Federal Legislators Jump on Commercial Financing Disclosure Bandwagon, Renew Push to Give CFPB Authority Over Industry
June 16, 2023
Feel like there’s a lot of state-level disclosure going around lately? Well now some members of Congress believe another layer is needed at the federal level. In a bill titled the “Small Business Financing Disclosure Act of 2023,” the language looks awfully familiar. There’s a Double Dipping clause in it, for example, which was a term first seen in a New York State law.
The federal bill, which was introduced by US Senator Robert Menendez and Congresswoman Nydia M. Velázquez, seeks to place the small business finance industry under the authority of the Consumer Financial Protection Bureau (CFPB). As part of that, the Director (currently Rohit Chopra) would be responsible for devising all the rules and formulas, according to the bill. Furthermore, with regards to sales-based financing, the bill specifically states:
1. The provider must disclose an APR.
2. The estimated term of repayment and periodic payments based on projected sales volume must be disclosed.
“Small businesses are the lifeblood of the American economy,” said Congresswoman Velázquez. “But for too long, predatory lenders have taken advantage of businesses in need of capital by offering loans and similar products with unclear terms and exorbitant interest rates.”
Supporters of the bill, including Senator Sherrod Brown and Senator Ron Wyden, also stated that the bill is aimed at “predatory lenders.”
In Senator Menendez’s press statement for the bill, it cites Funding Circle, a small business lending company, as a supporter.
“We believe a free and fair market operates most efficiently when there is transparency in pricing, terms and conditions,” said Ryan Metcalf, Head of U.S. Public Affairs at Funding Circle U.S. When a small business has all of the necessary information up front including the annual percentage rate (APR), they can comparison shop and make informed decisions that are best for their business. Funding Circle supports one national uniform small business financing disclosure law because it is in the best interests of small businesses and interstate commerce.”
The push for a small business financing bill is not new. A similar bill introduced by Velázquez last year did not move forward, nor did the one from 2021, nor the one from 2019. The difference is that previous versions focused on Confessions of Judgment and fairness in small business lending. The latest version takes on the air of disclosure while attempting to subjugate the whole industry to CFPB regulatory authority.
When Your Competitors Do Wrong, Do Right
June 1, 2023
“…no matter what industry you’re in there’s always going to be bad apples, and you kind of have to see which way they’re coming from,” said Heather Francis, CEO at Elevate Funding.
Competition within this industry will always exist, fueling the drive of professionals in the field. But how can one compete with a competitor who is actively deceiving the merchant? Furthermore, how can one advise that client to exercise due diligence without appearing to display dishonest intentions? Transparency has become a rising issue separating those in the field for the right reasons from those who are not.
“Companies should be dedicated to conducting their business consistent with the highest standards of ethics and integrity,” said Laura M. Marolla, VP ISO Relations at World Business Lenders (WBL). “We have an obligation to our colleagues, customers, business partners and investors, as well as the communities in which we operate to be honest and forthright in all our business practices and interactions.”
Funding and lending companies working with customers should be forthright about everything, from the amount the customer will receive, the total cost, and what they should expect throughout the relationship. Also they should be consistent with the terminology used so that the customer doesn’t become confused.
Francis explained that terms like “fee” could be interpreted in several different ways. Her company has developed an entire blog dedicated to terminology to help merchants weed out jargon.
“Terminology is very very important because I could understand fee to mean one thing and you could understand it to be different,” said Francis. “And that’s not transparent if we’re speaking a different language, that can be misconstrued.”
Case in point, Francis’s company Elevate offers Revenue-based financing while Marolla at WBL offers loans. On this basis alone, each company’s product works very differently.
“Ongoing education for all staff should be required, during which responsible lending practices should be emphasized and ingrained into the culture of the organization,” said Marolla. “While in the end, each merchant must take responsibility for its business decisions, informed decisions by merchants can be facilitated through transparency in disclosures and responsible business practices throughout the lending process.”
And if a competitor is not being transparent or responsible, Francis said that there is a delicate way to communicate that to the customer.
“From our team, what we do if a merchant says, ‘hey, so and so promised me X, Y, and Z,’ if there are reviews out there that show the other company can’t deliver that, we will send them the link. ‘You can see what previous customers have said, and it seems like they haven’t always been true to their word.’ We can also give the client something to look out for.”
One particular thing she said can be a red flag is if a company tells the customer at the last minute that they’re going to get a lot less than what they originally contracted for, which they have seen happen. Elevate hopes that when a customer recognizes a warning sign that they will remember Elevate’s polite manner of advising them what to have looked out for in the first place.
Francis explained it’s about making them feel free to come back to them, that there’s no hard feelings if it looks like they got a better deal. “‘If you have any questions. If you don’t feel that the person is being truthful with you, we’re happy to answer any questions, or you can bounce ideas off of us,'” is the message they try to leave them with. “We’re just trying to have a relationship so that we can curtail someone who’s lying about what they’re doing.”
Revenue-Based Financing? This Team of Entrepreneurs Learned The Trade in Argentina
May 26, 2023
Javier Alvarez Wrobel and Juan Cruz Alvarez Wrobel, brothers from Argentina, have worked in the lending business together for years. They’re even co-founders of a company that’s based in Buenos Aires.
It’s taught them a lot. While Americans fret over single digit inflation, Argentina’s rate of inflation soared past 100% earlier this year, the highest rate since it began dramatically increasing in 2018. That makes it very challenging to lend in the country.
“Due to the recent complicated economic situation, lots of lending companies in Argentina have closed,” said Javier. “I’d say there are only around 30 to 40 companies in the country doing what we do right now.”
For a population that largely also has little or no credit history, credit reports generally can’t be relied upon to approve loans at scale.
“That is why a lot of the underwriting in Argentina, when people request a loan, is made based on the cash movements on the consumers bank accounts,” said Javier.
That’s what they learned how to do. And with such a skillset as theirs, they were intrigued to learn that a similar model had taken off in the United States, one where business owners can get approved for funding based on data mostly available in their bank statements, revenue-based financing. The result was an expansion to the US and their launch of Upfunding Capital in Miami, FL in 2022. There, they teamed up with a third co-founder named Paula Sborovsky, who previously worked in Entre Ríos, a province directly north of Buenos Aires that sits along the border of Uruguay.
In the process, they’ve established a niche, a clientele mostly made up of immigrant business owners that have an Individual Tax Identification Number (ITIN) but not a social security number. The thin credit or lack of credit that may come with that is something they’re already used to.
“As we work with the Latino community, most of our clients are actually non-US citizens or at least not US born,” Javier said.
Javier said that the best and most reliable information they use for approvals is the way business owners conduct transactions on a day-to-day basis. Nevertheless, the company is pacing itself, testing out its technology and its underwriting models. Upfunding hopes to ramp up its volume in the second half of this year.
The work so far has been personally rewarding for the Upfunding team.
“It’s amazing to see,” said Javier, “for example, I got the chance to speak to a guy that is actually Argentinian living [in the US], trying to sell shoes, and seeing that we can actually offer a product for them to improve their own business that’s just starting out, for us is amazing because we are actually doing the same right now.”
How Raising The Debt Limit Affects MCA
May 22, 2023
Every few years, particularly during the administration of a divided government, the threat of a default on raising the debt limit of the United States rears up in the political and economic spheres. While both sides tend to play chicken before ultimately settling on a negotiated outcome that they can sell to their bases, the current debt limit crisis feels more serious as the X date of June 1 looms with no settlement in site.
This crisis has a significant effect on various industries, and amongst them is the merchant cash advance business. MCA companies are heavily relied upon by small businesses for immediate financial needs, and understanding what this crisis means for the industry is crucial for getting through it unscathed.
Let’s compare the current landscape to running a business:
When a company opts to increase its debt limit, it essentially seeks to borrow more money, trading liability for an asset. For example, if the company’s equity is worth 100 billion dollars, borrowing doesn’t change this figure as long as the borrowed amount is an idle asset in their account.
The U.S. government should theoretically operate similarly to a regular company, borrowing only what it can pay back, but with the only growing expenses, when the government borrows money and raises the debt ceiling, it doesn’t always have enough funds for repayment.
In addressing its fiscal shortfall, the government operates distinctly from a conventional business. Unlike a company compelled to confront its financial mismanagement head-on, the government possesses the ability to print additional U.S. dollars. However, this course of action inherently devalues the currency.
For the sake of illustration, consider the worth of the dollar as a fixed entity. Suppose every thousand dollars equates to one bar of gold. If we slice this bar of gold into a thousand pieces, each piece represents $1. When the government initiates the printing of more money, it is essentially the government carving that same bar of gold into tinier segments. Meaning, if sliced in 2,000 pieces, the same bar of that once held the value of $1,000 is now $2,000. The total quantity of gold remains constant, regardless of whether it’s divided into 1,000 or 2,000 slices. However, with increased currency in circulation, each dollar—like every slice—holds less value, thereby shrinking everyone’s piece of the proverbial gold bar.
Now that we’ve explained the dangers of wantonly raising the debt limit, how does this affect MCA companies?
The debt limit crisis’s impact on MCAs is pronounced due to the time-value factor of money.
Suppose a mortgage of $100,000, repaid with interest over 30 years, amounts to $300,000. If the value of the dollar reduces significantly over this period – say by 50% – the bank, despite appearing to make a profit, loses money. That’s because the money they receive later has less purchasing power than the same amount ten years prior.
This reality can be acutely felt in periods of high inflation, such as in 2021 and 2022, where inflation neared 9%, and many felt it was closer to 20%. We all feel it during our grocery shops, the prices of experiences, and in other areas of our lives. Here, $100 can only buy what $80 could a couple of years ago, eroding the value of the interest charged.
At Better Accounting Solutions, a number of the MCA businesses we’re working with are concerned with this rapid devaluation of the money they’re funding.
The key factor to consider is the duration for which the capital will be deployed and how it will be recouped. For instance, if you advance $1 million at a 24% factor rate over 24 months and the debt ceiling is raised causing the dollar value to drop, your returns in the second year might be significantly less valuable despite the factor rate. This depreciation means that even though you’re receiving the agreed-upon returns, the funds’ purchasing power is considerably less, translating into a net loss of what would have been 13.5% over the past two years.
However, if you’re giving out (after careful consideration) riskier short-term advances with higher factor rates, daily repayments, and shorter durations, the situation would be different. Here, you’re receiving your return within, say, six months. Even if the dollar’s value decreases by 20% over a year, you’re less affected because your returns are realized in a shorter time and at higher rates, leaving you with a net gain.
Therefore, the debt limit affects MCA providers significantly, whether it’s being covered in the news or not. The devaluation of the dollar, high inflation rates, and other economic consequences of a debt limit crisis can dramatically impact the returns on cash advance businesses, especially those with longer repayment periods. As a player in the finance industry, it’s crucial to consider these elements when making advances or lending money. By factoring in these variables, providers can better protect their interests, minimize risks, and ensure the stability of their operations even during times of economic uncertainty.
Pending Florida Law Draws From DailyFunder’s Rulebook
May 17, 2023Florida’s impending disclosure law is not so unique after all. As one user pointed out, Florida’s plan to require that brokers disclose their actual address and phone number in any advertisement is actually a copy & paste of a rule on DailyFunder.
On October 24, 2015, for example, DailyFunder declared that any company soliciting business would have to disclose their physical address and phone number. The rule was stickied in the Promotions subforum and is the first thing shown to users visiting that area.
This phone number and address requirement did not appear in commercial financing disclosure laws passed by other states yet it reared its head in Florida’s bill, a state with a strong user base of DailyFunder users.
The bill is currently awaiting the signature of Governor DeSantis. If enacted, the DailyFunder rule as a legal statute would be the first of its kind.
How Many Funders and Brokers Are There?
May 17, 2023
According to the State of Virginia, there are only 115 total sales-based financing providers lawfully registered to transact with merchants in the state. That includes all funders and brokers combined. The figure seems… low, although there are potential exceptions to the rule.
All MCA funders AND BROKERS were required to register with the state in accordance with the law before November 1, 2022. The initial registration fee is $1,000 and the annual fee is $500, but more importantly applicants must disclose any judgment, Memorandums of Understanding, cease & desist orders, or convictions resulting from a crime or an act of fraud, breach of trust, or money laundering “with respect to that person or any officer, director, manager, operator, or individual who otherwise controls the operations of such provider or broker.”
An automatically updated live list of registered providers can be viewed here.
Shopify Capital’s Funding Volume Continues to Surge
May 6, 2023Shopify’s business lending and merchant cash advance division originated a whopping $477M in the first quarter of 2023. That’s up substantially from the $346.7M produced in the first quarter last year. Despite the continuous strong increase, Shopify Capital was not mentioned or even asked about during the company’s quarterly earnings call.
Shopify is a huge e-commerce business. The company generated $1.5B in revenue in Q1 and generated a net income of $68M.
Small Business Financing Industry Representatives Testified in New York Senate Hearing on Licensing
April 26, 2023Several representatives from across the small business finance industry testified in a New York State Senate hearing on Tuesday. Up for debate was Senate Bill S1450, which would require a license to engage in commercial financing. As part of that, Banking Committee Chairman Senator James Sanders Jr. fielded testimony and asked questions about bad actors, usury caps, non-compliance penalties, and more. Those called upon at the hearing included:
- Natalie Pappas, Deputy General Counsel, Rapid Finance, on behalf of the SBFA
- Amy Carpenter Holmes, Deputy Counsel, Kapitus
- Chris Grimm, Head of State Government Relations, ILPA
- Katherine C. Fisher, Esq., Partner at Hudson Cook, LLP, on behalf of the RBFC
- Phil Goldfeder, CEO, American Fintech Council
- Chuck Bell, Programs Director of Advocacy, Consumer Reports
Almost all of the organizations were in favor of some form of licensing system in New York except for the Innovative Lending Platform Association (ILPA). The ILPA, more famously known for its previous SMART Box initiative, explained that high compliance costs, inflation, and rising interest rates were putting significant pressure on its member’s businesses.
The video below, which curates just the relevant parts of the day, consists of two separate panels on the same subject. Be sure to watch them both.
