The Next Frontier: Financing the ERC
January 11, 2023
“I have never sold a product that has no daily, no weekly, or no monthly payments,” said David Goldin. That is until now, he explained, because of the Employee Retention Credit from the IRS that’s sweeping the country. Goldin’s new company, Finance ERC, that he co-founded with Newtek co-founder Jeffrey Rubin, is buying the future ERC receivables of small businesses that have filed for it. A key feature? No payments.
“You basically drop off the money, they don’t pay you out of cash flow, we get paid when the checks arrive,” Goldin said. “It’s an amazing offering.”
Goldin is no stranger to the SMB finance game. He is one of the reasons that the MCA product exists today in the United States. A documentary about it was the second most watched in all of 2022, for example. And he’s still a busy guy. One of his other businesses, Capify, finances small businesses on two continents every day.
“I’m busy in the morning with the UK and I’m busy at night with Australia, but I had a lot of free time during the day,” he said about how he was able to pursue yet another venture. “I approached Jeff and we were seeing that there was a gap in the market that the checks don’t arrive.”
The ERC, a potentially generous tax credit available to eligible businesses, has recently enjoyed greater awareness since it was included in the March 2020 CARES Act. Businesses that qualify can amend previous returns to receive a refund. Folks in the small business finance industry, already in direct communication with businesses about their financial needs, have taken notice.
Finance ERC won’t do the filing itself for a business. They have to had filed already to seek out the funding, which can go up to $1 million at present. It’s the waiting game between filing and actually receiving the refund that leaves merchants in a crunch. Goldin said the wait time is “best case scenario three months, worst case scenario a year plus.” And there’s no guarantee that the claims will be paid. That’s a risk they bear.
The deals come in from a variety of sources, business loan brokers, MCA platforms, ERC filing companies and more. The funding amounts can be significantly larger than an MCA and with no payments to be made, is incredibly competitive. A number of other financial service providers are charging a fee just for helping the businesses file for the credit in the first place, which in itself can be lucrative, but Finance ERC sticks just to the funding.
“We work with the funding companies, we work with the brokers, the various ISOs, it’s a great product,” Goldin said.
But the life span of the ERC is purportedly capped. Some experts say that businesses can only amend their 2020 tax return through April 2024 and their 2021 return through April 2025 [dyor]. But then that’s supposed to be it, allegedly.
“That presumes the government is not going to offer any future tax incentives,” Goldin said. “What we’re building at Finance ERC is a platform to finance tax credits. [The ERC] is the first credit.”
The opportunity, he explained, is preparing now for what may repeat often in the future.
“We put together the right players and vendors,” Goldin said. “We’ve hired a super senior management team.” It’s a system that includes sales, marketing, operations, finance, underwriting and more, to be prepared to scale.
But even in the present, opportunity abounds.
“The best estimates I’ve read are 5-6 million ERC are still eligible,” Goldin said. “People in this industry call it America’s best kept secret.”
And thus as marketing of the ERC continues to grow all around, Finance ERC is ready to work with businesses, brokers, and filers going through the process. Businesses can even use the funding from Finance ERC to pay the fee to file in the first place.
“So now all of a sudden they put the risk to me which I’m happy to do for a file that we like, and I pay the filing company / the broker gets paid right away,” Goldin said.
2023 Is Here. Are You Ready?
January 1, 2023Happy New Year! deBanked CONNECT MIAMI is now only 2 and a half weeks away. Hosted at the Miami Beach Convention Center in South Beach on January 19th, this event will set the industry’s course for 2023.
Climbing Up The ROK
December 23, 2022
This month Patrick Manning took over as the new CEO of ROK Financial. Previously representing the company as CRO and President, Manning’s been on an upward trajectory since he first started in sales roughly eight years ago. He learned the business from founder and former ROK CEO James Webster, who will be stepping into a new role as Executive Chairman.
Manning will be overseeing the leadership team with the help of COO Shannon Treadwell and continuing to grow the organization.
“I also have a large hand in the relationships with our lenders, we are a broker, and we utilize all of the top lenders in the industry,” said Manning. “And I sit at the helm of managing and building those relationships with our lenders.”
Manning described the industry as “lacking information and education” whether this be from brokerages or business owners themselves. Taking pride in the way ROK does business, Manning went on to describe a new learning experience the company will be presenting to the industry.
“I’m going to continue to help push on the company initiative of rolling out ROK-U or ROK University. ROK-U is an education platform which encompasses ROK’s 10-15 years of broker experience to an easy-to-follow training platform geared to properly educate those that are looking to enter into the industry,” said Manning.
ROK’s goal is to improve the way brokers interact with business owners and carry out transactions. This fully remote program will be available to anybody interested in entering the industry where they’ll learn proper techniques as well as language. The company soft launched the program in May with 30 enrolled students from all over the country. Testing the program out to see what areas needed improvement, ROK-U will officially launch in January 2023. It is also free of charge and will be live on their website.
“The team has been working diligently to roll out new technologies to help with this initiative. Those that enroll in ROK-U will have access to best-in-class technologies powered by Salesforce Communities to assist in training and getting their businesses off the ground,” said Manning.
The company will also be introducing the ROK Tour, a new networking event in eight major cities throughout the U.S to help promote ROK University.
Tackling the California Disclosure Law With David J. Austin, Esq.
December 16, 2022
“I believe the law can be complied with in a technical sense based on how the statute is written,” said David J. Austin, Esq. of Austin LLP, “however, it opens up a funder to a number of attacks when they’re trying to enforce the funding.”
Austin, an attorney well-read on California’s new commercial financing disclosure law, has created a compliance guide specifically for merchant cash advance funders. Now that the law is in effect, he’s noticed a sudden urgency from small business finance companies to quickly wrap their heads around what they need to be doing.
“There’s nothing ambiguous about certain things in the statutes,” he said. “And it’s very specific, you have to use this font, you can’t use bold or italics, and I discussed that a little bit in [the guide]. It’s very specific about what you need to do.”
Austin imparted some helpful wisdom based upon the risks he sees. First, that funders need not just worry about the Department of Financial Protection and Innovation (DFPI) auditing one’s compliance, but also about what attorneys on the opposite side of the table might attempt to attack if these contracts ever end up in litigation, which they inevitably will. There should be concern, he said, about surrendering some control of the disclosure process to brokers, especially for this reason.
“In my view, the biggest liability in this statute is the broker screwing you up,” Austin said. “I can’t begin to say how important I think it is to—just for that one disclosure, take the broker out of the equation…”
Austin suggested that as far as California is concerned, funders should have direct communication with the merchant early on in the process so that when it comes time to make offers, the funder is able to send the required disclosures to the merchant themselves, and that the broker can simply be included in those communications. This workflow system might depart from one where a broker is accustomed to retaining all control of merchant communications, but Austin is looking at the risks through the lens of a funder.
“I think you just have to say, ‘look, it’s the law and we’re not going to do it any other way,'” he said.
While a much more complete scope of what’s required is all part of the guide he’s offering, he hinted that the “reasonably anticipated true-up” requirement of the disclosure was mostly centered around the knowable seasonality of a business and that he likes the Historical Method of predicting a business’s future sales versus the state’s other allowable option, the Underwriting Method. The Historical Method requires that a funding company examine at least 4 months of a business’s previous history, so if any brokers have been left wondering why a funder has recently started asking for 4 months bank statements instead of 3, this is probably the reason. Austin believes that the Underwriting method, by contrast, creates a lot of extra work, like state audits and additional litigation risk.
“The statute [on the Underwriting Method] is long,” he said. “And like I said, it requires auditing. So the first thing that’s going to happen in any litigation is you’re going to be asked to provide those auditing details.”
Any mca funder curious about compliance, including for access to the full guide, should contact David Austin directly at david.austin@austinllp.com.
Since the law has gone into effect, deBanked has determined that some funders are complying with the law already and are continuing to operate in the state like normal while others are taking a wait-and-see approach. Any funder thinking they can fly under the radar of the DFPI and ignore the regulations should consider that a compliance failure could likely be exposed in litigation.
“We know what the defense counsel is going to do,” said Austin, speaking on merchants’ lawyers using the disclosure requirements as a weapon. “They’re gonna push, push, push, push, push.”
Funding Companies Sue California Regulator Over Looming Disclosure Law
December 6, 2022
The alarm bells sounded over California’s commercial financing disclosure law were more than rhetorical bluster. This past Friday, a trade association representing dozens of small business finance companies filed a lawsuit against the Commissioner of the California Department of Financial Protection and Innovation (DFPI) on the basis that the regulations scheduled to go into effect on December 9th are unlawful.
The suit, filed by the Small Business Finance Association, makes two claims.
First, that the regulations violate the First Amendment on the premise that they compel the group’s members to make inaccurate disclosures to customers while at the same time prohibiting members from engaging in communications that could be used to clarify or correct the required false or misleading information to customers. This in part refers to the requirement that funders assign misleading and/or false APRs to purchase transactions while being forced to use language and terminology that contradicts the contracts themselves.
Second, that APR disclosures are defined and governed at the federal level by the Truth in Lending Act and that California’s custom formulas and disclosures would only serve to confuse customers. The SBFA argues that the regulations are “preempted” by TILA.
These controversies, which have been the subject of debate for years, are not new information, but enforcement of the law is finally slated to begin in just 3 days. The complaint argues that compliance with the law may expose its members to civil and criminal liability and thus they are left with no choice but to proceed accordingly. Given the circumstances, however, there does not appear to be hard feelings about the situation.
“The SBFA enjoys a great working relationship with the DFPI and share their commitment to providing meaningful disclosures to small business owners,” said SBFA Executive Director Steve Denis when asked what this lawsuit meant.
He continued:
“We recognize the challenges involved in implementing SB 1235 and appreciate the effort and transparency the DFPI provided during the regulatory process. This is a complex issue and our lawsuit reflects the comments we have made during the regulatory process. We believe there are significant issues with the regulation that not only makes it difficult for us to accurately comply, but are inconsistent, create liability, and will provide further confusion for our small business customers. Again, we appreciate the effort by the DFPI and look forward to continuing our work together as the matter is resolved.”
The actual complaint is available for download here.
The law is scheduled to go into effect on December 9th.
Co-founders of $2B Recurring Revenue Funding Platform Step Down
November 27, 2022
It’s not a loan, it’s a trade. That’s the mantra of Pipe, an alternative finance platform that allows businesses to trade their future recurring revenues in exchange for upfront capital today. It sounds similar to a merchant cash advance but the company has rejected such comparisons in the past. It instead branded itself as the “Nasdaq for revenue” and grew itself into getting a $2 billion valuation just last year.
Last week, however, all three co-founders announced they were stepping down from their roles. In an exclusive with Techcrunch, Pipe co-CEO Harry Hurst said that they realized they needed an executive team that could really take the company to the next level, explaining that “we’re 0-1 builders, not at-scale operators.”
The following day, a story in Forbes suggested that there was more to the announcement, drawing attention to the possibility that Pipe had facilitated deals with bitcoin mining companies and that a source had said that some of them had gone bad. A since deleted tweet by a VC had said that there had been a significant loss on at least one of them.
The timing of Hurst’s resignation, announced before a new CEO could even be hired, allowed rumors to swirl. On Sunday night, Hurst finally addressed them.
4/ We haven’t “loaned $80M to a bitcoin mining company” and “lost it all”. We do have some customers in the space, but none of them have gone to zero.
— Harry Hurst (@harryhurst) November 28, 2022
6/ On the $70M personal loan rumor (perhaps the most bizarre): I haven't taken a loan from Pipe or any other loan against my holdings in Pipe.
— Harry Hurst (@harryhurst) November 28, 2022
11/ Now that’s all been addressed – back to building.
— Harry Hurst (@harryhurst) November 28, 2022
A tweet by a VC that had originally fueled some of the unflattering rumors has since been deleted.
Your Default Rate Is Too Low, And It’s Hurting You
November 22, 2022
There may be no word as terrifying to stakeholders in the merchant cash advance business than the term ‘defaults’.
In an industry where a significant portion of revenue is generated from daily or weekly automatic withdrawals from a merchant’s bank account, defaults can cause deep and lasting problems. Not only do they eat into profits, but they damage relationships with banks and processors- both of which are essential to the success of any merchant cash advance company. Defaults can also be contagious: if one merchant in a large portfolio decides to stop making payments, it can have a ripple effect that leads to other merchants doing the same thing.
All these are reasons why MCA companies go to great lengths to avoid defaults at all costs: they exhaustively screen merchants before approving them for funding and do all the due diligence needed to ensure they can follow realistic payment plans. They also attach a fee to every deal to cover the percentage of the deal they expect will not come back, and conventional thinking would be to aim to keep that number as low as possible.
That’s a lot of work to keep that default rate low, but what would you think if I were to contend your default rate is too low, and it’s hurting your bottom line?
Fear of defaults is paralyzing MCA funders and inevitably leading them to leave opportunities-and money- on the table.
Better Accounting Solutions has been the leading accounting firm in the MCA space for over a decade, and has seen this across the board:
Many MCA companies have adopted a risk-averse approach to avoid defaults, opting for sure-fire deals in higher positions, rather than taking calculated risks that could enhance their bottom line. In the name of capitalizing on low-risk deals with a lower chance of default, many companies choose to fund deals where they charge smaller fees than what they could be charging if they choose to fund deals others are wary of taking.
Let’s look at two deal examples for an example of my thesis:
Average Andrew is the perfect merchant for an MCA company. He is getting a $100,000 advance with a deal length of 7 months (140 days) and with his rock-solid history, his default rate is a meager 6%. The RTR on the deal is 44%, the UR fee is 7%, broker’s commission is 10%, meaning the profit on this deal will be $35,500- a net unit profit percentage of 35%, profiting $5000 a month. He is a great client, and a pleasure to work with.
Now let’s examine his buddy, Reformed Ricky. He’s made some mistakes in the past and now wants a business advance to grow the business he believes is The One. No one else wants to touch him, so you offer him a deal of $35,000. Because he is a riskier advance proposition, you can raise the RTR to 49%, and the UR fee to 12%. On a deal like this, the commission is around 14% and the default rate will be a whopping 18% on a merchant like this, but the profit to be made on this deal is $10,150- a 29% net unit profit, getting $3,383.33 monthly profit over the length of the deal.
Now, looking at the structures of both deals, why would I advocate that someone advancing Reformed Ricky instead of Average Andy? What’s the advantage of working with the weaker merchant over the perfect one?
It’s simple:
Because of his history, you can set the duration of Reformed Ricky’s deal to 60 days (3 months). That means according to the terms of his deal, your profit is 9.67% a month. You’ll be stunned to learn that when you break down your monthly profit on Average Andy’s deal, it is a considerably smaller percentage of 5.00%!
This means every month you’re making more back on the smaller deal, and are getting it to work for you by placing it into new deals and generating more income for you, because of its shorter term. If you’re only taking deals with longer outstanding balances, it will take you a considerably longer amount of time just to make a smaller profit percentage.
On top of this, we also have to account for the compounding effect you will quickly be seeing when you take these ‘riskier deals: because you’re earning more money per month due to the shortened duration of supposedly weaker deals, you will be able to turn it around more times per year, supercharging your growth quicker than what you’d be seeing you stuck to only ‘traditionally-safe’ deals.
I’m not advocating for funders and brokers to be irresponsible and create a new and much less entertaining version of The Big Short, throwing money around to people that don’t stand a chance of paying it back.
I am saying that they should consider funding merchants and positions they were wary of till now, and responsibly assessing the opportunities and upside for them at those positions.
Of course, this doesn’t mean that you should mindlessly funnel money into every deal that comes your way. You still need to be responsible and vet your investment opportunities carefully, and of course, if it turns out you’re picking the wrong deals and your default rate explodes, you will have to reevaluate your approach.
However, working from a place of fear is not the way to grow and thrive, certainly in this business. Moreover, by avoiding risk altogether, MCA companies are likely to become less competitive over time. After all, it’s only through taking risks and innovating that businesses can thrive in today’s rapidly changing world, especially in the rapidly evolving and growing MCA industry, where more and more people are seeking to find their niche.
A great number of successful investors in MCA companies have complained to me that their partners are too conservative with the deals they are choosing to fund and leaving too much capital in the bank, costing the investors higher facor rates instead of working for them.
This approach is a way to break away, and ahead, of the pack, because only by taking the opportunities others keep passing by will MCA companies be able to grow and compete in the long run.
Don’t Forget About Utah’s Disclosure Law
November 14, 2022
While a new era of business moves forward in Virginia and the clock ticks down to compliance with the new complicated disclosure law in California on December 9th, it can be easy to miss state #3 in all of this, Utah.
Utah’s commercial financing disclosure law goes into effect on January 1, 2023. It’s more than just a form. Covered parties must apply for a commercial financing license. A checklist for that can be found here. Similar to other states, the commission paid to a broker must be disclosed but there is no APR requirement.
