To Syndicate or Not to Syndicate?
January 20, 2016
Someone once asked the question of, “To love or not to love?” But I believe soon every broker will have to ask the question of, “To participate or not to participate?” Is it time we all get into the game?
THE YEAR OF THE BROKER OR THE YEAR OF ROSY PROMISES?
AltFinanceDaily writers such as Sean Murray, Ed McKinley and myself, referred to 2015 as the Year of The Broker, as a stream of new brokers continued to rush into our space to take advantage of the perceived opportunities.
THE YEAR OF PARTICIPATION?
For experienced brokers, I’ve written two pieces so far here on AltFinanceDaily in relation to the broker’s future. I’ve talked about how I believe the future of our industry will be dominated by Strategic Networks and those who utilize these networks efficiently will not just be the dominant players going forward, but they will be pretty much the only “real” players going forward. I also talked about how success in our industry is based mainly on leveraged resources and networks, rather than having some sort of “superior” selling capability.
But with that being said, I wanted to use this article as a way to add to this discussion of the future by outlining my recommendation that experienced brokers “get into the game” when it comes to syndication and deal participation. DeBanked reported back in April of 2015 about how Strategic Funding Source’s syndication network of over 200 partners (at the time) invested over $260 million of their own capital into funded deals. This level of investment, according to the reporting, helped amass significant wealth for the 200 syndication partners that participated. If 2015 was the Year of The Broker, could 2016 be the Year of Participation?
IT’S NOT THE SAME ANYMORE
It’s no longer 2000 – 2013, when quite frankly a broker could amass great income by just strategically utilizing the Uniform Commercial Code (UCC) as a marketing model. But pretty soon the word got out and everybody rushed in to duplicate the methodology. What was once a great idea became a complete waste of marketing dollars.
UCCs are so bad today, that when you call a merchant and just mention the fact that you are from a funding company, they immediately hang up the telephone. Sometimes, I would call and before I would even have the chance to say a word, the staff member on the telephone would ask, “Are you calling about a cash advance?” Once I would reluctantly answer in the affirmative, they would of course immediately inform me to put them on the do not call list, never call again, and either in nice language or a language full of swearing, they would inform me that they aren’t interested and how I’m the 19th guy that has called them this week. This is the result of a merchant getting 20 calls a week from 20 different companies, about 20 different merchant cash advance products.
As a result, brokers are going to have to specialize in the Strategic Networks and leveraged resources that I have been discussing for nearly a year now on AltFinanceDaily. We will also have to juggle the rising marketing costs and increasing pressures on pricing as our industry goes more mainstream. You might not want to operate as a full-fledged direct funder, as I understand that the investment outlay for such a task is significant. But I believe going forward, you aren’t going to be able to “make it” like you used to by solely relying on commissions from brokering deals. You are going to have to get into the game and put some money in deals not just to sustain the amount of income you were making in commissions historically, but to potentially make more money than you ever made before.
A SHOUT OUT TO WBL
Also back in April of 2015, there was a pretty popular online discussion that discussed World Business Lenders’ (WBL) new ISO/Broker acquisition program. I had a conversation by telephone with Lenny Steigman from WBL on April 21st of last year to discuss the program in detail.
One of the things that Lenny mentioned on that call was the notion of the broker’s office requiring a shift in structure in order to survive in the upcoming future. Lenny discussed that brokers who chose to continue to operate on the sidelines relying solely on commissions from brokering deals, without getting involved in some sort of equity or syndication participation, might find the future of their involvement in our space limited as continued growth through strategic networks drive the progression of the industry. I could not agree more with Lenny Steigman. It’s certainly time for a shift and one of those shifts I believe will require more experienced brokers to become syndication partners through putting up a portion of the capital to fund the merchants that they service.
GET YOUR DUCKS IN ORDER
As you prepare for this shift and look to get into the game, make sure that you have your ducks in order:
Legal Representation: This is important, you need an attorney to review your syndication agreements as well as review the legal structure of the funder you are partnering with, to make sure that all of the legal terminologies are outlined properly.
Understand The Deals You Are Funding: Know the type of client you are funding, such as if they are A Paper, B Paper, C Paper, D Paper or E Paper. Your level of risk on the deal in terms of default increases when you get into the higher risk paper grades, thus, make sure you are getting a significant enough “return” on said deals to accommodate the risk you are tolerating.
Examine Your Funder’s Finances: By syndicating, you are doing more than just investing in the merchants that you serve, you are also investing in the financial soundness of the funder you are syndicating with. Make sure your funder is not on the verge of bankruptcy, profitable, and will actually be around a year from now.
Examine Your Funder’s Operational Structure: I’ve talked about the importance of making sure you vet who you partner with in relation to being a broker. Now that you are syndicating, you most definitely make sure you are dealing with a funder that’s “proven.” The funder should have at least 2 years in business, have funded in the eight digits in terms of volume, have a proven and profitable underwriting formula, have an office full of employees, not have a significant amount of bad reviews, be in good standing with the BBB, having an actual online presence, and they should be running a professional and competent organization overall.
Round Up Your Capital: The secret of many of the wealthy has always been their unique ability to utilize the money of other people for their business investments. They find equity investors seeking a return on their capital, invest said capital with a high return and collect a management fee off of the transaction. Or, they borrow money from a creditor at a particular interest rate, invest the monies for a higher rate of return, then pay off the loan with interest and pocket the profits. Whichever way you prefer, how about you utilize OPM (other people’s money) to your advantage (leverage) as well for your participation efforts?
TO PARTICIPATE OR NOT TO PARTICIPATE?
I believe we might be entering the year of participation, which means it’s time for the experienced brokers to join in on the strategic networks which will dominate our space going forward. New entrants who don’t know the space and still can’t spell “merchant cash advance” will be in for a bumpy ride going forward, but those with the experience, it’s time to add to your industry influence by coming off of the sidelines as brokers solely, and becoming broker/syndicates in the truest form.
Meet the Lending Platform With 0% Interest (Kiva)
January 6, 2016
Chany of Angela’s Boutique in Philadelphia, PA needs $5,000 to help purchase new signage and lighting to improve her storefront. She’s been turned down by banks even though she’s been in business for more than five years. 61 participants have already contributed to her loan thanks to a marketplace lending platform, which puts her very close to her goal. If it funds, all of the participants will get back their principal from her payments over the next 24 months and NO interest.
Meet Kiva Zip, the anti-Lending Club because the borrowers are far from anonymous and the yield delivered to investors is negative due to inflation.
Angela’s Boutique, which is a real prospect on the Kiva Zip platform, includes a picture of the owner, her bio, endorsements, and comments from supporters.
According to Jessica Feingold, Kiva’s East Coast Manager of Development, “Kiva is the world’s first and largest crowdfunding platform for social good with a mission to connect people through lending to alleviate poverty and expand economic opportunity.”
And just like Lending Club, contributions as small as $25 are accepted. Obviously structured as a non-profit, “Kiva and its growing global community of 1.2 million lenders has crowdfunded more than $775 million in microloans to over 1.7 million entrepreneurs in 83 countries, all the while maintaining a 98% repayment rate,” according to Feingold.
Normally thought of as an overseas endeavor, Feingold said that “in 2011, Kiva launched Kiva Zip, a pilot program in the US that provides 0% interest crowdfunded loans to small business entrepreneurs.” Their underlying purpose and target market sounds very much like those being served by for-profit alternative lenders. “Kiva doesn’t require a minimum FICO score, collateral, or a minimum operations period for the business,” Feingold said.
Since inception they’ve made loans to over 1,800 borrowers in 47 days states, Peru, and Guam.
Notably, Lending Club promises borrowers that their “identity will at all times remain confidential and not be disclosed to anyone,” according to their website. Kiva by contrast is looking to “instill empathy” in their lenders. “We want to show that whether in East New York or Uganda, underserved entrepreneurs are credit-worthy, and will pay you back,” Feingold said. “All of these features on the Kiva websites enhance our ability to do so.”
While there is definitely a certain allure about being able to see the borrower for yourself, the concept seems to fly in the face of Dodd-Frank’s Section 1071 which stipulated that lenders are prohibited from knowing the sex and gender of business loan applicants. While the CFPB is not currently enforcing the law until the rules can be clarified, Democratic members of Congress have been pushing them to take action.
According to the law, no loan underwriter or other officer or employee of a financial institution, or any affiliate of a financial institution, involved in making any determination concerning an application for credit shall have access to any information provided by the applicant about whether or not the business is women-owned or minority owned.
As small businesses often celebrate the heritage of their founders, and at times that can be the entire reason customers buy from them in the first place, the law has presumably put the small business lending world in an awkward position (and that’s why the law should be repealed). Non-profits like Kiva have embraced the very things that make a small business bankable outside of a credit score, like the owner, their background, and their story.
Borrowers on the Kiva Zip platform don’t raise all the money from strangers though. Their credit-worthiness is based on their ability to recruit friends and family to fund a small portion of their loan. The other lenders though of course may make their decisions based on the numbers or entirely on the perceived cultural, racial, or gender values of the borrower, all of the things that the CFPB is attempting to eradicate in the for-profit arena.
I didn’t ask Kiva any questions about Dodd Frank or Section 1071, but many people might empathize with their empathy approach as a way to fund small businesses that otherwise don’t qualify for bank loans. Its reminiscent of the subjective underwriting that a lot of alternative lenders and merchant cash advance companies employ to get deals done that banks won’t touch.
Not so coincidentally, Fundry, Yellowstone Capital’s parent company, donated $25,000 to Kiva just last month to support their cause.
Kiva’s Feingold (pictured at center above) said in regards to that, “Kiva is thrilled to receive a grant from Fundry to further our work to make credit more affordable.”
BizBloom Lights Up Times Square
December 24, 2015BizBloom’s “Yes, we’re local” campaign produced by industry veteran Thomas Costa is making its debut in New York City’s Times Square. Its mission, according to Costa, is to tell the story of the American Dream, particularly the struggles and accomplishments of entrepreneurs.
To do that, BizBloom intends to rely on the help of college students to interview small business owners all over the country. The stories that garner the largest social media responses will be featured in their slot airing over 43rd and Broadway. Additionally, for each story a student collects, BizBloom will donate to a special scholarship fund.
The campaign is already live and includes supporting endorsements from Quick Bridge Funding and AltFinanceDaily:
Got a Ferrari or Fine Art? If So, You May Have More Leverage Than You Think
December 23, 2015If you own a Ferrari, fine art or expensive wine, getting access to capital may be easier than you think.
Although it’s still a niche market, luxury asset-backed lending has been gaining traction lately, particularly with small and mid-size business owners. These executives are enticed by the ability to use certain high-priced valuables as a means of getting large amounts of cash quickly and often at a lower cost than other funding sources.
“People are increasingly learning that this is another option. It’s not for everybody, but it’s another option,” says Tom McDermott, chief commercial officer at Borro, a New York-based asset-backed lender that deals exclusively with luxury asset-based loans.
It’s notable that luxury asset-based lending by alternative funders is gaining ground at a time when unsecured money is so easy to come by. There are several reasons business owners are attracted to the idea of leveraging their valuables to attain cash. First off, they don’t need stellar credit or a proven track record in business to qualify. Secondly, they can typically get larger sums of money and at better rates than they might through other financing channels. A third reason is that many of them have already tapped out other funding options and leveraging their assets allows them to obtain additional funds quickly.
“A lot of small business owners have assets, so it’s something else for them to utilize in getting access to attractive small business financing,” says Steven Mandis, chairman of Kalamata Capital LLC, an alternative finance company in Bethesda, Maryland.
Here’s how the process typically works at most luxury asset-based lenders. Say a business owner wants to borrow against a high-priced item such as a top-of-the-line car, fine art or wine, jewelry or a luxury watch. First the luxury-based lender hires a third-party to appraise the item. Generally, depending on the asset and its marketability, lenders will lend 50 percent to 70 percent of the asset’s value. If the owner moves forward, the item or items are held and insured in a lender’s secure storage area until the loan is paid back. Default rates on these types of loans are relatively low, lenders say.
“People don’t want to put their house at risk when they need capital,” says McDermott of Borro. “They’d rather lose the Maserati or a lovely piece of art than the house,” he says. And even then, it doesn’t happen very often, he says. Borro clients only default on their loans about 8 percent of the time, McDermott says.
Barriers to Entry
To be certain, luxury-based lending is not a business that every funder wants to be in. For starters, there are a lot of regulatory hoops a funder has to jump through in order to do it. You need a pawnbroker’s license and a second-hand dealer license. You also need a secure facility or facilities to house the collateral, have secure ways of transporting the valuables, and you need to carry large amounts of insurance for the transfer of the items as well as during the holding period.
Indeed, keeping the items secure is critical. PledgeCap, a Lynbrook, New York-based funder, says on its website that it uses “cutting edge technology, top of the line bank vaults and armed guards” to keep a customer’s items safe. What’s more, all items are insured during transit and storage. All items are shipped through secured and insured FedEx shipping vendors for pickups and drop-offs.
“There aren’t a lot of players in the market because there are a lot of operational and legal requirements to adhere to. There are a lot of barriers to entry,” says Gene Ayzenberg, the company’s chief operating officer.
Putting Things in Perspective
Luxury asset-based lending is only a small subset of the overall asset-based lending market, which as a whole has been gaining ground in the past few years. After getting badly burned in the most recent recession, many lenders have come to appreciate the security blanket that collateral offers. According to the Commercial Finance Association’s quarterly Asset Based Lending Index, U.S. ABL loan commitments rose 7.2 percent in the second quarter, compared with the year-earlier period. In addition, new ABL credit commitments were 6.3% higher than the same period a year ago.
“Asset-based lending at one time used to be the lending of last resort. Now it’s the type of lending that it is accepted globally,” says Donald Clarke, president of Asset Based Lending Consultants Inc., a Hollywood, Florida-based company that provides due diligence services for lenders. “Today, everybody wants an asset.”
There’s not a lot of public data to gauge the size of the luxury market within the broader asset-based lending market. But a 2014 report that focuses on art lending gives more perspective to at least one facet of luxury asset-based lending.
Thirty six percent of the private banks polled said they offer art lending and art financing services using art and collectibles as collateral. That’s up from 27 percent in 2012 and 22 percent in 2011, according to the report by consulting firm Deloitte and ArtBanc, a company that provides art sales alternatives, valuations and collections management services.
Meanwhile, 40 percent of private banks said this would be a strategic focus in the coming 12 months, up considerably from the 13 percent who named this as a priority in 2012.
These market changes are likely driven by client demand. The Deloitte/ArtBanc survey found that 48 percent of establishes art collectors polled said they would be interested in using their art collection as collateral for a loan, up from 41 percent in 2012.
Many big banks won’t touch asset-based lending deals unless they are worth north of $5 million. Some community banks will do smaller deals, but many don’t have the necessary infrastructure or skill sets, explains Clarke, of Asset Based Lending Consultants. This, of course, leaves an opening for alternative funders to capture market share.
Luxury asset-based lending expected to experience growth
Some lenders say they expect demand for luxury asset-based loans to continue to increase over time as more people accumulate big-ticket items and they become more aware that they can satisfy their capital needs by leveraging those assets. “A lot of times they don’t even know they have this option available to them,” says Ayzenberg of PledgeCap.
He says most of his company’s customers are small and mid-size business owners. Often they have temporary cash flow issues, but bank loans aren’t necessarily an option for them for any number of reasons. For instance, some may have bad credit. Others may have excellent credit but not enough of a business track record to qualify for a bank loan. Others may not have the cash flow to secure the amount of money they need, or they may need the money very quickly. Asset-based lenders can generally make the money available within a day, whereas bank loans require a lot of paperwork and can take months to obtain.
Mandis, of Kalamata Capital, says his company has seen an increased willingness by business owners to put up their luxury assets as collateral in order to get larger amounts of money at more favorable terms. Many times business owners have a high-priced asset that they don’t want to sell and pay a tax or can’t easily unload within a short-time frame. By borrowing against the luxury asset, they will get the capital to take advantage of a short-term opportunity and make an attractive return quickly without having to worry about finding a buyer or paying taxes on the sale of the asset, he explains.
Certainly luxury asset-based lending is not for every customer. Not only do you have to have a valuable asset to be used as collateral, but you also have to be willing to part with the item while the loan is outstanding. The risk of default and not getting the item back may also be a barrier for some people.
“I would be very hesitant to put up my wife’s diamond ring for my business. I don’t think it’s typically someone’s first choice,” says Ami Kassar, chief executive and founder of Multifunding LLC, a company in Ambler, Pennsylvania that helps small businesses find the best loan for their business. He remembers considering this option for a client only once in the past several years and the client ultimately chose another funding source.
But companies that focus on luxury asset-based lending say there is a viable market for their services that will continue to grow as more people hear about it and use it successfully to fulfill their funding needs. People have been taking their small items to pawn shops for many years. Working with a licensed lender to leverage their larger and often more expensive items gives them an option they may not have had previously. “You can’t just drive a tractor into a local pawnshop and say, ‘Here just put this in your safe,’” says Ayzenberg of PledgeCap.
Also, unlike pawn shops, luxury asset-based lenders say they aren’t looking to sell the items to make a quick buck and will only sell the item as a last resort if a customer defaults and they can’t reach agreeable terms. “We want them to keep their items,” says Ayzenberg whose company has been in business since 2013. For every 100 loans, there are only a small percentage of customers that default and lose the items, he says.
Every lender runs their business slightly different. At Borro, for example, loans typically range between $20,000 and $10 million and span in time frame from three months to three years. Rates start in the mid-teens and are based on the size of the loan, the time frame and how easy the asset would be to sell. In order to work with Borro, the asset typically has to be worth more than around $40,000, McDermott says.
Borro, which has been in business since 2009, deals with customers directly. But it also gets a good number of referrals from other lenders. Let’s say a customer needs $500,000 and a particular lender can only offer a maximum of $350,000. That lender might refer the client to Borro, which kicks in $150,000 based on the value of a leveraged asset. The referring company gets a commission based on the loan value and doesn’t lose the whole deal. “It’s a way to keep your customers tied in with you,” McDermott says, adding that Borro has no intention of getting into other types of lending. “We complement each other. We don’t compete.”
PledgeCap also focuses exclusively on asset-based lending. The company typically funds loans between $1,000 and $5 million. The length of each loan is four months. Customers don’t have to pay every month, though most do. For every month the loan is outstanding customers pay a rate of 3 percent on average. Other fees, payable at the end of the loan, are assessed based on costs PledgeCap incurs and depend on factors such as the cost of insurance, the appraisal fee and the cost of transporting the item to the secure facility.
By contrast, Kalamata Capital, which has been in business since 2013, offers asset-backed loans in connection with several other small business financing options—such as working capital loans, SBA loans, lines of credit, merchant cash advance and invoice factoring—to give customers more flexibility in terms of rates.
In Kalamata’s case, it will evaluate the cash flow and other assets of a small business for financing options. Kalamata then combines both the amount it would lend against an asset and the amount it would lend to the small business, possibly giving the business a lower rate—and more options—in the process.
While it’s not a type of funding that works for everyone, Mandis, the chairman of Kalamata, expects to see continued growth in this area. “I don’t think the loan market for luxury assets is as large as many of the traditional small business finance areas, but it is something that can be helpful to small business owners,” he says.
CAN Capital: Beyond Hyperbole
December 11, 2015
It’s usually risky to say “first,” “largest” or “best,” but CAN Capital invites those superlatives and more.
Asked whether the company’s the biggest in the alternative funding business, CEO Dan DeMeo hedges only a little with qualifiers like “might” or “probably” before proudly announcing that the company has provided access to more than $5.5 billion in working capital through 163,000 fundings to merchants operating in over 540 different kinds of businesses.
Glenn Goldman, the company’s CEO from 2001 to 2013 and now Credibly’s chief executive, doesn’t mince words about his former employer when he calls CAN Capital the biggest and most profitable small business alternative finance company in the U.S.
Cofounder and Chairman Gary Johnson proclaims without hesitation that CAN Capital was the first alternative small business finance company. His wife and cofounder, Barbara Johnson, came up with the idea of the Merchant Cash Advance in 1998 when she had trouble raising funds to promote her business, he said.
CAN Capital developed the first platform to split card receipts between the merchant and funder, and it gave birth to the idea of daily remittances, Johnson continued. Within a few years of its founding the company was turning a profit, another first in alternative finance, he claimed.
The innovation continued from there, according to Andrea L. Petro, executive vice president and division manager of Lender Finance, a division of Wells Fargo Capital Finance. She cited a couple of possible firsts she’s witnessed in her dealings with CAN Capital.
When CAN Capital received a loan from Wells Fargo in 2003, it may have been the first sizeable placement in the alternative finance industry by a major traditional financial institution, Petro said. In 2010, CAN Capital was among the first alternative funders to offer direct loans, she noted.
Petro stopped short of characterizing CAN Capital as the best in the alternative finance business, but she praised the company’s management and lauded its systems for underwriting and monitoring funding. “They continually upgrade their systems, upgrade their software, upgrade their people,” she said.
Calling CAN Capital one of the best comes naturally to Kevin Efrusy, a partner at Accel Partners and a CAN Capital board member. Accel saw opportunity in alternative finance because banks were reluctant to lend at the same time that an explosion of data on small businesses was informing the underwriting process. When Accel sought a position in the industry, it contacted CAN Capital, he said.
“Frankly, CAN Capital didn’t need or want our money,” Efrusy said. “We approached them.” Five years ago, Accel convinced CAN Capital that additional resources could help the company grow, and it bought a stake in the company.
With so many extolling the virtues of CAN Capital, AltFinanceDaily asked DeMeo for a look at the thinking that underlies the success.
PLOTTING STRATEGY
CAN Capital pursues a strategy that DeMeo visualizes as a honeycomb. In the center cell, he places the objective of “helping small businesses succeed.” The compartmental element above that provides a place for the goal of serving as “the preferred provider of financial solutions to small business,” he said. The company’s cultural values, summarized as “Care, Dare and Deliver,” reside in the compartment below the center cell as table stake underpinnings, he added.
DeMeo also describes the company as driven by four strategic planks: “1) Expand the market, 2) broaden the product set, 3) deepen relationships with customers, and 4) achieve operating excellence,” he said.
What does success look like to the company? To DeMeo, it’s dramatic growth in the number of customers, resulting in increased revenue, a more valuable company and better career opportunities. “Digital automation and customer experience are at the center of those efforts,” he said.
CAN Capital operates with a “huge appetite for ‘test and learn,’” according to DeMeo. “That’s how we keep innovation alive,” he said.
And the result of all that? The company has increased fundings by 29 percent (CAGR) and revenue by 24 percent (CAGR), with corresponding growth in earnings, DeMeo said. It has also grown its digital business by 600 percent since 2014, he noted.
AT THE WHEEL
DeMeo, the man at the top of CAN Capital, joined the company in 2010 as chief financial officer and became CEO early in 2013. He was previously CFO at 1st Financial Bank, and also served as CFO for JP Morgan Chase’s consumer and small business unit. DeMeo also was chief marketing officer and ran business development head for GE Capital’s consumer card unit. His career began at Citibank, where he held senior roles in marketing and customer analytics.
“I was very fortunate to work for some pedigree companies earlier in my career,” DeMeo said. “Those companies emphasized market based training and development, and I worked with very smart and hardworking people. I also had great experience in unsecured lending.” His formative years left him with great appreciation for “behavioral analytics and the quantitative, information-based approach to business finance.”
Experience convinced him, as a CEO, the importance of attention to the balance sheet and income statement. It’s vital to combine that with innovation and growth orientation, DeMeo said. He seeks to lead, inspire and motivate employees, he emphasized.
DeMeo grew up in Atlantic City, NJ, with parents who valued hard work, education and maximizing opportunity. His wife and three children have supported him in his career despite the long hours and dedication necessary for success.
At CAN Capital DeMeo has faced the challenge of managing the business through internal and external cycles. Running the company often comes down to balancing what customers want with what makes economic sense, he said. “Pigs eat, and hogs get slaughtered,” he maintained. “You can’t get too greedy.”
DeMeo runs the company without the help of a President or Chief Operating Officer. While DeMeo serves as the public face of the company, he also devotes himself to every aspect of operations, he said.
WHAT’S IN A NAME?
Although CAN Capital’s drive for technological innovation and its measured approach to fundings have remained constant, the company has renamed itself several times to fit changing times.
In November 2013, it rebranded itself publicly as CAN Capital, and the company now provides access to business loans through CAN Capital Asset Servicing Inc, and Merchant Cash Advances through CAN Capital Merchant Services.
With the CAN Capital rebranding, it dropped the umbrella name of Capital Access Network. At the same time, it retired the AdvanceMe, New Logic Business Loans and CapTap names.
Most of the company’s old names applied to products or distribution channels, DeMeo said. The company had added them when it presented a new product, such as loans, or introduced a way of going to market, like end-to-end digital technology.
Consolidating the names reflected the company’s decision to put its direct marketing efforts on equal footing with business generated by partner companies, DeMeo said. Having just one name would result in a more efficient approach to building a stronger brand, he noted.
“The opportunity is to create one brand, multiple products and omni channel distribution under one company,” he said. “For a company our size, it would be hard to create brand awareness if you had to put significant promotional support behind every one of those sub brands.”
CAN Connect is a sub-brand that has survived. “That’s not a product name or distribution channel name,” DeMeo said. “It’s the technology suite we use to connect with partners so that we can exchange information in real time.”
CAN Connect is a way to speed up the process and eliminate friction for customers and partners. For example, a partner is able to link their CRM directly into CAN Capital’s decision engine, eliminating manual steps in submitting and generating offers. For partners with a customer-facing portal, CAN Connect enables an offer to be made available in real time to a small business owner, taking advantage of data sharing APIs to tailor the marketing message to fit the prospective customer’s needs.
Attention to detail pays off in repeat business for CAN Capital, in DeMeo’s view. “Almost 70% of our merchants return for another contract,” he said
THE GENESIS
By all accounts, CAN Capital is a company born of necessity. Barbara Johnson, who had the brainstorm that became CAN Capital, was running four Gymboree playgroup franchises in Connecticut and needed funds to finance summertime direct marketing efforts for fall enrollment.
But her company didn’t have much in the way of assets to pledge, so banks weren’t interested in providing funds. Why, she reasoned, couldn’t she just borrow or receive an advance against the credit card receipts she knew would flow in when the kids came back in the autumn? Thus, she gave birth to an industry.
Barbara Johnson and her husband, direct marketing executive Gary Johnson, cofounded the company as Countrywide Business Alliance and put up their own money to build a computerized platform to split card revenue, Gary Johnson said.
Then they persuaded a card processor to partner with them. Once they were operating and had signed their first customer, venture capital began flowing their way to grow the business. These days, the Johnsons remain major shareholders.
“What made it an interesting concept was how huge the market potential was,” Gary Johnson said. “That’s what the attraction still is today.” Although Merchant Cash Advances may now seem commonplace, they were startling at first, he said. “When we first went out in the marketplace, everybody thought it was a crazy idea,” he noted.
The company earned patents on processing related to Merchant Cash Advances and daily remittances, Gary Johnson said. At first, the patents deterred potential competitors from entering the business, but the company was unable to defend the patents successfully in court. Rivals then entered the fray.
Just the same, the company became profitable early on through “deliberate decision-making, having the right people in place and being bigger than everybody else,” he said.
Much of the company’s early business came through firms that provide merchants with transaction services, and that remains the case today, DeMeo said. Many were placing point of sale terminals in stores and restaurants to accept credit cards, and working capital became an upsell or cross-sell, he noted.
The large base of business CAN Capital built with merchant services companies means it will always be an important channel for the company. Recently, new merchant sign-ups have come from more diverse channels, including cobranded and referral partners, and the fast-growing direct marketing channels.
From the beginning, the merchants receiving capital used it to grow their businesses, DeMeo said. “That feeds the whole economic system and creates jobs,” he said.
TODAY’S NUTS AND BOLTS
Daily remittances give CAN Capital nearly constant insight into how well customers are performing, which enables the company to discover potential issues quickly and take action. Such close monitoring also provides the company with enough information to enable funding opportunities that competitors might pass up, DeMeo said.
“The basis for our decisions is how the business performs and business-specific indicators, such as capacity and consistency, versus looking at the personal credit history of the business owner,” DeMeo noted.
Having that data also helps the company create models it can use to serve other businesses in the same classification, DeMeo said. “It’s poured into machine learning for future decisioning,” he maintained. “It’s a cool concept, right?”
The company’s 450 or so employees work in several locations. Three hundred of the total are attached to the office in Kennesaw, GA, the region where the company first set up operations. To this day, that’s where the company conducts most of its business, DeMeo said.
About 25 employees work in technology and operating support in offices in Salt Lake City because the area offers a strong talent pool and provides the company with additional time zone coverage, DeMeo said.
Some of the company’s former executives came from Western Union, which had a presence in Costa Rica. About a hundred employees are now stationed there, working on technology, maintenance and development. That location also houses back-office redundancy for the company, too.
On Manhattan’s 14th Street, the company has 30 or so employees, who include digital engineers, marketing and business development teams, the human resources lead, the chief financial officer, the chief legal officer, and the chief executive officer. The company moved its executive office there from Scarsdale, NY to take advantage of the digital boom, he said, adding that, “Google’s right around the corner.”
Compared with most companies in alternative finance, CAN Capital has little venture capital as part of its ownership structure, DeMeo said. “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.” Competitors have to borrow to fund their growth, he noted.
The company has taken on infusions of debt financing, not equity financing. In the latter, a company is selling part of itself, DeMeo said. “We raised $650 million from a syndicate with five new banks and 10 banks in total.” The company completed a securitization of $200 million the year before, he said.
CAN Capital recently introduced the new TrakLoan product that has no fixed maturity date, with daily payments that are based on a fixed percentage of card receipts. This way, payments ebb and flow with the merchant’s card sales. CAN Capital is also testing “bank-like” installment loans of as much as $500,000 with a payback period of up to four years.
And there’s nowhere to go but up, in the view of CAN Capital executives. With a market of 28 million small American merchants and penetration of between 5 and 10 percent, they see plenty of potential to keep earning superlatives.
National Security Could Prove to be Alternative Lending’s Achilles Heel
December 11, 2015
While alternative lenders debate disclosure policies, stacking, and the cost of bad merchants, there’s a new regulatory threat taking root that no one seems to be able to slow down, national security. Ever since it was revealed that one of the two terrorists in the San Bernardino attack received a $28,500 loan from the Prosper Marketplace, government officials and the public at large are pointing fingers at online lenders.
House Financial Services Chair Jeb Hensarling said on Thursday that, “clearly the financing link to terrorism is a critical one.” As quoted by Politico, “everything’s on the table,” he said when asked about further scrutiny of online lenders.
His sentiment echoes other responses, some of which are clearly emotionally charged and accusatory. LendAcademy’s Peter Renton for example wrote, “I have had to answer such ridiculous questions as, is P2P lending going to become the new way for terrorists to get funding?”
With so much misinformation now floating around out there about online lenders, conspiracy theorists are even claiming that it would be impossible for someone earning $53,000 a year (As Syed Farook did) to get an unsecured loan for $28,000, the implication being that there is something more sinister going on. Of course those that work in the alternative lending industry, including myself personally as someone who invests on the Prosper Marketplace, know that’s not true.
But before the experts can be called on to answer the questions, those motivated to protect this country at all costs (with noble intentions) are rallying around swift and immediate consequences for online lenders such as Prosper.
“The issue may end up being whether marketplace lenders are too easy of a source of cash to finance terrorist attacks,” said Guggenheim Partners analyst Jaret Seiberg in a research letter.
In an article published by The Street, writer Ross Kenneth Urken basically likened Prosper Marketplace to Silk Road where bitcoins were used to buy drugs, weapons, and killers for hire.
Breitbart News, a right-wing news website, led in with an even bigger headline, San Bernardino: Has Islamic State Hijacked Consumer Loans?. It quickly sums up the story by insinuating that online lenders will become the funding tool of choice for ISIS. “The San Bernardino terrorists, Syed Rizwan Farook and his wife Tashfeen Malik, funded their killing spree with a debt consolidation loan, raising questions about whether terrorists might use popular consumer loans to fund their activities,” Breitbart wrote.
And the International Business Times argued that Utah industrial banks are aiding terrorism. “Meanwhile, industrial banks in Utah are taking full advantage of the lack of regulation in the peer-to-peer lending market while they still can, aiding potential terrorists along the way,” author Erin Banco concluded.
According to the WSJ, the House Financial Services Committee will examine whether new legislation is needed in online lending. They’ve also made inquiries to the Treasury Department about existing online lending regulations. Treasury Counselor Antonio Weiss’s previous remarks hinted that the Treasury up until recently was concerned about discriminatory lending practices more than anything else, but stressed that they were not a regulator in this area. Terror financing was not something they even addressed.
According to many sources, lawmakers are drafting up legislation on terrorism financing and expect to have something ready early next year. As for how that will impact online lenders is unknown. Right now, everyone’s still trying to figure out what just happened. Hopefully whatever is ultimately done is done intelligently.
Stop Being A Sub-Broker
December 10, 2015
In an industry with increasing competitive forces putting downward pressures on offer pricing, while simultaneously driving up demand for particular marketing channels (like SEO and quality data) which increases marketing costs, we are seeing massive downward pressures on profits. With this phenomenon occurring, you would have to wonder why in the world would anyone continually operate as a sub-broker today (willingly)? Are there any particular benefits to this, or is it just flat out non-sense? I wanted to explore this topic head on as we wrap up The Year Of The Broker.
THE VAST MAJORITY OF THE TIME, IT MAKES LITERALLY NO SENSE
There are times when I believe being a sub-broker makes some level of sense, but in my opinion those times (looking at our industry specifically) are very rare and most of the time being a sub-broker makes literally no sense based on the setup. The usual setup for a sub-broker is the same as a broker, which means you are going to be required to go out and spend money on marketing or other forms of lead generation to attract applicants.
Once you get those applications, you would forward them to the brokerage house so they can “close” the deal. A lot of sub-brokers believe this is some sort of grandiose deal, allowing them to as they say “free up time” to do other things. But this line of thinking makes literally no sense, because you have already done 98% of the work, which in our industry is just the consistent generation of high quality leads. Once you have done that and are doing that consistently, emailing the package over to a funder and chasing paperwork is the easiest part.
Why would you take only 25% – 50% of the commission structured on a deal, as well as most likely lose your ongoing renewal compensation, when you can instead take 100% of the commission, control your renewal portfolio and make renewal compensation going forward, which is the lifeblood of our industry?
LIES, LIES AND MORE LIES
Sub-brokers need to stop falling for the lies of larger brokerage houses which include the following:
“We are closers, you aren’t a closer, so let us handle it!”
This is rubbish. In our industry we don’t close, we are match-makers. The merchant comes to us looking for working capital, we pre-qualify their current standing and recommend a potential solution. If the merchant disagrees with the potential solution and we have nothing else that would work, the discussion ends. If the merchant agrees to the estimates and the product overview, we collect an application package to submit it to the funder that we believe can do an appropriately-priced deal. As long as we can get approval inline with expectations, everything moves forward on its own accord.
“We have access to special underwriting, platforms and pricing that you don’t have access to!”
More rubbish. When lenders get an A-paper deal, they give you A-paper quotes. When they get a B/C-paper deal, you get B/C-paper quotes. Look to establish a good relationship with a funder/lender. Let them know upfront that you are a small office so a smaller amount of volume will be coming through you. As long as you don’t have a high default rate, you will have access to the same systems, underwriters, base pricing, and innovative products of the funder/lender that the larger brokerage House has.
“We have access to special industry knowledge that you don’t have access to!”
More rubbish. With sources like AltFinanceDaily and other popular forums, the industry has been exposed. Everything you need to know, learn and be trained on has been covered. Also the assortment of direct funder and lender blogs/websites, media publications, and all of the like covering the industry, there’s no special industry knowledge that you can’t go out and attain on your own.
YOU MIGHT NOT EVEN GET PAID
Being a sub-broker might put you in a position of not even getting paid on new deal revenue as promised, as the large (or more experienced) brokerage is fully aware of your inability to truly challenge them legally or professionally.
- Sue If You Want, It Won’t Make A Difference: You can sue the broker for the $5,000 or so that they didn’t pay you on a couple new deals in Small Claims Court. But even though you can obtain a judgment, collecting on that judgment will be nearly impossible.
- Complain Online If You Want, It Won’t Make A Difference: You can also choose to damage their reputation online through posting various negative reviews, but do you think they will care? Go on the RipOffReport all you want, the largest merchant processing ISOs are all over those reports and that doesn’t do anything to stop their growth. The organizations getting these negative reviews will just say, “we serve thousands of clients and when you are as large as us, you are bound to have unhappy customers.” And that’s exactly what the brokerage house will say to their prospective merchants who bring up these negative review listings that you made.
BUT DOES BEING A SUB-BROKER “SOMETIMES” MAKE SENSE?
On very rare occasions do I believe being a sub-broker makes sense, and it includes if there’s some sort of initial training period and if the larger brokerage has significant marketing competitive advantages.
Training
So if you have zero experience, can’t spell Merchant Cash Advance, and believe you could benefit from a 6 month period with an established broker to show you the ropes, then being a sub-broker for a short period of time could make sense. However, I still believe that with the industry being exposed the way it is, you can train yourself and have to deal with insane non-compete agreements.
Marketing Competitive Advantages
So as a small shop, your marketing budget might be limited to $1k a month, whereas the larger brokerage is spending $20k a month and in a perfect world, might give you a deal where you can work with them without being required to generate your own leads.
They’ll claim to supply everything in terms of your dialer and warm leads, with funder networks already established. So all you have to do is come in, sit down, pick up the telephone, and sell all day to the warm leads coming in from their $20k in marketing. You don’t have to do any cold-calling. So you might be getting 50 leads a week that you convert to 12 applications, which you then convert to 4 new deals. If the average funding is $30k, then that’s $120k in funding with let’s say an average 6% commission that you would split 50/50 (3%/3%), giving you $3,600 per week which is $14,400 per month.
But we don’t live in a perfect world, now do we? Do you honestly believe the structure will be established as promoted? Such as more and more of the 50 leads you receive per week turn into mainly start-ups that don’t qualify for anything. Or, most weeks you don’t receive any warm leads at all, and are required to call UCCs, aged leads, or random listings out of the Yellow Pages, which are all horrible marketing mediums.
EITHER YOU GET IN ALL OF THE WAY, OR MAYBE YOU SHOULD GET OUT
If you are going to be in this industry, then properly set up your office, marketing plan, business plan, funder network and work your own deals. Get 100% of commission structured on new deals and control your renewal portfolio (the lifeblood of our business). If you are going to operate as a sub-broker, for the most part you are going to get a raw deal as we don’t live in a perfect world. We live in a world full of inefficiencies, “rah-rah” sales motivational speeches, and promises that don’t get kept.
Bad Merchants: Lies, Fraud, and Hard Times
December 4, 2015
Critics seldom tire of bashing alternative finance companies, but bad behavior by merchants on the other side of the funding equation goes largely unreported. Behind a veil of silence, devious funding applicants lie about their circumstances or falsify bank records to “qualify” for advances or loans they can’t or won’t repay. Meanwhile, imposters who don’t even own stores or restaurants apply for working capital and then disappear with the money.
“People advertise on craigslist to help you commit fraud,” declared Scott Williams, managing member at Florida-based Financial Advantage Group LLC, who helped start DataMerch LLC to track wayward funding applicants. “Fraud’s a booming business, and every year the numbers seem to increase.”
Deception’s naturally on the rise as the industry continues to grow, according to funders, industry attorneys and collections experts. But it’s also increasing because technology has made it easy for unscrupulous funding applicants to make themselves appear worthy of funding by doctoring or forging bank statements, observers agreed.
Some fraud-minded merchants buy “novelty” bank statements online for as little as $5 and fill them out electronically, said David Goldin, president and CEO of Capify, a New York-based funder formerly called AmeriMerchant, and president of the SBFA, which in the past was called the North American Merchant Advance Association.
To make matters worse, dishonest brokers sometimes coach merchants on how to create the forgeries or modify legitimate records, Goldin maintained. Funders have gone so far as to hire private investigators to scrutinize brokers, he said.
But savvy funders can avoid bogus bank statements, according to Nicholas Giuliano, a partner at Giuliano, McDonnell & Perrone, a New York law firm that handles collections. Funders can protect themselves by remaining skeptical of bank records supplied by applicants. “If the merchant cash advance company is not getting them directly from the source, they can be fooled,” Giuliano said of obtaining the documents from banks.
Another attorney at the firm, Christopher Murray, noted that many funders insist upon getting the merchant’s user name and password to log on to bank accounts to check for risk. That way, they can see for themselves what’s happening with the merchant.
Besides banking records, funders should beware of other types of false information the can prove difficult to ferret out and even more difficult to prove, Murray said. For example, a merchant who’s nine or ten months behind in the rent could convince a landlord to lie about the situation, he noted. The landlord might be willing to go along with the scam in the hope of recouping some of the back rent from a merchant newly flush with cash.
Merchants can also reduce their payments on cash advances by providing customers with incentives to pay with cash instead of cards or by routing transactions through point of sale terminals that aren’t integrated onto the platform that splits the revenue, said Jamie Polon, a partner at the Great Neck, N.Y.-based law firm of Mavrides, Moyal, Packman & Sadkin, LLP and manager of its Creditors’ Rights Group. A site inspection can sometimes detect the extra terminals used to reduce the funder’s share of revenue, he suggested.
In a ruse they call “the evil twin” around the law offices of Giuliano, McDonnell & Perrone, merchants simply deny applying for the funding or receiving it, Giuliano said. “Suddenly, the transaction goes bad, and they deny they had anything to do with it,” he said. “It was someone who stole the merchant’s identity somehow and then falsified records.”
In other cases, merchants direct their banks not to continue paying an obligation to a funder, or they change to a different bank that’s not aware of the loan or advance, according to Murray. They can also switch to a transaction processor that’s not aware of the revenue split with the funder. Such behavior earns the sobriquet “predatory merchant,” and they’re a real problem for the industry, he said.
Occasionally, merchants decide to stop paying off their loans or advances on the advice of a credit consulting company that markets itself as capable of consolidating debt and lowering payments, Giuliano said. “That’s a growing issue,” agreed Murray. “A lot of these guys are coming from the consumer side of the industry.”
The debt consolidator may even bully creditors to settle for substantially less than the merchant has agreed to pay, Murray continued. Remember that in most cases the merchants hiring those companies to negotiate tend to be in less financial trouble than merchants that file for bankruptcy protection, he advised.
“More often than not, they simply don’t want to pay,” he said of some of the merchants coached by “the credit consultants.” They pay themselves a hundred thousand a year, and everyone else be damned. You continue to see them drive Humvees.”
Merchants sometimes take out a cash advance and immediately use the money to hire a bankruptcy attorney, who tries to lower the amount paid back, Murray continued. However, such cases are becoming rare because bankruptcy judges have almost no tolerance for the practice and because underwriting continues to improve, he noted.
Still, it’s not unheard of for a merchant to sell a business and then apply for working capital, Murray said. In such cases, funders who perform an online search find the applicant’s name still associated with the enterprise he or she formerly owned. Moreover, no one may have filed papers indicating the sale of the business. “That’s a bit more common than one would like,” he said.
In other cases the applicant didn’t even own a business in the first place. “They’re not just fudging numbers – they’re fudging contact information,” said Polon. “It’s a pure bait and switch. There wasn’t even a company. It’s a scheme and it’s stealing money.”
Whatever transgressions the merchants or pseudo-merchants commit, they seldom come up on criminal charges. “It is extremely, extremely rare that you will find a law enforcement agency that cares that a merchant cash advance company or alternative lender has been defrauded,” Murray said. It happens only if a merchant cheats a number of funders and clients, he asserted. “Recently, a guy made it his business to collect fraudulent auto loans,” he continued. “That’s a guy who is doing some time.”
However, funders can take miscreants to court in civil actions. “We’re generally successful in obtaining judgments,” said Giuliano. “Then my question is ‘how do you enforce it?’ You have to find the assets.” About 80 percent of merchants fail to appear in court, Murray added. Funders may have to deal with two sets of attorneys – one to litigate the case and another to enforce the judgment. Even merchants who aren’t appearing in court to meet the charges usually find the wherewithal to hire counsel, he said.
Funders sometimes recover the full amount through litigation but sometimes accept a partial settlement. “Compromise is not uncommon,” noted Giuliano. Settling for less makes more sense when the merchant is struggling financially but hasn’t been malicious, said Murray.
To avoid court, attorneys try to persuade merchants to pay up, said Polon. “My job is to get people on the phone and try to facilitate a resolution,” he said of his work in “pre-litigation efforts,” which also included demand letters advising debtors an attorney was handling the case.
But it’s even better not to become involved with fraudsters in the first place. That’s why more than 400 funding companies are using commercially available software that detects and reduces incidence of falsified bank records, said a representative of Microbilt, a 37-year-old Kennesaw, Ga.-based consumer reporting agency that has supplied a fraud-detection product for nearly four years.
“Our system logs into their bank account and draws down the various data points, and we run them through 175 algorithms,” he said. “It’s really a tool to automate the process of transferring information from the bank to the lender,” he explained.
The tools note gross income, customer expenditures, loans outstanding, checks returned for non-sufficient funds and other factors. Funders use the portions of the data that apply to their risk models, noted Sean M. Albert, MicroBilt’s senior vice president and chief marketing officer.
Funders pay 25 cents to $1.25 each time they use MicroBilt’s service, with the rate based on how often they use it, Albert said. “They only pay for hits,” he said, noting that they don’t charge if information’s not available. Funders can integrate with the MicroBilt server or use the service online. The company checks to make sure that potential customers actually work in the alternative funding business.
MicroBilt is testing a product that gathers information from a merchant’s credit card processing statement to analyze ability to repay excessive chargebacks reflected in the statements could spell trouble, and seasonality in receipts should show up, he noted.
Additional help in avoiding problem merchants comes from the Small Business Finance Association, which maintains a list of more than 10,000 badly behaving funding applicants, said the SBFA’s David Goldin. The nearly 20 companies that belong to the trade group supply the names.
SBFA members, who pay $3,000 monthly to belong, have access to the list. According to Goldin, the dues make sense because preventing a single case of fraud can offset them for some time, he maintained. Besides, associations in other industries charge as much as $10,000 a month, he added.
Another database of possibly dubious merchants, maintained by DataMerch LLC, became available to funders in July, according to Scott Williams, who started the enterprise with Cody Burgess. It became integrated with the AltFinanceDaily news feed by early October, causing the number of participating funders to double to a total of about 40, he said. The service is free now, but will carry a fee in the future.
It’s not a blacklist of merchants that should never receive funding again, Williams emphasized. Businesses can return to solvency when circumstances can change, he noted. That’s why it’s wise to regard the database as an underwriting tool. In addition, merchants can in some cases add their side of the story to the listings.
Funding companies directly affected by wayward merchants can contribute names to the list, Williams said. About 2,500 merchants made the list within a few months of its inception, he noted. “We’re super happy with our numbers,” he said of the database’s growth.
Many merchants find themselves in the database because of hard times. Of those who land on the list because of fraud, perhaps 75 percent actually own businesses and about 25 percent are con artists applying for funding for shell companies, Williams said.
So far, only direct funders – not brokers or ISOs – can get access to the database, he continued, noting that DataMerch could rethink the restriction in the future. “We don’t want hearsay from a broker who might not know the full scope of the story,” he said.
DataMerch might grant brokers and ISOs the right to read the list to avoid wasting time pitching deals to substandard merchants, but the company does not intend to enable members of those groups to add merchants to the database, Williams said.
Williams sees a need for the new database because smaller companies can’t afford belonging to the SBFA. The association also tracks deals about to become final, which could prevent double-funding but makes some users uncomfortable because they don’t want to disclose their good merchants, Williams said.
Although dishonesty’s sometimes a factor, merchants often go into default just because of lean times, Jamie Polon, the attorney, cautioned. A restaurant could close, for example, because of construction or an equipment breakdown. “Were they not serving dinner anymore, or was there something much deeper going on?” he said. Fraud may play a role in 10 percent to 20 percent of the collections cases his law firm sees, he noted. More than 95 percent blame their troubles on a downturn in business, and the rest claim they didn’t understand the contract, he said.
To understand the downturn, it’s important to amass as much information about the merchant as possible, said Mark LeFevre, president and CEO of Kearns, Brinen & Monaghan, a Dover, Del.-based collections agency that works with funders. That information sheds light on a merchant’s ability to repay and could help determine what terms the merchant can meet, he said.
Timeliness matters because the sooner a creditor takes action to collect, the greater the chance of recouping all or most of the obligation, LeFevre maintained. When distress signals arise – such as closing an ACH account or a spate of unreturned phone calls – it’s time to place the merchant with a collections expert, he advised.
LeFevre’s company also traces a troubled merchant’s dwindling assets to help the funder receive a fair share. Funders can sometimes recover all or most of what they pay a collection agency by imposing fees on the merchant, he noted.
Pinning the collection fees to merchants in default makes sense because that’s where the guilt often resides, observers said. It’s part of balancing the bad behavior equation, they agreed.
