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:
A recent roundtable hosted by Pepper Hamilton partner Gregory J. Nowak examined some broad questions about merchant cash advances including:
- What is a merchant cash advance?
- How should a merchant cash advance transaction be structured?
- What are the key features for enforceability?
- Could a merchant cash advance transaction be a security?
- What is participation? is it a security? If yes, what does that mean?
- What is syndication?
- What’s the role of FINRA?
They published the presentation on jdsupra.com and it can be viewed here:
Last week’s Broker Fair Virtual was the first of its kind for the industry. The day-long event offered talks and networking, just like the in-person event, albeit without the catering service and open bar. Offering a digital space that included a virtual auditorium, networking lounge, expo hall, and individual company booths, the event attempted to recreate the experience of connecting and mingling with the rest of the industry, as much as was possible.
Kicking off with a Matrix-inspired introduction to the virtual space led by alternative finance’s version of Neo’s mentor, Mur-pheus (Murray as Morpheus), the show then went in numerous directions, with panels and talks covering a variety of topics and sectors.
Funding Metrics’ David Frascella took to the virtual stage to talk about how his company and the industry at large have been getting through the pandemic; what’s to come for America was up for discussion with Scott Rasmussen, the veteran pollster, who elaborated on how business could be effected by the upcoming presidential election; the future of combining people with data was debated by figures from Become, Elevate Funding, and Ocrolus; Canada’s lending situation and prospects were talked through in Covid and Canadian Credit;The new normal was discussed by NYC’s Fintech Women; and John Henry, an entrepreneur and star of VICELAND’s ‘Hustle,’ spoke of his experience running businesses and what made his story a success.
As well as this selection of talks, another standout was the cannabis panel. Led by a number of industry veterans, which broke down the difference in funding marijuana-based companies compared to other deals, and what could be down the road for the industry as more states consider legalization.
National Funding’s CRO, Justin Thompson, held an extended Q&A session, fielding queries about how National has been faring through these times and what its approaches are as the economy begins to open back up.
How long-term is long-term for the coronavirus’s impact? Are SBA deals the way to go? Does the industry need to go further with its adaption to this new normal? All these questions were asked and answered in The Great Debate, a panel made up of industry figures from various backgrounds.
And brokers’ futures were considered by Lendio’s Brock Blake, United Capital Source’s Jared Weitz, National Business Capital & Service’s James Webster, and The Watson Group’s Gerald Watson. Here, the idea of a recovery, how each struggled through March and April, and PPP were all debated by the panelists, with perspectives of what’s to come leaning both ways.
There’ll be an evolution of new industries and how we do business,” Gerald Watson noted in his closing words, “just look at this conference for example.”
There was no lobby to find brokers and funders hashing out deals in relative privacy away from the expo hall, instead this was replaced by private messages exchanged. Rather than line up for some chicken wings, people chowed down to whatever was in their home on that day. And instead of gathering around a bar and finishing the day after the final talk, attendees cracked something at their desk and chatted it up in the networking lounge, recalling previous events and what was once taken for granted: the ability to connect effortlessly.
The coronavirus continues to physically keep people apart, but for one day last week the industry was able to come together and network, make deals, and gain insight; albeit in a different way, internet connections providing.
A three-year-old deBanked blog post turned out to be a bit prophetic.
Titled If You Don’t Make Loans, You’re Not a Lender (And definitely not a ‘direct lender’) and posted on January 19, 2017, I hypothesized that the misuse of financial language on the phone or in an e-mail, particularly if one conflated merchant cash advances with lending, could one day result in a subpoena for a deposition to explain it.
In the People of the State of New York, by Office of the New York State Attorney General v. Richmond Capital Group LLC et al, that very scenario played out. Several people were subpoenaed last year and were required to give testimony to lawyers for the New York State Attorney General to explain why internal company communications allegedly referred to MCAs as loans or why a purported MCA company website made use of lending terminology.
The answers, which are public record, were not great. At least two individuals answered that line of questioning by pleading the fifth to potentially avoid self-incrimination.
While there are a lot of colorful details to consider in this case, the AG’s lawsuit dives into the various ways in which the defendants allegedly conflated financial products, including that a defendant company allegedly advertised itself as a “lender” when it actually was not.
While the allegations in the AG’s complaint are probably somewhat unique, there are claims and arguments within them that may be worth further legal review and analysis. Contact an industry-knowledgeable attorney if you have questions.
Broker Fair reached a milestone yesterday by successfully completing the industry’s first-ever virtual conference. The experimental concept was a response to this year’s restrictions and precautions on large gatherings.
We hope that the hundreds of attendees found the event fun, educational, and productive! The in-person show is still happening at Convene at Brookfield Place in Lower Manhattan on March 22, 2021.
Yesterday’s show included live sessions, a networking chat, and a virtual exhibit hall. Attendees will have formal access to the recorded sessions very soon (There were a lot of them).
Nearly three months on from the beginning of the United States’ lockdown, the alternative finance industry is starting to feel a recovery. As states look to ease lockdowns, businesses seek to start back up, and offices are reopening, an element of normalcy, if it can be called that, appears to be returning. deBanked reached out to a number of businesses in the industry to find out how they were plotting their recovery, as well as what they thought of the future for the space and the American economy.
One such company was Everest Business Funding. After experiencing a strong start to 2020 in January and February, covid-19 and the economic shutdown that accompanied it came as a shock to Everest, CEO Scott Crocket explained.
“It’s difficult to imagine an exogenous event outside of our control that could more squarely impact an industry like this,” Crockett stated. “I mean, after all, we provide capital to small and medium-sized businesses all across the United States, all 50 states, every type of small business you can imagine. And we’re cruising along, we had a record 2019, we’re off to a great start with January, February, even the beginning of March … and we really saw it come on in the third week of March, the week that started with Monday the 16th. It started as a kind of a trickle in, but by the end of the week it was more of a tidal wave in terms of the number of small businesses in our portfolio that were calling in looking for some type of relief as a result of what was happening.”
Crockett said that they paused all new funding the following week, out of concern for the company’s ability to generate business while there was a national economic shutdown in place. Since then however, Everest has been slowly getting back to what it was, with employees now returning to the office in waves and discussions being had over when exactly to start funding again, be it late June or early July.
Another firm that halted its funding operations was the New York-based PIRS Capital. Similarly, it was mid-March when the pressure was first felt, and PIRS didn’t return to funding until May 15th. PIRS COO Andrew Mallinger chalked this up to the company’s lack of reliance on automated underwriting processes, saying that although “the industry was leaning towards automatic funding and all these models and 20-second approvals, we weren’t fully invested in that yet. So it was good to see that the old-school approach is back and working again, interfacing with these brokers and really understanding their deals and what they’re bringing to the table.”
Mallinger is also confident going into the rest of 2020. Saying that while the company is maintaining a cautiously optimistic outlook, PIRS is working off the assumption that there will eventually be growth this year and that it is set to continue working from home for however long that may be, on the basis that New York may be one of the last states to return to offices.
Also looking forward is Velocity Group USA’s Trace Feinstein, who believes there will tough times ahead for many in the industry, but who also holds that there are opportunities for those who can make it through.
“Anyone who can weather this storm is going to come out 10 times better than they did going in.” The Chief Syndication Officer said in a call. “It’s an adjustment for our economy, it’s an adjustment for our country, and I think it’s an adjustment for our industry on top of that. So there’s a lot of different changes and things are going to be happening, but I think it’s going to be very good for the ones who make it out of it.”
Feinstein, who said that most of Velocity’s workers are back in its offices, noted that it approached underwriting during the pandemic with thoroughness. Daily underwriting meetings entailed going through each state, looking at what was happening there with infection rates, and discussing how various industries could be affected.
Reporting that applications following the lockdown were actually cleaner than before, with average credit scores going up to be between 650 and 750, Feinstein explained that he pushed underwriters to rely on common sense rather than overthinking their decisions and to treat these deals like they would any MCA application.
And while many funders have struggled through the lockdown period, another part of the industry, collection agencies, have been doing well after an initially tough stretch.
Shawn Smith of Minneapolis’ Dedicated Commercial Recovery has claimed to have grown the company’s portfolio by 100% in 60 days despite a particularly trying period in mid-April. Explaining that the company was two weeks away from having to bring in strict measures to keep things going, Dedicated began getting calls again just in time, with its clients mostly phoning in about MCA deals.
Looking ahead, Smith is anticipating a busy summer and fall as businesses, funders, and the courts come back, but he is worried about a second wave and the alternative finance industry not putting in the precautions needed to stave off the economic impacts this next time around.
“Anyone can lend out a lot of money or put out a lot of money on the street, but your ability to get it back is going to be very important, and you want the fire extinguisher in place before the house is on fire … what you’re seeing in the MCA industry is because it’s just not as aged as the equipment leasing and banking industries … the MCA companies just didn’t have 20-30 year veterans in collections and legal … we’re so concerned with how to write more deals and get more money out there, and not about how to get it back and not about having strong enough underwriting standards and things like that. So when it got stress tested, the pain came back real quick.”
Likewise, Kearns Brinen & Monaghan’s Mark LeFevre claimed that after having a rocky road during the earlier stages of the pandemic and switching to a “plan B” for the year, the collections company is optimistic about going forward. Having weathered what may be the worst stretch without having had to furlough or lay-off anyone, KBM now has brought most of its workers back after a reworking of the office space. A pre-return fumigation, sneeze guards, and temperature-taking upon re-entry to the office building have all been employed after KBM’s employees asked to return to the workplace.
“The industry is changing literally day to day,” explained the President and CEO. “Some of the laws that are passed by the House and by the Senate are changing quicker than I’ve ever seen. I’ve just never seen it before. But I think it’s for the better and we’re starting to see the comeback of the economy, the stock market, employment. The unemployment numbers are really good and, in my opinion, [the numbers will] continue to go down from what we’re seeing in our industry.”
deBanked recently caught up with Gunes Kulaligil, author of Merchant Cash Advance Valuation Dynamics.
Gunes Kulaligil (email@example.com) is a co-founder of Methodical Management, a New York based firm providing valuations, transaction advisory and due diligence services to lenders and investors active in the specialty finance sector. www.methodicalmgmt.com
deBanked: The economic effects of the coronavirus are myriad and widespread. What are some of the specific challenges that the merchant cash advance market is currently experiencing? And what new obstacles can the industry expect further down the line as a result of the pandemic?
Gunes Kulaligil: The pandemic has redefined what “off the charts” means for unemployment claims and other leading economic indicators, but the full impact of job losses and halted economic activity has yet to be observed in the credit performance of many specialty finance assets. MCAs are unique in the sense that payments are daily or weekly and tied directly to revenues. As such, we were able to observe the preliminary impact of the lockdown on MCA cashflows earlier than for most other types of non-bank specialty finance loans.
When incomes and revenues are disrupted, consumers and businesses alike will often prioritize which debt to service first. They may be unwilling to pay certain accounts, even if able to do so, in order to preserve cash for prolonged uncertainty. However, this is not the case for MCAs as payments are remitted automatically; therefore, the cashflows are aligned with and reflect true business performance free of the impact of payment prioritization. As early as the second half of March, we observed payments from merchants drop approximately 20% to 30% depending on the type of industry. In addition, payment pace continued to decline into April and May, albeit at a slower pace, as modifications and servicing efforts picked up. Funders have a vested interest in merchants being able to stay in business and to build their revenues back up. Thus, any modification effort — whether that is a deferral, reduced percentage of sales remitted, or lower payback amounts — that incentivizes the merchant and provides some flexibility goes a long way.
At the same time, funders’ portfolios look worse as performing MCAs pay down and a lack of new origination results mechanically in the remainder of their portfolios having more tail risk – a lack of new origination would be a drag on performance even without the pandemic. For these portfolios, it is crucial to monitor portfolio performance at a granular level to identify businesses that will successfully navigate reopening and increase their revenues; so that servicing resources can be directed where they are most needed and will be most effective. Funders that have invested in technology and maintain connectivity with merchants via CRM tools and with established servicing / resolution teams and processes will have a competitive edge in doing so.
Poor performance caused by the pandemic has also led warehouse facilities to breach covenants or take-out partners to pause purchases unless platforms pledge additional skin in the game or pay higher interest rates to go forward with covenant modifications or resume purchases. They may also increase monitoring requirements and the level of oversight they apply.
deBanked: Conversely, is the pandemic creating any opportunities for funders and brokers as the situation develops?
Gunes Kulaligil: Indeed. While the near-term outlook is grim, a lot of relief and stimulus is working its way through the economy. The U.S. Government is intent on providing support as states are starting to re-open as quickly and as safely as possible. In retrospect, nobody had a pandemic playbook and programs like PPP were designed, deployed and funded on the fly with collaboration from both banks and non-bank lenders during volatile markets.
Non-bank lenders’ success in being able to reach truly small businesses, as well as the speed and efficiency in deploying the funds, has not gone unnoticed. The PPP experience also highlighted stark differences between the types of clients that large commercial banks serve versus those served by non-bank lenders. As deBanked reported, banks focused on larger clients whereas non-bank and fintech lenders assisted much smaller businesses in comparison. Origination fees on PPP loans were not insignificant either. SBA pays PPP lenders a 1% to 5% origination fee depending on the funded amount. For example, Ready Capital reported a gross revenue of $100 million on $2.1 billion funded. Notably, Ready Capital’s average PPP loan size was approximately $70,000 compared to an average of more than $500,000 for JP Morgan Chase for approximately $15 billion the bank funded in round one of PPP.
Small business activity is not only a leading indicator of distress but also at the center of any significant economic recovery. Small businesses account for 45% of GDP with 88% of these businesses employing fewer than 20 people. There is no meaningful recovery without small businesses getting back on their feet. As businesses re-emerge, their financing needs will vary widely in timing, amount, frequency, term, etc. depending on industry and many other factors. Continued involvement from the federal government whether in the form of deploying more low-interest rate loans, forgivable loans or loans with some sort of guarantee is likely. Lenders who can continue to serve their clients either by extending a suite of bespoke private credit or by facilitating the deployment and servicing of government funds will succeed.
A survey conducted by Overland Park, KS-based Strategic Capital revealed that only 36.8% of respondents plan to completely return to the office full-time after cities fully open back up. The vast majority of respondents were small business finance brokers.
44.7% selected that they would minimize office space or only use office space to house core team members while 18.4% planned to terminate their office lease altogether and adopt a work from home model permanently.
Coming June 11th, Broker Fair in Virtual Reality. Much different from a webinar, Broker Fair Virtual will actually be a virtual world with a lobby, exhibit hall, networking lounge, and auditorium. Attendees will be able to interact with each other as well as visit and interact with sponsors at their virtual booths.
There will be live video sessions too of course (see the agenda here), but if you’re there for the networking, get ready for a totally unique experience!
Broker Fair 2020 Virtual isn’t replacing the In-person event. That’s been rescheduled to 3/22/21 at the same location, Convene at Brookfield Place in New York City. All attendees registered for the in-person event are able to attend this virtual event on June 11th for free. If you never registered for that, you can still buy tickets that grant access to both at: https://brokerfair.org/register/
See you at Broker Fair!
“Obviously, funding has really come to a standstill.”
So said Lendinero’s CEO and Founder, Gil Zapata, over a call with deBanked last week. Speaking about how his company, a broker firm based in Doral, Florida, and the industry have been affected by the novel coronavirus, Zapata explained the steps that he and his team have taken to try keep their heads above water.
Following a period of expansion that saw new hires in both their Florida offices as well as their premises in Nicaragua, covid-19’s shutdown of the American economy served as a full stop to what Zapata referred to as “growth mode.” Lendinero has kept the wheels turning by helping business owners secure EIDL and PPP funding and in the process planted seeds he hopes will prove profitable in the future.
Accompanying these PPP loans is the revenue coming from Lendinero’s recent partnership with Benworth Capital. With Benworth being an SBA-authorized PPP lender, Lendinero has acted as an agent for the lending company, assisting them with their focus on businesses in Miami.
To speed up these processes, Zapata and his team created a one-stop portal for potential borrowers.
As well as this, in order to cut expenses, Lendinero had to make significant reductions in its staff, affecting workers in both his North and Central American offices.
“We kept the best of the best and that’s helped out. And we restructured a lot of payments.”
Having brought on new workers during their period of growth, it was many of these who were let go, as Zapata and his colleagues decided that it would be best to keep on the more experienced staff who would not need training and as much oversight.
“We came to the conclusion that whoever is going to stay with us, they know that obviously they need to do something and they need to generate results for us or contribute to us … I think that to be micromanaging people at this time is nonsense.”
With these steps taken, Zapata is confident that Lendinero can continue operating for about a year, but is hopeful that the MCA industry will bounce back over the next six months.
“Something has to happen. Maybe a vaccine comes or maybe it doesn’t come but state governments are probably going to take some sort of action and measures to reopen, and we’ve seen that already. I think in six months from now, it’s not going to be the same growth that we had, but those who are able to come back and open up their businesses will help revitalize the MCA market.”
eCommerce platform Shopify, 2nd only to Amazon in retail eCommerce sales, issued $162.4M in merchant cash advances and business loans in Q1, up from $115.9M in the previous quarter. The statistic pushed them past the $1 billion threshold of funds cumulatively issued since inception.
The company’s provision and allowance for loan losses ticked up from significantly from the same period the prior year but Shopify at that time was originating 50% less volume.
The company reported a GAAP net loss of $31.4M on $470M in revenue. Shopify also has approximately $2.36B in cash and cash equivalents on its balance sheet.
The company reported an increase of monthly recurring revenue, thanks to an increase in the number of merchants joining the platform, strong app growth, and Shopify Plus fee revenue growth.
Shares of Shopify (NYSE: Shop) jumped by more than 5% after the announcement.
RC’s year-end earnings provided some additional insight into the state of Knight Capital at the time it was acquired. This included balance sheet figures that recorded $48.4M in assets ($39.5M of which were purchased future receivables) and $31.8M in liabilities.
Among Knight’s intangible assets were a valuation of $880,000 assigned to the Knight Capital trade name, $1.2M assigned to the value of Knight’s broker network, and $3.8M assigned to the company’s internally developed software.
Goodwill of $11.2 million was recognized as the consideration paid exceeded the fair value of the net assets acquired.
Maryland Merchant Cash Advance Prohibition Bill Put on Hold After State Abruptly Ended The Legislative SessionMarch 19, 2020
The State of Maryland decided to end their 2020 legislative session late last night rather than on the original April 6th deadline, due to COVID-19 concerns. Legislators managed to pass 650 bills in a “3-day sprint” but did not get to everything. Among the bills that did not even make it to the floor were SB913 and HB1478, the bills that called for an outright prohibition on a narrow definition of merchant cash advances.
But it’s not over. Legislative leaders plan to hold a special legislative session at the end of May which they may use to vote on the numerous bills they were not able to pass in time this week.
Senate President Bill Ferguson told the Baltimore Sun, “We want to give enough time for the public health crisis to move past.”
The bills were not exactly on the fast track as it was, having only gone through 1 committee hearing leading up to the deadline.
If the bills do not pass during the special legislative session in May, they might not be picked up again until the normal session resumes in Mid-January 2021.
In the past week and a half it appears as if six months of panic, reaction, and preparation have taken place. With the coronavirus having transformed from a subconscious worry at the back of our minds to a global pandemic that is leading industries and nations to be reshaped, uncertainty and a lack of information may lead to further confusion and anxiety.
As such, deBanked reached out to a number of funders within the alternative finance space to gauge how they’re feeling on the pandemic and understand what measures they are taking at this time.
One such company was BFS Capital. With its headquarters in Florida, CEO Mark Ruddock explained that he and his employees are used to preparing for crises. “It’s prime hurricane land. So we have a capability to operate without a single human head in the office. We have 100% capability for all of our team to work remotely regardless of whether they have work laptops or not.”
Communication is at the heart of this ability, with offices in Toronto, Omaha, New York, Chelmsford in the UK, and outsource partners in Guatemala, BFS relies on software like Microsoft Teams and Zoom to ensure smooth contact is maintained between its employees across the world.
And this mindset has recently been further enforced with regards to company-customer relations, Ruddock explained, noting that in that wake of the coronavirus, BFS has amped up its outreach to existing customers.
“Instead of just waiting for active inbound communication from our merchants, we actually now have an active outbound calling program. We’re trying to reach out to many of our merchants and understand how their businesses are doing, understand what sort of support and help they’re looking for. We’re trying to draw from this not only information about the specific merchant, but also information about that merchant’s geography, sector, and so on. And all of that is being fed back into a real-time dashboard internally.”
Beyond BFS, merchant outreach was a trend amongst the companies deBanked talked to. With funders reporting that they have teams trained to discuss future funding options with businesses if their finances suffer from a decrease in customers.
At the same time, some funders have decided to focus their efforts on tightening underwriting and funding channels, applying a conservative approach to which industries and locations will be served.
Velocity Group USA shared an internal memo to its ISOs with deBanked which detailed some instructions to brokers. Among these was the prompt for “our ISO’s to place more focus on essential businesses.” Non-essential businesses being categorized as community and recreation centers; gyms, including yoga, spin, and barre facilities; hair and nail salons and spas; casinos, concert venues, and theaters; bars and liquor stores; sports facilities and golf courses; most retail facilities, including shopping malls.
Placing a limitation upon funding like this has been a hot topic amongst the alternative finance community within recent days. A thread on the online discussion forum DailyFunder featured speculation and arguments over who is and isn’t funding anymore.
With so much of this being hearsay and rumor, deBanked found that asking funders directly whether or not they were funding currently to be the best remedy to this uncertainty. As of the time of publication, deBanked found that LoanMe had suspended funding until April 1 and that 1st Merchant Funding suspended further funding temporarily, with Vice President of Credit Risk Dylan Edwards saying that it would be “completely irresponsible” to continue funding.
In regards to how funders have been dealing with the coronavirus in their immediate surroundings, many, such as RDM’s CEO Reuven Mirlis, have noted that their employees have been offered the option of working from home, while others have made it a mandate to work from home. BlueVine’s CCO Brad Brodigan explained that this decision was part of their Business Continuity Plan and that prior to this they took extra measures so that their office was thoroughly disinfected and that social distancing was practiced within meetings of 5+ people.
Meanwhile Velocity Group USA has brought in Pat Gugliotta, the Commissioner of the business’s local fire department, to help establish contagion prevention protocols, based upon the screening processes practiced in JFK Airport. Explaining that this includes daily interviews with every staff member in the morning which look for trends relating to where they’ve been, who they’ve been in contact with, and how they’re feeling. As well as this, employee vitals are documented, with infrared thermometers being employed to monitor temperatures. “I’m trying to mirror our program to that program because I know the program works,” Gugliotta mentioned in a call.
While this may sound extreme, it must be remembered that this is an unprecedented crisis, meaning most strategies are untested and many funders are open to exploring novel precautions and solutions.
“This is an unprecedented event, which in its own right means you have to look at it differently,” BFS’s Ruddock explained. “I think it’s the sheer scope and speed that we have to cope with here. Scope meaning that this isn’t a hurricane which hits a region for a period of time and causes economic distress, which requires rebuilding, this is something that is international. This is not something that, like a recession, creeps at you over months and weeks and sometimes even signals orders. This is something that is happening with alarming speed. So in that way, these are unprecedented times now.”
This article will continue to be updated with funders who announce and disclose to us changes in their services, so check back to stay updated. Please do reach out if you would like to discuss the status of your company and how the coronavirus is affecting your business.
With New York in a State of Emergency, Its Legislators Rush to Regulate Disclosures in the Commercial Finance IndustryMarch 16, 2020
On March 7th, Governor Cuomo declared a disaster emergency for New York State. Four and 6 days later respectively, legislators in the state Assembly and Senate introduced commercial financing disclosure bills that would regulate all business-to-business financing transactions including secured loans, factoring, and merchant cash advances. The bills intend to create uniform disclosures for comparison purposes while also placing control of the commercial finance industry under the purview of the superintendent of the New York Department of Financial Services (DFS).
The bills also state that merchant cash advance companies may be required to prepare funding reports on all of their deals for the DFS to inspect so that the superintendent can analyze the difference between the estimated anticipated APR and the actual retrospective APR that resulted after the merchants delivered all of the receivables to the funder on each deal.
The bills are said to have been in the works for some time, but the timing of their introduction is awkward given the sudden economic situation that is unfolding in the state.
The bills are actually quite lengthy so you can read them yourselves in full here:
Assembly Bill A10118 – Introduced by Kenneth Zebrowski
Senate Bill S05470A – Introduced by Kevin Thomas
With companies in Australia, Britain, and the United States, David Goldin has weathered storms of various sizes and seriousness over the past two decades. Whether it was the recent wildfires that saw state-sized infernos engulf the Australian countryside, the regulatory upheaval that is Brexit, or the unprecedented shockwaves sent by the 2008 financial crisis, the CEO has seen his fair share of global disruption.
So when deBanked got in touch with Goldin about his perspective on the coronavirus pandemic, how it compares to what he’s seen before, and what funders should do to combat contagion, he was happy to discuss the insights he’s garnered from twenty years in business.
The following Q&A has been lightly edited for clarity and succinctness:
deBanked: Generally speaking, how bad do you think the coronavirus pandemic is going to get?
“I don’t think anyone knows the outcome. I think what you’re going to see is the industry completely change over the next few days. In the last 48 hours you went from mild cancellations to, today alone, the NBA, NHL, and MLB. And Cuomo just announced in New York that there can be no more than 500 people at events, colleges are shutting down left and right, and schools as well. Basically, we’re heading in the direction of shutting down the entire country at some point.
So I think funders have two issues. One is their existing customers, right? And how do you lend in this market? There’s the obvious and the not so obvious, because, for example, a deal that may have been great a few days ago, let’s say there’s a college bar near SUNY Albany, and they just announced this shutting down of schools, that bar may not see any business for who knows how long.
I’m not the CDC, I’m not the WHO, I’m not a medical expert, but I know in life, people are always afraid of the unknown and panic induces panic, but this is just my opinion. So I think once people start getting this virus, which is inevitable, and they recover from it, I think that’s going to offset some of the panic.
I think you’re going to have a couple of more shock factors. I would not be surprised if we learn in the next few weeks that the President of the United States has it.”
And what about our industry specifically?
“I think right now, lenders will say, ‘Well, if I [tighten up], typically what happens in our industry is if a company runs into trouble, it’s usually just that company,’ right? So if they start tightening up, they lose the business.
The entire playing field will be level by Monday or Tuesday of next week, by the latest. I think some of the playbook will be that some funders may take the position to stop funding for the next couple of weeks and look to see what happens because no one knows how bad this is going to get.”
Do you have any advice for funders?
“I think you have to price the risk because I think everyone is foolish to think that the bolts are not going to go off. So you’re either going to have to increase the pricing to the customer or raise the rates to the broker and limit the amount they could charge the customer temporarily for the increased risk your portfolio is now going to take.
I think you need to shorten the term. During the 2008 recession, the industry was at a 1.35 to a 1.37 factor rate, averaging six or seven months. There weren’t too many providers back then going past a year, there really was no such things as a second or third position.
This is a much different world we live in. So I think, unfortunately, some of the platforms that tend to be longer-term players which do one year, two years, three years, even four years, I think they’re going to be in a lot of trouble. Their ships are too far out to sea and I think they’re really going to have to focus on portfolio management and collections.
There’s going to be opportunities in the marketplace for those that don’t take a prudent approach, but I think in the short term people have to shorten their terms, potentially raise pricing for risk, and decrease the amount of capital that they’re taking out of a customer’s gross sales.”
What lessons do you think can be learned from this?
“I think as a platform you have to look at redundancy of capital, and that the time to raise money is when you don’t need it. So I think this could be a lesson for all to perhaps have more than one funding source.
I think brokers are going to really have to diversify. There’s good and bad, I think the approval rates at companies are going to fall through the floor, but I think you’ll get a lot of borrowers over the next few weeks that can typically go to a bank that won’t be able to go to a bank. But you’re going to see a lot of watching and waiting right now. And you’re going to see the industry revert back to where it was a while ago: shorter term deals, pricing in the risk, lower gross sales taken.”
How does this compare to previous crises?
“So I think this one’s a little bit different. It’s affecting everything and your playbook is going to change literally daily. This will be affecting the majority of the major cities. When you’re shutting down things like the MLB, the NBA, the NHL, shutting down colleges and universities, I don’t think this country or the world has ever experienced anything like this for this extended period of time.
Now that doesn’t mean everyone’s going to go out of business, there’ll be a redistribution. For example, if it was a restaurant in midtown Manhattan that relied a lot on people going from work, and these people are now working from home, perhaps their local restaurants or supermarket may see an uptick in business.
I think you’re going to see decisions slowing down and really digging a lot deeper into the underwriting, understanding what the business actually does, how it’s potentially affected.”
What should funders be doing to combat contagion?
“They should be testing a disaster recovery plan to work remotely.
But most importantly it’s really about everyone being healthy, helping their families and their employees. That’s first and foremost.”
A new $100 million revolving credit facility is poised to give a big boost to small business funding provider Funding Metrics. The company operates the Lendini and QuickFix Capital brands, and this new credit facility comes as the company seeks to increase its base of more than 9,500 small businesses served so far.
“We now have the money to grow over all aspects of that spectrum,” President Jim Carnes said. Since 2014, the company has provided more than $500 million dollars of funding to small businesses in a variety of industries, including healthcare, real estate, construction, restaurants and others.
The $100 million worth of revolving credit comes from what the company called a “a multi-billion dollar institutional credit fund,” with Brean Capital serving as Funding Metrics’ exclusive financial advisor for the transaction. The new credit line as well as a newly developed website and streamlined funding process will allow for growth and fantastic customer service. Among the company’s main ideals is to provide funding request approvals or denials within three hours or less.
One of the main challenges for online small business funding and its related activities in 2020, said Funding Metrics co-founder David Frascella, is increasing awareness of all the offers and products out there, including from his company. “There are plenty of options in today’s market,” he said. Increasing that awareness, he added, is something the industry should come together to better address. “We look forward to additional submissions from the ISO network and funding the next wave of small business leaders nationwide,” he said.
Funding Metrics is also a platinum sponsor of Broker Fair 2020 on May 18th in New York City.