What Would a Biden White House Mean for The MCA Industry?
November 14, 2020
What do small business finance companies think about the reality of a Biden White House? Will there be dramatic regulatory changes, massive new government stimulus, or significant differences in coronavirus policy?
“Not likely,” according to the head of two funders we spoke with. The CEOs of Greenwich Capital Management and Spartan Capital Group seemed to agree that overall, not much would change.
“We don’t expect any major changes to the industry to MCA,” Frank Ebanks, Spartan Capital owner, said. “I don’t think it would be any different than what we saw and experienced under Trump. Some states, some federal organizations attempted to regulate the industry, that’s already on the way, and that might continue: I don’t see it picking up any intensity.”
Ebanks’ firm has been around for four years, funding deals of up to $2 million. In that time, Ebanks has seen states like New York and California pass lending regulation and renewed activity at the CFPB, but never a fed-wide push to take on small business lending.
Nathan Abadi of Greenwich Capital Management, believes there might be short term benefits under Biden.
“In the short term, I think it’s going to be pretty good for people in our industry because under a Biden administration, we’ll see more bailouts go to SMBs than we would in a republican administration,” Abadi said. “If small businesses get bailed out, that means they can make their payments, and everyone is winning.”
He was less optimistic in the area of regulation, however.
“It’s necessary for our industry to have some vetting process and some regulation, as you saw happen with Par recently,” Abadi said. “All these other companies are taking in private investments from multiple investors, not necessarily accredited, and the money kind of goes into a black hole.”
Abadi further said that he thought while regulation is good for those who play by the rules, Democrats can go overboard.
Ebanks, meanwhile, thinks there is saftety in being a B2B business.
“Transactions between two individual companies are hard to regulate, especially when it comes to contracts,” Ebanks said. “That will stand and be around for a long time regardless of the government or who the president is.”
Ebanks continued to point out that an incoming administration would avoid changing anything that might hurt the economy now more than ever.
“I think that the President-Elect will put teams together that will attack the coronavirus situation aggressively and will neutralize it rather than try to live with it,” Ebanks said. “It’ll be tough for a month or two. And after that, it will be sort of back to normal, with just heavy aggressive localized actions.”
Pearl Capital is BACK
November 5, 2020
Pearl Capital was among the many small business finance companies that hit the pause button in 2020.
Now it’s BACK.
The company announced today that it was resuming funding MCAs after a long stretch of facilitating PPP loans, of which it processed more than $1.75B through a partnership it had with Cross River Bank.
“Pearl did not default on its senior credit line due to its superior underwriting and has added $250 Million in committed financing to expand its activities,” said company CEO Sol Lax. “If you are a small business and you have survived COVID, you shouldn’t have to shut your doors because you have limited access to capital. We are going to be there for small business both in further iterations of PPP as well as MCA.”
Pearl expects to resume at full speed rather than with limited capacity and highly restricted guidelines. According to the announcement, “Pearl’s ISO Partners can expect lighter stipulation requirements with fewer requested documentation than before and updated pricing. Virtually all business types are eligible for funding from Pearl including high risk industries like auto sales, real estate, home-based businesses, and insurance.
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“We’re thrilled to have the ability again to continue to provide financing for companies during an especially difficult time for businesses across the country and give much needed financial support to businesses,” Lax said.
Shopify Capital Originated $252M in MCAs and Business Loans in Q3
October 29, 2020
Shopify Capital, the finance arm of the 2nd largest e-commerce platform in the United States, reported making $252.1M worth of merchant cash advances and loans in the 3rd quarter. This is a 79% increase over the same period last year and spans three markets, the US, UK, and Canada. It’s also a quarterly record for the company.
The figure also solidly trumped the numbers recently reported by rival OnDeck.
Shopify CFO Amy Shapero said that the company has maintained loss ratios in line with historical performance.
“Businesses need financial resources to survive and fulfill their potential especially in these uncertain times and as you heard just now capital greatly increases the value of Shopify to our merchants,” she said during the earnings call.
Revisiting Miami in 2020
October 23, 2020deBanked reporter Johny Fernandez flew down to Miami in September to find out how the South Florida non-bank small business finance industry has been getting along since covid. The following are some excerpts of interviews:
Jordan Fein, CEO of Greenbox Capital
“I’d be lying to you if I told you that, well it was fine for us. It wasn’t fine for anybody. We got hit pretty hard. I’d say that anywhere between 20 – 24% of our Canadian and about 25 – 28% of our US market got wiped out. And we shut down funding from mid-March to the end of April and we started funding again in early May. We’ve just increasingly been bringing back people from furlough and getting our legs back under us and now I think we’re really cooking right now.”
Craig Hecker, CEO of Bitty Advance
“So I think [the covid crisis] taught us a lot. And I think that when you face challenges like this pandemic, it really pushes you to reinvent yourself or reinvent certain parts of your business that you never thought were possible. And one of those things that we’ve learned is that we have a lot of folks that prefer to work at home, they’re actually more efficient working from home, they’re not in any hurry to come back into the office setting. Of course, we have certain employees that their jobs require them to kind of be with other employees, etc. but I think it’s really forced us to adapt, and to just embrace the new normal.”
Larry Bassuk, President of Idea Financial
“I think that we’ve been consistent in our risk management approach from the beginning. When we first surveyed the alternative lending space to see where we thought the best opportunity was for Idea Financial, we decided to focus on the higher credit quality segment of the market. our credit standards reflect that, our risk management principles reflect that, and quite frankly, our product reflects that. So during the covid crisis, when it was very acute in March, April, May, we got to see in real time, how our risk mitigation principles were functioning. It was a real test of all the theory that crisis, we got to see things shake out, and we got to see things being proven. A lot of assumptions that we were very strict on, really helped us manage the crisis. Going forward, we see that we’re going to be doubling down on those risk management principles, doubling down on how we underwrite and keeping a very close watch on how the businesses perform pre-covid, during covid, and then hopefully post-covid.”
You can watch the full 12 minute, 35 second TV episode deBanked produced here.
deBanked Visits Local Commercial Finance Brokerage – Horizon Funding Group
October 22, 2020deBanked reporter Johny Fernandez visited the storefront office of Horizon Funding Group, a commercial finance brokerage located in Brooklyn. The company is owned by brothers James and John Celifarco.
Greenbox Capital on Official Panel to Aid Section 1071’s Rollout
October 21, 2020
This week, Greenbox Capital, the Miami-based alternative finance company known for its MCA and SMB financing, announced they are serving as a Small Entity Representative (SER) to the Consumer Financial Protection Bureau (CFPB) as the organization proceeds with the rollout of Section 1071 of the Dodd-Frank Act.
“I am representing, and Greenbox Capital is essentially representing, the industry,” CEO Jordan Fein said. “There are some banks, there’s Funding Circle, but other than that, it’s Greenbox Capital serving in the industry.”
Fein, who founded Greenbox in 2012 and has since facilitated MCAs and business loans across America, Puerto Rico, and Canada, wrote in a press release that it was an honor to be selected to provide feedback on Section 1071.
“Over 2 million businesses across the U.S. are either women or minority-owned,” Fein wrote. “It is vital they can secure funding as easily as non-minority-owned businesses.”
Congress passed the Dodd-Frank Act in 2010 in response to the Great Recession. To further protect consumers, the CFPB was born. Section 1071, an amendment to the 1974 Equal Credit Opportunity Act, mandates financial institutions report demographic information to the CFPB. But much was left undefined about how to go about doing that and who would technically be subject to it.
Ultimately, the intent behind the law was to measure potential disparities among factors like the race and gender of applicants. Ten years later, the rollout is finally moving along.
As part of this, the CFPB created a board of firms representing the affected industry, on which Greenbox sits, to ensure the law works with the industry, not against it. The first panel was on October 15, in compliance with the 1996 Small Business Regulatory Enforcement Fairness Act (SBREFA.)
“They’re going through the SBREFA process, which is a structured process where they have a panel of industry representatives, and they share what they’re planning to do,” Fein said. “They run it by companies like us and we give our opinion and talk about how we think companies will be impacted.”
According to an invitation letter the firms received, they will have until November 9 to respond.
Fein said Greenbox would ensure any suggestions it made would positively impact the industry. Especially during a pandemic, Fein said it is essential to create regulation with firms in mind.
Steve Denis Talks About SBFA Study: APR is a Bad Metric For SMB Loan Transparency
October 19, 2020
In response to regulatory bills in California and New York that will enforce APR disclosures on small business capital providers, the Small Business Finance Association (SBFA) funded a study by Kingsley-Kleimann to find out if APR is a good metric to use for business loans.
Steve Denis, the Executive director of the SBFA, said his group supported the study because the states should test concepts with actual small business owners before passing regulation. In the NY disclosure bill awaiting signature, Denis said there was no concept testing. Some of the companies that support the bill might not have even read what it stipulates.
“You have a group of companies that are pushing these types of disclosures, for no reason other than their own self-interest,” Denis said. “We’re fine with disclosure, we are all for transparency, but it needs to be done in a way that we believe is meaningful to small business owners.”
In qualitative testing of 24 small business owners and executives who have experience taking commercial loans, the study concluded participants did not understand what APR was. The study found that the total cost of financing model was a better way to understand and compare options for their use.
“As one participant, when asked to define APR, answered: ‘I feel like you are asking a kid, why is the sky blue?’ (Participant 3, NY).” The study concluded, “In other words, [APR] is ever-present yet also inscrutable.”
Kingsley-Kleimann is a research-based organization that studies communication and disclosure for government agencies like the FTC and private or public business. Participants were selected from Califonia and NY.
Denis said that the findings show what SMB lending companies have already known- Anual Percentage Rate is not a useful metric for short term loans. Many do not know that APR represents the annualized cost of funds for the loan term, with the fees and additional costs included.
“People don’t know what APR is; it confuses them,” Denis said. “They know it’s a metric they should use, but they don’t know why. The APR is such a marketing tool now, it’s not a valuable tool.”
The study showed most respondents thought APR was the same as an interest rate. It’s not.
Denis said using an annualized rate for shorter-term loans or SMB loans that have no ending date worsens the problems. In those cases, firms estimate an APR, and it is inaccurate.
“When you have a merchant cash advance, there’s no term,” Denis said. “So you have to estimate a term, and I mean that is just a recipe for fraud.”
Denis said that the firms supporting California SB1235 and the New York S 5470/A 10118-A disclosure bill and taking credit for writing the laws are the same companies that will suffer under the strict tolerance of an APR rule.
“The companies pushing this, the trade associations pushing it, they like to take credit for writing the bill in California and writing the bill in New York: I don’t even think they’ve read it,” Denis said. “It’s going to subject their own members to potentially millions if not hundreds of millions of dollars in potential liability [fines.]”
The SBFA is not against disclosure by any means, Denis said, but supported other avenues. The trade group believes knowing the total cost of a loan and the cost and timeline of payments will help protect and inform borrowers better than APR. Firms that support the disclosure bill are banking off the positive press, hoping to be seen as pro-consumer protections but forcing APR will make it harder to compare the actual value of loans, Denis said.
Denis is still optimistic that regulators will work with businesses affected by the incoming legislation. He said the NY legislature and governor’s office, as well as the California Department of Business Oversight, understand the problems of using APR.
“They’re receptive to these arguments, and they know what they’re doing,” Denis said. “The last thing they want to do is pass a bill that’s going to further confuse businesses, especially during a pandemic when businesses are relying on this capital to stay afloat.”
DailyFunder Still #1 Small Business Finance Community
October 14, 2020
DailyFunder, the small business finance forum founded by Sean Murray in 2012, continues to be the leading online community for the industry, according to a recent announcement. The forum recently surpassed 10,000 registered members, in addition to logging more than 2 million page views just in 2020 so far.
“The forum has attracted well over a million visitors since inception and users have historically spent longer than 10 minutes on the site in any given session on average,” Murray said.
deBanked’s parent company fully acquired DailyFunder earlier this year. The announcement was featured prominently in deBanked’s January/February 2020 magazine issue. In it, Murray renewed the website’s objective:
“The mission will be to create a great forum for those involved in day-to-day dealmaking,” he said in a Q&A. “How can we provide a platform that enables those in the industry to make more money? That’s the way I look at it. I think if we can provide that type of value, success will follow.”
