The OnDeck Hedge
May 6, 2015
Days after OnDeck went public in December 2014, a handful of their competitors licked their lips and said, “Perfect. Now we can hedge ourselves.”
But can they really?
OnDeck isn’t quite merchant cash advance and not quite Lending Club. They might be heralded in news media as the poster child for the non-bank business financing movement but one could hardly say that they typify the average company in the industry. They do things their own way and always have. It’s the very reason they are often criticized by their competitors. OnDeck doesn’t represent an industry but rather an antithesis to an industry they were borne out of.
That’s not to say there aren’t many common denominators between their products and others such as merchant cash advances. There are. But as an outside investor who wanted to be long on the success of the merchant cash advance industry, OnDeck isn’t a perfect match. And if they wanted to be long on non-bank business lending, the daily payment short term system at the core of the company probably isn’t what an investor had in mind.
OnDeck presents only one investment opportunity, themselves.
But what if you short them? That’s the trade some funders and lenders talk giddily about over drinks as the answer (at least hypothetically) to an eventual economic downturn. How do you hedge your own portfolio’s losses? Just short OnDeck! or so the theory goes.
I don’t doubt that some folks have secretly placed the OnDeck hedge in their back pocket as a legitimate possibility, but I’m not sure anyone has really thought this through.
First, many funders rely on credit facilities from third parties to fund deals and scale operations. That means restrictions and covenants on how the money is allocated. I don’t think taking a multi-million dollar short position on a single stock was what the institutional lenders had in mind. Business lenders and merchant cash advance companies are not hedge funds. The immediate reaction to a downturn (whether miniscule or massive) should be to reduce the default rate, tighten underwriting, and cut costs, not take huge positions in the securities markets.
The logic behind this trade is almost like realizing that the restaurant you own is on fire and instead of running for water to put it out, you call an insurance company and take out a policy on the neighboring businesses instead. If those businesses burn down, you get paid, and the loss from your own restaurant burning down will be offset. Except now your business is gone.
Second, OnDeck isn’t a perfect match for this trade. In Barroom small talk, the hypothetical circumstances surrounding a hedge are less often an economic downturn and more often about everything going to hell. If everything goes to hell, we can just short OnDeck!
Except there are many sane reasons why OnDeck would soar in such a scenario. If purchases of future sales were interpreted to be usurious loans, well then that might cause everything to go to hell for merchant cash advance companies but boost the value of OnDeck who has been cognizant of state usury laws and the complexities of being an actual lender for some time now.
And if business lenders issuing 5 year loans with monthly payments are all falling apart, it’s possible that OnDeck with their 1-year terms and daily payment schedules would be a refuge.
Just yesterday, OnDeck beat the street’s expectations and then for some reason immediately lost more than 15% of their market capitalization. Bloomberg’s Zeke Faux ran the following headline, OnDeck Tumbles as Competition Forces Online Lender to Cut Rates, despite OnDeck’s execs specifying TWICE in the earnings call that competition had no bearing in their decision to cut rates.
While beating the street and subsequently getting clobbered may lend credence to the phrase, “buy the rumor, sell the news,” there wasn’t anything particularly jarring in the report to warrant such a huge sell-off. OnDeck doubled year-over-year revenues and they funded an astounding $416 million in loans in a single quarter.
The 15+ day delinquency ratio increased from 7.2% to 8.4% year-over-year however. CEO Noah Breslow and CFO Howard Katzenberg defended this as normal Q1 seasonality but were non-committal to the direction this would move in future quarters. Maybe that’s what spooked investors? It’s tough to say.
Had CAN Capital been publicly traded too, should OnDeck have taken a short position on them when they saw their own 15+ day delinquency rate spike? And should OnDeck buy put contracts on competitors that also eventually go public, you know… just in case everything goes to hell?
Probably not.
The only investment OnDeck should focus on making is in themselves. Leave the trades to the hedge funds who may actually be in the business of buying insurance contracts on a burning restaurant’s next door neighbors.
The only hedge to a failing business is to create a business built to last. Shorting OnDeck makes for entertaining barroom chatter, but it cannot be a serious fallback for a funding company worried about their portfolio.
Get Paid More in Alternative Business Financing
May 5, 2015Maybe you’re happy with your current job now.
Maybe you’re making a lot of money.
Maybe you’re not.
Or maybe you’re at least curious to see what’s out there?
This is an exciting time to be in the alternative business financing industry. The OnDeck IPO made several senior-level people in the company instant multi-millionaires, many of whom are only in their 30s.
Now is the time
Back in 2007, payment processing professionals thought that the age of merchant cash advance was over. A Green Sheet writer in August of that year actually wrote a story about cash advance and said, “I think that boat has come and gone, and I missed it.”
And yet there were 20-somethings making between $200,000 to $1 Million a year. I knew a few of them and for their sakes, I won’t name names. The industry has treated those who are good at it very well.
Not everybody got rich though.
The industry got corporate really fast in 2008 and 2009 when it became apparent you couldn’t run a funding company like it was Delta Tau Chi in the movie Animal House. Commissions and salaries shrank and then leveled off for a time. But then the ACH payment methodology renewed the industry’s wild growth and made every business owner in the country a potential candidate for funding, rather than just those processing more than $5,000 a month in Visa/Mastercard sales.
Commissions shot up, way up. Opportunities exploded.
Today, having experience in the merchant cash advance or alternative business lending space is extremely valuable. It’s a buyer’s market. Demand for qualified and experienced professionals by funding companies and brokers far outpaces those looking for work. There are 20-somethings making well into the six figures again, particularly if they’re good at sales.
Other positions are in demand too: Operations, Underwriting, Administrative, Collections and more. If you have experience in these areas, there are employers very eager to talk to you.
But maybe you’re 100% happy.
Or maybe you’re not.
It’s a buyer’s market
Because the demand for experienced individuals is so overwhelmingly high, we’ve created the deBanked Jobs network and put the ball fully in the court of the job candidates. That means you can fill out a blind profile that details your background, but keeps your identifying information away from employers. Employers can view the background but they won’t be able to see your name, email address, or username. If they like your profile, they can contact you through the site.
You’ll be able to see who the employer is and their message when you log on. Only if you choose to email them or call them to schedule an interview will they ever know who you are. If you don’t do either, they’ll never know who you were. Like I said, the ball is in your court. Why not see who comes knocking once they’ve seen a little bit about you?
Initially, we’re only allowing a handful of vetted employers on the network to prevent abuse and solicit feedback. As of now an employer can only send you one message.
We’re also not sending email notifications so if you’ve registered with your work email address, job notifications will not be sent there. They can only be viewed by logging on.
If you no longer want your profile to be discoverable by employers, just untick this checkbox and click save. It’s unticked by default so if you’ve already set up a profile but forgot to tick the box, you won’t be receiving any messages anytime soon.
Anyone can create a jobs profile so long as they have a deBanked forum account. If you don’t have one, register here. Then just log on to create a profile on the network at https://debanked.com/jobs/.
Have feedback? Notice a bug? Are you an employer looking to hire that wants access to this? Email sean@debanked.com.
The industry’s growth is on fire. Are you happy with your place in it???
OnDeck Q1 2015 Earnings Call
May 4, 2015OnDeck (ONDK) is scheduled to release Q1 2015 earnings today at 5pm EST. Anyone can register to listen to the call via web HERE or by dialing in through (877)201-0168 with conference ID 23530259.
OnDeck closed Friday at $19.29, just 8 cents below where it closed leading up to the 2014 Q4 and year-end earnings call on February 23rd. By that measure, the stock has been relatively flat.
Recently, the company announced expansions into Canada and Australia, though analysts such as Henry Coffey of Sterne Agee remain skeptical.
“If the opportunity is so large in the U.S., why go halfway around the world to lose money?” Coffey told the Wall Street Journal.
The Street doesn’t see eye to eye on OnDeck. Compass Point issued a sell rating with a price target of $14 while Deutsche Bank issued a buy rating with a price target of $28. Meanwhile, news media continue to disseminate incorrect information about the company by often times referring to them as a peer-to-peer lender.
OnDeck has never been a peer-to-peer lender.
In April, the company announced a strategic partnership with Prosper, though the extent of their collaboration is uncertain.
OnDeck predicted a net loss for all of 2015 in their 2014 year-end report. Consequently, it is likely OnDeck will report a loss today for Q1, though analysts expect year over year revenue growth of almost double.
Wasted Leads, a Plague in the Business Financing Industry
May 1, 2015Many people don’t know this, but a few years ago I dabbled in online lead generation for business lenders and MCA companies. I did online marketing, captured prospects, qualified them using a very simple algorithm, and then directed them to the appropriate companies for a fee. I don’t do this anymore.
One of the first features I added to boost conversion rates of the recipients was auto-phone connect. It worked like this:
- Prospect fills out a web form with their phone number
- Algorithm qualifies it
- Data is sent to appropriate lender/funder via API or email
- My phone system dials the recipient’s live sales line
- Sales rep picks up
- My phone system then dials the applicant’s phone number and if they answer, they’re immediately connected to the sales rep on the other end
The entire process was fully automated. An applicant could fill out a form and be called with a live sales rep on the other end in literally 3 seconds. Basing the idea on studies performed by experts like Dr. James Oldroyd, who believes the odds of reaching a lead declines exponentially after the first five minutes, I thought my system was pretty damn brilliant.
Not quite. Every single company that tried it hated it. There were problems on all sides. The receiving companies would be too busy on other calls to answer the auto-connects, they’d be out to lunch, or the calls would come after working hours. Some receiving companies felt they didn’t have time to digest the lead they were being auto-connected to since the call was being connected before their CRM or email was even processing the data. That meant right after the merchant had just filled out a web form with all the necessary information, the sales rep being auto-connected to them didn’t have it yet and thus the merchant had to frustratingly state it all again.
Even worse, sales reps would answer the call and wait to be auto-connected to the applying merchant, but many merchants wouldn’t answer the phone on their side even though they had just literally filled out a form seconds ago requesting somebody call them. That meant sales reps were often answering dead calls. Doh!
Technological flaws aside, some of the casual feedback I got was that seasoned sales reps preferred to contact leads at their own pace anyway, with the belief that it improved their closing percentages. Why go into a call completely unprepared in seconds or minutes when you could mentally digest the prospect’s application and possibly do a little research on them online before reaching out?
But Oldroyd’s research would argue that it was better to reach out as soon as possible because waiting a span of mere minutes exponentially increases the likelihood the prospect will not even pick up the phone when you call.
So what was the happy medium or best method? It’s hard to say since I didn’t continue to evolve it or test further. I bowed to the pressure of the lenders and funders, all whom wanted it gone and I disabled the automatic phone connects for good.
Meanwhile in 2015
An experiment conducted early this year by FinServ’s Steve Conner found that 100% of sampled business financing brokers/ISOs in the industry waited longer than five minutes to call an inbound web lead. That’s a long enough delay by Oldroyd’s standards to infer that many merchants will no longer be interested by then to even accept the call.
Conner pretended to be a merchant and completed web forms on the websites of 52 brokers and funders in the industry. The fastest broker called in 6 minutes, but the average (for those that actually called) was an astoundingly slow 742 minutes, MORE THAN 12 HOURS LATER! More than half never even called at all. What the heck?!
Back in September I said that lenders will pay as much as $200 for an exclusive inbound lead in this industry. The kicker? Conner’s experiment and Oldroyd’s data say that brokers are waiting until the lead is already pretty much dead by the time they finally attempt to make their first contact.
No wonder costs per acquisition are so high?
The numbers were better for direct funders even though more than half of them never called the prospect at all. For those that did call, the average time to make contact was 17.5 minutes, far better than the average of 12 hours for brokers.
While I do not know specifically which websites were sampled, Conner’s full report (which you can download online) says that they researched the companies beforehand.
One has to wonder what happened to the leads for which nobody called. Were they filtered out and rejected by an algorithm? And if so, shouldn’t the prospect deserve to know?
While receiving a phone call from a sales rep literally seconds after completing a web form may seem creepy or overly ambitious, there’s nothing more disconcerting than complete silence. Where exactly did your information go then?
In July 2011, I pretended to be a merchant (much like recently featured loan broker William Ramos did) and filled out a single MCA website form to find out who would call me and what they would say. I still remember the name of the make-believe business I used because I still get called and emailed regularly by that company to see if my delicatessen is ready to get funded. It is now four years later.
“I’m still shopping around,” I tell them.
The periodic emails don’t bother me. Many years ago, they paid for my contact information, possibly as high as $200 for it. They might as well keep trying.
1-call-close or bust
Ken Krogue, the CEO of InsideSales and a Forbes Contributor, discovered after his research that sales reps only make 1.3 call attempts on average to a lead before giving up. He tested over 10,000 companies in fifteen secret shopper studies. “We fill in a lead on their Web site with a real phone number and email address and track how fast they respond and how many calls or emails they make,” he wrote on Forbes.
35% to 64% of sales leads never get called at all according to Krogue, whose results mimic the numbers Conner experienced in the business financing industry.
In off-the-record conversations I’ve had with a handful of lead generators in this space (companies that are neither brokers or funders), a leading challenge they face with buyers obsessed with costs and closing ratios is that the buyers don’t always end up calling all the leads or they call them once and never call them again.
There’s pressure on lead generators to provide 1-call-close quality leads. If the merchant can’t be closed on the first call, some reps are just throwing them in the trash, never to be remarketed to ever again.
“Spoiled,” was the word used by one industry veteran to describe the newer generation of sales reps who have walked into an industry growing by leaps and bounds. So many leads are coming in, that they don’t even know what to do with them all.
Research argues however they should be calling them inside of five minutes and of course following up. And there’s no reason that so many are never called at all.
One issue Conner discovered in his experiment is that several companies in this industry had broken websites. The HTML or javascript wasn’t set up right and the forms couldn’t even be submitted. :::face palm:::
A lot of money might be pouring into this industry, but a lot of money may also be getting flushed down the tubes.
Do you know your Web form-to-call response times? You should…
Defraud Merchant Cash Advance Companies, Go to Jail
April 27, 2015
We once dubbed the summer of 2013, the summer of fraud, after merchants began exploiting alternative lenders at record levels. Well it looks like in at least one instance, there were consequences.
Just two months ago, the Essex District Attorney’s office in Massachusetts announced that, “six people were arraigned in Haverhill District Court on numerous counts of larceny, money laundering and fraud following a three-month investigation involving local, state and federal authorities into a false invoice scheme.”
But invoice factoring wasn’t the only thing on the crew’s hit list. Sources and research revealed that among the victims were at least five merchant cash advance companies, the names of whom we won’t mention.
At least one funding company’s UCC was filed two weeks after the defendants had been arrested, alluding to the possibility that they had obtained one last merchant cash advance in the days prior.
The Salem News reported that the group is alleged to have netted at least $700,000 over a five year period.
47-year old Susan Yerdon was fingered as the mastermind and was sentenced to three and a half to six years in state prison.
According to The Salem News, “she pleaded guilty to money laundering and other charges, will be required, in exchange for her sentence, to testify against some of her codefendants.”
“Police seized a Mercedes Benz E Class AMG, a GMC Yukon Denali, a BMW 328i, a Cadillac DTS, and a Pontiac Solstice.”
The Business Backer Appoints Simcha Kackley as VP of Marketing
April 21, 2015CINCINNATI, April 21, 2015 — The Business Backer, a leading provider of small business financing solutions, today announced the appointment of Simcha Kackley as the company’s Vice President of Marketing. In her new role, Kackley will be responsible for leading the firm’s marketing and growth strategy. Additionally she will support the execution of all marketing activities including lead generation and penetration of the direct and partnership channels. She will report to Jim Salters, The Business Backer’s CEO and will be based in the firm’s headquarters in Blue Ash.
“As the company continues to experience tremendous growth, Simcha will play an integral role in further defining our brand both internally and externally,” said Salters. “She is a strategic, data-driven and digitally-focused marketer and we’re thrilled to add her expertise to our ever-growing team.”
Kackley has over a decade of diverse marketing experience, most recently serving as Director of Marketing at iSqFt, an online platform that connected contractors with construction jobs across the U.S. Prior to that, she served as the Director of Marketing for the Jewish Federation of Cincinnati. In both roles she demonstrated measurable results in cross-functional strategic planning, branding and lead generation, among others.
“I’m thrilled to be joining a company that is so deeply committed to the success of the small business owner,” said Kackley. “Our focus on True Relationship Financing ensures that the needs of our customers are the driving force for everything we do and I look forward to enhancing our effort to help small businesses get the capital they need to survive and thrive.”
Kackley holds an MBA from the University of Cincinnati and a Bachelor’s degree in marketing from Xavier University. She is active in the local community through philanthropic work with the National MS Society. She founded and hosted Rock ‘n Aspire, an annualCincinnati-based fundraiser created to inspire music lovers to unify in support of the National MS Society, whose mission is to find a cure and address the challenges of everyone affected by MS. She is also the incoming President of the local chapter of the American Marketing Association.
About The Business Backer
The Business Backer, headquartered in Blue Ash, Ohio, provides customized funding solutions and advice for small and medium-sized businesses. The Business Backer’s revolutionary approach to underwriting, combined with a team of expert advisors, has allowed the company to provide more than $250 million in funding for thousands of small businesses across the United States. The Business Backer has received numerous local and national awards for growth, ethics and leadership. Learn more at www.businessbacker.com.
STRATEGIC FUNDING SOURCE NAMES ALAN NUSSBAUM VICE PRESIDENT OF BUSINESS DEVELOPMENT
April 20, 2015NEW YORK (April 20, 2015) – Strategic Funding Source, Inc., a leading provider of small business financing, today announced that Alan Nussbaum has joined the company as Vice President of Business Development.
In his role, Nussbaum will be responsible for developing untapped affinity relationships and other industry opportunities including the opening of new channels in emerging markets, which seek access to capital. He will report to David Sederholt, the Chief Operating Officer of Strategic Funding Source and will be based at the company’s New York City headquarters.
Nussbaum is one of the early entrants to the small business alternative financing industry and spent over 16 years leading sales initiatives with CAN Capital, the largest company in the industry. During his tenure at CAN Capital, he contributed to the growth of the company by developing diverse sales channels and will now bring his years of experience to Strategic Funding Source. As with several executives of Strategic Funding Source, Nussbaum started his career as the owner operator of small businesses, which included restaurants and a food service supply company.
“We’re pleased to welcome Alan to the management team at Strategic Funding Source,” said Sederholt. “I have known him for over 20 years as a respected member of the industry and look forward to him contributing his vast experience and insights to our company.”
“Over the course of my career, I have seen alternative finance products evolve into the mainstream direct solution for small businesses,” said Nussbaum. “I’m excited to join Strategic Funding Source, which has never forgotten the importance of people in their relationships. The company has a proven record as a leader and innovator that combines technology with a human touch. I look forward to helping both Strategic Funding Source and the small businesses we serve continue to grow.”
Nussbaum is a graduate of Pratt Institute in Brooklyn, N.Y.
About Strategic Funding Source, Inc.
Strategic Funding Source finances the future of small businesses utilizing advanced technology and human insight. Established in 2006, the company is headquartered in New York City and maintains regional offices in Virginia, Washington state, and Florida. The company has served thousands of small business clients across the U.S. and Australia, having financed over $800MM since inception. Visit www.sfscapital.com to learn more about Strategic Funding Source, its financing products and partnership opportunities.
Is Alternative Lending An Illusion? (LendIt 2015 Summary)
April 18, 2015More than 2,400 people packed into the LendIt conference last week in New York City and everywhere you turned, startups were boasting of their ability to lend billions of dollars to underserved consumers and businesses. Companies not even old enough to have attended last year’s LendIt conference had reportedly lent tens of millions or hundreds of millions of dollars already. Is it all an illusion?
Investors circled like hawks to try and grab an opportunity into this exploding market. Alternative lenders were practically being tackled by VCs, Private Equity firms, and specialty finance lenders:
Technological innovation is disrupting the status quo, attendees echoed. Surely banks can afford to develop new technology to compete, so why haven’t they? Lendio’s Brock Blake wasn’t afraid to challenge the Short Term Business Lending Panel on this. “Is there real innovation happening or is there regulatory arbitrage?” he asked.
The panelists mostly agreed that it was a combination of both. Stephen Sheinbaum, founder of Merchant Cash and Capital (MCC) and BizFi, said “regulation is not something that scares us in any way.” That’s not surprising considering MCC has survived more than ten years in business and fellow panelist CAN Capital has survived more than seventeen.
But for the newer players entirely reliant on third party brokers or dependent on a Reg D exemption to issue securities, their success may indeed be regulatory arbitrage. And time is on their side.
Karen Mills, the former head of the Small Business Administration asked several regulatory bodies who would stand up to oversee small business lending. “No one stood up,” she said.
It’s the brokers that worry some folks most, an issue that PayPal and Square Capital do not have to contend with at all. OnDeck CEO Noah Breslow stated, “there is always going to be a set of customers that want to shop and want to have help.”
Kabbage’s Kathryn Petralia explained that only 2% of their business comes from brokers and their fees are capped at 4%. CAN Capital’s Jason Rockman argued that it’s about working with brokers that share their values. MCC’s Sheinbaum said, “you have to be willing to not do business with some of the unscrupulous players out there.”
But while these industry captains minimized the role that brokers play, 2015 is already being dubbed the Year of the Broker.
The regulatory environment isn’t the only issue to be worried about, skeptics argued. There was cautious alarm about the market’s viability when interest rates rise or the economy takes a turn for the worse.
“I think there’s going to be a shakeout,” said Steve Allocca of PayPal. MCC’s Sheinbaum explained that when he sees other funders doing deals that don’t appear to make sense, to not feel pressured to do them as well. “Stick to your disciplines. Stick to your guns,” he preached.
Fundation CEO Sam Graziano argued that small business lending is already very risky. The lifetime default rate on 7(a) SBA Loans is 20%, he said. Graziano, who hates the term alternative lending prefers to refer to the industry as digitally enabled lending.
And digitally enabling is something that OnDeck has focused on. In Breslow’s presentation, he said that applying offline for a loan takes 33 hours of work on average. Banks are shuttering branches at a record rate, he added.
Banks are dead, said many in attendance. Kathryn Petralia of Kabbage disagreed. “The death of banks has been greatly exaggerated,” she argued on a panel.
Indeed, Mills’ report shows that total outstanding debt on business loans by banks dwarfs the alternatives by more than 50 to 1.
But former U.S. Treasury Secretary Larry Summers is convinced the tide is turning.”The conventional financial sector has, in important respects, let all of its main constituents down over the last generation, and technology-based businesses have the opportunity to transform finance over the next generation,” he said during the keynote speech.
With conference sessions looking and feeling like a cramped NYC subway during rush hour, the popularity of alternative lending is no illusion.
But healthy skepticism is at least creeping in while the industry marches forward. Changes in regulations, interest rates, and economic activity will separate those simply riding a wave from those that have created something real. Expect companies that exhibited at this year’s conference to be gone by 2016 or 2017, said several panelists.
The final count of LendIt attendees was 2,493 people. 150 people who tried to register at the last minute were turned away. More are expected to attend next year.
Objectively, alternative lending appears to be very real.
