Making Cents of Short Term Business Lending
June 22, 2014Where do you see yourself in 5 years? Perhaps you’ve seriously planned what you’ll be doing in mid-2019 or maybe you at least have an idea of how things will play out. It’s only a half a decade after all so how hard could it be to foresee the future?
Surely all of us saw the DOW surging 5 years ago and got rich right?
Did New Yorkers factor Hurricane Sandy into their 5 year plan back in 2009?
It’s only 5 years, what could possibly happen to a small business in that time?
As I recently logged onto LendingClub to invest in consumers loans, I began to wonder just how safe the 60 month terms were. Not that I have a lot of options since LendingClub only offers 3 or 5 year terms, but the latter is unquestionably risky. The borrower might look good now, but where in the heck will they be in 5 years? I can’t even begin to guess.
Mortgages, student loans, and car leases aside, I can think of very few reasons to use a 5 year loan from a personal perspective, mainly because that’s an extremely long commitment. For a small business, such a term far exceeds the rationale behind “working capital”, the reason oft-cited by businesses seeking less than $200,000.
The Small Business Administration’s website speaks of this:
Businesses that are seasonal or cyclical often require more working capital to stay afloat during the off season. Although your company may make more than enough to pay all its obligations yearly, you must ensure you have enough working capital at any one time to meet your short term obligations. For example, a company may do significantly more business over the holidays, resulting in large payoffs at the end of the year. However, the company must have enough working capital to buy inventory and cover payroll during the off season as well, when revenues are lower.
Working capital may come in handy for something like inventory for which the business probably expects to sell it all off in less than a year. Can you imagine still making monthly payments in 2019 for inventory you bought with a loan in 2014?
I bet this guy can’t:
And if the financial picture looks great and they have a long term need, why not go out 5 years?
Verizon replaced Washington Mutual. But a Verizon store, that will last forever…
Only 41.1% of retail businesses live to experience their 5th birthday.
And even then when business types are aggregated, making it past year 5 doesn’t ensure lifelong success. Don’t confuse established with safe:
In fact, even borrowers are opting for shorter term loans with higher interest rates than long term loans with lower interest rates. Part of that is due to the lower net dollar cost paid for the loan said OnDeck Capital CEO Noah Breslow in an interview with Peter Renton:
5 years ago I used to spend way too much time on Instagram. Oh wait, no I didn’t… there was no such thing as Instagram.
What do you think is the best bet for this CD store? A 3-6 month working capital loan or a 5 year term loan?
Giving a borrower a lengthy repayment term ensures they will be able to pay you back right?
Above is the result of my $25 contribution towards a 5-year LendingClub loan issued on May 16th. They missed the very first payment. I’m really looking forward to the next 59 months…
In 2019, everything will be business as usual, won’t it Madam President…
As short term business lending critics herald the emergence of 3-5 year term business loans, I think it’s important to remember that they are catering to a market that likely has different goals. Long terms are often not appropriate for borrowers with working capital needs. The CEO of RapidAdvance, Jeremy Brown discussed this in an article he wrote for DailyFunder more than a year ago.
Our industry is based on providing working capital to merchants. By its very definition, working capital is less than 12 months. Longer term deals are permanent capital, even when they are repaid over 15-24 months.
As a borrower, the very idea of committing yourself to monthly payments 5 years from now should be considered very seriously. The average length of a marriage prior to a divorce is 8 years. For past or future divorcees, a 5 year loan is more than half as long as a marriage!
Alternative lenders should be asking themselves if they really have the data and underwriting skills necessary to make accurate predictions that far out in the future. Working capital underwriting models are not applicable as long term assessments.
If you’re going to make 5 year business loans, make sure to take advantage of Google maps. Take a look back at the business location and the ones surrounding it over the last few years. You may not feel so safe about your investment…
Exponential Finance
June 15, 2014
Last week, DailyFunder was a media sponsor of Exponential Finance presented by Singularity University & CNBC. It was a totally different atmosphere from some of the other events I’ve been to this year already (Transact 14, LendIt, etc.). In the upcoming July/August issue of DailyFunder magazine, I’ve got a column that summarizes the event that I think you’ll like.
Exponential Finance brought together leading experts to inform financial services leaders how technologies such as artificial intelligence, quantum computing, crowdfunding, digital currencies, and robotics are impacting business. And my mind = blown.
Some tweets to hold you over:
Robots may be coming to a bank near you: http://t.co/r0PlWUrYqU #xfinance pic.twitter.com/WYWUhZIUaD
— CNBC Social Team (@CNBCSocial) June 10, 2014
"The more data you produce, the more organized crime will consume." Goodman’s Law. #xfinance Be prepared!
— Exponential Finance (@xfinance) June 11, 2014
"Banks charge 32B in overdraft every year…that's almost as much as the gov. spends on food stamps." – Customers Bancorp CEO at #xfinance
— CNBC Social Team (@CNBCSocial) June 11, 2014
"It is no coincidence that Satoshi Nakamoto published this paper [on Bitcoin] during the financial crisis." #xfinance pic.twitter.com/a9eCWO7OXi
— CNBC Social Team (@CNBCSocial) June 11, 2014
Robots are going to steal your finance job:
I also had the chance to do a Q&A with a longtime prominent U.S. Congressman. The next issue should be available in about 3 weeks.
Do Opportunities Abound?
June 8, 2014
Just recently I found myself in an office surrounded by some folks who had each worked in the merchant cash advance business for more than 10 years. The first generation of MCA pioneers are still out there of course but it’s rare to be in the presence of so many at one time. It was weird. Weirder still was the realization that no matter how much things have changed, some things continue to be exactly the same.
Me: You guys looking to recruit ISOs?
Them: Damn right
As far as the industry is concerned, these guys might as well have fought in ‘Nam. They’re from another generation where life was hard and men were still men. When businesses couldn’t get bank loans, these guys were splitting payments with their bare hands and reprogramming credit card machines with nothing more than a paper clip and a ball of twine. Funding a deal wasn’t a product of technology, it was one of sweat, tears, and blood. Have you ever bled for your deals?
This August I celebrate my 8th year in the industry. Next month marks the 4 year anniversary of this blog. I enjoy reading some of my posts from back then, particularly since most of them discuss the ordeals of credit card processing. A lot of what I’ve written no longer applies and some of what I’m writing these days will be outdated years from now. As I approach 600 articles and blog posts on this subject matter, I’ve had to stop and ask myself if everything has already been written. What more can possibly be said about this business? Perhaps the tale of the industry has already been told and I am on my way to retelling exaggerated stories to anyone who will listen. I don’t want to be that wrinkled up old man swaying back and forth in a rocking chair talking about how ISOs got it so easy these days.
Sadly, even the name of the website is reflective of a previous era. This is the Merchant Processing Resource, not exactly what you’d expect a top destination to be called on the subject of alternative business lending.
But the story’s not finished. Every passing month is filled with events that inspire a dozen new chapters, which is more than one man can keep up with. Last month at the LendIt conference, I got a glimpse of just how many opportunities still lie ahead.
Some alternative business financing companies such as Funding Circle and DealStruck are diverging away from merchant cash advance and going back to the traditional roots of term lending. Funding Circle is doing it with a 21st century twist, by making their system peer-to-peer based.
Still other firms have sprung up around LendingClub’s and Prosper’s APIs and offer their users ways to make better loan investment decisions.
And even among the players we’re all familiar with, there is innovation, growth, and new ideas. Just recently CAN Capital launched CAN Connect, a software application that can be integrated with any other company’s software. According to CAN’s release,
Through CAN Connect™, merchants will be able to receive a CAN Instant Quote™ based solely on data provided by the partner. Once the merchant elects to proceed, they are taken through a simple online application process and can obtain access to working capital without ever leaving the partner’s platform.
Indeed technology has even allowed me to become a lender myself,
My LendingClub portfolio, which is still very young and made up by hundreds of $25 consumer loan contributions has a current Net Annualized Return of more than 10%. Contrast that against the average U.S. savings account that pays out less than 1%.
While it’s certainly not the 54% yield that OnDeck Capital enjoys, there are levels of risk and markets set up for just about anyone interested in alternative lending.
And what might come next may not all be broker/funder related. As the industry flies in a thousand different directions, entire new industries and services are going to grow up around them. That brings me back full circle. Has everything already been written? 4 years of blogging here and this might as well be my first day.
Some things haven’t changed a bit, but the rest of it, well… we must soldier on in this strange new world.
Do you see opportunities ahead? Discuss with industry insiders on DailyFunder.
Fund Merchants, Create Jobs
May 30, 2014OnDeck Capital CEO Noah Breslow was on Bloomberg TV Thursday. In a way, he’s become the unofficial spokesman for all daily funders, companies of all shapes and sizes that deal in daily payments rather than monthly. Breslow was forthcoming about the high annualized costs of their loans but mentioned they’ve come down significantly from when they first started 7 years ago.
Perhaps the best takeaway in this 2 minute, 46 second clip is the mention of creating 22,000 jobs.
Are the loans expensive? Yes. Can a lot of good still come from them? Absolutely.
Great work. I think other companies in the industry should follow suit and conduct similar economic surveys. DailyFunder is currently running one of their own that’s geared towards alternative business lending and merchant cash advance professionals. You can take that anonymous 2 minute survey here.
Make Your Voice Heard
May 29, 2014Have an opinion on which way the industry is headed? Or eager to read about events that you feel are most relevant? DailyFunder is running a preliminary research survey geared towards those involved in merchant cash advance and alternative business lending. It’s completely anonymous and it will be used to help steer the direction of DailyFunder, the only alternative business lending publication. That means we want to know how you think, what you think, and what you care about.
Collected responses already prove that industry insiders have a lot to say, especially in the write-in questions. So go and make sure your voice is heard. It’s anonymous and it’ll only take a minute or two.
Some of the statistical results may be published in the next issue of the magazine.
START SURVEY
