The CAN Capital Shakeup Is A Sign of the Times
November 30, 2016Update 11/30 7:30 pm: CAN says they are still open for business and still providing access to capital for current customers and renewal business. They are not actively seeking new business at this time, but will evaluate it as it comes in.
Part II of the industry’s season finale has begun. On Tuesday afternoon, CAN Capital confirmed that CEO Dan DeMeo had been put on a leave of absence. The chief risk officer and chief financial officer have also reportedly stepped down. Parris Sanz, the company’s chief legal officer, is now running the company, a CAN spokesperson said. His new title, acting head (which is how their statement referred to him), is perhaps a subtle clue that the company did not plan these moves far in advance. And it’s the phrasing that’s used to describe the departure of these executives that’s worth raising an eyebrow. A leave of absence? A curious fate indeed.
In an exclusive interview AltFinanceDaily conducted with DeMeo last year, he said of CAN at the time, “it’s a self-sustaining business. We’re not forced to approach the capital market to cover our burn rate. We’re cash-flow positive.”
But more recently, there’s a different tone. A spokesperson for CAN said that the company had “self-identified that some assets were not performing as expected and that there was a need for process improvements in collections.” The sudden decapitation of the company’s top officers seems a harsh consequence for this apparent underperformance, especially given that CAN has long been on the short-list as a potential IPO candidate. DeMeo himself had been with the company since 2010, having started originally as the CFO and rising to the CEO position in 2013.
While CAN Capital is a private company, they are notable in that they have originated more than $6 billion in funding to small businesses since 1998 and secured a $650 million credit facility led by Wells Fargo just last year.
Some of CAN’s ISOs report being told that originations have been put on hold until January. A source with close knowledge of the company however, said that’s not correct. The Financial Times reported though that CAN had paused new business until the end of the year and would only be servicing current customers. And they might indeed need time to upgrade their systems since American Banker cited an unnamed source that said “problems arose when CAN Capital used old systems, which were not designed to require daily repayments, to collect money owed by term loan borrowers.”
Some outsiders are not surprised by what’s going. Alex Gemici, the chief revenue officer of World Business Lenders (WBL), said that it’s an indicator that uncollateralized lending is not the panacea everyone thought it was. “What we’ve been saying all along is right there on AltFinanceDaily,” Gemici said, while directing me to the prediction they made a year ago that appears right on this website. At a December 2015 event at the Waldorf Astoria, WBL CEO Doug Naidus told a crowd comprised mostly of his company’s employees that he believed the bubble was about to burst. He doubled down on that prophecy in an interview four months ago in which he chided companies for having forsaken sound underwriting.
Is he right? In the last six months, the CEOs of Lending Club, Prosper and CAN Capital have all stepped down. Avant shed a lot of its staff. Dealstruck, Circleback Lending and Windset Capital have stopped funding. Confidence in the business side of alternative finance has also started to slip on a measurable basis before the election even happened.
“I believe companies are experiencing higher than normal losses due to a serious lack of proper underwriting practices, policies, and procedures,” said Andrew Hernandez, a managing partner at Central Diligence Group, a company that specializes in risk analysis who wasn’t commenting about any lender specifically. “As I say to people not familiar with the space, ‘putting the money out is the easy side of the business; getting it back is what proves to be the most difficult.'”
But CAN has not specifically fingered underwriting practices as the reason for their management shakeup, instead leaning towards it being a lapse in their process as the company grew. “It became clear that our business has grown and evolved faster than some of our internal processes,” they said in their statement.
The only alternative business lender funding more annually is OnDeck, a company that has garnered its fair share of criticism over its lackluster financial performance. Their stock is currently down a whopping 77% from the IPO price, but they have put on a good face for the industry they lead. The familiarity of their famous CEO and the decade in business under their belt arguably even has a calming effect on the tumultuous world of financial technology startups.
OnDeck too though, has been referenced in the context of bursting bubbles. Less than two years ago, RapidAdvance chairman Jeremy Brown voiced concern that the industry was heading into unsustainable territory, even going so far as to call out OnDeck by name. “When I see some of the business practices, offers, terms and other aspects of our business today, I am worried,” he wrote. “I am worried because I believe that 2008 has been too quickly forgotten, and very few, other than those of us that were on the front lines on the funding side at that time, appreciate what happened to outstanding portfolios at that time when average duration was 6 months and no deals were written over 8 months.”
For risk experts like Hernandez of Central Diligence Group, he thinks the newness of everything has been part of the problem. “I believe [funding companies] have faced a big hurdle in acquiring talent,” he said while adding that funding companies can be forced to hire underwriters with no prior knowledge of the product just to keep up with the growth.
While still very little is known about what exactly happened at CAN Capital, most people that AltFinanceDaily spoke with were shocked that anything could happen there at all. “It’s insane,” said the chief executive of another competitor who wished to remain anonymous. “This is CAN we’re talking about.”
A sign of the times?
Letter From The Editor – Nov/Dec 2016
November 1, 20162016 didn’t produce the robots, laser beams and interplanetary colonization I jokingly predicted in the final issue of last year. Instead, the year was rife with terrestrial matters like profitability, sustainability, legal compliance and adjusted expectations. The advances made in financial technology revealed their vulnerabilities and in some cases, their mortalities. But those still standing at the end of 2016 may be better prepared for the future than when they started. Change, in whatever form it may take, can be good.
You need not look further than Mark Cerminaro, the chief revenue officer of RapidAdvance who once aspired to play football in the NFL. Change came for him in several forms, from a sports injury to a harrowing experience in the World Trade Center on 9/11. Today, he’s a major mover and shaker in alternative finance, having made it on the Commercial Finance Association’s 2016 “40 under 40” list of achievers. In this issue, you’ll learn more about Mark and his rapid advance with RapidAdvance.
Change for another fellow came at a more significant cost. In October, an MCA broker turned-debt negotiator was arrested and charged with mail fraud. It’s alleged those debts he offered to negotiate didn’t actually get negotiated and he left a trail of damaged merchants and funders in his wake as a result. But that’s just the tip of the iceberg, you’ll learn, as the scheme descended into a legal war that involved Native American tribes, fake names and phony lawyers. It’s a side of the story that even federal agents left alone.
Change was also once promised by a man known as Senator Barack Obama, many years ago. Did he accomplish it? One thing for certain is that a bigger change, a “yuuge” change even, is coming in the form of a President Donald Trump. He has pledged to repeal and replace Dodd Frank, a bold intention made by an even bolder man. Trump is the curveball that breaks predictive models, a force that could be really good or really bad. Most of the advances in fintech have only known a world in which Obama is President. Is the industry ready for Trump?
It’s difficult to project what will happen in 2017, but in this issue, funders bid adieu to 2016. See you next year.
Some Alternative Funders See Pot As Next Big Market Opportunity
October 17, 2016
For some funders, marijuana is not just about sewing their wild oats. Rather, they see the business potential of being early to what’s expected to be a highly profitable and long-lasting party.
Indeed, for the right type of funder, doling out money to marijuana-related businesses is a promising market—certainly in the short term because these companies are so capital-starved. Because marijuana is still classified by the feds as an illegal drug, many related businesses can’t even get a bank account much less access to bank loans or more traditional funding. Many alternative funders are also unwilling to lend to marijuana-related businesses, which has left a significant void that’s beginning to be filled by opportunistic private equity investors, venture capitalists and others.
Meanwhile, rapidly shifting public opinion and state-centered initiatives bode well for what many estimate is a multi-billion dollar market. Indeed, industry watchers say marijuana funding will eventually be an even stronger niche than lending to alcohol producers, tobacco companies or pharmaceuticals because of all the ancillary business opportunities related to medical marijuana use.
“I think it’s probably the biggest opportunity we’ve seen since the Internet,” says Steve Gormley, managing partner and chief executive at Seventh Point LLC, a Norwalk, Connecticut-based private equity firm that invests in the cannabis industry. “Consumption continues to grow and demand is there,” he notes.
Despite shifting public opinion, legalized marijuana use is still quite controversial. So, all things considered, it takes a particularly thick-skinned funding company—one that has no moral objectives to marijuana and is also willing to accept a significant amount of legal, business and reputational risk—to throw its hat in the ring.
One of the biggest challenges keeping banks and many mainstream funders at bay is that cannabis remains illegal under law. Despite numerous attempts by proponents to scrap marijuana’s outlaw status, the DEA recently dealt out a significant blow by opting to maintain the status quo. This means that for the foreseeable future marijuana remains a Schedule I drug, on par with LSD and heroin, and as a result many lenders will choose to remain on the sidelines for now.
It remains promising, however, that over the past several years, the federal government has taken a more laissez-faire approach, giving individual states the authority to decide how they will deal with legalizing marijuana use. Forty-two states, the District of Columbia, and the U.S. territories of Puerto Rico and Guam have adopted laws recognizing marijuana’s medical value, according to the Marijuana Policy Project, an advocacy group. Four states—Alaska, Washington, Oregon, and Colorado—as well as the District of Columbia have gone even further. They allow the recreational use of marijuana for adults, with certain restrictions. Meanwhile, marijuana initiatives are on the November ballot in numerous states.
As these changes have percolated, forward-thinking alternative funders have been dipping their toes in the market—getting an early start on a market that’s hungrily looking for growth capital. “The last couple years there have been fewer investors than capital needed, but we believe that tide is changing,” says Morgan Paxhia, managing director and chief investor of Poseidon Asset Management LLC in San Francisco, an investment management company founded in 2013 to invest exclusively in the cannabis industry.
Paxhia says he’s starting to see more venture capitalists, lease-finance companies and private equity investors willing to provide liquidity to marijuana-based companies that are seeking to grow. The short-term cash advance marketplace, however, is not there yet. The challenge is finding funders willing to do the business with them.
“The people that are building these businesses have to always be worried about their cash. It’s not a given that they’ll get new additional investment,” Paxhia says. “Most people are quick to brush it aside. They won’t give it a minute to take a serious look at it and understand that it is already a multi-billion dollar market growing at 30 percent annualized for the next several years,”
A QUIETLY GROWING INDUSTRY
There are a number of private investors and venture capitalists who have spent the last several years researching and ramping up to invest in what they see as a goldmine of business opportunities. Many of these companies aren’t shy about publicly expressing their support for change.
“We see this as an opportunity of a lifetime to witness a societal change and we want to be a part of it,” says Paxhia who together with his sister runs a $10 million investment fund.
At the same time, there are also some alternative funders who dabble in this space and won’t discuss it publicly—partly because of the perceived stigma and partly out of concern that their financial backers won’t approve. To cover themselves, some are only willing to deal with companies that have hard assets. Often times the rates they offer are much higher than businesses in other industries with comparable financials would pay.
Andrew Vanam, founder of Rx Capital Funding LLC, an ISO in Norwalk, Connecticut, who focuses on the healthcare and medical industry, has helped a handful of few marijuana-related businesses get funding in the past few years and would love to help facilitate more deals. But he says it’s extremely difficult to find lenders that are willing to fund cannabis-related businesses as well as offer reasonable rates. Many of the files he generates in the cannabis space have incredible financials, positive cash flow, and month-on-month growth. However, lenders still treat these businesses as high-risk and offer rates so high it’s not even worth bringing back to a client. Instead, “they are taking hard money loans from private investors that put these cash advance offers to shame,” he says.
ASSESSING THE RISKS
Certainly there are risks to funding marijuana businesses. In Colorado—one of the first states to legalize the recreational use of marijuana—values are getting lofty, and people are overpaying for properties that house marijuana-related businesses, notes Glen Weinberg, a partner in Fairview Commercial Lending, a hard-money lender with offices in Atlanta and Evergreen, Colorado.
Weinberg has financed between 75 and 100 commercial real estate loans where marijuana businesses were involved, but says recently he’s shied away. “I’m not comfortable with the valuations at a lot of these marijuana properties,” he says.
Even investors who are bullish on the space urge caution. “If you’re in a [nationwide] market that is growing at about 64 percent per year, that rising tide floats all boats, but there’s a lot of risk, so you have to be careful,” says Chet Billingsley, chief executive of Mentor Capital Inc., a public operating company in Ramona, California, which acquires and provides liquidity for medical and social use cannabis companies.
Billingsley says he has learned some hard lessons through his dealings with about nine marijuana-related companies. For example, he recently won a court judgment against a company that Mentor had supplied with millions of dollars in cash and stock. The company later balked at the terms of the deal and tried to renege, but Mentor ultimately prevailed in court. Still, Billingsley says Mentor went through many unnecessary hassles and racked up $300k in legal costs over the course of its two-and-a-half-year legal battle.
Many business owners in the marijuana space started out during a period when it w as completely illegal. Often these companies march to the beat of their own drum; to protect themselves, lenders need to do more than offer a standard funding contract and hope for the best, Billingsley says.
“The contract has to be solid and it has to be explained in detail to the marijuana operator who is often not sophisticated with regard to contracts.” If you leave things open to interpretation, you’re likely to end up in court, where anything can happen, he cautions.
Companies that fund cannabis businesses say they have very extensive vetting processes—so much so that they turn away a good portion of requests. Jeffrey Howard, managing partner of Salveo Capital in Chicago, says about two-thirds of the companies that come across his desk don’t make it past the company’s initial criteria. “We see a ton of companies and business plans from companies seeking capital to raise money,” he says. “We are going to be very selective about who we invest in and how much.”
Gormley, of Seventh Point, leverages all the same resources he would if he were buying any retail or production manufacturing outfit. He does extremely invasive vetting of the individuals involved and uses private detectives to help.
It many cases it comes down to the business’s management team, according to Paxhia of Poseidon Asset Management. “All the businesses are very early-stage and most companies have a very short track record, so you have to place a greater emphasis on the people,” he says.
OPPORTUNITIES ABOUND
Despite the risks, funders that work in the marijuana space say they are filling an important need by providing capital to marijuana-related businesses. For Gormley of Seventh Point, it’s a calculated risk in an area he’s been following for quite some time. “How often do you get to be part of history, and how often do you get to participate in a burgeoning market?” he says.
Industry participants stress the many funding opportunities aside from companies that cultivate and distribute the plant. Indeed, there are many ancillary businesses that provide products and services geared towards patients and cannabis users without having anything to do with the actual plant.
Howard of Salveo Capital, says his company is gearing up to provide private equity and venture capital to several marijuana-related businesses through its Salveo Fund I and will only make select investments into companies that “touch the plant.” The goal is to eventually have $25 million of committed capital to invest in multiple early-stage companies that offer ancillary products and services to the marijuana industry. “We think there’s more exciting opportunities than ‘touch the plant’ investments,” he says.
Crowdfunding platforms are another avenue for companies in the marijuana space. This type of funding hasn’t yet been utilized to its full potential, industry watchers say.
Eaze Solutions, a San Francisco-based provider of technology that optimizes medical marijuana delivery, is one example of a company that turned to crowdfunding. It raised part of a $1.5 million infusion to fund its expansion via the crowdfunding site AngelList in 2014. Loto Labs, in Redwood City, California, is another example. It raised more than $220k via Indiegogo to fund production of its Evoke vaporizer. There’s also CannaFundr, an online investment marketplace for companies in the cannabis industry to gain access to capital.
Seth Yakatan, co-founder of Katan Associates in Hermosa Beach, California, suggests that crowdfunding will become more of an option for certain types of cannabis based companies, specifically those that aren’t as closely tied to the actual production of the plant. “Until federal regulations change, it’s going to be hard to raise money for an entity where you are actively engaged in the cultivation, distribution or sales of a product that’s federally illegal,” says Yakatan, whose company invests in and advises cannabis-related companies that have a biotech or pharmaceutical orientation.
Because laws on legalized marijuana are still in limbo, industry watchers say the market is still many years away from being mainstream. “Public perception will be similar to alcohol in 10 years from now,” predicts Weinberg of Fairview Commercial Lending, adding that he expects banks to enter the funding arena in five to 10 years.
In the meantime, alternative funders who can stomach risk continue to pave the path for others. Howard of Salveo Capital expects private equity investors, venture capitalists and other alternative players to continue playing a big role in getting the nascent industry off the ground.
“I strongly believe that in the interim there’s a significant advantage for players like us to be funding and to be in on the ground floor of this industry before it changes,” Howard says.
Indeed, many alternative funders believe the potential upside significantly outweighs possible negative consequences. “The perceived risk at this point is far greater than the actual risk,” says Paxhia of Poseidon Asset Management.
Merchant Cash Advance Misinformation Abounds – What’s A Broker To Think?
October 10, 2016
Last week, at least two panelists at the major commercial loan broker conference critiqued merchant cash advances, even going so far as to assign an arbitrary cost to them. Craig McGrain, President of factoring company Durham Funding, said they cost about 75%. Bob Coleman, owner of The Coleman Report, an SBA loan journal, said that merchant cash advance contracts should stipulate that prices are basically equivalent to 100% APR. Neither accurately describes a merchant cash advance if for no other reason than because a merchant cash advance is merely a methodology or a mechanism, not a price. The term itself is derived from the process of making a merchant an advance on their future projected sales. With hundreds of companies employing that concept, some are able to do it at a low cost and others at a high cost.
And it’s obviously the high cost ones to which their disdain was directed. But even then, when MCAs are properly structured as a purchase of future sales, there is no calculable APR because there is no assigned time frame, predetermined payments, or interest rate. This doesn’t mean an MCA product can’t be expensive, because surely they can be, but assigning randomly high percentages to scare people only compounds the misinformation that has persisted for years.
On a panel I participated in with Bob Coleman, Coleman said that these purchases were really just loans. The New York Supreme Court, however, repeatedly disagrees with him. In Platinum Rapid Funding Group Ltd v. VIP Limousine Services, Inc. and Charles Cotton, the court affirmed a purchase of future receivables for an upfront payment, adding that the request for the Court to convert the Agreement to a loan and assign an interest rate to it would require unwarranted speculation, and would contradict the explicit terms of the sale of future receivables in accordance with the Merchant Agreement.
In Merchant Cash & Capital, LLC v G&E Asian Am. Enter., Inc., the court reached the same conclusion.
With regard to McGrain of Durham Funding, he said that 70%-80% of companies that apply for his company’s factoring services have already used an MCA. This kind of competitive pressure is probably a leading reason why a factor would mischaracterize MCAs. In fact, the factoring industry has felt so threatened by MCAs, that two years ago the International Factoring Association voted to ban all MCA companies from their organization.
This isn’t to suggest that factoring is an inferior product and that MCA is the newer better thing. On the contrary, factoring is an excellent loan alternative and to McGrain’s credit he said that he believed the free market would work everything out. To facilitate that, more MCA brokers need to be educated on factoring and SBA lending. And in return commercial finance brokers need to understand the true nuts and bolts of MCA. That process gets sullied when misinformation abounds. Merchants will get the best help when the brokers fully understand all of the market’s options.
My panel with SBA lending expert Bob Coleman and equipment leasing veteran Kit Menkin at the NACLB conference last week highlighted some differences of opinions across these closely related industries but also demonstrated areas in which we all agree. Small businesses have different needs and it’s up to the brokers to prescribe the most appropriate solution. Whether it’s short-term or long-term, cheap or expensive, proactive or reactive, there’s capital out there. Hopefully the kind of cooperative engagement the NACLB conference provided this year will continue to be fostered for years to come.
Online Consumer Lenders Stumble, While Online Business Lenders Stay On Their Game
July 8, 2016
Something is happening in the land of marketplace lending, painful setbacks. And it’s mostly on the consumer side.
Avant, for example, plans to cut up to 40% of its staff, according to the Wall Street Journal. Prosper is cutting or has cut its workforce by 28%. For Lending Club it’s by 12% and for CommonBond by 10%. And then there’s Kabbage, whose consumer lending division playfully named Karrot, has been wound down altogether.
Kabbage/Karrot CEO Rob Frohwein told the WSJ that Karrot was put to sleep about three or four months ago, right around the time that it became obvious to industry insiders that the temperature had changed.
Ironically, the person who best summed up the problem is the chief executive of a lender that rivals the ones that are suffering, but has announced no such job cuts of his own. In March, SoFi CEO Mike Cagney told the WSJ “In normal environments, we wouldn’t have brought a deal into the market, but we have to lend. This is the problem with our space.” And that is a problem indeed because the success of these businesses becomes entirely dependent on making as many loans as possible so they can raise more capital to make as many more loans as possible so they can raise more capital. Perhaps the end game of that dangerous cycle is to go public, but the market has gotten a glimpse now of what that might look like, and they’re not very impressed with Lending Club.
The pressure of living up to the expectation of eternal loan growth manifested itself when Lending Club manipulated loan data in a $22 million loan sale to an investor, but it was a problem all the way back to their inception. In 2009, the company founder made $722,800 worth of loans to himself and to family members, allegedly to keep up the appearances of continuous loan growth. It was never found out until last month, seven years later.
That is a perfect example of the vulnerability that SoFi’s CEO spoke of months ago when he said, “we have to lend.” Because if they don’t lend or investors won’t give them money to lend, well then we’d probably see things like massive job cuts, falling stocking prices, and a loss of investor confidence. And that’s what we’re seeing now.
This wave of cuts is not affecting much of the business lending side
Despite the rush to the exits on consumer lending, Kabbage’s CEO is still very bullish on their business lending practice, so much so that they intend to increase their staff by more than 25%.
And in the last month alone, four companies that primarily offer merchant cash advances, have announced new credit facilities to the aggregate tune of $118 Million, one of whom is Fundry which landed $75 Million. Meanwhile, Fora Financial secured a $52.5 Million credit facility in May. Fora offers both business loans and MCAs.
And here’s one big difference between the consumer side and the business side. While online consumers lenders have found themselves trapped on the hamster wheel of having to lend, there is very little such pressure on those engaged in business-to-business transactions. Sure, their investors and prospective investors want to see growth, but only a handful are following the Silicon Valley playbook of always trying to get to the next venture round fast enough, lest they self destruct.
Avant’s latest equity investment, for example, was a Series E round. Prosper and Lending Club also hopped from equity round to equity round, progressing on a track with evermore venture capitalists that were likely betting on the companies going public.
But over on the business side, they’re much less likely to involve venture capitalists. Equity deals tend to be one-offs, major stakes acquired by private equity firms or private family offices, sometimes for as much as a majority share. These deals tend to be substantially bigger, are harder to land, and are less likely to be driven by long-shot gambles. In other words, the motivation is less likely to be driven by the hope that the company can simply lend just enough in a short amount of time to land another round of capital from another investor.
Examples:
- RapidAdvance was acquired by Rockbridge Growth Equity
- Fora Financial sold an undisclosed but “significant” stake to Palladium Equity Partners
- Strategic Funding Source sold a large stake to Pine Brook Partners
- Fundry sold a large stake to a private family office
Business lending behemoth CAN Capital has raised all the way up to a Series C round but they’ve been in existence for 18 years, way longer than any of their online lending peers. Several other of the top companies in the business-to-business space have relied only on wealthy investors that did not even warrant the need for press.
The upside is that these companies are less vulnerable to the whims of market interest and confidence. Having a down month would not trigger an immediate death spiral, where a downtick in loans means less investor interest which means a further downtick in loans, etc.
The margins in the business-to-business side tend to be bigger too, which means it’s the profitability that often motivates investments, rather than pure origination growth potential.
There are outliers, of course. Kabbage, which has raised Series A through E rounds already, admitted to the WSJ that they still aren’t profitable. Funding Circle, which also raised several rounds, disclosed that at the end of 2014, they had lost £19.4 Million for the year, about the equivalent of $30 Million US at the time.
These facts do not mean that either company is in trouble. Kabbage is not limiting themselves to just making loans for instance, since they also have a software strategy to license their underwriting technology to banks like they have already with Spain’s Banco Santander SA and Canada’s Scotiabank. And Funding Circle enjoys government support at least in the UK where they primarily operate. There, the UK government is investing millions of dollars towards loans on their platform as part of an initiative to support small businesses.
Business lenders and merchant cash advance companies may not necessarily be on the same venture capital track as many of their consumer lending peers because it is a lot more difficult to perfect and scale small business loan underwriting. Even the most tech savvy of the bunch are examining tax returns, verifying property leases, reviewing corporate ownership documents, and scrutinizing applicants through phone interviews. While this process can be done much faster than a bank, there’s still a very old-world commercial finance feel to it that lacks a certain sex appeal to a Silicon Valley venture capitalist who may be expecting a standalone world-altering algorithm to do all the risk related work so that marketing and volume becomes all that matters. Maybe on the consumer side something close to that exists.
Instead, a commercial underwriting model steeped in a profitability-first mindset makes online business lenders better suited to be acquired by a traditional finance firm, rather than a venture capitalist that is probably hoping to hitch a ride on the join-the-fintech-frenzy-and-go-public-quickly-so-I-can-make-it-rain express train.
Consumer lenders who had to lend and are faltering lately, will now have to figure out something more long term beyond just making as many loans as possible. It might not be something that excites their venture capitalist friends, but it is crucial to building a company that will last a long time.
Is OnDeck Back On Deck? – Industry Veterans Weigh In
March 8, 2016
After an unpleasant seesaw ride, Ondeck’s stock bounced back to its pre-earnings levels hovering around $8. The lender’s stock crashed 20 percent following its financial earnings on February 22nd due to a soft forward guidance.
The online lender funded a record $557 million in loans in Q4 2015 and generated $68 million in revenue but it wasn’t enough to make up for the $4.6 million in loss. As AltFinanceDaily commented earlier, the markets can be unforgiving and irrational in its speculation of a downturn. And while OnDeck prides itself for being a company built for downturns because of its short-term repayment cycle, its stock has slumped over 65 percent since its December 2014 debut.
AltFinanceDaily spoke to experts to ask how reflective this was of the industry and if this portends a larger economic gloom. Here’s what they had to say:
Downturn Survival? Not So Sure
David Obstfeld and Eric Cavalli of merchant cash advance provider S.O.S Capital, think that the market reaction to OnDeck is too strong, even unwarranted. “This is a fairly new industry and many don’t understand it yet,” said Cavalli. “Everybody is expecting an economic downturn and since this is an unproven business, one cannot really comment on whether MCA and the small business lending industry will actually survive.”
While OnDeck’s big data-led algorithmic lending has brought about a major shift in the industry, Obstfeld and Cavalli suspected that it might be why the company lost touch with the ISO base they relied on when it started.
OnDeck, Not On Deck
Heather Francis of Elevate Funding does not consider OnDeck a part of the alternative finance industry given its business model and its fintech brand identity. “OnDeck has a brand issue, they want to be a software company on one hand and an alternative bank on the other,” Francis said. “The marketplace does not know what to do with them and no one sees what OnDeck sees in the mirror.”
Francis also commented that the hype around algorithmic lending is driven less by success and more for investor appeal in fintech. “OnDeck and Lending Club have a lot of capital behind them but there will be a lot of segregation between these companies and the traditional alternative finance companies. OnDeck cannot handle any kind of downturn.”
Just Process, Not Alarm
Corey Cicero at Platinum Rapid Funding considered the market reaction to be harsh and said that this is a normal trajectory for any company. “They are a market leader as far as brand names go. They have a lot to validate their leadership and they are on everybody’s bank statement who has a merchant cash advance,” Cicero said. “I don’t think the stock will be affected further. Congress is figuring out what to do with the industry, everyone else is figuring it out. This is a process.”
Industry Trends
Obstfeld at S.O.S Capital expects a major shakeout in the lending industry. “The market is saturated and in the next six months, the reputable companies will slash rates and when rates cannot be lowered further, companies will get creative with products and pricing.”
And Francis thinks that shakeout could come in the form of consolidation. “The market will shrink and people will spend more to get more origination and the most eye-catching product appealing to millennial entrepreneurs will take off.”
Meanwhile, Cicero at Platinum Rapid Funding said he thinks that there will be a purge of people writing bad loans. “This industry has a low barrier to entry leading to too much competition. People who write bad loans will be weeded out and the industry will correct itself.”
Industry Trade Group Coming of Age: The SBFA is Becoming More Political
February 1, 2016By hiring an executive director, the Small Business Finance Association hopes to achieve at least two goals – taking a step toward becoming a full-service trade group and providing a public voice for the alternative finance industry.
Stephen Denis, formerly deputy staff director of the U.S. House Committee on Small Business, went to work in the new role in mid-December, setting up shop with his cell phone and laptop in a Washington, DC, area coffee emporium. He’s the SBFA’s first full-time employee.
Hiring Denis, who also has association experience, represents “the next evolution” of the trade group, according to David Goldin, SBFA president and Capify’s founder, president and CEO.
The SBFA, which got its start in 2008 as the North American Merchant Advance Association, changed its name last year because members have added small-business loans to the their merchant cash advance offerings. Although the trade group’s not exactly new, it has plenty of room to grow and its leadership and members seem open to change.
“The goal is to start from scratch and take a look at everything the association is doing,” Denis told AltFinanceDaily, “and to really build this out to a robust group that represents the interests of small businesses.”
Denis appears optimistic about pursuing that goal. He’s a native of the Boston area and a Harvard University graduate whose first job out of school was as an aide to Republican Sen. John E. Sununu of New Hampshire. After three years in that position, he took a job for two years with a UK-based trade association, traveling frequently to London to inform the group of Congressional action in the United States.
From there, Denis went on to become director of government affairs and economic development for the Cincinnati Business Committee, a regional association that included Fortune 500 companies among its members. After two years in that role, Denis joined the staff of Rep. Steve Chabot, R-Ohio, moving back to Washington and serving as the congressman’s deputy chief of staff during a five-year stint that ended when he joined the SBFA.
While working for Chabot, Denis also became deputy staff director of the House Committee for Small Business, the No. 2 position there, and he has held that job for the last three years. The committee’s tasks include learning as much as they can about small business, including financing, and using the information to advise members of the House on policy initiatives.
The experience Denis has amassed in government should serve the association well because his duties include briefing federal legislators and regulators on how the alternative-finance business works. With Denis as spokesperson, the industry can speak to government with a single voice, Goldin asserted.
“We are going to be aggressive in our outreach to legislators and regulators as well as be active reaching out to local, state governments,” Denis said. The SBFA will “work with other trade groups and small business groups to promote our mission to ensure small businesses have alternative finance options available to them.”
Until now, too many players from the alternative finance industry have been vying for lawmakers’ attention, Goldin said. To make matters worse, some of those seeking to influence government in hearings on Capitol Hill are brokers instead of lenders and thus may not have a perfect understanding of risk and other aspects of the business, he maintained.
“We’re hearing that there are people trying to be the voice of small-business finance that either don’t have a lot of years of experience or they’re not telling the whole story,” Goldin said. “We want to make sure the industry’s represented properly.”
Denis can draw attention away from the “noise” created by unqualified voices and focus on information that Congress needs to make reasonable decisions about the alternative finance business, Goldin maintained.
Besides getting the word out in Washington, the SBFA hopes to convey its message to the general public on “the benefits of alternative financing,” Goldin said. At the same time the group can help make small business owners aware of the finance options, Denis added.
Asked whether hiring Denis marks the beginning of an effort to lobby members of Congress for legislation the association deems favorable to the industry, Goldin said only that additional announcements will be forthcoming.
Meanwhile, updated “best practices” guidelines might be in the offing to help industry players navigate the business ethically and efficiently, Goldin said. A set of six best practices the association released in 2011 included clear disclosure of fees, clear disclosure of recourse, sensitivity to a merchants’ cash flow, making sure advances aren’t presented as loans and paying off outstanding balances on previous advances.
Addressing other possible steps in the association’s growth, Goldin said the group doesn’t plan to publish an industry trade magazine or newsletter. However, a trade show or conference might make sense, he noted.
Denis said he and the board had not discussed the possibility of a test, credential or accreditation to certify the expertise of qualified members of the industry. However, associations often establish and monitor such standards, so it would be reasonable for the SBFA to do so, he added.
The association might establish a Washington office, Goldin said. “We’ll look to Steve for his thoughts and guidance on that,” he observed. Denis seems amenable to the idea. “Down the road, we would love to open an office and hire more people,” he said.
In Goldin’s view, all of those moves might help the rest of the world comprehend the industry. Understanding the industry requires taking into account the cost of dealing with risk and business operations, he said.
Placing a $20,000 merchant cash advance, for example, requires a customer-acquisition effort that costs about $3,000 and a write-off of losses and overhead of about $4,000, Goldin said. That’s a total of $27,000 even without the cost of capital, he maintained.
“Most people don’t understand the economics of our business,” Goldin continued. The majority of placements are for less than $25,000, he said, characterizing them as “almost a loss leader when you factor in the acquisition costs.”
While spreading that type of information on the industry’s inner workings, Denis will also conduct the day-to-day for the not-for-profit’s affairs. The association’s board of directors will continue to set policy and objectives.
Members elect the board members to two-year terms. Current board members are Goldin; Jeremy Brown of Rapid Advance, who’s also serving as the group’s vice president; John D’Amico, GRP Funding; Stephen Sheinbaum, Bizfi; and John Snead, Merchants Capital Access.
Member companies include Bizfi, BFS Capital, Capify, Credibly, Elevate Funding, Fora Financial, GRP Funding, Merchant Capital Source, Merchants Capital Access (MCA), Nextwave Funding, NLYH Group LLC, North American Bancard, Principis Capital, Rapid Advance, Strategic Funding Source and Swift Capital.
Companies pay $3,000 in monthly dues, which Denis characterizes as inexpensive for a DC-based trade association.
Membership could spread to other types of businesses, Denis said. “I’d like to expand the tent to other industries,” he noted. “The association is trying to represent the interests of small business and make sure they have every finance option available to them.”
But a key purpose of the trade association is to provide a forum for members to come together as an industry, Denis said. “We’re thinking big,” he admitted. “We hope that all members of the marketplace will want to become a part of it.”
World Business Lenders Rings in 2016
December 18, 2015On December 8th, World Business Lenders (WBL) wrapped up 2015 and prepared for the coming new year at their annual shareholder meeting hosted at the Waldorf Astoria in New York City. The event, which was mostly restricted to company employees, referral partners and shareholders, featured some out-of-town guest speakers including BFS Capital CEO Marc Glazer and RapidAdvance Chairman Jeremy Brown.
On a panel moderated by WBL Managing Director Alex Gemici, Brown and Glazer expressed their optimism for the industry’s future, but to some extent heeded caution. Brown specifically made reference to his prediction of a bursting bubble but conceded that he might have been off by a year or two. Glazer reminded the audience that both executives had weathered the financial crisis so that they had witnessed firsthand how a recession can affect their businesses, and made them stronger because of it.
WBL CEO Doug Naidus made a similar admission in his presentation, in that he thought that the bubble of unsecured lending would burst in 2015 but that it hadn’t happened yet. Still, he thinks it’s right around the corner. One of their primary hedges against a correction is that they secure their loans against real estate. Naidus has a background in mortgage lending so it’s a market they’re familiar with.
Another one of their key strategies is the franchise model. Over the last two years, WBL has acquired commercial finance brokerages and converted them into originating houses for their collateralized loan program. It has had a really positive impact on their growth and on their margins, according to information disclosed at the event. It’s expected that they will continue to pursue more acquisitions.
The sentiment of the event was rather festive and optimistic, with WBL enjoying a positive trajectory of growth and success.
