Technology Drives Changes in CRE Lending Space
December 21, 2017
Online technology, which paved new paths for consumer and small business lending, is making similar inroads with the commercial real estate industry.
Over the last few years, several online marketplaces have been established to try and match commercial real estate borrowers with lenders quickly and efficiently using technology. In the past, commercial real estate lending depended heavily on having local connections, but online platforms are blurring these lines—making geographical borders less relevant and opening doors for new types of lenders to establish themselves.
While banks remain the largest source of commercial real estate mortgage financing, non–bank players—including credit unions, private capital lenders, accredited and non–accredited investors, hedge funds, insurance companies and lending arms of brokerage firms—have become more formidable opponents in recent years. Online platforms offer even more opportunity for these alternative players to gain a competitive edge.
At present, most of these commercial real estate marketplaces are purely intermediaries—they’re matching borrowers and investors, not actually doing the lending. Certainly, it’s an easier business model to develop than a direct lending one, but things could change over time, as borrowers become more comfortable with the online model and develop confidence that these platforms can perform, industry participants say.
“You have to be viewed as credible with a certainty of funding for borrowers to come to you. You can’t just put up a flag and say ‘Hey we’re making loans’ because borrowers won’t trust you and they won’t have the confidence that the loan is going to close,” says Evan Gentry, founder and chief executive of Money360, one of the few online direct lenders in this space. “However, once you develop a reputation of strong performance, the tide turns very quickly and that confidence is established,” he says.
For now, however, many of the marketplaces say they are content to remain intermediaries and offer business opportunities to lenders instead of competing with them. The sheer size of the market— commercial/multifamily debt outstanding rose to $3.01 trillion at the end of the first quarter, according to data from the Mortgage Bankers Association—and the fact that is an enormously diverse industry with no plain vanilla product makes it more likely that several platforms can co–exist without completely cannibalizing each other’s business, observers say.
Each of the online marketplaces has a different business and pricing model. Some marketplaces focus on small loans, while some have larger minimums; some focus on just debt; some focus on a mixture of equity and debt. Some sites cater to institutional lenders and accredited investors to help fund loans. Other sites invite non–accredited investors who meet certain criteria to participate in loans, opening doors to a segment of the population which previously had minimal access to commercial real estate deals. While the sites differ in their approach, the upshot is clear: banks—while still formidable competitors in commercial real estate lending—are no longer the only game in town for funding these deals.
The struggle for lenders is how to work most effectively with these marketplaces. “If you can acquire customers through only your own channels, then of course you’re going to do that,” says David Snitkof, chief analytics officer at Orchard Platform, which provides data, technology and software to the online lending industry. Otherwise, these marketplaces present a viable opportunity to expand distribution, he says.
GROWTH OPPORTUNITIES ABOUND
The surge of new companies acting as marketplaces between borrowers and lenders of all kinds comes as the commercial real estate industry is finally coming up to speed with respect to technology. The commercial real estate business has been static for decades in terms of how loans are processed and originated, according to industry participants.
“The use of technology is going to be an enormous disrupting force in that space,” says Mitch Ginsberg, co–founder and chief executive of CommLoan, one of the newer marketplaces for commercial real estate lending. Commercial real estate lending is “probably one of the last industries that hasn’t been touched by technology, and it’s ripe for massive disruption,” he says.
CommLoan of Scottsdale, Ariz., was founded in 2014, but the marketplace has only been fully operational since 2016. The platform targets borrowers seeking $1 million to $25 million of capital for all types of commercial real estate loans. It works with more than 440 lenders—including banks, credit unions, commercial mortgage companies, private money lenders and Wall Street firms. Altogether, CommLoan says it has processed more than $680 million in commercial transactions.
Online marketplaces can help make the commercial real estate industry more efficient and transparent, says Yulia Yaani, co-founder and chief executive of RealAtom of Arlington, Va., another new online commercial real estate marketplace. “People are tired of paying huge fees as a result of the market being so opaque,” she says.
RealAtom began operating in 2016 and targets borrowers who are seeking commercial real estate loans from $1 million to $70 million. The lenders on the platform include banks, alternative lenders, insurance companies, pension funds, hedge funds and hard money lenders. The company processed $468 million in commercial loans in its first 11 months of operating, according to Yaani.
Another benefit of online marketplaces is that they “create a liquid, national marketplace where lenders all across the U.S. can bid on a borrower’s business,” says Ely Razin, chief executive of commercial real estate data company CrediFi, which operates the upstart CredifX marketplace. Historically people who own commercial real estate have only been able to get financing through a local relationship with a bank or broker. “For borrowers, this means more certainty of obtaining a loan and optimized capital not limited by the relationship with the local lender,” he says.
CredifX started operating earlier this year to match commercial real estate borrowers, brokers and lenders including banks, finance companies, mortgage companies, hard money and bridge lenders. The platform is for loans of $1 million to $20 million across all major property types in the commercial space. It matches borrowers with appropriate lenders using the information that parent company CrediFi collects and analyzes. The company declined to disclose how much it has processed in commercial transactions.
To be sure, it’s hard to say how the marketplace model will evolve over time and which players will withstand the test of time. Certainly a similar model has faced challenges on the consumer and small business lending side.
“I think the pure marketplace will become more rare as time goes on,” says Peter Renton, founder of Lend Academy, an educational resource for the P2P lending industry. “There are examples of successful companies with a pure marketplace, but they are rare and difficult to scale. The only well-established company that seems completely wedded to the pure marketplace is Funding Circle; pretty much all other companies have switched to a hybrid model of some sort,” he says.
Commercial vs Residential
While much of the recent growth has been within commercial real estate, there are also some marketplaces that cater to residential borrowers or offer a mix of commercial and residential opportunities.
Magilla Loans, for instance, started out in 2016 as a solely commercial marketplace, but expanded outside this silo because customers were asking for residential and other types of loans, says Dean Sioukas, the company’s founder. The company now connects borrowers with lenders for a whole host of loan types—commercial, residential and others like franchise loans and equipment loans. Lenders on the platform include roughly 130 banks, mortgage loan originators, accredited investors, credit unions and online non-depository institutions. The average loan size is $1.4M for business loans and $500K for home loans. Nearly $4 billion in loans has been channeled through the platform since January 2016; of that 70 percent is tied to commercial real estate, according to the company.
While there are marketplaces that focus on residential mortgage lending, some industry participants say that side of the business isn’t as appealing to new online entrants in part because the cost to acquire customers is really high and there are more challenges to working on a national scale.
“It may not be that commercial is more attractive. It may just be easier. Going directly to borrowers in the residential space has proven harder than many companies expected,” says Brett Crosby, co-founder and chief operating officer of PeerStreet, a marketplace for accredited investors to invest in high-quality private real estate backed loans. Experience seems to suggest that for residential mortgage origination, “it’s much better to have a good ground game and know your local market,” he says.
To be sure, as the online market for real estate matures, it’s not so surprising that companies would shift business models to find their own sweet spot. RealtyMogul.com is one example of a company that has morphed over time. The online platform began operating in 2013 in both the residential and commercial space, but has since moved away from the residential business. Accredited investors, non-accredited investors and institutions can use the platform to find equity or debt-based commercial real estate investment opportunities, and borrowers can apply for private hard money loans, bridge loans and permanent loans.
Money360 is another example of a company that has shifted gears. It started out as a pure marketplace, but changed its business model to become a lending platform in 2014. Now the online direct lender in Ladera Ranch, Calif., provides small-to mid-balance commercial real estate loans ranging from $1 million to $20 million. It’s one of the only companies targeting the commercial real estate space in this way and has closed nearly $500 million in total loans since 2014.
Gentry, the company’s founder, says he would expect to see more industrywide changes as the online commercial real estate business continues to evolve. The key to success, he says, is executing well and “knowing when to pivot when you realize something’s not working just right.”
Ultimately, Gentry predicts more online lenders will target the commercial real estate space. He says technology-based alternative lenders have an advantage because they can operate more quickly and efficiently while still being very competitive from a pricing perspective.
“You put all those things together (speed, efficiency and competitive pricing) and that’s what borrowers are looking for,” Gentry says.
Hard Work, Big Success – The True Story of an MCA Broker
December 15, 2017Sales is a tough field for anyone to break into even if they come from the most ideal of circumstances. At some point, the rubber meets the road for every MCA broker, at which time they must decide whether they’ve got what it takes to make it in this business.
This is what makes Lerry Dore’s story so remarkable, as it seems that the more he got knocked down in life, the higher he was destined to rise. Today he’s employed as an MCA broker at Cresthill Capital. And while education has been paramount to getting him here, evidenced by the fact that during his entire employment he has been in college and he is still one of the funding company’s most successful brokers, Dore more than anything else was trained at the school of hard knocks.
Coming to America
Dore was born in South Florida, but he wouldn’t stay in the United States for long. After his parents split up, his mom was having a tough time making ends meet and made the impossible decision to send him to Haiti to live with extended family.
“My mom had a very hard time supporting us right out of the gate. Soon after I was born, I was sent to Haiti to live with my aunt and cousins,” he said, adding that this gave his mom a chance to get on her feet. “She needed to get a job so that she could provide for us at a basic level.”
Dore would remain in Haiti for the first three years of his life, where his first language would become Haitian Creole. But you wouldn’t detect a hint of an accent talking to him today at the age of 23.
Dore’s mom eventually found a job. She was only earning minimum wage at a hospital, but it was enough to get the wheels in motion to bring her son home.
“She was in a position to provide food, electricity and shelter for us. That’s why I came back,” said Dore, adding that he doesn’t remember much of Haiti with the exception of the plane ride home. “That’s where my memories start,” he said. Perhaps it was somewhere over the Caribbean that young Dore’s dreams began to form.
When he got back to Florida, Dore was able to meet his mom for what felt like the first time for him. He also met his brothers and sisters for the first time ever. He explained how at this point, his mom was still getting adjusted to life in America as an adult immigrant.
“There were a lot of things that I went through as a kid to this point that she couldn’t give me guidance on. She simply didn’t have that experience. That brought a challenge,” he said. Little did he know that these obstacles would help shape him into the resilient person and successful MCA broker he is today.
While getting used to the American culture was a challenge, something that his mother never lost sight of was the importance of education. “She was very big into education,” he said. Dore’s mom discovered Head Start, a government subsidized program that provided a pre-school education for families who couldn’t otherwise afford it. That was where it would all begin for Dore, and come hell or high water his mother was going to enroll him. Without the luxury of an air-conditioned vehicle to drive in the hot Florida heat, the pair set off on foot to sign up. Some 12-15 blocks later they arrived.
“Both of us were sweating bullets. She didn’t know it, but there was a small registration fee. At the time, she didn’t have it,” Dore explained. It was then that fate seems to have stepped in in the form of the woman who was handling registration. She pulled the pair aside and told them that after witnessing the dedication that this mother had toward her son, she was going to waive the fee. In return she only asked that they keep it on the down low.
“That small gesture made a dramatic difference in my life,” Dore said. “If I was not able to attend, I wouldn’t start school until I was seven or 10 years’ old. That was a very important moment in my life.”
Indeed, it was, as it would set in motion a series of events that would lead Dore to where he is today, a successful MCA broker at Cresthill Capital. But before he would join the firm, there were still more hardships waiting for him, not the least of which was the death of a friend in his teenage years. “That could have been me,” Dore exclaimed.
For the average person, life’s setbacks could have held them down forever. For Dore, they seem only to have propelled him further. “The reason why I stayed out of trouble was I was in school and my mother kept us grounded,” he said.
During his teenage years, Dore and his family lived in an apartment complex in a neighborhood of immigrant Haitians where he said the median income was $25,000 to $30,000 per year. He shared a room with his brothers and sisters.
“I focused on athletics,” he said, adding: “That’s where I got my competitive nature. Also, my thick skin,” both of which, incidentally, are characteristics that would serve him well as a broker later in life.
While he excelled at basketball at his Boca Raton high school, Dore wouldn’t be able to pursue those dreams for long. He and his family would be uprooted from their home time and time again amid landlord trouble. This series of setbacks, which involved him sleeping on his brother’s couch for a time, instilled a sense of maturity in Dore at a very young age.
He had a few Division II and Division III offers to play basketball in other states, but he turned them down. Instead of chasing his own dreams, Dore decided to focus on business and find a way to sustain and support his family “Once I graduated, I was not interested in basketball. I wanted to finish college,” said Dore, and lucky for the MCA industry he had his sights set on the field of finance.
Funding Merchants
After High School, the first thing that Dore did was to go online and look for a job. As it so happens, the first ad he saw was at a stock brokerage in Boca Raton. “That’s where I started, in phone sales. I didn’t have a Series 7 license at the time. I was just calling from the Yellow Pages. Once I got someone on the phone, I would transfer the call to someone who had a license,” he explained.
This went on for a couple of months until he heard about a startup company in nearby Delray Beach. “At the time, they were prospecting merchants. That’s how I got into the industry,” he said.
His first job in the MCA niche was with a very small ISO shop. But it was there that he would make a connection to change the course of his career. He was working on a deal that was hard to place and was only getting rejections. That is until he came across Mike Daniels, Cresthill’s No. 1 producer.
“I couldn’t get the deal done anywhere else. The merchant was getting frustrated with the process. I heard of a company that takes chances on merchants with imperfect credit,” he said. That funder was Cresthill Capital. Little did he know at the time, but they would eventually become his employer.
He sent the merchant file over to Daniels, who then reached out to the merchant and got the deal funded. It was at that point, Dore said, that he started to fall in love with Cresthill “because of how [Daniels] was able to treat the merchant with respect and get the deal done.”
For the next six months, Dore would proceed to trust all of his business with Cresthill. He was still employed by the small ISO shop, but he began to outgrow his environment and long for a platform that allowed him to explore his talent and excel. But his pursuit only left him frustrated and thinking about leaving the MCA industry, something he confided in Cresthill Capital’s Daniels, who was turning into a mentor, about.
It was at this point in his life and career that instead of being the rock, Dore needed to lean on someone else. Daniels and Cresthill Capital were there for him. He was invited in for an interview, and as they say the rest is history.
“I was shocked at how diverse the workforce is. There were different types of people with different backgrounds. I liked it right off the bat. And then everyone was very friendly to me from the moment I walked in,” he said. He was greeted at the front door by Cresthill Capital’s Mike Marano, who then proceeded to interview him.
“I’ve actually interviewed and sat with every single person at my company and hired them personally. What I can say about Lerry is that from the moment I looked at his face and saw his eyes, I knew intuitively that he was a good person. And responsible. I had no idea how deep of a person he was, how much humanity he would show. He was a willing student, and we were happy to teach him. And he continues to soak it up like a sponge,” Marano told AltFinanceDaily.
Dore was convinced Cresthill Capital was the right place for him when Marano insisted that Dore stay in school and continue his education. “They said, ‘we will work around your schedule,’ and that really drew me in,” he said, adding that the dog-friendly environment was a bonus.
Dore has been employed by Cresthill Capital for the past 18 months and is graduating from college this week. He is not only supporting himself, but he’s the highest earner in his family, which has allowed him to help support them.
Paying it Forward
As if on cue from the mystery lady that paid his school tuition when he was just a child, Dore is now interested in paying it forward in life. He said that similar to how Cresthill Capital is involved with philanthropy, he’d like to give back to the community. But his vision goes beyond his neighborhood.
“I want to help kids that are similar to me, who are in programs that try to help them excel in this country. I want at some point to work with immigrants that come in from Haiti and work with them to give them a platform, like the lady who gave us a chance,” said Dore.
Since the Haiti earthquake, his extended family has relocated north to Canada. “But I still feel to some degree a responsibility to try and help out the people in that country and the ones who come here through immigration,” he said.
As for Marano, he said all Dore needs to do is exactly what he’s been doing. “When he leaves me, he won’t have to work again. But knowing this kid, he probably will anyway,” Marano said.
AltFinanceDaily Connect: Miami — SOLD OUT
December 12, 2017AltFinanceDaily’s cocktail networking event on January 25th in South Beach is now SOLD OUT!
If you missed out on your chance to RSVP, you can still register for our much bigger, better, and more comprehensive event on May 14, 2018 in Brooklyn; Broker Fair 2018.
With 20 sponsors already signed on, Broker Fair is sizing up to be the biggest event in the MCA and small business lending industry of the entire year! During this exclusive full-day conference, brokers, lenders, funders and service providers alike can expect education, inspiration and opportunities to connect and grow their business. You can view our preliminary agenda here.
DON’T GET LEFT OUT. REGISTER FOR BROKER FAIR 2018 TODAY!. Got questions? E-mail: info@brokerfair.org
Closing Loans and MCAs — From the Bedroom to the Office
December 8, 2017
The merchant cash advance industry has gone mainstream so quickly that it has become more difficult to identify potential customers.
Market saturation and industry consolidation have caused the cost of sales leads to increase sharply. Yet a New York business loan broker is finding success by applying lead generation and online marketing strategies to merchant cash advance, or MCA, while expanding the number of services he offers prospects. Funding is just the foot in the door.
Philip Smith, founder and CEO of PJP Marketing Inc., told AltFinanceDaily the MCA industry’s acceptance has made it more difficult for sales lead generators to produce profits. But expanding the number of services that independent sales organizations (ISOs) offer can offset the contraction. Smith’s life as a stay-at-home-dad, was recently featured in Innovate Long Island, a regional newspaper.
An ISO can’t just be a broker anymore. It needs to change, identify new revenue streams to excel. In doing so, a lead generator transforms itself into a business consultant that prospective customers turn to for additional services they often didn’t even know existed, Smith said.
For example, business loans and MCA is Smith’s largest business generator. But his most popular add-on services with such sales leads are credit repair and credit monitoring.
“The market is relatively easy,” Smith said. “The hard part is monetizing. The ISOs are going out of business because they refuse to monetize the other, non-cash advance leads.”
Smith, armed with a degree in business/e-business from the University of Phoenix, is also an advocate for entrepreneurs who want to work from home. It’s a viable model for lead generators because low overhead costs provide entrepreneurs an opportunity to capitalize on aggressive business strategies.
As such, Smith markets his pajama-centric business model with IWorkInMyJams.com. But he acknowledges that working from home presents its own challenges. Entrepreneurs need to be extra focused and tough to distract. No watching Dr. Phil during work hours.
Since they don’t work with more experienced managers, work-from-home entrepreneurs also need to seek their own sources of business advice and strategies. They deal with the reality that some lenders may deem them too small to do business. “Not everyone will work with you,” he said.
Working from home also requires a entrepreneur to set office hour limits and parameters to prevent burnout, Smith said.
“Do you know when to turn it off?” he asked. “That’s my problem. I’m up until 1 o’clock in the morning because I can.”
Smith now brokers sales leads in several verticals such as credit repair, tax relief, mortgage and solar energy. He claims revenue of $1.6 million last year and plans to reach $2 million this year.
When he was just 23, Smith launched his first company, We Link You Internet Services, a business that evolved into a web hosting concern.
He later worked for New York-based Canrock Ventures to launch a search-engine optimization platform called SEOPledge that was acquired in 2013. The following year, he founded what is now called PJP Marketing to broker leads amid the rapidly rising MCA space using the digital marketing skills he’d learned from the previous positions.
In October, AltFinanceDaily reported that several factors have contributed to several changes in the MCA industry, including consolidation, making it more difficult for alternative-funding business lead generators.
ISOs and brokers have gotten pickier about the types of leads they’ll accept as MCA evolves from a niche business to one that’s more commonplace. Also, a stricter application of the Telephone Consumer Protection Act (TCPA) has chilled soliciting and hamstrung the ability to connect with business owners who are prospective clients.
Last year’s LendingClub Corp. scandal ousted several senior managers, including the company’s then-CEO. Last summer, Bizfi laid off workers and sold the servicing rights to its $250 million loan portfolio to rival Credibly.
The result has been a consolidation of the alternative funding business.
“There are still roughly 75,000 business owners every week who meet the criteria for an [MCA],” California-based Lenders Marketing partner Justin Benton told AltFinanceDaily. “Now instead of there being 5,000 options in the space, there are 2,000, so those 2,000 are gobbling it all up.”
David Ross, a 12-year veteran of the MCA industry and owner of Pro Leads NYC, said MCAs higher profile has been a game changer for lead generators.
“MCA is beyond saturation,” he said. “All of the merchants know about it and understand it. Now, [funders] want exclusive leads.”
Working from home is a possible option for ISOs that are wizards at online marketing. But it’s less attractive for the conventional lead generator who relies on backing from a marketing team, Ross said.
“Realistically, if you’re a broker and want to make money you have to be on someone’s floor,” he said. “You need marketing.”
Last year, a Bryant Park Capital report estimated the MCA market to be worth about $12.8 billion. It’s projected to top $15 billion this year. Smith expects the continued strong demand for MCAs regardless of all the industry consolidation and costlier lead generation.
“I think they will always be fine because they can live through the storm,” he said. “It’s now a mainstream service so more people know about it.”
Smith told Donna Drake during an appearance on the Live It Up television program that going it alone as entrepreneur takes a “do-not-quit attitude” that has served him well so far.
“Any business is pretty much a numbers game,” he said. “I live and breathe it every single day.”
The Bad Broker And Merchant Due Diligence
November 15, 2017
There may be a rogue broker on the loose. The scam involves a fraudulent Letter of Intent (LOI) falsely claiming to be that of a major funder designed to resemble the real McCoy. Events like this place a spotlight on the risks associated with this market and is a reminder that not all small businesses are armed with the right information.
AltFinanceDaily was contacted by a victim of the fraud, Noah Grayson, managing director and founder of Encino, Calif.-based South End Capital. Grayson said the real victims are the merchants who get taken advantage of by these scams. In this case it was a New York-based small business owner who took on too many MCAs.
Grayson is quick to point out the MCAs were not at fault and each may have even thought they were the first position funder since it all unfolded so quickly. “They’re just trying to do business and provide financing to businesses, and they got burned as well. They’re going to take some degree of financial loss because of this and maybe more,” Grayson said.
False Pretenses
When Grayson reviewed an email that he received from the borrower, which included a copy of the LOI, he knew immediately that it was fraudulent and the borrower had been misled. “It was a fraudulent LOI and we had no record of the borrower or the brokers who provided it in our system,” Grayson exclaimed.
As it turns out, the borrower was tricked by the fake LOI that sought to leverage the reputation of South End Capital’s brand to coerce him into taking out $260,000 of MCAs from four separate funders. They did it under the false pretense that South End Capital would then consolidate those positions in 10 days and extend as much as $900,000 more in working capital to grow the business.
To be clear, South End Capital does offer a genuine MCA consolidation loan program. Grayson had never agreed to consolidate the business owner’s MCA positions, however, or provide an additional $900,000. That part was fabricated. This left the merchant holding the bag for more than a quarter of a million dollars in MCAs, placing his business, which has been successful since the 1960s, on the brink of bankruptcy protection in the interim because of the crippling weekly payments.
Fraud Prevention
Andi McNeal, research director at the Association of Certified Fraud Examiners, or ACFE, said she has seen this before, only on the consumer side of the industry. “Loan consolidation fraud for credit card debt is very common in the consumer space, and it’s not surprising to know that similar schemes are popping up in the small business space, too,” she said.
She went onto explain that because a small business is typically run by a small management team who typically aren’t trained in fraud prevention, they often adopt the same mindset as they do in personal finances. They don’t always have the necessary checks and balances in place, which can place them at risk of being victimized by such schemes.
“Sometimes they’re not savvy enough to detect those types of scams coming at them,” she noted. “Certainly, big businesses can fall prey to this, but it’s less common.”
Staying on Defense
The recent saga unfolded over a period of six weeks. Meanwhile Grayson has outlined some red flags for small businesses to watch out for to prevent becoming the next victim to a new fraud.
“If what you’re being told seems suspicious or doesn’t make sense, question it. Ask questions and get more information,” said Grayson.
Another rule of thumb is to stick to the document in front of them. Again, this may just be a case of a few bad apples spoiling the bunch, but sometimes brokers tell small businesses something contrary to what appears in front of them on the official document. “The LOI spells it out,” said Grayson, adding that when in doubt the borrower should defer to the document.
The merchant should also take it upon themselves to call the lender whose name is on the LOI to verify its authenticity before signing it or providing any upfront fees.
“In this case, it was a fraudulent document and it didn’t help out the borrower but calling us to confirm it initially would have. Most of the time, looking at what’s written out on paper from the verified source will help and getting a verbal or email confirmation from the actual lender, certainly will,” Grayson said.
Another defensive step merchants can take is to simply review the website of the brokers and funders and look for names, press releases and past closings, details which Grayson noted were all missing from the broker in question’s site.
“Anybody can say they make loans and provide financing. They could tomorrow put up a website for a couple bucks and say they’re a lender and start taking applications. But just because there’s a website doesn’t mean they’re legitimate,” Grayson said.
He’s suggesting merchants check out the names of the principals and employees on the site. Google is their friend to check for any history of loans closing. Look for closing announcements and any complaints tied to the entity in question. Call the Secretary of State Department and inquire about any complaints.
At the end of the day, it comes down to the merchant doing their homework. “A lot is on him. He should have done more research, absolutely. But anybody can be coerced or tricked if the right things are said,” said Grayson.
If a merchant does find themselves in a situation where they fall victim to a fraud, there are steps they should take. McNeal said that while each situation is unique, a good first step is always going to be to reach out to a trusted legal counsel.
“They can help guide you through the process of what the options are. Do you have recourse? Does the situation call for insurance to help cover the losses? They also can advise on which law enforcement or government agencies are the most helpful – should the case be referred to the local authorities or do they need to bring in the FBI,” the ACFE’s McNeal advised.
More Pervasive
Grayson’s fear is that this is not an isolated incident. He has reason to be cynical, as this was the second incident this year resembling the most recent situation that they have experienced.
The first incident was relayed to South End Capital by a handful of borrowers about one specific MCA broker. No fraudulent documents were ever recovered, but the borrowers recalled the harrowing details of the incident
“Per the multiple borrowers, the broker used our real LOIs and lied to borrowers about how to interpret them to coerce tens of thousands of dollars in upfront fees from them. For example, for an LOI we issued for our SBA loan program that listed what SBA guarantee fees would be due at closing, he would convince them that that fee was his and they needed to pay it to him upfront to proceed,” Grayson explained.
The small business owner at the center of the scandal declined to comment, and it’s unclear whether they were the one to initiate the original communication with the broker or vice versa.
Check Out The Preliminary Agenda of Broker Fair 2018
November 15, 2017The preliminary agenda of Broker Fair 2018 was published to the event’s website on Tuesday evening. While subject to revisions between now and May 14th, Broker Fair is already shaping up to be the hallmark event for the MCA and small business lending industry. Fifteen sponsors have already signed on including National Funding, RapidAdvance, and Funding Metrics as Platinum-level and CFG Merchant Solutions as Gold-level.
Broker Fair 2018 will be the largest gathering of merchant cash advance and business loan brokers in the country. Until now, there’s never been anything like it.
To register, sign up online or contact Sarah@brokerfair.org
We hope to see you in Brooklyn at The William Vale in May!
Update 4-26-18:/strong> Most recent version of the agenda below
From Ineligible to 0% APR – Los Angeles Company Monetizes Startup Leads, Combats Stacking
November 10, 2017
Merchants have no shortage of options when it comes to accessing funding in today’s climate. And while MCAs and loan products have become more pervasive, one company’s solution is to reintroduce traditional financing in a strategic manner. Seek Business Capital finds credit card offers and credit lines for the credit-worthy who may not be eligible or ideally suited for a business loan.
Roy Ferman is an Australia transplant who runs the company out of the Los Angeles headquarters, miles from the usual domicile for alternative funders of Silicon Valley, New York and Austin.
“We liked LA from a perspective of the sunshine, but we also like being away from the rest of the funding industry. It gives us the ability to put our heads down and focus on what we’re doing and not worry about what anybody else is doing,” Ferman told AltFinanceDaily.
Seek Business Capital partners with MCAs and brokers on leads and recently expanded with a new hire in New York. Kunal Bhasin joined the company over the summer as vice president of business development. “We were traveling out there to meet with partners and doing redeye flights. Now someone is on the ground there training partners on how to better find opportunities to use our product,” Ferman said.
Basically, the company tells MCAs and brokers that the startup leads (those that are trying to start a business or have just started one), to send those deals to Seek Capital, instead of throwing them in the trash.
They recently adopted a fully automated underwriting product that delivers an instant decision for merchants though there’s an element of the human touch on the services side of the transaction.
“For us, the biggest driver is FICO. We take someone with a good FICO score but just started their business and we are still able to offer this person funding,” said Ferman, adding that the sweet spot is a credit score of 680 or higher. “Cash flow is always going to be a factor. For us, we’re predominantly based on FICO. Even still, FICO is one thing. That’s the body of the car. Sometimes we want to look under the hood and see what’s really going on,” said Ferman.
Economic Indicator
Seek Business Capital is industry agnostic though some of the more common sectors they work with are retail, restaurants and trucking. “What’s really interesting is we get a little bit of a sneak peek into emerging industries and local economies,” Ferman said.
For instance, when cannabis was legalized for recreational use in Colorado, they saw a spike in demand from “peripheral businesses” such as contractors that were building out the storefronts, security companies and restaurants amid a rise in tourism to the area.
A similar boom is expected in California when cannabis for recreational use becomes legal in the state in 2018 via Prop 64.
Zach Lazarus, CEO of San Diego-based A Green Alternative, a cannabis dispensary and delivery service, said: “You name it, it’s going up in California right now,” in response to Prop 64. He added there are desert towns and farm communities looking to embrace the boom, which he compares to the gold rush of 1849.
“It’s the service providers, architects, contractors, all these different niche needs are the people who are really going to benefit from the boom,” Lazarus said. Contractors especially need access to capital right away; they don’t generally get fully compensated until once the job is complete, and they need to purchase materials in the interim.
Lazarus said banks won’t loan to cannabis businesses and in his experience other lenders have been predatory in nature. He may just not have come across the right funder yet.
Anti-Stacking Tool
One of the problems that Seek Business Capital seeks to solve is that of merchants taking on too many positions. “We found two ways to provide our services. Our bread and butter and our historical performance has always been in startup funding. We’ve evolved to move more upstream with lenders and we’ve become an anti-stacking tool, if you will,” Ferman noted.
The problem with stacking is that it can put a major strain on the cash flow of the merchant and it put the first position funder at additional risk than what they originally agreed to underwrite.
“We offer 0% for the first 12 months. It’s very advantageous and we’re not crushing cash flow. We view it as an anti-stacking tool. There are few lenders and ISOs who use it, taking both our credit card position and the original term loan but protecting the merchant. The merchant gets all the money they need so they’re not interested in stacking,” said Ferman.
Seek Business Capital charges merchants a success fee of 9.9% of whatever funding they receive for them. Payment is made once the small business receives their funding and the merchant will typically choose to pay Seek Business Capital with the capital they receive from the credit extended to them.
Now they’re taking things to the next level with a data product that they plan to license to third party credit aggregators next quarter.
“We’ve seen everything from the credit profile, to income, to the approval rate, the approval score and the amount. We’ve taken all that data and analyzed $150 million worth of credit card approvals for big clients. We now have a strong indicator of which profile is going to get approved from which bank and how much,” Ferman explained.
A customer submits their details into Seek Business Capital’s decision engine, which generates an estimated approval or decline rate in real time. For instance, they might see that their approval likelihood is 25% for one card and 86% for another along with the estimated approval amount. It’s a soft credit pull so customers don’t have to worry about harming their credit. In addition to the decision engine there’s a recommendation engine that makes credit card suggestions to merchants.
Ferman said the biggest competition the company faces is a potential customer taking out a home equity line, dip into their 401(k) or borrow from friends and family.
CFC on the Front Lines of the MCA Regulation Battle
November 6, 2017
As the US Senate attempts to reach a bipartisan agreement on relaxing some of the rules in the Dodd Frank legislation of 2010 that would treat banks more favorably, the MCA industry is having to fend off legislation and regulation of its own at the state and federal levels that could position funders in a similarly crippling position.
MCA regulation has been thrust into the spotlight for a number of reasons, not the least of which has been the Consumer Financial Production Bureau (CFPB). The CFPB is moving forward with the Dodd-Frank Section 1071 rulemaking process for data collection regarding small business lending, a sector of the market for which they do not have jurisdiction, sources say.
Front and center in the policy discussions has been the Commercial Finance Coalition (CFC), a merchant cash advance trade association that is coming up on its two-year anniversary in December. While federal policymakers appear to be listening, state legislatures have been a more difficult nut to crack.
The CFC’s Influence
In its short two-year history, the CFC has been one of the most vocal if not the most influential trade organization lobbying on behalf of the MCA industry, having attended 70 congressional meetings and having led advocacy efforts for the industry in the halls of Albany, Sacramento, Illinois and Washington, D.C.
Dan Gans, executive director of the CFC, has been the voice of the MCA industry on Capitol Hill and has been invited to testify in key congressional hearings. “For whatever reason, the CFC has really become the voice and has taken an active part in the so far successful advocacy efforts to educate and mitigate potential harm to our members’ ability to deploy capital to small businesses that need access,” Gans told AltFinanceDaily.
Most recently the CFC participated in a fly-in, one of two such events this year, to Washington, D.C. in which the association’s counsel Katherine Fisher of Hudson Cook, LLP testified.
In her testimony Fisher said: “The MCA and commercial lending spaces are sufficiently regulated by existing federal and state laws and regulations. Both MCA companies and commercial lenders must comply with laws and regulations affecting nearly every aspect of their transactions, from marketing and underwriting through servicing and collection.”
She went on to explain: “Even if they comply with every applicable law and regulation, small business financers must also be wary of the Federal Trade Commission’s powerful authority to prevent unfair or deceptive acts or practices.”
Fisher told AltFinanceDaily she received a “positive” response to her testimony from funders but has not heard anything from lawmakers.
Gans said Fisher did a fantastic job in articulating the needs and status of the industry.
“She presented a very good case as to why the industry is currently adequately regulated. We don’t feel there is a need for federal regulation. In some cases, less regulation would allow our members to deploy more capital and help more small businesses,” Gans said.
The sweet spot for MCAs, Gans explained, are transactions under $100,000 and probably in the $24,000 – $40,000 range. He said the industry does a fantastic job of being able to deploy financial resources to small businesses in a timely manner that neither banks nor SBA lenders can match. He’s not suggesting MCA is for everybody but for some businesses it’s an essential product that can help. There have been many success stories.
“Competition is all over the place. But that’s great for the merchant. The more options that merchants have, the more we can enforce best practices and more competitive rates. And the more we can keep the government from impeding people from getting into this space, the better off small businesses are going to be,” said Gans.
Setting the Record Straight
The CFC was formed with the mindset that the organization, which is currently comprised of CEOs of small- and medium-sized funders, would take a proactive rather than a reactive approach to industry regulation. In its two-year history the CFC has tasked itself not only with educating policymakers on the role of MCA funders for small businesses but also with undoing the misinformation and misconception surrounding the anatomy of an MCA.
“Unfortunately, because MCA uses the term cash advance in its product name, uninformed people will often confuse MCA as some form of payday lending. And so that has been one of our biggest challenges, educating members of congress and committees that there is absolutely no correlation between MCA products and what their views of consumer payday loans is,” said Gans, adding that the CFC has had to communicate that MCA is a version of factoring has been around for more than 1,000 years.
A common thread that the CFC has been able to weave with lawmakers has been the diverse geographical representation of both the trade group and the House and Senate.
“Most venture capital is deployed in a few spots – New York, California and Texas – and it’s a cliff to get to those three states. So, one nice thing that I take pride in is my members are looking all around the country regardless of the geographic location. That helps us with policymakers, most of whom are not from the New York City metropolitan area or Silicon Valley. It’s nice being able to look at them in the eye and tell them we care just as much about your district as you do,” he said.
The Road Ahead
The CFC has an ambitious long-term agenda, one that includes raising their profile in the industry and participating in events.
“I think one of the ambitions we have is to have an organization where funders and brokers can be at the same table and work though some of the issues impacting the industry and try to make sure people are doing things in the right and best way.”
The trade group is planning to partner up with AltFinanceDaily for Broker Fair 2018 and they’re looking to bolster membership.
“The industry has had a lot of free riders that are benefiting from our advocacy efforts but not supporting it. So, from my perspective, if you’re in this industry, particularly in the MCA space, we’d like to expand membership. If we grow our membership, we can do more things, engage more states and expand our lobbying team,” said Gans. “The more members we have, the more we can do to advance the ball and protect the interests of the industry.”
The CFC will need all the help it can muster given the fight ahead to fend off regulation particularly in Washington, Albany and Sacramento. “I think we could see some harmful regulations and potentially legislation over time. Some of those bad ideas that emanate in states have a tendency to percolate into Washington. If at some point there is a less business-friendly administration in the future, we could see all those ideas get some traction at the federal level,” Gans warned.
