Small Business

Survey Reveals U.S. Small Business Owner Outlook

August 16, 2018
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Confidence among small business owners in the U.S. is up, according to a quarterly online survey produced by CNBC and SurveyMonkey. Of more than 2,000 small business owners polled from July 27 to August 5 this year, 58 percent of respondents say business conditions are “good,” up from 53 percent last quarter and up from 39 percent a year ago.

According to the survey, about 33 percent of small business owners anticipate hiring additional full-time employees this year, which is seven percentage points higher than a year ago. Sixteen percent of small business owners said they currently have open positions that they have been unable to fill for at least three months. This CNBC/SurveyMonkey survey polled exactly 2,085 self-identified small business owners 18 and older.


Study Reveals Positivity and Concerns of Small Business Owners

June 5, 2018
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According to a survey conducted by SmartBiz Loans and released today, almost 57 percent of small business owners said their outlook on business growth over the next 12 months was “fairly positive” or “positive.” And 35 percent of respondents reported that the new tax plan has already caused them to make changes in their business, with ten percent reporting that they are actively investing in new equipment or staffing.

“This positivity points to the resiliency of small business owners,” said CEO of SmartBiz Evan Singer. “They know circumstances are changing, and they’re adapting as needed.”

As for concerns, according to the survey, 31 percent of respondents said that securing lower cost financing was a priority concern. Twenty-two percent of small business owners “agree” or “strongly agree” that access to credit has become easier in the last few years, however 49 percent of small business owners “agree” or “strongly agree” that the cost of credit has increased.

Regarding non-credit related concerns, 53 percent of small business owners named the cost of providing health insurance for employees and a key business consideration. And 49 percent said that finding and hiring quality employees was a top concern.

Nine out of 10 small business owners said they value experience over education in new hires, while 31 percent said they were willing to hire candidates who lack some qualifications and train them. In what the report described as a “difficult hiring environment,”  in order to retain employees, 51 percent of owners said they were offering more flexible work arrangements and 33 percent said they were increasing wages.


Report Demonstrates How Online Lenders Benefit Economy

May 31, 2018
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Main Street signA report on “The Economic Benefits of Online Lending to Small Businesses and the U.S. Economy” was released yesterday, using data from 180,000 U.S. small businesses that represented nearly $10 billion in funding from 2015 to 2017.

The report used data from five online lenders, including OnDeck, Kabbage and Lendio, and was sponsored by the Electronic Transactions Association (ETA), the Small Business Finance Association (SBFA) and the Innovative Lending Platform Association. The report was researched by three economists at NDP Analytics, an independent research firm.

One of the key findings was that the ten billion dollars funded from 2015 to 2017 by five of the top alternative small business lenders generated $37.7 billion in gross output and created 358,911 jobs and $12.6 billion in wages.

“I think the most important takeaway from this study is that small businesses are benefiting from a wide variety of choices in lending products,” said Jason Oxman, CEO of the ETA. “And, in particular, the online small business lenders have provided really a remarkable amount of working capital to small businesses in this country.”

Oxman told deBanked that he was surprised to learn from the report the percentage of borrowers that operate extremely small businesses. According to the report, 24 percent of online business borrowers operate businesses that have less than $100,000 in annual sales. And two-thirds of online business borrowers had less than $500,000 in annual sales.

“These are clearly small businesses,” Oxman said. “These are companies that obviously have capital needs and are getting those needs met by online small business lenders.”

New York State was a focus of part of the research. According to a press release for the report, data extracted from it indicated that “overall, the small business loans provided by online lenders [from 2015 to 2017] generated $2.5 billion in gross output and created 20,154 jobs with over $795 million in wages” for communities in New York State.

“We [organized the report] with New York in mind,” said Steve Denis, Executive Director at the SBFA. “We wanted to send a message to show how much of an impact the online lending industry had on the state.”

Other interesting data from the report include:

— 75 percent of U.S. businesses have less than 10 employees.

— 22 percent of small business owners use their personal savings to expand

— Online lenders offer loans to companies in all stages of their life cycle and the distribution of company age is relatively uniform.

“[Alternative small business lending] is creating a lot of economic activity,” Denis said. “We’re helping to create jobs, and we need to protect this tool. It’s a valuable resource for businesses…and this [report] demonstrates how important it is to the economy.”


Demand for Tax Guard Grows, and Receives Private Equity Investment

April 19, 2018
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Hansen RadaHansen Rada, CEO, Tax Guard

Tax Guard announced on Monday that it received an investment from Falfurrias Capital Partners, a Charlotte, NC-based private equity firm.

“What really excites me about [partnering with Falfurrias Capital Partners] is the breadth of experience that they bring to the table,” said CEO and co-founder Hansen Rada. “They have some real icons in banking that are now going to be members of the board and will continue to assist us from a strategic point of view as we begin to expand our platform.”

Tax Guard generates tax liability research on companies and individuals for lender clients that want a clearer picture of who they might be lending to.

“Across the board, 22 percent of businesses owe money to the Internal Revenue Service, and no lien has been filed,” Rada told deBanked. “In other words, there’s no public record of this. That’s where Tax Guard [comes in]. We identify these tax liabilities before the lien has been filed to notify lenders of potential risk.”   

Rada said that since 2010 tax liens have dropped by 70 percent, yet the number of people and businesses that owe money has gone up steadily. This is because of a tactic the IRS uses, according to Rada, where it issues fewer liens which allows people’s credit scores to rise. When credit scores rise, people and businesses can take out loans that they can ultimately use to pay back to the government in taxes.

Regardless of whether or not this is a tactic, in addition to fewer liens, even existing liens have become more difficult for lenders to see. In March, Experian, one of the three major credit bureaus, said that it would stop reporting all tax liens from its consumer credit reporting database this week. And the other two major credit bureaus, Equifax and Transunion, have already stopped including civil judgments and tax liens on their consumer credit reports.

Rada agreed that these developments are positive for his business and said that this continues to validate the company’s value proposition. Specifically, Tax Guard provides reports to commercial lenders to let them know, in real time, if a business fails to pay its taxes.

“Our clients are anyone that cares if the people or businesses they are lending money to owe money to the IRS,” Rada said.

Rada said Tax Guard does business with about 350 lenders, including a national bank, community banks and alternative online lending companies.

So how does Tax Guard conduct its research? It contacts the IRS directly about specific people and companies. For the most part, this data-collecting process can be done by anyone. But it takes a long time and Rada said they are able to bypass the “middleman,” like public record searches and county courthouses. Tax Guard gets paid by its clients per business/individual report that it produces, and it customizes pricing based on volume.

As part of the investment deal, four people connected to Falfurrias Capital Partners will be joining Tax Guard in some capacity. Chris Marshall, a co-founder of Capital Bank and previously a senior executive at Bank of America, will join Tax Guard as Executive Chairman. Marc Oken, co-founder of Falfurrias Capital Partners and a former Bank of America CFO, will join the Tax Guard board, along with Geordie Pierson, a principal at Falfurrias Capital Partners, and Joe Price, a former Bank of America CFO.

Founded in 2009, Tax Guard has 65 employees at its office in Boulder, CO.

How One Company is Helping MCA Brokers and Clients Through Credit Repair

March 5, 2018
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Joe Clapman, Venture Credit Solutions
Joe Clapman, founder and CEO, Venture Credit Solutions

Venture Credit Solutions, a New Jersey-based credit repair business, was created in 2016 by founder and CEO Joe Clapman. Because of extensive licensing and other legal conditions required to run a credit repair shop, the company didn’t start operating until the beginning of this year, with a soft launch at deBanked’s Miami event in January.    

Formerly an MCA broker, Clapman saw firsthand that really bad personal credit could hinder one’s ability to get cash advances for their businesses, along with home mortgages and even jobs. So he started a consumer credit repair business. He is very clear about what he can and cannot do.

“We get erroneous items that do not belong on your credit report, off,” he said.  

He cannot recoup people’s money or eliminate credit card debt. He does not guarantee that he will improve your credit score, but he maintains that when negative erroneous data is removed, generally FICO scores go up and people become eligible for more credit or better credit.

This can benefit MCA brokers by allowing them to take unfundable or less fundable MCA clients and turn them into additional clients for credit repair. Clapman said that brokers for credit repair can get a commission similar to a $15,000 to $20,000 MCA deal.

“We don’t have some secret handshake with Equifax and Experian,” Clapman said.  “We can’t do anything you can’t do on your own.”

Instead, Clapman told deBanked that Venture Credit Solutions is a service-based company of researchers, who he calls “information givers,” that are trained in determining the accuracy of data on personal credit reports.

“Any data on your credit report has to be accurate to the letter,” he said.

Clapman and his team make money only when they are able to successfully prove inaccurate data and remove it from a customer’s credit report. Every line of a customer’s report is itemized and the customer is told beforehand how much they will pay Venture Credit Solutions if the company is able to prove that the data is inaccurate.

And data is either accurate or it isn’t.

“If someone tells me that something is accurately described on their credit report, it’s actually illegal for me to try and get it removed,” Clapman said.

While Venture Credit Solutions provides services to individual consumers, they do not advertise to the general public. Instead, they get business from brokers, who Clapman calls “referral agents.” These are MCA and real estate brokers, among others, who are trying to improve their client’s credit – if it has been inaccurately reported.

Clapman gave the example of an MCA merchant who signed a document allowing his broker to submit an application to only one funder. But the broker sent the application out to like 93 funders, severely damaging his credit because of all the credit inquiries.

“We can help him to get all these inquiries off,” Clapman said.

One of the core mantras at Venture Credit Solutions is “The client is your client.” This is important to Clapman because he wants to communicate to his referral agents that the company is not trying to steal their clients – by, for instance, finding the client a lower mortgage. Doing something like this would adversely affect the customer’s credit, which is exactly what Venture Credit Solutions is trying to improve.  

“We’re trying to create a win-win process,” Clapman said. “The broker is winning because he’s not losing a client, he’s helping a client [and getting a commision.] And the client is winning because his credit is getting better.”

Clapman said that he is in talks with the New York and New Jersey police and fire departments to potentially help their members who might have erroneous data on their credit reports.

Venture Credit Solutions also has a program for startup companies, designed to improve and build the credit of entrepreneurs. The company now has 15 people working at its office in New Jersey and it plans to be onboarding at least an additional 30 within the next two weeks. Some will work remotely, but all will be in the US, Clapman said.


AmEx to Launch Small Business Loans on Lendio

April 20, 2016
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American Express is getting knee deep in small business lending and has chosen to go online. 

The bank is partnering with small business loan marketplace Lendio to bring its merchant financing products to small businesses. This marks a step forward for American Express as it wants to look beyond its customer base and turn new merchants into borrowers. 

Lendio CEO Brock Blake called the product a hybrid between a merchant cash advance and a bank loan ranging from $5,000 up to $2 million for two years. Merchants with a minimum revenue of $50,000 and two years of operating history can apply for this loan based on cash flow and credit card sales.

“This was a relationship that has been a long time coming,” said Blake.  “We are fortunate to have won this deal and this opens the door for many similar relationships.”

In February this year, American Express ended a 16 year relationship with retail giant Costco. That partnership constituted 20 percent of the company’s outstanding loans which it hopes to recover by growing the small business loan revenue. The bank also featured its charge cards on online marketplace, Fundera for merchants to compare its business charge cards with traditional loans. To provide some context, Amex cards for small businesses funded $190 billion in purchases, up from $122 billion in 2010.

And as for Lendio — the company has been bullish about striking big ticket deals. The Salt Lake City-based loan marketplace funded $128 million in financing over 5000 small businesses, clocking in 1175 percent annual growth from the previous year.


Square Goes Back To The Drawing Board, Ahead of First Earnings

February 19, 2016
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Square registerSquare is bracing for its first milestone as a public company – its first earnings report.

On March 9th, the payments company will present a scorecard of how it’s doing and what that means for its investors. Visa picking up a 10 percent stake in the company came as a respite for the stock which has generated close to 27 percent losses since its IPO.

But that might not be enough to prove that the seven year old company is in a sustainable business. Square has to prove that it is all a small business needs. From capital, payroll to point-of-sale, Square wants to be the one stop shop for small merchants, not relying entirely on its payments business which makes up 95 percent of its revenue.

When the company started in 2009, its strategy was to go after micro merchants that were too fragmented and small for bigger payments companies. Square started by giving these merchants a dongle to accept card payments for a flat fee. While the idea was to serve an untapped market, the company could not be shielded from the risks that these merchants bring to a business with their heterogeneity, fragmentation and smaller deals.

But ahead of its first earnings call, the company is ramping up its efforts towards bringing more businesses into its fold. Forbes reported that Square expanded its payroll product to merchants in Tennessee, New Hampshire, Nevada, South Dakota, and Alaska in addition to the existing markets of California, Texas and Florida allowing them to serve 30 percent of independent businesses in the U.S.


American Express wants to lend more to small businesses

February 10, 2016
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American Express hopes to tide over the bitter credit-card deal with Costco by lending to small businesses.

The two companies ended their 16-year partnership when Costco joined hands with Citi in March 2015. This June, customers will receive their Costco-brand Visa credit cards.

AmEx wants to turn its focus on what it is already familiar with — small business loans. In 2014, AmeEx cards for small businesses funded $190 billion in purchases, up from $122 billion in 2010, with enough reason to believe that there is room to grow the business.

AmEx hopes for the small-business loans to make up for the lost revenue from the Costco deal which accounts 20 percent of the company’s outstanding loans, according to a Reuters report.


The Funding Calls That Won’t Stop

November 23, 2014
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“Your business has been approved for a loan…”

Last week, Chicago Public Radio (WBEZ 95.1 FM) investigated a trend in the small business community, the use of merchant cash advance financing. The station called me in advance to answer some questions about merchant cash advances and I gave my best explanation of the industry and its products.

Of the discussion that lasted more than 30 minutes, only about five of my sentences made it on the air. While I clarify some of my positions below, it was sobering to learn the context of how they were used, as a defense to real life merchant complaints.

The satisfaction rate with merchant cash advances are pretty high and I say that mainly because it’s so rare to hear complaints from anyone other than journalists that can’t believe anyone would accept rates above 6% APR. And while there are indeed bad actors in the industry (as there are in any industry), the gripe one merchant had about phone solicitations that just won’t stop is a recurring theme.

It’s happening to me too.

As an account representative in 2010 calling real time leads sold to five parties at once, I did what anyone would do, I pretended to be a small business myself and inquired through the website that we bought leads from and entered my cell phone as the point of contact

Ring. Ring. Ring…

Within a half hour, representatives from four companies called me, and I learned exactly who my competition was, how they explained the product, and what they would say to win me over. Two of the four were really good and one even referenced my name personally, saying something to the effect of, “If you get a call from Sean Murray, his rates are worse than mine.” Obviously he had already done what I was doing now, which was pretend to be a small business so he could prove to the prospect he was well informed about the alternatives. He had heard my pitch already and was now throwing me under the bus by planting the seed that I was going to offer something more expensive even if it wasn’t the truth.

In the end none of them won because it was all a farce. One never called me again after the first call. Another kept at it for a week and the remaining two followed up for a month.

And then it got quiet…

I had been marked as a dead lead and forgotten about until three months later when one company sent a follow up email. “Smart,” I thought. But then a call came six months later, and then more emails, some from companies I didn’t originally engage with.

And they continued at regular intervals, every couple of months an email or call. Was it interesting? Yes. Annoying? No.

Until this year.

call centerThe volume of emails have slowed but I’ve somehow ended up on robo calling lists. “Press 1 to talk to a funding specialist or press 9 to be added to the Do Not Call list”

The press 9 option doesn’t work for me. Sure, I might be removed from that marketer’s list, but it in no way removes you from anyone else’s list. I knew that already of course because I’ve been on the other end before.

The first time I got one of these calls, I was excited to tell the sales representative who I really was, level with him, and explain that it was a really good idea to take me off the list. But much like other business loan robo call complaints, the representative wouldn’t tell me anything about himself or his company.

I got yelled at.

Every time I tried to ask a question, he’d get louder, insisting I tell him my monthly gross sales volume for the “cash advance I wanted.”

A rogue actor maybe, but I’ve since gotten additional business loan robo calls and have made no progress in getting myself removed. I just hang up now.

Call it sweet irony perhaps. Or maybe a wake up call (pun intended). I applied on a website once four years ago and the rest is history.

My experience with repeat solicitations is marginal compared to somebody that has actually used a merchant cash advance. With the filing of a public UCC-1, anyone in the industry can easily access that data and convert it into a marketing list. And they do.

Brokers that scorn UCC marketing acknowledge that these businesses could be getting called 5-10 times a day. My own clients had reported repetitive calls back when I was an account representative. And while UCC marketing is very cost effective, in today’s market where more than a thousand companies are offering similar financial products, it’s probably safe to say it’s overly saturated.

And if 5-10 calls per day were even remotely accurate, I’d surmise that level of volume is marring the industry’s reputation as a whole.

I could argue though that when customers have a great many options to choose from, they win. With more than a thousand companies offering merchant cash advances and business loans, it’s truly a buyer’s market. Play all the companies against each other and you should end up with the best possible terms. It’s a great time to seek capital.

Except we’ve got to do something about those phone calls, or at least the robo calls.

Every angry robo dial recipient becomes one less person likely to speak positively about the the nonbank financing industry. Aged leads, UCCs and phone calls might be inexpensive, but the cost to undo negative preconceived notions is immeasurable.

Do you want to be known as the company that helped small businesses or the annoying people that won’t stop calling? If merchants are taking to the air waves to complain, it will only be a matter of time before the FTC and FCC become interested.

Regarding my comments on the radio about APRs and daily amortization, they were pulled from a conversation that compared daily payment loans to purchases of future sales. I DO believe bad actors exist and every business owner should have an accountant, lawyer, or savvy third party review any contracts they enter into, financial or otherwise.

Are We in a $300 Billion Market?

August 7, 2014
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stacking turf warEarlier today on a large group conference call with Tom Green and Mozelle Romero of LendingClub, I learned a few more details about their business loan program. In the Q&A segment, one attendee came right out and asked if they believed their competition was merchant cash advance companies and online business lenders.

According to Green, it’s not so much other companies that they feel they are up against but more of the broad challenge of market awareness. Their struggle is about getting people to know that there are non-bank options available and to make people aware of their existence.

It’s the same challenge merchant cash advance (MCA) companies have been dealing with for more than a decade. Notably though, there are many in the MCA industry that feel the market is saturated and thus a lot of the industry’s growth has been fostered through a turf war for the same merchants. Stacking (the practice of funding merchants multiple advances or loans simultaneously) is partially spurred by a belief that there are no more untapped businesses left to fund. The acquisition costs of a brand new untouched business that is both interested and qualified is so high, that it is not a pursuit some funders and brokers can afford to take on.

$300 billion?!Market Size
At present, daily funders, which are a combination of both MCA companies and lenders that require daily payments, are funding somewhere between $3-$5 billion a year. On the call Green said he believed the potential market was far larger than that, though he discredited the $200 billion figure that some independent research had predicted. That was only because LendingClub believes the potential market is substantially higher, more like $300 billion.

$300 billion?! That’s about 100x larger than the current daily funder market combined and starkly contradicts any belief that there’s no merchants out there who haven’t already gotten funded.

LendingClub’s minimum gross sales requirement is $6,250 a month and they have an upper monthly gross threshold on applicants at $830,000 a month, though they’ve had businesses apply who do even more than that. Their sweet spot as Green put it, is the segment doing $16,000 to $416,000 gross per month.

I can’t help but notice that’s the same sweet spot that daily funders have. And we mustn’t forget, LendingClub’s target business owner has at least 660 FICO. If it’s a $300 billion market for good credit applicants, then it’s got to be even bigger for the ultra FICO-lenient companies in MCA.

What’s a business?
LendingClub only needs someone with at least 20% ownership to both apply for and guarantee the loan, an unheard of stipulation in the rest of alternative business lending. One cardinal rule in MCA has been that there needs to be at least 51% or 80% ownership signing the contract. That’s had a lot to do with the fact that most MCA agreements are not personally guaranteed and the signatory is required to have absolute authority to sell the business’s future proceeds.

Summer of Fraud
fraudIn 2013 the MCA industry experienced what many insiders dubbed the summer of fraud. Spurred by advances in technology, small businesses were applying for financing en masse while armed with pristinely produced fraudulent bank statements. Fake documents overwhelmed the industry so hard that today it is commonplace for underwriters to verify their legitimacy with the banks. This is done manually or with the help of tools such as Decision Logic or Yodlee.

Knowing this firsthand, I asked LendingClub if they also take the care to verify bank statements. In the majority of cases they do not. They rely greatly on an algorithm that detects fraudulent answers on the application but the statements themselves are not scrutinized except in very high risk situations. Considering they’re wildly less expensive than MCAs, I find it odd that they are exposed to this type of risk. Fraudulent documents are the norm and in these underwriting conditions, I would expect them to charge as much or more than MCA companies, not less.

At the same time it’s important to mention that at present, business loans on their platform are only funded by institutional investors. Retail investors can only invest in consumer loans. LendingClub has been very transparent about excluding retail investors here for the very purpose of shielding them from unevaluated and unforeseen risk. My guess is that as time goes on, they will do more to validate the bank statements which is the bread and butter of assessing the risk and health of a business.

Check out: LendingClub doesn’t require bank statements for personal loans. Are they missing pieces of the puzzle?

$300 billion
In a FICO flexible environment, it’s possible the potential for daily funders is at least $300 billion. If true, that would mean that for the 16 years that MCA players have been around, they barely reached even 1% of their target audience. I’ve been saying it since I’ve started this blog 4 years ago, every business owner I’ve spoken to has never heard of a merchant cash advance… which means saturation is a myth.

Tom Green was right, the real competition is public awareness. 99% of the potential market is untapped. If you’re fighting with 5 other companies over the same merchant, you gotta:

Keep on looking now
You gotta keep on looking now
Keep on looking now

You’re looking for love
In all the wrong places

Making Cents of Short Term Business Lending

June 22, 2014
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Where 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?

5 years dow jones

Did New Yorkers factor Hurricane Sandy into their 5 year plan back in 2009?

hurricane sandy

It’s only 5 years, what could possibly happen to a small business in that time?

June 2009

june 2009 west neck road

October 2009

October 2009 west neck road

January 2013

Jan 2013

These 2 storefront locations are blocks away from where I grew up.

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?

September 2008

Huntington Village Corner September 2008

July 2012

Huntington Village July 2012

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 there was no such thing as Obamacare. Forget acts of God such as hurricanes, even itty bitty things such as legislation can have massive implications on small business performance. Predicting the loss of 2.9 million jobs per year may have you reconsider your 5 year plans.


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.

cd store

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?

5 year loan

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…

Access to Capital – A Dose of Reality

June 15, 2014
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So much for a lack of transparency… While sitting directly next to Maria Contreras-Sweet, the head of the Small Business Administration, OnDeck Capital’s CEO corrected U.S. Senator Cory Booker’s comments about the APR of their loans. High teens? Not so, said Noah Breslow who explained their average 6 month loan has an APR of 60% even while costing only 15 cents on the dollar.

Why is access to capital so expensive? Rob Frohwein, the CEO of Kabbage said that up until recently his company was borrowing funds at a net rate of more than 20% APR. In order to turn a profit, they had to lend at a rate much higher than that.

The Access to Capital small business panel included:
Maria Contreras-Sweet – Head of the U.S. Small Business Administration
Noah Breslow – CEO, OnDeck Capital
Rohit Arora – CEO, Biz2Credit
David Nayor – CEO, BoeFly
Rob Frohwein – CEO, Kabbage
Paul Quintero – CEO, Accion East
Rohan Matthew – CEO, Intersect Fund
Jonny Price – Senior Director, Kiva Zip
Jeff Bogan – SVP, LendingClub
Steve Allocca – Global Head of Credit, PayPal
Jay Savulich – Managing Director of Programs, Rising Tide Capital

The Deal

May 25, 2014
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When times are tough, small businesses take chances. Last year, a family run business in Cohasset, MA made a snap decision and agreed to a $75,000 loan with infinity percent interest, literally. The principal was completely repaid in just 74 days but as per the contract, they still had to make fixed interest payments for as long as the business was open.

It wasn’t necessarily a good deal. Heck, some might think it was a really bad deal, but they got the cash when they needed it. The perpetual fixed payments kicked in after the principal was repaid because the lender structured them as royalty fees. A normal merchant cash advance will take a percentage of a merchant’s sales up until a predetermined amount has been satisfied, but this deal required a percentage forever. Is Wall Street running amok yet again? Shouldn’t people be monitoring stuff like this?

As it would turn out, about 6.5 million people were witness to this transaction. More than half of those people, most of whom are hard-working American families, cheered the business owner on. That’s because this deal had nothing to do with Wall Street and did not involve a commercial loan broker.

The business is named Wicked Good Cupcakes and it’s a deal they made on Shark Tank, a hit TV show on ABC. Kevin O’Leary loaned them $75,000 and took a percentage of every sale until he was repaid just 2.5 months later. Since then he is taking a permanent royalty of 45 cents per cupcake sold.

As quoted in the Boston Business Journal

“The royalty deal has worked great for us,” said Tracey Noonan, the CEO of the company.

Many people told her immediately following the deal that she was stupid. But today, Wicked Good Cupcakes is doing better than ever.

O’Leary, whom the business owners called an “angel in disguise” has referred to the deal as one of the most phenomenal ever made on the show. Wicked Good Cupcakes is actually on pace to do $3 million in revenue in 2014.

While it’s true that part of their success is due to the appearance on the show, nowhere does it say that entrepreneurs have to agree to take a deal if offered one. That means the owners could have walked away from O’Leary’s offer and still experienced the same post-show hysteria of celebrity. But they needed the money… and there was an offer on the table. It wasn’t the best deal, but it was A deal.

And that’s the nature of business. Everything is about circumstances. You could be flush with cash or in a pinch, growing fast or playing defense. All the while opportunities and obstacles approach from every turn.

sharkUnlike consumers who are afforded protections from making decisions that might not be in their best interest, small businesses are free to pursue whatever strategy they want. The best part about capitalism is that you’re the master of your own destiny.

The terms O’Leary offered to Wicked Good Cupcakes were not unique. Just recently in the 12th episode of Season 5, he offered a $100,000 loan to Tipsy Elves that once repaid, would still require payments in perpetuity in the form of a royalty fee for every sale. That’s an equivalent APR of infinity. In the end, they turned it down and went with Robert Herjavec’s equity offer instead.

Many viewers have taken to twitter to share their doubts about the viability of the Tipsy Elves business model, which is selling ugly Christmas sweaters. That healthy dose of skepticism is something alternative lenders are no strangers to, and as such they tend to price their deals accordingly.

Even deal making that is done on TV in front of millions of witnesses can go sour. Just ask Marcus Lemonis, the star of the TV show The Profit, who recently made a deal with a business in my own backyard, A. Stein Meat Products in Brooklyn, NY. After learning the business was on the brink of insolvency, Lemonis offered them a cash lifeline in exchange for buying their Brooklyn Burger brand at a bargain price of $190,000. In any other circumstances, that deal might not have happened.

Lemonis expeditiously wired them the cash, but never got what he paid for in return. Mora and Buxbaum, the owners, claim the funds were a loan but they have never made a payment. Defaults like these happen every day, especially in alternative business lending.

The entrepreneur applies for a business loan, the loan gets made, and the borrower quickly defaults. The result is that the price goes up for the next guy. That’s the risk part that lenders always talk about, the odds that they’re not going to get paid back. If every business repaid their loans, the average cost of financing in alternative business lending would probably be about 6% a year, around what an A rated personal loan costs on LendingClub, instead of the high double digit or triple digit rates that exist now.

Even Kevin O’Leary isn’t taking any chances, hence he protects himself by charging infinity percent interest, and America thanks him every Friday night for blessing entrepreneurs with an opportunity. It’s not the best deal, but it’s A deal.

Small business owners are sophisticated enough to make tough decisions all on their own. That’s the reason we can put them in the public eye, in front of more than 6 million people who either cheer for their success or literally cry out for their demise. These entrepreneurs don’t go on Rainbow & Unicorn Tank, they go on Shark Tank. Sometimes the entrepreneurs walk away with a partner, sometimes they get a loan with infinity percent interest. In the end, it’s their choice, a choice that 36,000 small businesses hoped they would have in 2012. That’s how many applied to be on the show that year.

Business is business and a deal’s a deal. The ball’s always in your court…

Quotes from Kevin O’Leary

Business is war. I go out there, I want to kill the competitors. I want to make their lives miserable. I want to steal their market share. I want them to fear me and I want everyone on my team thinking we’re going to win.

Here’s how I think of my money – as soldiers – I send them out to war everyday. I want them to take prisoners and come home, so there’s more of them.

You may lose your wife, you may lose your dog, your mother may hate you. None of those things matter. What matters is that you achieve success and become free. Then you can do whatever you like.

I’m not a tough guy. I’m just delivering the truth and only the truth and if you can’t deal with it, too bad.

Nobody forces you to work at Wal-Mart. Start your own business! Sell something to Wal-Mart!

Don’t cry about money, it never cries for you.

The only reason to do business is to make money; that’s the only reason for doing business.

Money has no grey areas. You either make it or you lose it.

Working 24 hours a day isn’t enough anymore. You have to be willing to sacrifice everything to be successful, including your personal life, your family life, maybe more. If people think it’s any less, they’re wrong, and they will fail.

I have met many entrepreneurs who have the passion and even the work ethic to succeed – but who are so obsessed with an idea that they don’t see its obvious flaws. Think about that. If you can’t even acknowledge your failures, how can you cut the rope and move on?

I don’t mind rude people. I want people that I can make money with, so if their executional abilities are good, and they’re arrogant and rude, I don’t care.

Can you handle it?

The Real Impact on Small Business

May 22, 2014
Article by:

the truthIt’s not easy being in the lending business. Just talking about money can make people uncomfortable. Bringing up how much money you have, don’t have, or wish you had is like bringing up politics at Thanksgiving dinner. It’s taboo in this society. It’s even rude to ask somebody how much they make a year. That’s one of two reasons why being a lender or loan broker is so difficult, you’re forced to dive head first into emotionally charged waters.

The second reason is telling an applicant ‘no’. It feels personal even if it’s not. “It’s just business,” the bearer of bad news will say, but it never feels that way. I know that firsthand through my experience as both a broker and an underwriter. Rejection is a painful experience for an applicant no matter how professional they are.

But sometimes you get to tell an applicant ‘yes’ and that can be an emotionally moving experience as well. Looking back, the only applicants I ever heard cry were the ones that got approved. Some of those approvals were expensive but they were given an opportunity in a world where up until that point, no one was willing to give them any opportunity at all. They were the forgotten businesses of America.

PayPal’s VP of SMB Lending recently said that he feels “blessed to be serving this higher need.Blessed was an interesting word choice. Being able to support small businesses doesn’t just make him feel happy or hopeful or satisfied, it makes him feel blessed.

What is the real impact that alternative financing companies have on small businesses? Thanks to the funding companies who took the time to find out. Today, we can see for ourselves:

Above is just a small handful of the testimonials you can find on the websites of CAN Capital, Kabbage, RapidAdvance, Fora Financial, and Merchant Cash and Capital. Real businesses, real stories, real impact.

And there you have it…

Would You Fund This Business?

April 12, 2014
Article by:

Burned down businessIs the site inspection dead?
One of the strangest byproducts of the automation age is that underwriting tools once deemed absolutely essential are being replaced with APIs, digital verifications, and algorithmic scoring. Speed is everything, but why?

Faster speed through automation allows for scaleability. The promise of speed to a potential customer also encourages them to apply. Working capital can be an impulse decision now. You don’t even need to leave your chair to get $80,000 for your small business. But who’s making sure these businesses are sound… or more importantly, that they even exist?

I learned through conversations at Transact 14 that there is a growing dependency on Google Earth for site verification, more specifically Street View. Really??? Street View?!

While tech heavy funding companies laud real-time data through hundreds of APIs, it’s amusing to think that something like Street View, which might not be updated for months or years at a time, suffices as a site verification. Indeed, Street View still shows Christmas decorations in my home town.

Google Earth can pinpoint the obvious things like showing you something is located in the middle of nowhere:


But can it show you this sign located inside?

lost our lease

And how would you know if the writing was literally on the wall if it just went up yesterday?

Going out of business

Or that everything is completely on the up and up except that the business will be:

closed for winter

If you had the chance to speak with Jason Fullen or Joe Volk at NVMS during Transact 14, you’d know that site inspections performed by real live humans can be done in the same day they’re ordered. Or if you were getting wild at the Quiktrak party, you’d know that many of the older merchant cash advance companies still rely on site inspections, particularly on large deals.

How dumb would you feel if the $150,000 deal you funded looked like this on the inside?

burned out

Investigate a little
Who better to know the scoop on the business than the locals? I am reminded of the time a $100,000 deal I worked on where the site inspector commented that a restaurant was actually a front for a brothel that was likely going to get shut down.

I also recall almost funding a $100,000+ supermarket until the site inspection revealed that all of the shelves in the store were empty. I guess that merchant wasn’t lying when they said they needed the money to buy inventory!

And there was my own personal trip to a Brazilian Steakhouse for the final approval on an MCA deal based on credit card transactions. The server politely informed me at the end of my meal that the establishment no longer accepted credit cards as of a few days ago. How convenient…

Can social media be our eyes?
In the social media era, it’s almost as if a million site inspections are being conducted every minute. Can reviewer data be our eyes?

burned store

closing down

flooded store

If there are too few reviews or they’re aged, can you rely on all your other data points? Can you trust that the available reviews are from real customers?

Speed is king these days, but ignorance is never in style. One has to consider if they can trust external data versus what they see with their own two eyes. We’ve all seen deals that looked great on paper, but turned out to be complete


After further review of the deal:

jurassic park

Should we fund businesses we never see? It’s your call.

Merchant Cash Advance Syndication: Crowdfunding?

March 28, 2014
Article by:

merchant cash advance syndicationYou might not have known this, but one of the most lucrative opportunities in merchant cash advance is the ability to participate in deals. It’s a phenomenon Paul A. Rianda, Esq addressed in DailyFunder’s March/April issue with his piece, So You Want to Participate?

Syndication is industry jargon of course. You probably know the concept by its sexier pop culture name, crowdfunding. For all the shadowy rumors and misinformation that circulates out there about merchant cash advance companies, they’re similar to the trendy financial tech companies that have become darlings of the mainstream media.

Did you know that many merchant cash advances are crowdfunded? To date, no online marketplace has been able to gain traction in the public domain aside from perhaps FundersCloud, so crowdfunding in this industry happens almost entirely behind the scenes. There is so much crowdfunding taking place that it’s becoming something of a novelty for one party to bear 100% of the risk in a merchant cash advance transaction. Big broker shops chip in their own funds as do underwriters, account reps, specialty finance firms, hedge funds, lenders, and even friends and family members of the aforementioned.

Merchant cash advance companies find themselves playing the role of servicer quite often, which is coincidentally the model that Lending Club is built on. A $25,000 advance to an auto repair shop could be collectively funded by 10 parties, but serviced by only 1. Each participant is referred to as a syndicate. This is not quite the same system as peer-to-peer lending because syndicates are not random strangers. Syndication is typically only open to businesses, and most often ones that are familiar with the transaction such as the company brokering the deal itself.

In the immediate aftermath of the ’08-’09 financial crisis, some merchant cash advance companies became very mistrusting of brokers and deal pipelines were going nowhere. Underwriters had a list of solid rebuttals for deals they weren’t comfortable with. “If you want us to approve this deal so bad, why don’t you fund it yourself!,” underwriters would say. Such language was intended to put a broker’s objections over a declined deal to bed. But with all the money being spent to originate these deals, it wasn’t long until brokers stumbled upon a solution to put anxious merchant cash advance companies at ease. “Fund it myself? I’d love to, but I just can’t put up ALL of the cash.

And so some brokers started off by reinvesting their commissions into the deals they made happen. That earned them a nice return, which in turn got reinvested into additional deals. Fast forward a few years later and deals are being parceled out by the truckload to brokers, underwriters, investors, lenders, and friends. There’s a lot of money to be made in commissions but anybody who’s anybody in this business has a syndication portfolio. The appetite for it is heavy. Wealthy individuals and investors spend their days cold calling merchant cash advance companies, brokers, and even me, trying to get their money into these deals. They know the ROI is high and they want in.

crowdfundingThat’s the interesting twist about crowdfunding in the merchant cash advance industry. You can’t get in on it unless you know somebody. There are no online exchanges for anonymous investors to sign up and pay in. It requires back door meetings, contracts, and typically advice from sound legal counsel. A certain level of business acumen and financial prowess are needed to be considered. These transactions are fraught with risk.

In Lending Club’s peer-to-peer model, investors can participate in a “note” with an investment as small as $25. This is a world apart from merchant cash advance where it is commonplace to contribute a minimum of $500 per deal but can range up to well over $100,000.

Lending Club defines diversification as the possession of more than 100 notes. At $25 a pop, an investor would only need to spend $2,500. With merchant cash advance, 100 deals could be $50,000 or $10,000,000. By that measure, syndication is crowdfunding at the grownup’s table, a table that doesn’t care about sexy labels to appease silicon valley, only yield.

Strange merchant cash advance jargon keeps the industry shrouded in mystery. Did you know that split-funding and split-processing are terms often used interchangeably? Or that they have a different meaning than splitting? Or that the split refers to something else entirely?

Do you know what a holdback is or a withhold? How about a stack, a 2nd, a grasshopper, an ISO, an ACH deal, a junk, a reup, a batch, a residual, a purchase price, a factor rate, or a UCC lead?

Paul Rianda did a great job detailing the risks of syndication, but there is one thing he left unsaid, and that’s if you’re going to participate in merchant cash advances, you better be able to keep up with the conversation.

At face value, syndication is nothing more than crowdfunding. But if your reup blows up because some random UCC hunting ISO stacked an ACH on top of your split while junking him hard and upping the factor with a shorter turn, you just might curse the hopper that ignored your holdback and did a 2nd. And on that note, perhaps it’s better that the industry refrain from adopting mainstream terminology. We wouldn’t want everybody to think this business is easy. Because it’s not.

One factor to consider is the actual product being crowdfunded. In equity crowfunding, participants pool funds together to buy shares of a business. In crowdlending, participants pool funds together to make a loan. But in merchant cash advance syndication, participants pool capital to purchase future revenues of a business. An assessment is made to predict the pace of future income and a discounted price is paid to the business owner upfront. That purchase price is commonly known as the advance amount.

Syndication has more in common with equity crowdfunding than crowdlending. If you buy future revenues and the business fails, then your purchase becomes worthless. There is typically no recourse against the business owner personally unless they purposely interfere with the revenue stream and breach the agreement. Sound a bit complicated? It is, but crowdfunding in this space is prevalent nonetheless. To get in on it, you need to know someone, and to do it intelligently, you better know what the risks are.

If you want to sit at the grownup’s table and syndicate, consult with an attorney first. There’s a reason this industry hasn’t adopted sexy labels. It isn’t like anything else.

General Solicitation or Crowdfunding?

Federal Reserve Examined Alternative Business Lending

March 20, 2014
Article by:

Federal ReserveBack in January, 3 staff members of the Federal Reserve board investigated peer-to-peer (p2p) business lending, particularly by comparing it against p2p consumer lending. It offers this introductory background, “As distrust and dissatisfaction with commercial banks grew during the recent financial crisis,there was large growth in nonstandard types of borrowing arrangements.” That’s usually where we’d segue off into a discussion about merchant cash advance but it was the p2p model that had them so intrigued.

As it is a 28 page study, I have pasted the excerpts I felt were most relevant with my comments on top. The link to the full report is at the bottom:

Something I’ve noticed a lot myself:

Small business owners often intermingle their personal and business finances

Something Lending Club might want to think about a day after they announced business loans with an interest rate of 5.9%:

Our results indicate that loans for small business purposes were more than two-and-a-half times more likely to perform poorly.

Do merchant cash advance companies face a similar risk?

Between 2006 and 2008 peer-to-peer lending grew steadily. It hit a snag in 2008 when the SEC determined that their loans should be classified as securities and, thus, regulated. This led both Prosper and Lending Club to put any new loans on hold until they properly registered with the SEC.


Lending to small businesses is generally considered to be riskier and more costly because small firms have higher failure rates and are more vulnerable to downturns in the economy. Lending to small businesses is further complicated by their informational opacity. Most do not have the detailed financial statements

Lending Club had higher decline rates in high risk states.

while Florida was home to more than 4,000 applications for small business loans, fewer than 300 of them were funded

We’ve all seen deals where the merchant requests much more than we’d ever feel comfortable with:

requesting greater amounts of money decreased the likelihood of a loan being funded; each additional $1,000 requested decreased the likelihood of funding by about 4 percent.

Rest assured, the government will be watching and measuring the impacts all the while. Do higher cost, low paperwork loans impact small business longevity? I’m reminded of the raging stacking debate taking place in the industry right now…:

As small business owners are increasingly turning to this alternative source of money to fund their businesses, policy makers may wish to keep a close eye on both levels and terms of such lending. Because such loans require less paperwork than traditional loans, they may be considered relatively attractive. However, given the relatively higher rate paid on such loans, it may be in the best interest of the business owner to pursue more formal options. More research is required to understand the long-term impact of such loans on the longevity of the firm and more education to potential borrowers is likely in order.

Download the Federal Reserve Report HERE.

Is There Cause for Alarm?

March 8, 2014
Article by:

CNN 3/7/14

Brick and mortar chain stores died this week, after a long illness. Born along Main Street, raised in shopping malls across post-World War II America, the traditional store enjoyed decades of good health, wealth and steady growth. But in recent years its fortunes have declined. Survived by and online outfits too numerous to list.

– CNN 3/7/14

Just a day after Jeremy Brown’s new CEO Corner post appeared on DailyFunder with an overt bubble warning, CNN’s Chris Isidore alluded that the era of brick & mortar retail may be drawing to a close. In Isidore’s brief sensational article, he fingers an overabundance of retail space, a weak economy, and the Internet as the culprits behind Main Street‘s decline.

In the broad alternative business lending industry, the sentiment is quite the opposite. Small business demand for working capital is surging and no one is predicting anything less than stellar growth for the foreseeable future. But is the growth real?

Jeremy Brown is the CEO of Bethesda, MD-based RapidAdvance and he explains the growth may not be what it appears to be on the surface. Some cash providers are overpaying commissions, stretching out terms longer than what their risk tolerance supports, and are growing by funding businesses that have already been funded by someone else (a practice known as stacking).

If the industry collectively booked 50,000 deals in 2013 and increased that to 100,000 deals in 2014, you’d have 100% growth, or at least it would appear that way on the surface. What if the additional 50,000 deals funded this year were not new clients but rather additional advances and loans made to existing clients? It’s a lot easier to give all of your clients money twice instead of acquiring new ones.

This all begs the question, is demand for non-bank financing really growing by leaps and bounds? Or does it just appear that way because those that have already utilized it are demanding more of it?

Brown left his readers with this conclusion, “There will be a rebalancing at some point. And it will not be pretty.”

Chime in with your thoughts about this on DailyFunder.

When Will the Bubble Burst? by Jeremy Brown will also appear in the next print issue of DailyFunder. If you haven’t subscribed to the magazine already, you can do so HERE.

What’s the Reason Behind the Rise of Non-bank Financing?

March 6, 2014
Article by:

OnDeck Capital CEO Noah Breslow is no stranger to CNBC. Just as word hit the press that his company had raised another $77 million, he made a television appearance to discuss their success.

So why are small businesses owners turning to alternatives?

Many businesses that use alternatives such as OnDeck qualify for traditional bank financing and use the alternatives anyway. Now that’s something to think about…

How Will Obamacare Affect Small Businesses?

December 12, 2013
Article by:

It’s one thing to assume how small businesses feel about Obamacare and another to hear it straight from the horse’s mouth. New York-based funding provider Merchant Cash and Capital surveyed their clients and this is what they learned:

  • Nearly one third of respondents believe the Act will increase operational expenses.
  • 40 percent aren’t sure how it will impact their business.
  • One in four respondents said they will halt any growth initiatives in the near future as a result of the Act.

Additional survey details

Infographic from MCC
obamacare infographic