Não é bom: When Split-Payment Business Loans Fail
February 20, 2022
As tech companies like Square and Shopify capitalize on their respective abilities to collect loan payments from borrowers by withholding a percentage of their credit card sales, similar companies have replicated that model across the world. StoneCo, for example, which is traded on the Nasdaq but operates in Brazil, had a market cap last year of over $25 billion. More recently, however, it’s dropped to nearly $3 billion.
In Brazil, StoneCo used its wide reaching payment business to start originating small business loans that were paid back through their customers’ credit card sales. That business seemed to hold up quite well early on in the pandemic but then took a turn for the worse. According to Bloomberg, distressed businesses came up with ways to circumvent their payments. “…[B]usinesses started jumping to other payments firms, meaning Stone no longer had access to their card purchases,” it said.
“Lockdowns pressured businesses’ cash flows and several sought ways to not pay back their loans,” StoneCo CEO Thiago Piau said.
Historically, diverting sales through another payment processor to avoid this type of obligation was known as “splitting.” It’s an inherent risk to finance companies that make underwriting decisions based on the assumption that the customer is unable to exit the relationship without seriously disrupting its business.
StoneCo was hit so bad that it stopped lending altogether and a significant percentage of its customers went into default. In the company’s Q3 2021 earnings call, Chief Strategy Officer Lia Matos said that they intend to get back into lending again but with some adjustments.
“So, those improvements are, for example, the inclusion of personal guarantees from the business owners and potentially other business they may have, improve risk scoring through additional data,” said Matos.
Covid may have been less damaging to similar companies in the US like Square, for example, because Square was able to repurpose itself to a PPP lender. The incentive to move to another payments platform may have been diminished by the allure of leveraging a pre-existing relationship to secure PPP funds.
StoneCo in Brazil is an example of what can happen to a fintech lender reliant on recouping credit card sales when that relationship doesn’t stick.
To help ensure the team gets things right in the future, StoneCo recently acquired Gyra+. Described as “a data-driven SME lender, which operates under a fee-based, asset-light approach,” the company plans to gently ease back into lending.
“I think that we are not ready to provide a specific guidance in terms of scaling the credit,” said CEO Thiago Piau in November. “We are really focused toward engineering and getting the feedback of clients and all the clients’ experience that we have learned throughout this.”
Brazil has a population of 212 million people.
Pick a Niche or Go Far and Wide? SMB Financiers Weigh in
February 18, 2022
As big tech continues to pave the way for new avenues for providing capital for small businesses, the legacy infrastructure in place has their own ideas of how to compete in funding a digitally native business owner. While some say that the strength is in finding a niche, others disagree— claiming that the key is to expand business, avoiding a one-dimensional aspect of funding. On top of this, some commercial finance brokers even claim that an ability to handle digital assets will give them an advantage over a larger tech company, too.
“Finding the niche as far as who you’re funding, and what type of deals you’re funding, will lead to continuing growth,” said Matt Rojas, Senior Lending Officer at Ironwood Finance. While Rojas believes the strength of a smaller brokerage is the ability to service a niche client, he expressed the idea that larger companies getting into the space are going too deep too quickly—resulting in an unsustainable rate of expansion.
“I see the biggest problem with the fly-by-night brokers, these bigger MCA shops that you’re seeing entice brokers to send the clients to them,” Rojas said. “I don’t see how that will sustain long term unless they continue to meet milestones to acquire their capital. I just had a merchant [get] bought out from our firm [by another funder] for over 40K plus, [but] their cash flow could only sustain an 18K MCA max. I’ll never understand how these firms are going to operate on a larger scale unless they are bought by the big firms.”
Other people in small business lending think that the strength is to offer a variety of financial products and options to give merchants choices. “The only way to keep up with the big boys of the industry is to simply just not be a one-trick pony,” said Juan Caban, Managing Partner at Financial Lynx. “Just like they are adapting into new markets and products, we as lenders and brokers need to also enhance our offerings.”
While people like Caban are molding products based on the competitive flow of the industry, Rojas seems to believe the system will bleed the big players dry. “It’s my understanding that as a lender we don’t need to compete with each other on rates like you’re seeing,” Rojas said. “I believe they call this the cash burn stage.”
“They’re going to burn as much cash to acquire clients,” Rojas continued. Then, the dominos fall. […] It’s like a story that paints itself over and over again. The same thing will happen to these bigger firms you mentioned due to the simple fact that their underwriting process doesn’t factor NSFs, non-repayments, or defaults.”
While Rojas focused on what the bigger companies are doing, Caban spoke on what brokers can do on the fly to adjust. He expanded on the idea of using old tactics in new ways, saying that traditional sales tactics may work if implemented with a well-researched and modern spin.
“Before cold calling, research and understand who your target market is and be prepared,” Caban said. “When cold calling, no one merchant has similar needs and goals. We need to ask the right questions, learn about the business, then find customized solutions that are in line with their financial needs and goals.”
A merchant will always appreciate a broker or lender who takes an interest in their business and find solutions that are in line with their goals rather than [their own] financial interests.”
Some brokers have gone outside of the box when it comes to how they will compete in the future of small business lending, saying that traditional currencies have been won over by big tech, and it’s digital assets that will open a brand new market for the next-generation small business lender.
“Since 2008, technology has changed a lot more than just the process in which small business owners find and acquire funding,” said Nicholas Saccone, Senior Funding Advisor at Proto Financial. “As you know, cryptocurrency is becoming more and more mainstream by the day with the Fed scrambling to get control over it. Whether you believe in crypto or not, it will [change] the way we see money.”
Saccone expressed that brokers who embrace learning about digital assets will not only be able to compete with large tech lenders, but beat them out.
“PayPal, DoorDash, and Square can make it easy for companies to secure fiat currency, but as crypto becomes more mainstream, brokers will fulfill a new role as they help educate clients on the new financial system that is upon us,” Saccone said. “It will be physically impossible for large tech companies to integrate crypto into their current systems without brokers doing the dirty work.”
“Mass adoption comes from the top down,” Saccone continued. “Digital collateral tokens, such as Flexa’s AMP, will change the payment processing industry forever. Transactions will become instant and it is my belief within the next ten years, merchants will be utilizing digital assets more than fiat cash.”
Shopify Capital Originated $324M in Funding in Q4
February 16, 2022
Shopify Capital originated $324M in Q4 2021, bringing the full-year total to $1.39B. That figure represents a massive increase over the company’s previous originations record of $794M in 2020.
During the quarterly earnings call, Shopify CFO Amy Shapero listed Shopify Capital among the divisions that drove revenue growth for the company in 2021.
“As merchants build momentum, inventory and marketing needs to grow alongside it,” said Shopify CEO Harley Finkelstein. “And this is where Shopify Capital comes in, offering merchants the funding they need to expand their business.”
Total originations came in just shy of the numbers that rival OnDeck reported a week earlier. OnDeck originated $1.76B in funding to small businesses in 2021.
New Jersey Reintroduces Commercial Financing APR Disclosure Bill
January 20, 2022
Members of New Jersey’s state legislature are trying for a fifth year in a row to advance a commercial financing APR disclosure bill. Senate Bill 819 was introduced on January 18th. Senate Majority Whip Troy Singleton (D) is the primary sponsor.
Similar to what was just introduced in the Virginia legislature, the bill is mainly aimed at “sales-based financing.”
“Sales-based financing means a transaction that is repaid by the recipient to the provider, over time and as a percentage of sales or revenue, in which the payment amount may increase or decrease according to the volume of sales made or revenue received by the recipient. ‘Sales-based financing’ includes a true-up mechanism where the financing is repaid as a fixed payment but provides for a reconciliation process that adjusts the payment to an amount that is a percentage of sales or revenue.”
DoorDash Now Offers Merchant Cash Advances
January 19, 2022
DoorDash has made its way into the small business financing game. DoorDash Capital, as the financing arm is so named, claims to provide merchant cash advances to DoorDash partners against future sales orders placed through the DoorDash app.
The DoorDash website explains the product in detail.
“There is no interest rate because a merchant cash advance is not a loan,” the website says. “There is a fixed fee stated up front which will be collected together with the capital advance. Your fee will never change after you have accepted the offer.”
All of these deals are processed through Parafin, a Silicon Valley-based funder who was started by former Robinhood data scientists and engineers. They spoke to the Wall Street Journal in September about their launch and the onboarding of their first customer, Mindbody.
As a software provider with a financing arm of their business, Mindbody reportedly uses Parafin’s funds to provide financing through Mindbody Capital. When speaking to the Journal, Parafin’s Chief Executive Sahill Poddar said that Mindbody customers would pay fees between 6%-15%.
“We are categorically distinct from online lenders,” Poddar told the Journal.“We only get paid back when the [small business] makes sales.”
It’s still unclear the amount of DoorDash merchants getting financing from DoorDash Capital. From the looks of it, the program is still in its infancy.
When deBanked reached out to DoorDash for a progress report on the program, the company declined to speak. “No comment at this time,” said a DoorDash representative when asked about the progress, usage, and ideas behind DoorDash Capital.
“Our goal is to provide our partners with fair, fast and convenient financing,” the DoorDash website says. “To help partners gain access to additional capital, we partnered with Parafin, a business financing provider, to offer cash advances that you pay back automatically with your DoorDash sales. You can use the capital for inventory, payroll, rent, marketing or for your cash flow needs.”
Virginia Hops on the Commercial Finance APR Disclosure Bandwagon
January 14, 2022
Add Virginia to the list of states introducing initiatives to codify disclosures in commercial finance. Virginia House Bill 1027 is aimed squarely at “sales-based financing providers.”
The Virginia bill calls for an estimated APR to be disclosed on sales-based financing contracts using methods conceived in New York’s recent legislation.
As has been witnessed, however, New York’s regulators recently discovered weaknesses in their own law.
The Virginia bill is in its very early stages. It was introduced on Wednesday, January 12th by Delegate Kathy K.L. Tran (D).
New York’s Commercial Financing Disclosure Law to Undergo Further Comment and Review
January 4, 2022
Implementation of the New York Commercial Financing Disclosure law originally intended to go into effect four days ago, is now subject to another delay on top of the existing one, with no official date on when compliance will be required.
Seeing as the New York Department of Financial Services (DFS) was still accepting comments on the proposed regulation through December 20th, DFS had originally granted covered companies a six-month reprieve on compliance. But after having reviewed the comments, DFS determined that it’s actually back to the drawing board on a regulatory proposal. Sometime “early in the new year,” DFS said, it will publish a revised proposal for further public comment.
“Given the complexity of the disclosures required by the CDFL (Commercial Financing Disclosure Law), we believe the Legislature intended that the Department first provide regulatory guidance regarding the standardized disclosures required to be provided under the CDFL,” said Serwat Farooq, a Deputy Superintendent at DFS, in a published statement. “Waiting to commence CDFL obligations until implementing regulations are in place will ensure that the disclosures are made in a consistent, standardized fashion. This will help businesses understand the terms and conditions of the various forms of credit being offered to them, the very intent of the CDFL.”
Funders Planning Mounted Response to Debt Settlement Schemers
December 30, 2021
Debt settlement companies are still using their tricky tactics, according to Efraim Kandinov of Fundfi Merchant Funding. He says a large group of funders are currently strategizing a mounted response to activity he believes is illicit.
Fundfi’s lawyers have already begun to send out Cease and Desists to the companies that have been telling his clients to breach their contracts and stop paying. He says it has become such an issue, that merchants in other parts of the country have begun ignoring his calls because of his New York area code, which they now associate with this kind of scam.
“[The merchant] said,‘I’m having all these New York numbers specifically, call me and plead with me ‘why are you doing this to yourself? Stop paying. Don’t pay these guys, pay me a fee and I’ll take care of it.’”
”This merchant was smart enough to say, ‘hey, this sounds like a scam’ and gave me the rundown.”
According to Kandinov, his company is one of the many that merchants are being told not to pay, while there are other funders who the debt settlers instruct to keep paying.
“They’re specifically targeting certain funders,” said Kandinov. “Whether they’ve been sued before by other ones, or have agreements, I have no idea. However I’m starting to realize, they’re specially targeting certain companies.”
