a backseat to approvals and banks during our discussion. But the focus has seemingly move towards approvals and conversions, which will in turn lead to commissions returning. Which brings me to Aggression and Repositioning. The state of our industry is a timid one, and it’s neither the fault of the funders or the merchants. Many experts will tell you that our space was overdue for a market correction of sorts, because many were far too aggressive for far too long. This aggression gave way to bad habits such as lowered underwriting standards and lack of consideration for merchant ability to repay. More and more funders are shifting back to “normal” guidelines, providing fair and just offers. This is an encouraging sign that we are finding our way back to sustainable positive growth. But it will take time for the industry to fully reposition itself. Something that is being delayed by products from the PPP, SBA, and the hope for a third round of stimulus.
But hope is on the horizon. While the pessimists will look at that word as a form of denial, I challenge all of you to take a glass half-full approach. Hope is the confident expectation of good. The change and adjustments we’re experiencing now are what life is all about, and will ultimately lend way to better things. If you’re in need of a little dose of hope, or want a sounding board to know you’re not alone through this, feel free to drop me a line at firstname.lastname@example.org.
Stay safe, be well, and do not lose hope.
New York State Legislature Passes Law That Requires APR Disclosure On Small Business Finance Contracts (Even If They’re Not Loans)July 24, 2020
Factoring companies and merchant cash advance providers may be in for a rude awakening in New York. The legislature there, in a matter of days, has rammed through a new law that requires APRs and other uniform disclosures be presented on commercial finance contracts… even if the agreements are not loans and even if one cannot be mathematically ascertained.
The law also makes New York’s Department of Financial Services (DFS) the overseer and regulatory authority of all such finance agreements. DFS can impose penalties for violations of the law, the language says.
The bill was passed through so quickly that unusual jargon remained in the final version, increasing the likelihood that there will be confusion during the roll-out. One such issue raised is the requirement that a capital provider disclose whether or not there is any “double dipping” going on in the transaction. The term led to a rather interesting debate on the Senate Floor where Senator George Borrello expounded that double dipping might be well understood at a party where potato chips are available but that it did not formally exist in finance and made little sense to have it written into law.
Senator Kevin Thomas, the senate sponsor of the bill, admitted that there was opposition to the “technicalities” of it by some industry groups like the Small Business Finance Association and that PayPal was one such particular company that had opposed it on that basis. Senator Borrello raised the concern that a similar law had already been passed in California and that even with all of their best minds, the state regulatory authorities had been unable to come up with a mutually agreed upon way to calculate APR for products in which there is no absolute time-frame. Thomas, acknowledging that, hoped that DFS would be able to come up with their own math.
APR as defined under Federal “Regulation Z”, which the New York law points to for its definition, does not permit any room for imprecision. The issue calls to mind a consent order that an online consumer lender (LendUp) entered into with the Consumer Financial Protection Bureau in 2016 after the agency accused the lender of understating its APR by only 1/10th of 1%. The penalty to LendUp was $1.8 million.
Providers of small business loans, MCAs, factoring and other types of commercial financing in New York would probably be well advised to consult an attorney for a legal analysis and plan of action for compliance with this law. The governor still needs to sign the bill and New York’s DFS still has to prepare for its new oversight role.
Passage of the law was celebrated by Funding Circle on social media and retweeted by Assemblyman Ken Zebrowski who sponsored the bill. The Responsible Business Lending Coalition simultaneously published a statement.
There’s new management over at Bitty Advance. The Fort Lauderdale-based funding company has been acquired by long-time industry veteran Craig Hecker. Hecker, who years ago founded, grew, and sold Rapid Capital Funding had originally acquired a stake in Bitty earlier this year, but in the following months purchased the remainder of the business from founders Eddie Siegel and Lenny Duvdivani.
Hecker told deBanked that under his management Bitty has committed capital that will allow the business to fund up to $10 million per month.
“I’m very excited to take my industry experience and knowledge and apply it to this segment of the MCA space,” he says.
As part of the takeover, Hecker says that he has “re-assembled his dream team of technologists and ops” that have been part of his inner-circle for nearly a decade and “were critical in building out the platform” that had made Rapid Capital Funding successful.
Bitty has historically focused on micro-advances and the company plans to really scale up its efforts in the $2,500 – $12,500 small merchant market segment with the aid of automated technology. In addition to this, Bitty has launched a new sales partner portal for ISOs. “That way [ISOs] will always know what’s going on with merchant applications,” hecker said.
For 2M7, the Toronto-based alternative funding company, the concept of a global economic shutdown was far-fetched. January and February of 2020 had been some of their best months in business yet. But, like every company, 2M7 was forced to reckon with the unreckonable and feel the effects of an economic lockdown.
“In terms of client onboarding and funding volume, in terms of collecting volume, and in terms of any metric you would look at, [January and February] were two very strong months,” CEO Avi Bernstein explained in a call. “And then in March, I don’t want to say we slammed on the brakes, but in the first or second week of March we basically just said, ‘you know what, we just need to really change the focus of what we’re doing.”
Saying that they were a week or two ahead of the curve, Bernstein notes that in the leadup to the shutdown their customers had already been asking for deferred or reduced payments. And with anxiety and concern in the air, 2M7 changed course and moved from focusing on bringing in new customers and increasing collections, they “hunkered down” and worked exclusively on the needs of existing clients.
“We funded throughout very minimally … and really our main effort was to get in touch with all our existing merchants and see how they were being affected, if they needed a payment plan, or if they needed a little bit more capital to tide them over. And we adjusted each one on an ongoing basis as we kind of floated through the panic of the lockdown to the waiting time to when we really started to reopen. … And you know, the ones that were still operating in the kind of environment that they were operating, if they had any additional expenses, they had additional requirements for capital.”
This approach lasted up until mid-June, around the time that the Canadian economy began to reopen. Lasting all of three months, this halting was not without victims as 2M7 had to furlough a number of staff members, many of whom were on the sales team that had reduced responsibilities during this time. Since then though, these employees have been brought back in, new customers have been brought on, and 2M7 has returned to its offices.
“As the Canadian economy started reopening and wrapping up even a little bit earlier than we were, we worked with provinces that were already more advanced in the opening stages. Saskatchewan, Nova Scotia, New Brunswick, Newfoundland, they were doing better in terms of reopening and they were ahead of us. … We were able to work with them in terms of ramping up. Now as the economy’s kicking into gear, we’re seeing more and more demand from businesses and we’ve started feeling our how much of their client base is still in existence, how much of their market is still in existence; whether it be manufacturing or transportation, or whatever it is.”
Looking ahead, Bernstein is cautiously optimistic, believing the worst is behind them but that there is still a ways to go for the Canadian market that has shown resilience in that last four months. Explaining that he think the shutdown won’t lead to any great reset of the Canadian market, the CEO thinks that it will instead act as a catalyst for events that were already in motion: debt-laden companies will struggle and possibly perish.
But beyond that, Bernstein is feeling positive about the future, saying that “people are starting to come out of their caves, and slowly but surely businesses are starting to reopen and invest. A lot of businesses are hiring back their employees. So that’s good news for Canada and good news for small businesses in the Canadian marketplace. … I feel like we’re going to come out okay.”
I recently connected with Matthew Washington, the Chief Revenue Officer of PIRS Capital to get his take on the state of the industry right now and whether or not there are opportunities in the market. Video below:
Over the last few months, “securitizations” were frequently cited as a reference point for the health of a small business lender or alternative finance provider. Given the vague information and inferences that circulated, I decided to schedule a chat with Methodical Management co-founder Gunes Kulaligil to get his perspective. Our discussion on the state of securitizations in alternative lending below: