“Our Model Disclosure Legislation”: ILPA’s CEO on New York’s APR disclosure bill
July 28, 2020
Late last week the New York State legislature voted to pass A10118A/S5470B, a bill that might lead to greater clarity and consumer knowledge according to Scott Stewart, CEO of the Innovative Lending Platform Association, a trade association of small business lenders.
Referring to it as “our model disclosure legislation,” Stewart explained in a phone call the work that the ILPA put in to help the bill through as well as what sort of impacts can be expected from S5470B.
“The implications are that small businesses, certainly in New York to begin with, but we think throughout the country, will have the opportunity to really see, understand, and compare various different sources and products for financing their small businesses in terms of their expansion and success. That’s something we’re very proud of and I think that’s something the small business borrower really deserves to see. They deserve to see and understand exactly what they’re doing and when they’re taking out financing products for their businesses.”
What exactly these business owners will understand better relates to the details of the bill, which requires small business financing contracts to disclose the annual percentage rate as well as other uniform disclosures. If signed by New York Governor Cuomo, the bill could have ramifications on small business lenders, MCA, and factoring providers.
ILPA, founded in 2016 and comprised by the likes of Kabbage, OnDeck, and BlueVine; worked alongside legislators to help with the drafting of the bill, assisting with the wording so that it reflects their own SMART Box initiative. This being a form offered by ILPA which lists a number of metrics worth considering when seeking small business financing.
“In January 2019, our team came together and decided that it made sense in the wake of 1235 in California to take a proactive approach to codify SMART Box as legislation in a state, and we selected New York because we felt we had a favorable legislature there,” Stewart said. “I think it’s an incredible achievement. You see the big margins that it passed by in both the Assembly and the Senate and we’re very, very proud of that. I think it really speaks to our cooperative approach to building legislation. And now, as we move toward the implementation phase, we’re going to be in a place where, hopefully in the next six months or so, small businesses will begin receiving really clear disclosures on the capital and credit that they’re trying to take out.”
As noted though, the bill must be signed by Governor Cuomo before becoming law, and then it will affect New York only. Beyond the Empire State though, Stewart is hopeful that ILPA will be able to implement the terms of S5470B in other states.
“Now that we have hopefully harmonized the legislative landscape between California, with 1235, and New York; hopefully we’ll be able to export that to other states. We don’t have any accurate plans at this time to do that, but we feel like if two of the larger states in the nation have very similar disclosure regimes then we’re on the track toward seeing this nationwide.”
Interview With Chad Otar, CEO of Lending Valley
July 28, 2020I recently spoke with Lending Valley CEO Chad Otar, who told us that not only is his funding company still working remotely, but that he’ll probably never return to an office ever again. Watch below:
MCA in Conversation: Where do we go from here?
July 27, 2020
DeBanked Magazine recently posted the “Underwriter’s Song” to highlight an entire industry’s yearning for simpler times, claiming it was the MCA soundtrack for 2020. But I disagree and nominate a different song. You see, growing up in the south with a close-knit family gave way to a childhood filled with generations worth of entertainment. Many of my summers and holiday vacations were spent with the Turner Classic Movie channel playing in the background, and songs from the Oldies Country station on the radio. I tell you this to explain how I am reminded of a song I’ve heard countless times before, and is more applicable today than ever before. That song is “If We Make It Through to December” by the venerable Merle Haggard, a tune whose message resonates with not only the merchant cash advance industry, but our entire country.
The Expectations and Reality
Way back in March and April, the consensus appeared to be an expected return to “normal” by June, while areas hit hardest by COVID-19 would return by July. Yet here we are, teeter-tottering on the fence of moving forward. Now, our country is faced with the possibility of a second wave of shutdowns, rising crime, riots, a fourth stimulus, and funders whose workforce remains remote or have yet to resume funding. The proverbial “goal post” has moved yet again, and with it the expectations of many of us in the industry. Over the past few weeks, I had the opportunity to speak with a number of our referral partners to gauge their thoughts on the current state of our industry. A common theme in our discussions was the desire for validation. Not just as a business owner, but as an employer. They wanted to be reassured that they were taking the best steps forward and not alone in their decision making. To help those seeking the same validation, here is what the majority had to say:
- Yes, all had to terminate or furlough staff on various levels.
- Yes, all adjusted marketing budgets.
- Yes, all are struggling with managing remote employees.
- Yes, all are finding it harder to place files.
- Yes, all are seeing interruptions in relationships with funders and merchants alike.
- Yes, all are competing against the Government’s low-cost products.
- Yes, all are having files killed in late stages of funding or having offers adjusted.
- Yes, all are struggling to predict what comes next.
- Yes, all are managing unrealistic expectations from clients.
- Yes, all are having merchants walk away from fair and just offers.
- Yes, all are struggling to remain motivated.
- And yes, all of you are doing the best you can!
The New Normal
The Word Cloud below describes the state of the MCA industry using our partners’ own words. I find that the overall thoughts are best visualized by taking a step back to see which stand out the most. Our conversation was focused on the industry as a whole, then a discussion specific to Elevate Funding and how we’ve pivoted during these unprecedented times. As you can see, some of the keywords that stand out the most are; merchants, PPP, offers, funders, and marketing.
Much of the conversations focused around merchants and their new funding expectations. Each partner I spoke with agreed the demand for money is there, but the willingness to move forward on offers was very low. This reluctance is driven in part by low cost expectations based on PPP and SBA product rates, as well as uncertainty over increased debt in an unstable market. We’re also seeing a change in merchant demographics, where the mid-sized small businesses who previously did not qualify for SBA loans, now have access to these products. As a result, the remaining merchants whose best option is an MCA are now located on the opposite extreme ends of the spectrum; either those who did not qualify for PPP or SBA EIDL, and the large-scale businesses whose lines were revoked by their bank. Our response as a company has been to adjust our offers to better suit merchant’s expectations, and to shift from underwriting a business owner’s activity to underwriting the consumers’ activity. Monitoring government restrictions down to a county level countrywide and understanding consumer trends has enabled us to further mitigate risk during a time of uncertainty, and not only fund deals, but fund deals that will perform.
Meanwhile, our industry is seeing credit profiles and business profiles that have never applied in our space before, as a decreasing number of providers are available to service current merchants. During our conversations, some expressed a concern over lack of A-paper funders. Many of whom have either paused funding or entirely moved over to servicing PPP products. Another concern was the mental toll of having deals fall apart at the eleventh hour due to fast changing qualifications, variations in merchant revenue, or funders deciding to pause funding at inopportune times. These factors combined with the increasingly common “bait-and-switch” technique of funders providing a large offer, only to change to a much lower offer in the final stages of funding, has left many broker shops and ISOs feeling very discouraged.
The Path Upward and Onward
The conversations were not entirely negative, as new marketing opportunities have opened up with the goliaths of the industry such as Kabbage, OnDeck, Lendio, and Square shifting their marketing dollars towards PPP and SBA products. Many folks are finding their advertising dollars across marketing platforms are stretching further, particularly with search engine optimization. While this opens up an increased likelihood of fraud and in applicants who fall below qualifications, it has enabled many shops to operate on an even playing field with inbound marketing. Many small funders, including Elevate Funding, have already created new products to cater to lower revenue merchants and those directly affected by COVID-19. We’ve already received tremendous response on this change from partners and merchants alike. As merchants slowly shift back towards alternative financing solutions once the government runs out of money for its loan products, we remain optimistic there will be increased opportunities in terms of both volume and quality.
While the Word Cloud highlighted a number of topics, it also highlighted important topics that were not discussed; Expectations, Renewals, Commission, Aggression, and Repositioning.
Expectations in particular, is of note as it is different from opinions. Everyone has an opinion, but there is a tremendous sense of uncertainty going forward and it’s very difficult to create expectations or goals when forecasting is not possible. Many companies are doing away with forecasting models altogether, and switching to a dashboard for production goals and expectations based on real time data.
The drastic change we’re seeing now should demonstrate the importance of renewals and customer retention. Neither of which were brought up during all of my partner discussions. Over time, the industry has moved away from a “residual mindset” to seeking instant gratification of new fundings in the quest for market share supremacy. As funders, we have to ask ourselves; Are we inadvertently throwing out the baby with the bathwater with new deal bonus structures and monthly promotional campaigns to drive new deal growth? Or perhaps, renewals were scarce in discussions because when funders said when funding stopped, they meant all funding? While I can’t speak to each funder’s operations, Elevate has continued to fund throughout the pandemic with established merchants and renewals being a saving grace to drive our momentum forward. In my opinion, client retention has never been more important during an ever-changing landscape.
I was shocked to see commission taking a backseat to approvals and banks during our discussion. But the focus has seemingly move towards approvals and conversions, which will in turn lead to commissions returning. Which brings me to Aggression and Repositioning. The state of our industry is a timid one, and it’s neither the fault of the funders or the merchants. Many experts will tell you that our space was overdue for a market correction of sorts, because many were far too aggressive for far too long. This aggression gave way to bad habits such as lowered underwriting standards and lack of consideration for merchant ability to repay. More and more funders are shifting back to “normal” guidelines, providing fair and just offers. This is an encouraging sign that we are finding our way back to sustainable positive growth. But it will take time for the industry to fully reposition itself. Something that is being delayed by products from the PPP, SBA, and the hope for a third round of stimulus.
But hope is on the horizon. While the pessimists will look at that word as a form of denial, I challenge all of you to take a glass half-full approach. Hope is the confident expectation of good. The change and adjustments we’re experiencing now are what life is all about, and will ultimately lend way to better things. If you’re in need of a little dose of hope, or want a sounding board to know you’re not alone through this, feel free to drop me a line at heather@elevatefunding.com.
Stay safe, be well, and do not lose hope.
New York State Legislature Passes Law That Requires APR Disclosure On Small Business Finance Contracts (Even If They’re Not Loans)
July 24, 2020
Factoring companies and merchant cash advance providers may be in for a rude awakening in New York. The legislature there, in a matter of days, has rammed through a new law that requires APRs and other uniform disclosures be presented on commercial finance contracts… even if the agreements are not loans and even if one cannot be mathematically ascertained.
The law also makes New York’s Department of Financial Services (DFS) the overseer and regulatory authority of all such finance agreements. DFS can impose penalties for violations of the law, the language says.
The bill was passed through so quickly that unusual jargon remained in the final version, increasing the likelihood that there will be confusion during the roll-out. One such issue raised is the requirement that a capital provider disclose whether or not there is any “double dipping” going on in the transaction. The term led to a rather interesting debate on the Senate Floor where Senator George Borrello expounded that double dipping might be well understood at a party where potato chips are available but that it did not formally exist in finance and made little sense to have it written into law.
Senator Kevin Thomas, the senate sponsor of the bill, admitted that there was opposition to the “technicalities” of it by some industry groups like the Small Business Finance Association and that PayPal was one such particular company that had opposed it on that basis. Senator Borrello raised the concern that a similar law had already been passed in California and that even with all of their best minds, the state regulatory authorities had been unable to come up with a mutually agreed upon way to calculate APR for products in which there is no absolute time-frame. Thomas, acknowledging that, hoped that DFS would be able to come up with their own math.
APR as defined under Federal “Regulation Z”, which the New York law points to for its definition, does not permit any room for imprecision. The issue calls to mind a consent order that an online consumer lender (LendUp) entered into with the Consumer Financial Protection Bureau in 2016 after the agency accused the lender of understating its APR by only 1/10th of 1%. The penalty to LendUp was $1.8 million.
Providers of small business loans, MCAs, factoring and other types of commercial financing in New York would probably be well advised to consult an attorney for a legal analysis and plan of action for compliance with this law. The governor still needs to sign the bill and New York’s DFS still has to prepare for its new oversight role.
Passage of the law was celebrated by Funding Circle on social media and retweeted by Assemblyman Ken Zebrowski who sponsored the bill. The Responsible Business Lending Coalition simultaneously published a statement.
Bitty Advance Has Been Acquired By Industry Veteran Craig Hecker
July 23, 2020
There’s new management over at Bitty Advance. The Fort Lauderdale-based funding company has been acquired by long-time industry veteran Craig Hecker. Hecker, who years ago founded, grew, and sold Rapid Capital Funding had originally acquired a stake in Bitty earlier this year, but in the following months purchased the remainder of the business from founders Eddie Siegel and Lenny Duvdivani.
Hecker told deBanked that under his management Bitty has committed capital that will allow the business to fund up to $10 million per month.
“I’m very excited to take my industry experience and knowledge and apply it to this segment of the MCA space,” he says.
As part of the takeover, Hecker says that he has “re-assembled his dream team of technologists and ops” that have been part of his inner-circle for nearly a decade and “were critical in building out the platform” that had made Rapid Capital Funding successful.
Bitty has historically focused on micro-advances and the company plans to really scale up its efforts in the $2,500 – $12,500 small merchant market segment with the aid of automated technology. In addition to this, Bitty has launched a new sales partner portal for ISOs. “That way [ISOs] will always know what’s going on with merchant applications,” hecker said.
“People are Starting to Come Out of Their Caves”: How 2M7 got through the lockdown
July 13, 2020
For 2M7, the Toronto-based alternative funding company, the concept of a global economic shutdown was far-fetched. January and February of 2020 had been some of their best months in business yet. But, like every company, 2M7 was forced to reckon with the unreckonable and feel the effects of an economic lockdown.
“In terms of client onboarding and funding volume, in terms of collecting volume, and in terms of any metric you would look at, [January and February] were two very strong months,” CEO Avi Bernstein explained in a call. “And then in March, I don’t want to say we slammed on the brakes, but in the first or second week of March we basically just said, ‘you know what, we just need to really change the focus of what we’re doing.”
Saying that they were a week or two ahead of the curve, Bernstein notes that in the leadup to the shutdown their customers had already been asking for deferred or reduced payments. And with anxiety and concern in the air, 2M7 changed course and moved from focusing on bringing in new customers and increasing collections, they “hunkered down” and worked exclusively on the needs of existing clients.
“We funded throughout very minimally … and really our main effort was to get in touch with all our existing merchants and see how they were being affected, if they needed a payment plan, or if they needed a little bit more capital to tide them over. And we adjusted each one on an ongoing basis as we kind of floated through the panic of the lockdown to the waiting time to when we really started to reopen. … And you know, the ones that were still operating in the kind of environment that they were operating, if they had any additional expenses, they had additional requirements for capital.”
This approach lasted up until mid-June, around the time that the Canadian economy began to reopen. Lasting all of three months, this halting was not without victims as 2M7 had to furlough a number of staff members, many of whom were on the sales team that had reduced responsibilities during this time. Since then though, these employees have been brought back in, new customers have been brought on, and 2M7 has returned to its offices.
“As the Canadian economy started reopening and wrapping up even a little bit earlier than we were, we worked with provinces that were already more advanced in the opening stages. Saskatchewan, Nova Scotia, New Brunswick, Newfoundland, they were doing better in terms of reopening and they were ahead of us. … We were able to work with them in terms of ramping up. Now as the economy’s kicking into gear, we’re seeing more and more demand from businesses and we’ve started feeling our how much of their client base is still in existence, how much of their market is still in existence; whether it be manufacturing or transportation, or whatever it is.”
Looking ahead, Bernstein is cautiously optimistic, believing the worst is behind them but that there is still a ways to go for the Canadian market that has shown resilience in that last four months. Explaining that he think the shutdown won’t lead to any great reset of the Canadian market, the CEO thinks that it will instead act as a catalyst for events that were already in motion: debt-laden companies will struggle and possibly perish.
But beyond that, Bernstein is feeling positive about the future, saying that “people are starting to come out of their caves, and slowly but surely businesses are starting to reopen and invest. A lot of businesses are hiring back their employees. So that’s good news for Canada and good news for small businesses in the Canadian marketplace. … I feel like we’re going to come out okay.”
Discussion: The State of The Industry With Matthew Washington at PIRS Capital
July 9, 2020I recently connected with Matthew Washington, the Chief Revenue Officer of PIRS Capital to get his take on the state of the industry right now and whether or not there are opportunities in the market. Video below:
The State of Securitizations in Alternative Lending
July 6, 2020Over the last few months, “securitizations” were frequently cited as a reference point for the health of a small business lender or alternative finance provider. Given the vague information and inferences that circulated, I decided to schedule a chat with Methodical Management co-founder Gunes Kulaligil to get his perspective. Our discussion on the state of securitizations in alternative lending below:
