Maryland State Legislators Want to Enact “Prohibition” on Merchant Cash Advances

February 21, 2020
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Aprohibition Maryland State Senator and 4 State Delegates are calling for a prohibition on merchant cash advances through a bill introduced this month that aims to make it illegal to arrange, facilitate or consummate a merchant cash advance with a merchant in the state.

Maryland State Senate Bill 913 and House Bill 1478, literally headlined as Merchant Cash Advance Prohibition, defines a merchant cash advance as:

AN ARRANGEMENT BETWEEN A BUYER AND A SELLER IN WHICH THE BUYER AGREES TO PURCHASE AN AGREED–ON PERCENTAGE OF FUTURE CREDIT CARD REVENUES OR DEBIT CARD REVENUES THAT ARE DUE TO A SELLER FOR A PREDETERMINED PURCHASE PRICE

If all went to plan, the law would go into effect as early as October 1st of this year. Support at this early stage is bipartisan, with the Senate Bill sponsored by a Democrat and the House bill sponsored by 4 republicans. Hearings on the matter are being held on March 2nd and 3rd.

Patreon Adds MCA-like Product With Patreon Capital

February 20, 2020
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PatreonPatreon, the membership platform that provides payment and subscription services for creators, will now start funding those artists that are on its site through Patreon Capital. Said to be modeled after Shopify Capital, the service will be available to certain creators initially, with Patreon reaching out directly to them to offer merchant cash advances.

The move comes after CEO Jack Conte had been quoted in January saying that “The reality is Patreon needs to build new businesses and new services and new revenue lines in order to build a sustainable business.”

It seems like this new service is part of a trend that has overtaken tech companies recently, best exemplified by the Apple Card, wherein established players, worried about longevity, are moving further into financial services, hoping to get long-lasting hooks into their customers.

Historically, Patreon has made money by taking a 5% cut from the subscription payments made to artists on its platform, with a further 5% going towards covering transaction fees, and the remaining 90% being left for the artist, who retains complete ownership of their work. It currently has over 100,000 creators on its site and over three million active monthly users. Contributions begin at $1, with content being unlocked in exchange for payment. Thus far, Patreon has paid out over $1 billion.

It has been reported that about a dozen deals have been made between creators and Patreon Capital so far. Hot Pod News ran a story featuring one such case, in which Multitude, a Brooklyn-based podcast studio, disclosed that it took funding of $75,000 over two years in order to pay the SAG-AFTRA rates of the actors it wanted to employ for a new audio sitcom titled Next Stop.

“We were running into this problem where we have a ton of great ideas, but because we’re a small business, we constantly have to decide between putting money towards paying our people and getting more equipment versus saving it up for a bigger project,” Multitude’s CEO, Amanda McLoughlin, told Hot Pod.

The premium attached to the financing was not revealed, however Multitude did note that the revenues of one of the studio’s other shows, Join the Party, would be taken as collateral if Next Stop is not profitable enough to pay the premium after two years.

“This arrangement is directly tied to the fact that we have successful podcasts making money on Patreon, and that we’ve already invested in the Patreon system to pay this stuff back,” comment Eric Silver, Multitude’s Head of Creative, underlining how Patreon Capital is linked with the analytics of Patreon’s base service. Much like how Amazon uses sales metrics and user data to gauge which retailers to lend to on its own marketplace, Patreon appears to be making use of seven years of data on its creators to determine who is best positioned to receive funding.

“Patreon has access to all the data about a creator’s earnings history, what they offer as benefits, how much they engage with their patrons … everything needed to forecast their earnings and retention, without a creator even needing to submit an application.” Patreon VP of Finance Carlos Cabrero stated. “This would be essentially impossible for a bank to replicate.”

We’ve Acquired All Of DailyFunder

February 6, 2020
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Daily FunderdeBanked’s parent company has acquired 100% of DailyFunder. I was a co-founder of the online forum that launched in 2012 and had remained a partner in it until recently when I had the opportunity to acquire the remainder of the company’s shares.

What does this mean for DailyFunder?
DailyFunder will remain an independent entity and website, and it will continue to keep its trademark name. Its concept, a message board for business finance professionals, will fit nicely into our ecosystem. Our full ownership of DailyFunder will allow us to provide the site with updates, fixes, and improved moderation. Some changes to the site may be implemented over the next several weeks and months.

More than 16,000 threads and 129,000 posts have been published on the forum since inception, a testament to the value that such a site provides to the unique community it fosters. DailyFunder has nearly 10,000 registered members. Discussion on the site originally centered around merchant cash advance but has since evolved to all types of commercial finance.

If you’re one of the men and women who fund daily, well then I hope to see you on the DailyFunder!

If you have a technical question or moderation issue, please email: webmaster@dailyfunder.com. If you have an advertising question, please email me at: sean@dailyfunder.com. Please bear with us as our team gets acclimated to the new change.

CAN Capital Brings On Edward Dietz as Chief Compliance Officer & General Counsel

February 5, 2020
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CAN Capital is continuing its executive hiring spree into 2020 with the news that it has brought on Edward Dietz as its latest Chief Compliance Officer and General Counsel. After providing legal expertise to Marlin Business Services Corporation for nine years and working as an associate for two law firms in Wisconsin and Pennsylvania previous to this, Dietz will oversee CAN’s compliance with all federal and state lending, banking, and securities laws.

“Having worked with Ed and knowing his skill set and the many intangibles that he brings to CAN, I feel fortunate that he’s leading our legal and compliance efforts,” noted CEO Edward Siciliano in a statement. “Ed’s just what we needed as we position CAN for growth and to lead a new era of small business lending.”

Having graduated from the University of Michigan Law School in 2004, Dietz has nearly two decades of legal experience.

Speaking on the news, Dietz said that he “could not be more excited to join a company and a team that believes so deeply that its people and its culture are the keys to harnessing the company’s growth potential.”

Liberis Secures $42 Million in Funding, Plans American Expansion

February 3, 2020
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Liberis HomepageLiberis, the London-based small business finance provider, secured £32 million ($42 million) in capital late last month following a round of equity fundraising. The firm, which has funded businesses through cash advances since 2007, has now raised a total of over £150 million ($197 million) via debt and equity.

Having already entered Nordic markets, Liberis looks to use this funding to further expand into Europe as well as make their mark in America. Speaking to deBanked, Liberis CEO Rob Straathof explained that the company would be working with its North American partner, Worldpay, to spread itself across all 50 states. Beyond Worldpay, Liberis is planning to create more partnerships with merchant acquirers, those payment platforms which serve merchants, or “SME champions,” as Straathof calls them.

Liberis will not be using brokers to provide cash advances to business owners in the States, the reason being that the company prefers to work with its affiliated partners. “We purely rely on our partners and integrating with our partners,” explained Straathof. “In the UK we still do brokers, but that’s kind of a legacy. It works very well for us and we have a great relationship with brokers. It’s a good channel for us, but we have no intention at this point to launch that in the US.”

The company will also use the funding to increase its staff by 30% in 2020, hiring around 50 people to bolster its 165-person workforce across their four offices in London, Dublin, Stockholm, and Denver.

Appellate Court Affirms Decision in Merchant Funding Services, LLC v Micromanos Corporation etc.

February 1, 2020
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On January 29th, 2020 the Appellate Division, 2nd Department, of the Supreme Court of New York, upheld the original decision issued in Merchant Funding Services, LLC v Micromanos, etc. et al.. The case concerns a Confession of Judgment (COJ) filed following Micromanos’ default on a merchant cash advance contract. The defendants sought to vacate the COJ on the basis that the underlying agreement was allegedly a criminally usurious loan but the original judge ruled in favor of the plaintiffs.

The case was so notable that deBanked published a summary of the decision three years ago. Of particular interest is that the defendants not only lost but were accused by the judge of attempting to mislead the Court. Despite that, the defendants appealed.

The defendants have now lost again. The underlying case law they had relied on to support their arguments, Volunteer Pharmacy, was overturned the same day this decision was issued, leaving little room to wonder why the Appellate Division ruled accordingly.

One Of The Most Devastating Court Decisions Against Merchant Cash Advances Has Been Overturned

January 29, 2020
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gavelMerchant Cash Advances have sat on comfortable legal footing in New York ever since an appellate court ruled in favor of Pearl Beta Funding, LLC against Champion Auto Sales, LLC in 2018, but even so, it hasn’t stopped lawyers from trying to invalidate merchant cash advance (MCA) contracts on behalf of aggrieved customers.

That’s because an MCA provided by New York-based Merchant Funding Services LLC to a business known as Volunteer Pharmacy in 2016 was ruled by New York Supreme Court Judge David F Everett to be so “criminally usurious on its face” that the normal process required to vacate a Confession of Judgment could simply be bypassed without even having to evaluate the merits of each side’s arguments and the matter automatically won in favor of Volunteer Pharmacy. The judge’s written decision, which voided the MCA contract ab initio, was replete with a scathing opinion of MFS’s business model.

The decision quietly stunned the merchant cash advance industry. MFS understandably appealed.

Dozens of lawsuits against MCA companies in the ensuing years went on to cite Judge Everett’s decision in Volunteer Pharmacy with limited success. And while the industry sat around to find out what would happen in that case, Pearl Beta Funding, a rival to Merchant Funding Services, won an appeal of its own, the landmark usury case in March 2018 that seemingly solidified once and for all the commonly held understanding that such MCA agreements were not usurious.

Despite this, the uncertainty of Volunteer Pharmacy still lingered in the background, that is until now.

On January 29th, 2020 the Appellate Division, 2nd Department, of the Supreme Court of New York, overturned Judge Everett’s decision and ruled in favor of Merchant Funding Services. The panel of judges said they need not even weigh a lot of Everett’s contentions because he was wrong on the underlying procedural issue, that a judgment by confession could be vacated in such an instance without having to go through the normal legal process.

The ruling ultimately provides clarity on the process that determines how a judgment by confession can be vacated. One major impact is that lawyers seeking to invalidate merchant cash advance agreements will no longer have Volunteer Pharmacy as a crutch to rely on.

The Scoop Behind Sprout Funding’s Acquisition of Jet Capital

January 25, 2020
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Sprout Funding HomepageNews from North Texas this month as Dallas-based Sprout Funding announced its acquisition of Jet Capital. The move comes as Sprout seeks to expand its technical operations.

“Sprout built a reputation as a group that funds a lot of its own internal deals, and Jet had spent a lot of time, energy, and money on their tech platforms,” Sprout’s CEO and Founder Brad Woy told deBanked. “So while we were really good on the sales and marketing side, they seemed to be a little bit more advanced in their tech and reporting, and we brought those two things together.”

Almost all of Jet’s employees will be joining Sprout, with the exception of one person who chose to go their separate way following the merger.

Jet’s COO Allan Thompson spoke kindly of the purchase, saying in a statement that “There is a great cultural alignment in addition to the obvious benefits of combining our technology, processes and people. The result will provide increased capabilities for Sprout and opportunity for all of our customers and partners.”

The financial terms of the acquisition were not disclosed.

deBanked CONNECT MIAMI 2020 Photos

January 21, 2020
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View a selection of deBanked CONNECT MIAMI photos here

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How GRID Finance’s Cash Advances Are Building Stronger Irish Communities

December 27, 2019
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Design Tower
Above: The Design Tower on Grand Canal Quay in Dublin, home of GRID Finance’s headquarters

Five years ago, a small company in Dublin put Ireland’s fintech scene on the map by advising local SMEs to “get on the GRID.” GRID Finance, founded by Derek F Butler, introduced a peer-to-peer lending model to Irish businesses at a time when the industry was just beginning to form. From the beginning, the company’s secret sauce was the GRID Score, a proprietary credit score system that enabled the company to take on the difficult task of assessing the risk of SMEs.

Butler, who I sat down with in September at the company’s headquarters alongside Chief Marketing Officer Andrea Linehan, says the GRID Score is an SME’s “passport to the economy.”

It’s the upper tier that GRID caters to while providing a unique product within Ireland known as a cash advance. The setup is similar to Square and PayPal in the US in that the loans are repaid via a percentage of an SME’s credit/debit card transactions on a daily basis. The term of the loan is fixed and the costs are reasonable.

“The reality is that small business funding and financing is a high risk,” Linehan says.

“There’s no subprime market here,” Butler adds. “We’re trying to build a prime cash advance market versus a subprime one in the US.”

Grid FinanceLike GRID’s competitors in the industry, Linehan believes that finance in Ireland will transition online. “Ireland is still dominated by two banks,” she says, referring to Bank of Ireland and AIB. The company, therefore, believes it has a good head start on the impending shift. But in the meantime, they’ve learned how important it is to be embedded in the local communities. To that end, GRID has an office in Limerick, Ireland’s third largest city with 95,000 people that’s located about 200km away from its headquarters in Silicon Docks.

And their mission goes beyond providing funds. “If we can help get [SMEs] ready by giving them the tips to improve their financial health right now, let’s try and do that,” Butler says. “We want them to understand their financial health versus their cost of capital.”

While the company has sustained modest growth, Business Post reported earlier this month that GRID plans to raise €100 million in 2020 to provide even more loans through its platform.

Butler likens GRID’s mission to the MetLife Foundation, promoting financial health and building stronger communities. “We do a lot of work with the MetLife foundation because of the impact they have,” he says. “It’s why I launched GRID Finance.”

deBanked Throwback Thursday

December 26, 2019
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As we count down the end of the decade, I thought you might want to take a glimpse of how the decade started here at deBanked. Below is a snapshot of the main merchant cash info page that was on our site in December 2010!

CLICK HERE FOR A CLEARER IMAGE

debanked in 2010

When 2010 ended, I published the following predictions for 2011:

  • Businesses will increasingly face pressure on past due taxes and as a consequence would face smaller funding offers with higher costs.
  • Credit card processors will venture into funding their own clients rather than rely on 3rd party MCA companies.
  • Brokers will increasingly begin to fund their own deals.
  • Increasing competition will create downward pressure on costs.
  • It will become harder for desperate businesses to obtain funds from anywhere, including MCAs.

Might some of that be true of the recent years?????

You can still find some of our original 2010 content here.

Online Small Business Borrowing Decisions Not Driven By Costs or Disclosures, Fed Study Finds

December 23, 2019
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uncertain termsA new study on transparency conducted by the Federal Reserve on non-bank small business finance providers indicates that borrowers are not driven by costs or disclosures. The #1 reason for a business to apply with an online lender was the speed of the process, the study showed. #2 was the likelihood of being funded. Cost ranked near the bottom of the list.

While a focus group pointed out many areas that are ripe for improvement, the Fed was left to conclude that “clearer information—in the form of standardized disclosures—will not necessarily alter the decisions of some small business borrowers about whether and where to obtain financing.”

The Fed further commented that some loan applicants revealed that they had already “committed the expected loan proceeds” before a lender could even present rates and terms. Others borrowers wished they could know their approved rate and terms before even providing a lender with any data. These findings seem to undermine the potential value of enhanced uniformity in disclosures.

The report, which attempts to paint a bleak picture of online lending in spite of the data, seems to validate what online lenders have been saying all along, that speed is supreme. Even where transparency is lacking, it cannot be overstated that big banks scored lower on transparency than online lenders did.

Uncertain Terms: What Small Business Borrowers Find When Browsing Online Lender Websites evaluated BFS Capital, CAN Capital, Credibly, Fundation, Funding Circle, Kabbage, Lending Club, National Funding, OnDeck, Rapid Finance, PayPal Working Capital, and Square Capital.

1 Week Until deBanked CONNECT MIAMI

December 19, 2019
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For ISOs Only — How To Develop Your Factoring Brokerage Business (Part 2)

December 12, 2019
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In Part 2, we’re going to focus on 3 major areas:

(1) What is Factoring and How Does it Work?
(2) What Are the Costs?
(3) How Do You Qualify?

We’re also going to touch on HOW TO find factoring funders.

Gerald Watson - The Watson GroupWhat is Factoring and How Does it Work?

Factoring actually dates back to 2000 BC but got going in the US during the 1600s when colonists sought “advance payments” on tobacco, cotton, etc., shipped across the Atlantic to England. Today, it’s a TRILLION DOLLAR INDUSTRY worldwide, involving commercial banks, asset-based lenders, Fintech companies, and private hedge funds all over the world. And a million years later the purpose of factoring is the same; speed up cash flow by leveraging receivables, while waiting to get paid.

In a nutshell, much like an MCA, factoring is an advance against “future invoice proceeds.”
However, unlike an MCA where the advance is largely based on bank statements, with factoring, advances are based on the number of confirmed invoices the merchant has outstanding with their approved B2B customers. The invoice(s), which is the asset, serves as COLLATERAL.

So, while an MCA funder “looks backwards” at bank statements to help determine eligible amount, the factoring funder “looks forward” to determine eligible amount based on approved invoices.

Factoring advance rates typically range from 70% to 90% of the invoice face value, and are based on volume, industry type, etc.

There are two major elements required for factoring to work. The first is the merchant must be doing business with a credit-worthy B2B customer. Approval isn’t based on the financial strength of the merchant, but on their customer, i.e. the company paying the bill.

The second major element is that, in addition to being credit-worthy, the customer must agree to send invoice payments DIRECTLY to the funder. This provides the funder with an assurance of payment and substantially reduces the risk of re-payment or default.

So, unlike an MCA where payment is on a daily or weekly basis, the factoring advance has NO PAYMENTS, and actually pays itself off once the invoice has been paid. The funder then deducts the advance along with their fee and wires the balance to the merchant.

With no payments and invoice proceeds automatically paying off the advance, I refer to this as a “SELF LIQUIDATING LOAN”. It’s also “ELASTIC”, which means the more confirmed invoices the merchant has outstanding, the more funding they are eligible to draw. It’s like having a revolving LOC with no payments………of course unless the customer doesn’t pay, right? Good question!

So, here’s the answer: There’s actually two types of factoring; (1) RECOURSE FACTORING, which means if a customer doesn’t pay the invoice, the Merchant is financially responsible for the advance, and (2) NON-RECOURSE FACTORING, which means they’re not.

Here’s the process in a nutshell: Merchant submits app and doc checklist for preliminary underwriting approval. Funder issues term sheet, and if accepted by Merchant, underwriting and due diligence is completed. A closing and funding docs package are submitted to the merchant, and upon execution, the funder is prepared to start confirming and funding invoices.

“WE ACTUALLY HAD A $13 MILLION FILE FUNDED IN 48 HOURS!”

How long does it take from start to finish? Depends on how much hair there is on the file. A clean file can take as little as 5 to 7 business days. A file with a lot of hair can take much longer. We actually had a $13 million file funded in 48 hours! That guy was pretty happy and so was I. It was an acquisition with a deadline. So, here’s what to tell your merchants with regards to timing: “funding is not calendar-related, but event related”. In other words, once the required events are completed then funding can occur.”

What Are the Costs?

There are several major factors that determine cost, rate, terms. volume, invoice size and funding frequency, industry type, risk, etc. Every funder has their own respective rate and fee schedule. Some charge application/due diligence fees while others don’t. Some charge origination and/or admin fees, while others don’t.

Some funders base their pricing on APR, with rates as low as Prime + 3 to 5%, while others have all-in rates typically ranging from 1.5% to 3% per month. After the first 30 days, monthly rates are typically broken down in 10 or 15 day increments (pro-rating). As a result, the ACTUAL COST of factoring in dollars and cents, is based on the amount of time the advance is outstanding, from the funding date to the date the invoice payment is received by the funder.

Here’s an alternative perspective on cost: Factoring is like “renting money on a daily basis,” where the funder essentially takes “equity in the transaction” versus equity in the business. Comparing the bottom-line cost with the bottom-line benefits is the key. But at the end of the day, “the highest price you pay for money is the price you pay for the LACK of it”.

Just like with MCAs, make sure you understand the rate structure, terms, and fees charged by your factoring funder, and how to calculate the cost in dollars and cents as well.

How Do You Qualify?

Factoring approvals have 3 components: The first is the merchant. Again, every funder has their own approval criteria and document checklist. Some require minimal info, while others ask for EVERYTHING including a pint of blood. While most only require one month bank, approval is not based on deposits, or how well they manage their account. Remember their primary focus is on assessing the quality of the receivables, determining if they have sufficient gross profit margins, ensure they are in good standing, and address any “deal killers”, i.e. tax liens, judgments, or UCC filings in first position, which is where they need to be, in most cases. (We actually have funding partners who will factor in second and third positions)

The second factoring approval is the merchant’s customer(s), typically referred to as the debtor. This is determined by the funder who looks at things like D&B, PAYDEX Scores, and other proprietary industry databases. In some instances, a lack of secondary financial/credit information on the customer can be offset through their payment history with the merchant. In other instances, the funder may require bank and trade references if no history exists. Candidly speaking, best practices by the merchant says they should already be doing the same thing; i.e. credit qualifying their customers, whether they need funding or not, unless it’s a large, well established company or government agency. The fact is, extending terms to someone you don’t know can be risky because ‘all businesses may not be good businesses.’ Let’s face it, it’s all about getting paid, right?

Ever heard this horror story; “I need an MCA because I got burned by one of my customers who strung me out and never paid me!” Too bad. They should have picked up that $100 bill off the street! Just kidding!

“…HALF THE ORDERS HAD ALREADY PASSED THE CANCELLATION DATE!”

The third factoring approval is on the deal itself, i.e. the purchase order or contract the merchant has with the debtor. There are over 15 different things the funder will look at to identify existing or potential funding issues. Here’s an example. I recently got a referral for a client who had 63 different purchase orders going to 63 different locations for the same large customer, but BEFORE he started shipping, half the orders had already passed the CANCELLATION DATE! What do you think the chances are of the deal being approved for funding? Don’t know yet. Will let you know when I get to part 3 of the series. Keep your fingers crossed and so will I.

Typical things the funder looks at are payment terms, default clauses, customer signature, offset clauses, just to name a few. If you’d like a complete list, just shoot me over an email.

How to Find Funders

Finding factoring funders is easy. Just google FACTORING and you’ll get a whole bunch. What’s NOT so easy is determining the “best fit” for YOUR merchant because one size does not fit all. Over the years, some of the biggest horror stories I’ve heard from both funders and clients was a relationship that went bad because it was not the best fit. But remember this; just because you picked the wrong spouse doesn’t mean getting married is a bad idea. Determining the best fit is one of the key functions for your factoring brokerage business.

Some funders you will find specialize by industry, i.e. transportation, medical, staffing, construction, while others don’t. Some can move quickly while others take two weeks. Some are more flexible than others. Some focus on A-credit Merchants and have the lower rates, while others work with start-ups. Always find out UPFRONT their approval criteria and constraints. Shoot over an email and I’ll send our list of the Top 10 Questions to Ask Before Selecting a Factoring Funder.

Merchant Growth Partners with goeasy to Provide Funding via Physical Branches

December 11, 2019
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Merchant Growth goeasyThis month Merchant Growth, the Vancouver-based alternative finance company, announced its partnership with goeasy Ltd. that will see Merchant Growth’s services being offered in goeasy branches throughout Canada. Beginning with British Columbia, Alberta, and Saskatchewan in 2019, Merchant Growth aims to have expanded to the remaining provinces in the first quarter of 2020.

Under the partnership, goeasy will receive compensation from Merchant Growth for all loans made through them while Merchant Growth will provide the capital.

“goeasy is a unique Canadian success and they’ve done that by being disciplined managers, by putting their customers first, and by building a great reputation for themselves in the industry,” said David Gens, Merchant Growth’s President and CEO. “And what we see in them is an ideal partner in that they have the market reach in terms of brand recognition and locations around the country.”

It is the latter of these factors that make the deal stand out. Given the industry’s standard of digital applications, goeasy and Merchant Growth’s return to brick and mortar branches that offer live human managers, clerks, and even physical paper, marks a turn back towards more historical methods of doing business.

Gens commented on this, stating that “there’s something to be said for face-to-face interactions and for that reason I don’t think you’re ever going to go down to having no bank branches … Having a physical location where you can chat with people about your financial needs is something that will always exist as far as I can see.”

Investors Receive Recovery Checks in 1 Global Capital Case

December 9, 2019
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money exchangeFor all the noise surrounding the collapse of 1 Global Capital, investors recently recovered nearly $112 million, equating to about 40 cents on the dollar so far.

“We continue to pursue collections where we can and legal actions where we can, and we’re working to see what else we can garner for the estate,” 1 Global’s trustee told the SunSentinel.

The sizable recovery thus far could probably be attributed to the large outstanding A/R the company had on its books. Although prosecutors have characterized 1 Global as a ponzi scheme, the company did legitimately engage in the business it claimed to and it had amassed a massive portfolio of receivables. 1 Global also still had a significant amount of cash on hand when it declared bankruptcy last year, a move it undertook mainly because parallel investigations from the SEC and US Attorney’s office had become paralyzing.

Approximately 3,750 investors have been paid out.

The Broker: How Gerald Watson Mixes Factoring with MCAs

December 3, 2019
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Gerald WatsonRole?

I’m the owner of The Watson Group, a factoring broker company.

 

How did you end up in the industry?

I got started in what I call the contract financing industry about 35 years ago, kind of by accident. I had spent years working with a large management consulting company in Boston and we had some major contracts in the DC area. I was on an assignment there and my son was in school there with another kid, and I met the parents and the dad told me what he was doing and he said I needed to come by the offices to check it out.

I really had no intention of going at all, but finally to get this guy off my back, I went by one day and he showed me the business they were in. When I left I was totally on board. I had been working for several years in management consulting, but this was all new and I was excited because it was helping real businesses solve real problems and it was very hands-on.

I came on board and I’ll never forget my first day on the job: I didn’t know anything from anything – rights, factoring, contracts financing – this was years before the MCA industry even existed, and my boss said he just got a job, 911 call from a printer and they needed some funding help. “Can you help them? Why don’t you come ride with me? It’d be good on the job training for you.” And so we sat down with the guy and found a solution for him. And to this day he hasn’t had to close his business.

 

How were those early days?

Interesting because this was before the internet, almost before cell phones, in fact. I remember at one point when I was being hired, the Motorola flip phone was just coming out and they were like $1,500 around 25 years ago. And I said okay, I’ll take the job but you’ve got to give me one of these Motorola phones, so he did and it was great but this is before the internet and I didn’t really believe in traditional advertising or mailing out brochures, so the strategy I take is called “institutional referral-based marketing.”

In a nutshell, what that is, is working with various institutions that refer clients to use on a regular basis and as part of that process, I’d give talks or seminars and workshops and sit on panels and teach some of these referral groups how to assess deals and package them and get them ready for funding. You know, develop a pretty solid reputation in the industry for what we did and even today we’re 100% referral.

 

What can you tell me of the style in which you approach deals?

The approach that I’ve always taken is really a diagnostic approach, we kind of almost see ourselves as doctors. If you go to a doctor and you have pain, you may not know what’s causing that pain, you just want to feel better. And so what does the doctor do? They have to understand what’s going on in order to make you feel better.

Client’s got a pain: “I need money. I need working capital and I need it now.” And so we get a clear picture of what their objectives are and what they’re looking to accomplish: how much they need, what they need it for, timing, etc., and like a doctor, we go through a series of diagnostic tests, which can involve getting a list of documents – financials, bank statements, whatever it is – and going through them. You’re drilling down on where they’re at and coming up after that, coming up with what I call a treatment plan or funding strategy.

Here’s the key: you’ve got to ask the right questions, because if you don’t ask the right questions you’ll never get the right answer. All too often what a broker will do is they’ll get right into solutions and answers and talk about why what they offer is the best or why their funder is the best thing since sliced bread without having a picture of what their client’s true needs are in this situation. So I have a whole series of quizzes I’ve done a million times so I don’t need to write them down. I know what they are but I systematically go through ‘em, and we call that a preliminary underwriting interview.

 

What is the value of combining MCAs and factoring?

Funding solutions typically involve multi-funding products. And that’s where the advent of MCAs came in, and why they’re such a real asset. Because you meet a client today and it’s Wednesday, or Tuesday, hell maybe even Thursday, and the guy’s siting there with half a million dollars in receivables that we can convert into cash but we may need 3 days to do it, but he needs 2 days.

MCAs are a great product because we can step in, solve the problem, get him an immediate injection to stop the bleeding, and take it out from factoring proceeds a few days later. So it’s a great compliment and tool and this is something I’ve tried to educate on both sides. It’s not a threat it’s a complement. The key is how you use it. It’s like two medications. You go to a doctor, they’ll prescribe a list of meds, the key is to make sure they all complement each other.

 

Any advice for those looking to combine MCAs and factoring?

The first thing you want to do as an ISO who’s interested in developing a factoring brokering business is to understand the basics of factoring: what is factoring, how does it work, how do you qualify, how much does it cost?

The second thing you want to do is look internally to develop your customer base and the quickest customer base is what we call the low-hanging fruit. These are existing merchants that didn’t fund. Any merchant that is in B2B, whether they got funded or not, is a candidate for factoring. So go back through the files, look at the database and you may find out you probably have a lot more than what you ever imagined.

The third is to develop your database of funding resources – of funders.

And the last thing you want to have is a game plan. What’s your game plan and what’s your strategy for moving forward with your factoring broker business?


Connect with Gerald on LinkedIn

Broker Fair / Black Friday ONE-DAY ONLY Special Price

November 28, 2019
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Broker Fair 2020

Broker Fair Returns to New York City on May 18, 2020. Take advantage of this special ONE-DAY only discount code and get 29% OFF THE EARLY BIRD PRICE. This incredible deal ends at 11:59pm EST on 11/29/19.

Promo code: brokerfair29

Register here

Broker Fair’s two previous annual events sold out in advance. Hundreds of brokers from the commercial financing, merchant cash advance, and small business lending industries will be in attendance this year. See you at Broker Fair!

Flender Makes BIG Mark in Ireland’s SME Lending Market

November 26, 2019
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Dublin IrelandIreland can seem like a small place, so much so that on my way to meeting with Colin Canny, Flender’s Head of Partnerships, I quite literally bumped into Flender’s co-founder & CEO Kristjan Koik who was walking through Dublin’s Silicon Docks. I recognized Koik from the who’s who catalogue of executives I had compiled before traveling abroad to explore the Irish fintech scene. He was cordial and polite. And yet through his demeanor I sensed there was more, that there was a story to be told even if it was not ready to be shared.

The following month Flender would reveal remarkable news, a new €75 million funding line, bringing their total to €109 million raised since the company’s founding in 2015. The company is backed by Eiffel Investment Group, Enterprise Ireland, entrepreneur Mark Roden and former Ireland rugby player Jamie Heaslip.

This large amount of funding, even by UK or US standards, makes Flender stand out, and so when I finally meet with Canny on that warm Fall day in September, I’m pretty thankful he afforded me the time.

Flender, Canny explains, is derived from Flexible Lender. The pamphlet he produces and hands to me says that their idea is simple, to provide businesses with the funding they need and ensure the application process is fast, easy, and transparent.

Application details for products like term loans and merchant cash advances require the usual stips like historical bank statements, a profit & loss statement, and a balance sheet. But there’s also a section quintessentially Irish, that is that it can be beneficial to submit your last 2 years herd numbers if you’re a farmer, complete with your last 12 months Milk Reports and property acreage figure.

Flender GuideCanny explains that Flender is not a high-risk fall-back lender, but rather the opposite. “Our credit process is extremely tight,” he says, “in line with banks.” And with good rationale, seeing that the company is still somewhat reliant on a peer-to-peer funding model. More than half of individual peers on the platform are Irish but Canny says that it’s not unusual for non-residents including Americans to lend on the platform as well.

Canny says the Irish market is very “community based.” The transparency of the marketplace aligns with that characterization. Like other peer-to-peer small business lenders in Ireland, borrower identity is publicly accessible on the platform, as are the terms of the loan. Anyone can view the business name of a prospective borrower on the website, the address, a bio, and even their “story.”

Flender taps several marketing channels like Google Adwords, radio, direct sales, and even brokers. Canny says they generate an underwriting decision in as quick as 4-6 hours and fund a business in as little as 24 hours. Borrowers like the product so much that many renew. Seventy percent of the SMEs in the country are peer-to-peer bankable, Canny explains, creating a wide playing field to target.

Meawnwhile, CEO Kristjan Koik told the Irish Times that the top 3 banks in Ireland have 92 percent of the SME lending marketshare so there is still a ton of opportunity for non-banks like Flender to grab hold of.

As for how the massive credit line impacts them going forward? Koik told the Times that they would be cutting interest rates by up to 1 percent across their various loan products. Interest rates now start as low as 6.45% and terms range up to 36 months.

As Canny and I part ways I present one final question, will Flender be expanding abroad? I get no definitive answer. He was cordial and polite, and yet I sensed through his demeanor that there was more, perhaps even a story in the works that was not yet ready to be shared.

Merchant Cash Advance Valuation Dynamics

November 20, 2019
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Understanding the differences in cashflow dynamics between small business loans and MCAs is crucial for investors when valuing these alternative investments. A small business loan usually has familiar terms such as a principal amount that is paid back with interest over time, typically with a monthly payment schedule. An MCA agreement does not have these terms. Instead, the merchant agrees to sell a certain percentage of future revenues generated by the business, up to a specified “Purchased Amount,” to the funder in exchange for a lump sum of cash (the “Funded Amount”). MCAs often have an initially agreed-upon dollar amount that is debited daily by the funder via ACH. However, merchants have the ability to reconcile the total debited at the end of each month based on their actual sales activity and the agreed-upon percentage. If the merchant’s sales are slower than projected, the MCA company owes the merchant back a portion of the month’s debits to be in line with the contractual percentage of sales, and the daily ACH amount may be adjusted.

The preferred approach for valuing MCAs is discounted cashflow analysis. Given the nuances of MCA cash flow dynamics, modeling should be done individually for each MCA. Projections should be modeled using assumptions that are supportable from historical data and the methodologies used should be transparent. This modeling should incorporate not only the cash flow from the merchant, but also the cash flows arising from deal mechanics such as commissions paid, origination fees and ongoing fees as well as expected charge-offs. Since the funder cannot know for certain which merchants will realize revenues higher or lower than projected or default when underwriting the MCA, any attempt at an accurate projection of future cash flows must incorporate probabilities for scenarios where the timing and amount of cash flows is different than the underwritten scenario. Because businesses in a particular sector may have similar historical cash flow behavior, each MCA should be analyzed based on the historical experience of MCAs with similar characteristics such as business type, advance amount and purpose for taking out the MCA. A smaller but related issue is incorporating the probability that the merchant chooses to pay off the Purchased Amount via a lump sum payment and negotiates a discount to the Purchased Amount.

Examining payment behavior involves creating payment curves that compare the cash flow received at each point in time, expressed as a percentage of the Purchased Amount, to the cash flow projected to have been received at that time during underwriting. This curve is the “Cash Flow Curve,” and its steepness is the “Cash Flow Speed.” More specifically, the Cash Flow Speed is the cash flow received to date divided by the cash flow projected to be received as of that date during underwriting. A perfectly underwritten MCA would be one on which no reconciliations are made and each daily ACH goes through without issues, meaning that all of the Purchased Amount was received exactly as originally projected, and its Cash Flow Speed would be 100.0% every day. As with most things, this does not work in practice like it does in theory. Some merchants will have ACHs which fail, make additional payments to make up for failed ACHs, renegotiate the daily ACH amount as part of a reconciliation or after a failed ACH, turn off ACH completely or have other issues. Analyzing the Cash Flow Curve for each MCA and comparing it to its cohort is essential to understanding performance drivers when projecting future cash flows.

To illustrate a possible MCA agreement, assume a merchant sells $70,000 of future sales (the Purchased Amount) to the funder for $50,000 (the Funded Amount). The Purchased Amount is to be received via ACH daily, with $500 debited per day for the next 140 business days based on projected revenues. In this example, the Gross Factor is 1.40, i.e. $70,000 divided by $50,000. Assuming that the funder pays a commission of 8% of the Funded Amount, the Funder’s Cost is $54,000, and the Net Factor is 1.30, i.e. $70,000 divided by $54,000. The graph below illustrates some possibilities of what the actual Cash Flow Curves might be.

mca curve 1

Received as Projected: depicts an MCA where debits via ACH are received each day, and the ACH is unchanged until the full Purchased Amount is received. Its Cash Flow Speed at the measurement day (and every day) is 100.0%.

Pays Off Early: depicts an MCA where the merchant elects to send additional cash flow to the funder, eventually negotiating to pay off the MCA early after 49 business days with a discount to the Purchased Amount negotiated with the funder. Its Cash Flow Speed at the measurement day is 121.4%.

Defaults: depicts and MCA where the ACH debit fails with increasing frequency until the bank account is closed and the funder takes the merchant into litigation for the remaining Purchased Amount (the “Defaulted Amount”). Note that the funder may be entitled to recoup amounts beyond the Defaulted Amount in litigation. Its Cash Flow Speed at the measurement day is 71.4%.

Slower than Projected: depicts an MCA where ACH fails sometimes, but the merchant does not shut down and the funder receives cash flow slower than projected. An example of a one-off reconciliation payment is included, assuming the merchant had not been paying in accordance with the contract and agreed to make a “catch-up” payment. After 140 days only $59,000, or 84.3% of the $70,000 Purchased Amount, has been received, although the funder would likely still expect to recoup most or all of the remaining Purchased Amount. Its Cash Flow Speed at the measurement day is 85.7%.

Used for Modeling: When analyzing this MCA on day 0, before any cash flow behavior is known, each of these possibilities (as well as others) would be incorporated into the analysis on a probability-weighted basis. An example of a probability-weighted average Cash Flow Curve is shown. After 140 days 85.7% of the Purchased Amount has been received, although cash flow is assumed to continue to be received until 210 days (150% of the underwritten projection), with 90.3% of the Purchased Amount received by then. Its Cash Flow Speed at the measurement day is 104.6%.

Based on the Funder’s Cost, the chart below shows some return metrics based on these Cash Flow Curves.

mca curve 2

As the industry matures and attracts more capital from institutional investors, it is increasingly important to have clearly defined metrics in place to evaluate underwriting effectiveness, assess relative credit performance of originators or cohorts of MCAs, and to perform valuations. Standardizing on terms such as Funded Amount, Purchased Amount, Gross Factor, and Net Factor and concepts such as Cash Flow Curve and Cash Flow Speed should ease the understanding of MCAs by eliminating ambiguity amongst various participants in the industry.