Ten Percent of Small Businesses That Sought Financing in 2021 Sought a Merchant Cash Advance
April 18, 2022A whopping 10% of small businesses that sought financing last year sought out a merchant cash advance, according to the latest study published by the Federal Reserve. That figure was up from 8% in 2020 and 9% in 2019. For the the preceding years, that figure had held fairly consistent at 7%. [See 2015, See 2017]. Market penetration, therefore, has arguably increased by about 40% since 2015.
Meanwhile, the percentage of applicants that sought out leasing has gone down over the last seven years: from 11% in 2015 to 8% in 2021. Factoring has hovered around 3-4% consistently.
The pursuit of of loans and lines of credit decreased dramatically from 89% in 2020 to 72% in 2021. And approvals have gone down across the board. Approvals on business loans, lines of credits, and MCAs hit a peak of 83% in 2019 and plunged to 76% in 2020, the first year of Covid. The figure fell even further in 2021, down to 68%. Online lenders and large banks had the lowest approval rates overall, at 51% and 48% respectively.
Small Business Finance Industry Mulls What’s in The Rearview, Is Optimistic For Rest of 2022
April 14, 2022
The small business finance industry is looking ahead to anticipated growth for the remainder of the year, despite new challenges ahead. With massive government aid fading in the rearview, some industry players now have had the time to consider what the impact of it was as they move onward into the future.
Bob Squiers of Meridian Leads expressed his view on the topic, “a lot of our customers, mostly the ISO shops, many of them converted and started selling and pitching the government programs. So in that sense it kind of helped keep those guys afloat, helped keep our business going. A lot of what we do in the marketing side, translated for those government programs. But then it did also squash the demand for the cash advance.”
In some cases, government funding has helped merchants pay off pre-existing obligations in a timely manner. Matthew Washington, founder and CEO of Moneywell GRP, noted, “An educated business owner is using the financing options available as they see fit for the timing. Someone that is waiting to get an SBA or an EIDL is more susceptible to take a bridge product to get them through that time gap,” he said. “As long as you’re working with the merchant and pushing out good products and you know what is on the rise, I think it has done nothing but help in some cases.”
Trucking became one of the number one fields that made up a large percentage of submissions during the pandemic, industry insiders say. However, with gas prices increasing, business with trucking could go down. Other businesses such as restaurants, where only a third received funding last year from the government, are desperate for funding.
“There’s tons of restaurants left that haven’t yet received their funding. So we could be seeing a lot of exposure in that industry,” stated Michael Yunatan of Specialty Capital. “But overall, I definitely do feel that we’ll be seeing an uptrend in our numbers across the board.”
“We definitely do think the industry is growing as a whole,” said Yunatan. “Even though we are a new player in the space we have been growing.”
Chad Otar, founder and CEO of Lending Valley, said, “We need to keep monitoring the interest rates that are coming up from the Federal Reserve, we need to make sure we’re not heading towards a recession, we need to make sure that we’re able to fully have the capital ready, in order to be able to deploy at a reasonable rate.”
Otar acclaimed the indirect benefit of large tech companies operating in the space with a competing product, arguing that the presence of PayPal and Amazon are helping to bring exposure to the industry overall.
“And now that Kabbage is back as well, since they partnered up with American Express, it’s gonna help us out to be able to push the product more into the mainstream,” said Otar. “So I believe there will be a growth in the industry.”
Brokers, Funders Find Their Footing and It’s Back to Business
April 12, 2022
For Mike Brooks, CEO of Best Connect Capital, the deal making never stops. A former boxing trainer turned funder said that there are no days off. “I’m always funding, I am always, always funding,” he said.
Recently, Brooks has taken an interest in text message marketing. “I’ve had trouble finding somebody in text marketing,” he said. I was going on the internet and using word of mouth, and I wasn’t really able to connect with anybody. I hooked up with this company [in Miami], and it worked out really well. I already funded a couple of deals.”
Around the industry, brokers and funders have found their footing after Covid. A recent mass gathering in Miami definitely helped push things along. “The second I got off the plane in Miami this year, I saw an old friend, a business associate,” said Brooks. “That was a great connect right there.”
Nicholas Saccone, Senior Funding Advisor at Proto Financial had a similar experience. “Having the opportunity to meet up with some of our partners face-to-face [is] a really cool experience,” said Saccone. “Sometimes it is hard to find time to build relationships with all of our schedules. [Through networking] I’m able to get different perspectives on where the industry is headed and where we are now.”
“Small business lending is on the up and up,” said Frankie DiAntonio, CEO of Lexington Capital, who also ventured down to Miami with his team from Long Island. “With inflation going up, we’re finding that small businesses are outsourcing their need of funding outside the government, and there are companies like us that can come in and take care of them.”
DiAntonio spoke about how important it is to sell legitimacy to both his lenders and staff. “We’re the new kids on the block, we’re a newer company,” he said. Despite the head start his competitors may have, DiAntonio said that old school sales mentalities combined with modern marketing strategies have recently helped his company consistently fund deals and build a book of business.
“We bring in a lot of Google click ads which brings us a lot of leads, but obviously our guys just make phone calls throughout the day, as much as humanly possible,” DiAntonio said. “My guys know what they’re doing, they know the industry, they’re really good on the phones, and they know how to take care of customers.”
Tomorrow’s Broker/Funder Relationship, According to Funders
February 23, 2022
“In the end, we all press zero to talk to someone.”
The conversation about what characteristics will make up tomorrow’s loan brokers is surrounded with ideas latched in fintech, social media, and more. Brokers from around North America have been showcasing these new strategies on social media or in chats with deBanked, which sparked the question — what do the funders think of all of this?
Efraim Kandinov, CEO of FundFi Merchant Funding, has a lot of ideas about how brokers should function in a constantly changing financial landscape. According to him, it’s not the style of funding or modernization of business logistics that will make tomorrow’s broker, but it’s leveraging ethics with both merchants and funders to preserve future business down the line.
“I believe more and more merchants look for the digital aspect and remove the broker because of the dishonesty that we usually uncover and want something clean without interpretation. Many issues with merchants in my opinion [stem] from being misled by the broker, promising something after to just take this deal or promising to get payments lowered and take an overleveraged position.”
Other funders think much differently, identifying a sense of community being brought about by tech, having a ‘we’re in this together’ type of mantra to hold the legacy industry up.
“There’s a sense of familiarity when dealing with my brokers,” said Amanda Schuster, CEO and President of Fundhouse LLC. “We’re your friends, we get you, we get your business.”
Schuster believes that relationships between funders, brokers and merchants alike will help them weather the storm of tech’s emergence into their industry.” We are your business and it’s just as important to us that you succeed,” she said. “I have business owners that I still speak to this day, that I funded over five years ago.”
Schuster dismissed companies like PayPal, Square, and Shopify’s takeover of small business lending, circling back to the interpersonal value that a broker provides as a face to a financial product.
“At the end of the day, business is always about the people,” she said. It’s about creating a need and filling it. You can’t do that on a website.”
When asked about the value of this happy-go-lucky community of brokers, funders and merchants, Kandinov brought up how some brokers have found ways around the ‘repeat business’ model of funding deals, thus making relationships between brokers and merchants pointless.
“I think brokers are less caring of repeat business because they have discovered a short term model of stack, stack, stack, and then put in a reverse. This front loads commission. I believe a broker has a huge advantage in creating the relationship. [This] unfortunately is starting to take a back seat to a new way to score big commissions.”
Kandinov spoke about brokers who will say anything to make a sale carelessly shooting themselves in the foot when it comes to forming a book of business. By saying whatever they need to get paid now, merchants are either going straight to the funders to big tech for their next source of funding.
“Jaded merchants then look to only speak to the funding house in the future and stay or just prefer the direct to consumer model of fintech,” said Kandinov.
Despite these feelings, Kandinov does believe that there’s a bright outlook on the future of the broker/funder relationship if some change occurs.
“[Brokers] deserve their high commissions as they do a lot of work. I think funding houses have much less overhead with the broker model, but lately with the broker behavior it is almost pushing themselves out if it continues. I do not believe fintech alone is advantageous, just in speed and clarity. It’s a byproduct of poor behavior.”
Bitty Advance’s New Suite
February 22, 2022
Bitty Advance hopes that an enticing in-person environment will bring people back to the office. As part of that, the company recently moved into a new space.
“We want to give our team both the flexibility of working from home and having a premier office space for collaboration,” Bitty Principal and CEO Craig Hecker told deBanked. “…making our space open and dynamic, with comfortable couches, TVs, and relaxed meeting areas was important, we are also incorporating fun things like resting areas and table tennis to promote wellness and engagement.”
The new office is immediately adjacent to Dania Pointe, a 102-acre premier mixed-use development with almost one million square feet of retail and restaurants, luxury offices, hotels, luxury apartments, and public event space.
Bitty is seeking to acquire tech talent in many areas as they expand platform offerings for their white-label application intake process, affiliate online checkout referral page, payment processing & management interface, and self-service customer portal.
“Bitty is a tech company first. All of our focus is on utilizing technology to revolutionize the MCA space,” said Hecker.
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, 2022As 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.
