Consultative Selling in Small Business Finance
October 16, 2019
It’s nearly impossible to teach fiscal responsibility to most consumers, according to researchers at universities and nonprofit agencies. But alternative small-business funders and brokers often manage to steer clients toward financial prudence, and imparting pecuniary knowledge can become part of a consultative approach to selling.
Still, nobody says it’s easy to convince the public or merchants to handle cash, credit and debt wisely and responsibly. Consider the consumer research cited by Mariel Beasley, principal at the Center for Advanced Hindsight at Duke University and co-director of the Common Cents Lab, which works to improve the financial behavior of low- and moderate-income households.
“For the last 30 years in the U.S. there has been a huge emphasis on increasing financial education, financial literacy,” Beasley says. But it hasn’t really worked. “Content-based financial education classes only accounted for .1 percent variation in financial behavior,” she continues. “We like to joke that it’s not zero but it’s very, very close.” And that’s the average. Online and classroom financial education influences lower-income people even less.
The problem stems from trying to teach financial responsibility too late in life, says Noah Grayson, president and founder of Norwalk, Conn.-based South End Capital. He advocates introducing young people to finance at the same time they’re learning history, algebra and other standard subjects in school.
Yet Grayson and others contend that it’s never too late for motivated entrepreneurs to pick up the basics. Even novice small-business owners tend to possess a little more financial acumen than the average person, they say. That makes entrepreneurs easier to teach than the general public but still in need of coaching in the basics of handling money.
Take the example of a shopkeeper who grabs an offer of $50,000 with no idea how he’ll use the funds to grow the business or how he’ll pay the money back, suggests Cheryl Tibbs, general manager of One Stop Commercial Capital, Douglasville, Ga. “The easy access to credit blinds a lot of merchants,” she notes.
Entrepreneurs often make bad decisions simply because they don’t have a background in business, according to Jared Weitz, CEO of New York based United Capital Source. “Many of the people who come to us are trying their hardest,” he observes.
Weitz offers the example of his own close relative who’s a veterinarian. That profession attracts some of the brainiest high-school valedictorians but doesn’t mean they know business. “He’s the best doctor ever and he’s not a great businessman because he doesn’t think about those things first. What he thinks about is helping people. That’s why he got into his profession.”
Entrepreneurs often devote themselves to a vision that isn’t businesses-oriented. “They start a business because they have a great idea or a great product, and that’s what excites them,” Grayson says. “They jump in with both feet and don’t think much about the business side.” The business side isn’t as much fun.
Merchants also attend to so many aspects of an enterprise—everything from sales, production and distribution to hiring, payroll and training—that they can’t afford to devote too much time to any single facet, notes Joe Fiorella, principal at Kansas City, Mo.-based Central Funding. Business owners respond to what’s most urgent, not necessarily what’s most important.
For whatever reason, some business owners spiral downward into financial ruin, bouncing checks, stacking merchant cash advances and continually seeking yet another merchant cash advance to bail them out of a precarious situation, says Jeremy Brown, chairman of Bethesda, Md.-based Rapid Advance.
Weitz advises sitting down with those clients and coming to an understanding of the situation. In some cases, enough cash might be coming in but the incoming autopayments aren’t timed to cover the outgoing autopayments, he says by way of example.
Informing clients of such problems makes a demonstrable difference. “We can see that it works because we have clients renewing with us,” says Weitz. “We’re able to swim them upstream to different products” as their finances gradually improve, he says.
The products in that stream begin with relatively higher-cost vehicles like merchant cash advances and proceed to other less-expensive instruments with better terms, says Brown. Those include term loans, Small Business Administration loans, equipment leasing, receivables factoring and, ultimately the goal for any well-capitalized small business—a relationship with the local bank.
Failing to consider those options and instead simply abetting stackers to make a quick buck can give the industry a “black eye,” and it benefits none of the parties involved, Tibbs observes. But merchants deserve as much blame as funders and brokers, she maintains.
Prospective clients who stack MCAs, don’t care about their credit rating and simply want to staunch their financial bleeding probably account for 35 percent to 40 percent of the applicants Tibbs encounters, she says.
Just the same, alt-funders continue to urge clients to hire accountants, consult attorneys, employ helpful software, shore up credit ratings, keep tabs on cash flow, calculate margins, improve distribution chains and outline plans for growth. It’s what helps the industry rise above the “get-money quick” image that it’s outgrowing, Weitz, says. Many funders and brokers consider providing financial advice an essential aspect of consultative selling. It’s an approach that begins with making sure applicants understand the debt they’re taking on, the terms of the payback and how their businesses will benefit from the influx of capital. It continues with a commitment to helping clients not just with funding but also with other types of business consultation.
“It’s not so much selling as building a rapport with clients—serving as a strategic advisor or financial resource for them, identifying their needs and directing them to the right loan product to meet those needs,” says Grayson. “They should feel they can call you about anything specific to their business, not just their loan requests.” He also cautions against providing information the client will not absorb or will find offensive.
Justin Bakes, CEO of Boston-based Forward Financing also advocates consultative selling. “It’s all about questions and getting information on what’s driving the business owner,” he says. “It’s a process.”
Consultative sales hinges on knowing the customer, agrees Jason Solomon, Forward Financing vice president of sales. “Businesses are never similar in the mind of the business owner,” he notes. “To effectively structure a program best-suited to the merchant’s long-time business needs and set a proper path forward to better and better financial products, you need to know who the business owner is and what his long term goals are.”
“It’s taking an approach of actually being a consultant as opposed to a $7 an hour order taker,” Tibbs says of consultative selling. “I like to teach new reps to think of it as if you were a doctor. Doctors ask questions to arrive at a final diagnosis. So if you’re asking your prospective customer questions about their business, about their cash flow, about their intentions of how they’re planning to get back on track.”
Learning about the clients’ business helps brokers recommend the least-expensive funding instrument, Tibbs says. “I really hate to see someone with a 700 credit score come in to get a merchant cash advance,” she maintains. The consultative approach requires knowing the funding products, knowing how to listen to the customer and combining those two elements to make an informed decision on which product to recommend, she notes.
Consultative sales can greatly benefit clients, Weitz maintains. If a pizzeria proprietor asks for an expensive $50,000 cash advance to buy a new oven, a responsible broker may find the applicant qualifies for an equipment loan with single-digit interest and monthly payments over a five-year period that puts less pressure on daily cash flow.
It’s also about pointing out errors. Brokers and funders see common mistakes when they look at tax returns and financial records, says Brown. “The biggest issue is that small-business owners—because they work so hard— make a profit of X amount of money and then take that out of the business,” he notes. Instead, he advises reinvesting a portion of those funds so that they can build equity in the business and avoid the need to seek outside capital at high rates.
Another common error occurs when entrepreneurs take a short-term approach to their businesses instead of making longer-term plans, Brown says. That longer-term vision includes learning what it takes to improve their businesses enough to qualify for lower-cost financing.
Sometimes, small merchants also make the mistake of blending their personal finances and their business dealings. Some do it out of necessity because they’re launching an enterprise on their personal credit cards, and others act of ignorance. “They don’t necessarily know they’re doing something wrong,” Grayson observes. “There are tax ramifications.”
Some just don’t look at their businesses objectively. Take the example of a company that approached Central Funding for capital to buy inventory in Asia. Fiorella studied the numbers and then informed the merchant that it wasn’t a money problem—it was a margins problem. “You could sell three times what you’re wanting to buy, and you still won’t get to where you want to be,” he reports telling the potential customer.
Consultative selling also means establishing a long-term relationship. Forward Financing uses technology to keep in contact with clients regularly, not just when clients need capital, Bakes notes. That cultivates long-lasting relationships and shows the company cares. As the relationship matures it becomes easier to maintain because the customers want to talk to the company. “They’re running to pick up the phone.”
The conversations that don’t hinge on funding usually center on Forward Financing learning more about the customer’s business, says Solomon. That include the client’s needs and how they’ve used the capital they’ve received.
“We have our own internal cadence and guidelines for when we reach out and how often and what happens,” says Solomon. Customer relationship management technology provides triggers when it’s time for the sales team or the account-servicing team to contact clients by phone or email.
Do small-business owners take advice on their finances? Some need a steady infusion of capital at increasingly higher cost and simply won’t heed the best tips, says Solomon. “It’s certainly a mix,” he says. “Not everybody is going to listen.”
Paradoxically, the business owners most open to advice already have the best-run companies, says Fiorella. Those who are closed to counseling often need it the most, he declares.
Moreover, not everybody is taking the consultative approach. “New brokers are so excited to get a commission check they throw the consultative approach out the window,” Tibbs says.
Yet many alt-funders bring consultative experience from other professions into their work with providing funds to small business. Tibbs, for example, previously helped home buyers find the best mortgage.
Consultative selling came naturally to Central Funding because the company started as a business and analytics consultancy called Blue Sea Services and then transformed itself into an alternative funding firm, says Fiorella. Central Funding reviews clients’ financial statements and operations between rounds of funding, he notes.
Consultations with borrowers reach an especially deep level at PledgeCap, a Long Island-based asset-based lender, because clients who default have to forfeit the valuables they put up as collateral—anything from a yacht to a bulldozer—says Gene Ayzenberg, PledgeCap’s chief operating officer. Conversations cover the value of the assets and the risk of losing them as well as the reasons for seeking capital, he notes.
No matter how salespeople arrive at their belief in the consultative approach, they last much longer in the business than their competitors who are merely seeking a quick payoff, Tibbs says. Others contend that it’s clearly the best way to operate these days.
“The consultative approach is the only one that works,” says Weitz. “Today, everything is about the customer experience. People are making more-educated, better informed decisions.” What’s more, with the consultative approach clients just keep getting smarter, he adds.
The days of the hard sell have ended, Grayson agrees. Customers have access to information on the internet, and brokers and funders can prosper by helping customers, he says. “Our compensation doesn’t vary much depending upon which product we put a client in so we can dig deeper into what will fit the client without thinking about what the economic benefit will be to us.”
Even though the public has become familiar with alternative financing in general, most haven’t learned the nuances. That’s where consultative selling can help by outlining the differing products now available for businesses with nearly any type of credit-worthiness. “It’s for everybody,” Weitz says of today’s alternative small business funding, “not just a bank turn-down.”
Banks, Alt Funders Continue to Compete for Small Business
February 13, 2018
The alternative small-business finance industry owes its very existence to banks’ reluctance to lend money to mom-and-pop shopkeepers, tradespeople and restauranteurs, but bankers’ tight fists may be loosening. Small-business owners are reporting better results when they apply for bank loans.
In fact, small entrepreneurs succeeded in landing bank loans 37 percent of the time in the fourth quarter of 2017, up from 29 percent a year earlier, according to the 1,341 merchants surveyed for the most recent quarterly Private Capital Access Index report provided by Dun & Bradstreet and Pepperdine University’s Graziadio School of Business and Management.
“That’s a big change. It’s outside the margin of error and outside normal statistical variation,” Craig R. Everett, assistant professor of finance at Pepperdine and director of the Graziadio and Dun & Bradstreet Private Capital Markets Project, tells AltFinanceDaily. He’s comparing the shift to patterns established in the nearly six years the quarterly index has pegged small-business trends.
But the effects of bankers’ increased willingness to lend to small businesses may prove a bit muted in the alternative funding industry. That’s partly because Pepperdine and Dun & Bradstreet define small businesses as having up to $5 million in annual revenue. Alt funders often deal with much smaller enterprises that could still fail to capture the attention of bank loan officers, says Noah Grayson, managing director of South End Capital in Encino, Calif. “If you’re making $5 million in gross revenue, that’s a pretty robust business,” he says of his clients.
Then there are the borrowers whose companies seem small in that they employ just a few people but might rake in $5 million on a single contract – like contractors who specialize in heavy construction equipment or have a presence in the aviation business – but aren’t profitable enough to qualify for bank loans, says Gene Ayzenberg, CEO of PledgeCap, a company with offices on Long Island and in Manhattan that specializes in business and personal loans secured by collateral.
Besides, lots of alternative lenders don’t regard gross revenue as the measure of a business. “I would look at what kind of resources and infrastructure the business has to define what is small and medium-sized,” says David Obstfeld, CEO of New York-based SOS Capital. Many alt lenders cite the importance of net over gross.
The size of prospective borrowers aside, banks are probably lending to small merchants more often these days because small businesses are becoming more profitable in today’s relatively healthy business climate and thus stand a better chance of qualifying for credit, Everett says. The recent reduction in corporate taxes will also improve profits and make small businesses more credit-worthy, he says.
The change in bank lending volume seems tied to those financial gains and doesn’t appear to be linked to any shift in policy among bankers, Everett notes. But new policies at the Small Business Administration could prompt the banking community to view small-business loans more favorably, according to Grayson. The SBA is increasing the percentage it guarantees for some loans and reducing the amount required for a down payment on some loans, he notes. That could make life more difficult for some alternative lenders because most of the small-business loans made by major banks, like Wells Fargo and Chase, are SBA loans, he says. The SBA did not provide details regarding the changes by press time.
Regardless of what’s making banks loosen their grip on the purse strings, merchants are feeling more optimistic – or at least less gloomy – about obtaining bank loans in the near term, the study by Pepperdine and Dunn & Bradstreet indicates. In the fourth quarter of last year, 55 percent of small-business owners predicted difficulty in raising financing in the next six months, down from 61 percent a year earlier, the survey shows.
“That’s an improvement, but I still think it’s an alarmingly high number,” Ayzenberg says of those findings. “Before they even start worrying about how their operations are going and how good their product is, one in two businesses is already worrying that their bank is not going to be able to fulfill their needs. They shouldn’t have to have those fears.”
So, banks are becoming a bit more likely to loan to small businesses but still aren’t throwing open the flood gates to create a flood of funding. That’s true of banks that qualify as large and those classified as small.
American banks tend to be either small community institutions or huge national concerns that are swallowing up the remaining mid-sized regional banks, observers agree. Between 80 and 90 banks control assets of $10 billion or more and thus qualify as large, while thousands of small banks have more limited resources, says David O’Connell, an Aite Group senior analyst.
Large and small banks exhibit about the same degree of ambivalence toward small-business loans. Banks can mitigate the downside of the loans because they have funds to hire staffs and buy technology to analyze risk, O’Connell says. Executives at small banks can avoid potential problems with small-business loans because they’re often dealing with prospective borrowers who were their high school or college classmates, he notes.
Whether banks are large or small, they have their reasons to deny loans to small businesses. Perhaps foremost among the rationales for denying loans to small businesses is the cost of underwriting, says O’Connell. Banks simply can’t make enough money on the loans to pay the cost of processing them, he says, adding that, “It’s a long-standing problem.” For example, a bank can make a profit by loaning $2 million at prime plus 2 percent, but can’t cover the underwriting costs of an $80,000 loan that also earns prime plus 2 percent. The underwriting costs would be the same in both cases, he notes.
Banks became even more ambivalent about loaning to small businesses after the Great Recession struck in 2008, O-Connell continues. They didn’t want to repeat the mistakes of the freewheeling period that preceded the economic catastrophe. About the same time, private equity and hedge funds began madding more capital available to alternative lenders, he says. Meanwhile, technology and alternative data sets helped the alternative industry understand risk and reduce underwriting costs, he maintains.
Banks also find it more expensive to loan to small businesses these days because the Dodd-Frank Act has increased compliance costs, Everett points out. “Red tape and reserve requirements for the banks have all increased under Dodd-Frank, so making loans to small businesses is less cost-effective than it was before.” Banks now need upwards of $1 billion in assets under management to remain viable, and they feel compelled to expand their staffs to follow all the new rules for lending, he says.
What’s more, bankers still exercise extreme caution when it comes to extending credit to small businesses because stores or restaurants often fail and then the business or the owner defaults on the loan, Everett says. That’s why banks often require business-loan applicants to demonstrate two years of profitability to qualify for credit, he notes. Higher interest that can mitigate that risk, but state usury laws often capping rates at 36 percent or less, Everett notes. New York, for example, limits banks to 16 percent, he says.
State usury laws don’t apply to factoring or merchant cash advances, and that enables alternative funders to charge more for the use of funds, Everett says. “If it’s not called a loan and what the customer is paying is not called interest, then it’s not subject to state usury laws,” he says.
Obstfeld puts it this way: “In would be great to be in a business where nobody defaults. The rates we charge at SOS Capital are necessary to cover our losses and be profitable at the same time.”
The high cost of obtaining funds in the alternative market could eventually prompt the federal government to intervene with regulation but that probably won’t happen anytime soon, Everett predicts. O’Connell agrees, noting that in the current political climate the government has little appetite for new restrictions on a major source of capital for thousands of small businesses.
Because alternative funders have greater flexibility than banks in how much they can charge for access to credit, banks have sometimes formed referral relationships with alt funders to hand off small-business borrowers. “That looks good on paper and makes great headlines, but it’s harder to do in real life,” O’Connell maintains, because the bank loses control of the customer experience. If the alt funder doesn’t manage customers’ expectations effectively, the bank might have to take the blame – at least in some consumers’ minds, he contends. He’s surveyed bankers and found them feeling “really mixed” about such partnerships.
The impact of such partnerships hasn’t been as great as some anticipated. “We were quite nervous when we heard that JPMorgan would be using OnDeck’s platform,” recalls Obstfeld. “However, it’s been quite some time that they’ve been doing that and it hasn’t seemed to make a dent – at all – in alternative lending.”
But alternative funders can provide borrowers with advantages that banks can’t match. Some alternative lenders can approve a client’s application in a few hours and wire funds to the recipient the same day, Grayson says. Steve Hauptman, chief operating officer at SOS Capital, notes that banks can require weeks or even months to respond to an application.
That’s why SOS Capital customers sometimes obtains funding from the company as a bridge to keep operating while they’re waiting for an SBA bank loan or to take advantage of an opportunity that requires a quick response, Obstfeld says.
The advantages of the alternative funding industry don’t end there. SBA bank loans require more paperwork than is needed for a merchant cash advance, which can slow the process even further as the client assembles the documentation, Obstfeld notes.
In addition, banks can simply seem slow to respond to the needs of the market. “Banks are banks – they’re never going to be able to do the things we can do,” says Obstfeld. “If one product becomes an issue, we can pivot and create new product tomorrow. It takes banks years to get approval for something new.”
Then there are cards. Besides an increase in banks’ willingness to lend to small businesses, merchants are finding it easier to obtain business credit cards, the index provided by Pepperdine and Dun & Bradstreet finds. In the fourth quarter of last year, 65 percent of survey respondents applied successfully for cards, compared with 51 percent in the corresponding period a year earlier.
Easier access to credit cards might not make merchants less likely to apply for loans, Everett says. “Usually, credit cards are a backup plan,” he notes. “They’re the poor man’s line of credit. It’s a very high interest rate.” Most businesses would prefer to open a line of credit from a bank with a lower interest rate. Many cardholders use cards only for travel expenses or to ease short-term cash-flow issues, he says.
Finding the right credit card poses a challenge, even for those who are adept at online searches, says Grayson of South End Capital. In addition, many business credit cards carry a low spending limit. A business might qualify for a $5,000 credit limit on the card but could receive a $50,000 loan, he adds. “A card generally doesn’t fill their needs,” he declares.
Others have a slightly different view of business cards. “Once you get approved, it’s easy money,” Obstfeld says of business credit cards. However, cards can’t finance some of the actions that cash from merchant cash advances can cover, such as buying out a partner or opening a second location, he notes.
Moreover, the fact that competitors exist – whether they’re banks, card issuers or other alternative lenders – doesn’t necessarily threaten existing alt funders, according to Hauptman. Remember that banks and alternative lenders aren’t offering the same products, he says. Those products, such as bank loans, factoring and merchant cash advances, each have advantages and disadvantages, which prompt merchants to pursue the vehicles that are right for them, he says.
Having banks and nonbanks in the mix can even prove complementary, too. Pumping more funds into the small-business economy from any source can result in a healthier environment that offers more opportunities for all, Ayzenberg says.
The real danger resides not so much from direct competition but rather from failing to keep pace with the alternative lending industry’s introduction of new products, falling behind in the quest to speed up the decision-making process granting funding or neglecting to obtain technology that eases the application process, Grayson says.
In one recent development, some alternative lenders aren’t reviewing credit histories, he notes. Instead they look just at deposits and can extend credit based just on that, Grayson notes. That’s somewhat like a merchant cash advance, but it’s offered at single-digit rates and on favorable terms, he says. “A lot of lenders are making it very simple for borrowers to get money now,” he continues, concluding that alt funding firms that can’t afford to make such improvements probably can’t remain in business.
Though some players will inevitably disappear, the alternative small-business funding industry in general seems likely to survive so long as banks remain reticent about lending to small businesses – the situation that gave rise to the alternative industry in the first place.
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.
Go West, MCA Broker
August 16, 2017
If you check out the AltFinanceDaily forum, one of the latest discussions originated from a self-described newbie business owner who wants to know, ‘What separates a successful ISO from the rest?’ The user, who calls himself jellyfish capital, asks the AltFinanceDaily universe:
“I’m trying to figure out what the variables are that would dictate a successful brokerage/ISO vs. a shop that has a ton of turnaround and doesn’t make any money and ultimately ends up shutting its doors.”
The answer just might lie in the types of financial products the broker can sell.
MCA Broker Shift
Noah Grayson is managing director and founder of South End Capital, a commercial and investment residential real estate lender launched in 2009 that also started doing SBA loans and MCA consolidation loans in recent years to help out merchants with stacked MCA positions. Grayson pointed to a shift in the types of brokers signing up with the Encino, Calif-based lender.
“We’ve noticed a large number of brokers signing up with us are coming over from the MCA space. They’ve relayed to our staff that competition is too stiff to make enough money only originating MCAs, and they are looking for other avenues to bring in revenue,” Grayson said.
Indeed, South End Capital has seen an influx of brokers from the MCA industry gravitating their way. In fact, there has been more than a 10 percent spike year-to-date versus the same period last year in the number of brokers that discovered South End Capital through some form of Internet origin, such as AltFinanceDaily, versus a targeted ad in a real estate related publication or through more traditional real estate origination means.
“What we’re hearing from our MCA industry referral partners is that their[customers] now want any option other than an MCA. These brokers are coming to us now because they are trying to evolve their businesses to stay afloat. Offering real estate or SBA loans has proved to be the next logical step for these brokers and it has provided a big bump to our business,” said Grayson.
As in any industry, making a career change can introduce unexpected challenges. A hurdle for the brokers, particularly as it relates to making the jump to commercial real estate lending, has been unrealistic expectations.
“Many MCA brokers have an expectation that real estate or SBA loans will work similarly to an [MCA], but it’s a more involved process. There’s more documentation and more moving parts to understand. There has been a big learning curve for a lot of these brokers — some have been willing to learn and are excited about the opportunity. However, many MCA brokers have proven extremely resistant to change and unable to adapt” noted Grayson.
There are hurdles facing the MCA industry, too.
Merchant Motivation
So what’s driving the shift? Small businesses, some of which are saddled with short-term obligations, have begun to realize that thanks to the rise of alternative lenders they have more options. Meanwhile unscrupulous collection agencies are throwing a monkey wrench into the situation, making it trickier for merchants to gain access to cash advances.
David Soleimani, CEO of LendFi Corp, said a major setback for the MCA industry has been the interference of collection companies convincing good paying merchants to default and cut their payments in half. By negotiating payments with a third party, merchants essentially become blacklisted from receiving any further MCAs.
LendFi senior account rep Jonathan Meyer specializes in cash advances, term loans, equipment leasing and lines of credit. He’s noticing a trend of more MCA brokers expanding their line of business in the last year.
“Companies are overextended [with cash advances.] It’s a problem,” said Meyer. “If everything is perfect, we can do a term loan or a line of credit if it falls under certain criteria.”
One small business came to LendFi’s Meyer recently and as a result saved himself a lot of cash. “I consolidated someone’s loan recently. I got him a term loan and saved him $14,000 a month. He had two loans at $110,000. I got him a term loan for $165,000 and he saved $14,000 a month. He was paying $22,000 per month,” said Meyer, adding that he also consolidated the payments from a daily to a monthly schedule. “That’s a huge savings,” he said.
For all of the twists and turns that may be up ahead for brokers and merchants alike, one thing seems clear. The MCA industry isn’t going anywhere.
“There will always be a [customer] whose only option is an MCA, and it has its benefits for many. For example, the only way to get business funding in one or two days is with an MCA. However, I think the reasons why someone would need an MCA are becoming fewer and fewer as other more viable financing options emerge,” said Grayson.
PayPal Scoops Up Swift Financial
August 10, 2017
Online lending M&A is under way. PayPal is bolstering its merchant lending capabilities with the addition of Swift Financial. While the deal was kept under wraps, some industry participants heard some buzz about a possible combination.
PayPal has been investing in its lending arm of late, evidenced by the addition of former Amazon executive Mark Britto as senior vice president and general manager of global credit in July.
Noah Grayson, South End Capital managing director and founder, weighed in on the deal.
“A merger of two industry leaders like this is not surprising. As the economy continues to improve and small business owners have access to more financing options, alternative business lenders are going to continue to consolidate to stave off competition, retain deal flow and secure profitability,” said Grayson.
Dave Girouard, founder and CEO at Upstart, a consumer lending platform that uses machine learning, reacted to the deal:
“I expect to see more consolidation in online lending across both consumer and small business in the next year. Platforms with either giant balance sheets or proprietary technology will likely stick around, but others will struggle to compete,” Girouard told AltFinanceDaily.
Alternative lender LendUp was a recent recipient of a PayPal investment. Sasha Orloff, LendUp’s CEO, had this to say about the deal:
“I’m not surprised to see an acquisition in the fintech credit space and expect this will kick off a wave of acquisitions. PayPal is a force to be reckoned with and we have seen them lead the industry again and again. Whether it is the partner model like with Synchrony, the acquisition model like Swift, Braintree/Venmo, Xoom, or the investment model like LendUp, they are proving again and again why they are leading innovation in financial services decade after decade,” said Orloff.
Meanwhile don’t expect to see a PayPal/LendUp pairing anytime soon.
“For our part, we’re going after a very different market and we’re focused on driving consumer financial inclusion — and we’re very focused on remaining an independent company and helping companies like PayPal and banks offer better products for millennials and the emerging middle class,” Orloff added.
PayPal was already working with Swift on a white-label basis for one of its products, PayPal Business Loan, which is a term loan with structured repayments.
“Swift Financial offers complementary business financing solutions and advanced underwriting capabilities that accelerate our ability to acquire new merchant partners with business financing solutions and to deepen our relationships with existing merchants and channel distribution partners,” said Darrell Esch, VP and Commercial officer, Global Credit, PayPal, pointing to Swift’s advanced underwriting and product capabilities and seasoned management team.
Swift was launched just over a decade ago and has extended loans to 20,000-plus merchants.
Revenue Based Financing Continues to Spread at Global Pace
September 30, 2025
Earlier this month, Uber Eats joined the revenue-based financing movement by partnering with Pipe Capital.
Karl Hebert, Vice President of Global Commerce and Financial Services at Uber, said of it, “We are happy to team up with Pipe to bring working capital to Uber Eats. Restaurants are our partners at Uber, and the backbone of our communities, yet many struggle with access to capital.”
It’s an unsurprising step considering rival DoorDash rolled out a merchant cash advance program nearly four years ago, though Uber arguably began experimenting with MCAs nearly ten years ago. And Uber is hardly doing it just to do it. Uber, for example, rolled out Uber Eats Financing, a revenue based financing product in Mexico through a partnership with R2 this past January, which went so well that they also rolled it out in Chile months later.
📢 Announcing a big milestone for R2 & @Uber!
Following a successful launch in Mexico, we’ve expanded our partnership with Uber Eats to Chile — bringing frictionless access to capital to thousands of merchants across the region. https://t.co/61WgP1ZtHy
— Roger Larach (@rogerlarach) April 30, 2025
In Chile with R2, the service is described as taking place entirely within the Uber Eats Manager App with a 5-minute application process and payments made automatically and deducted by a fixed percentage from sales made using the platform.
In the US with Pipe, it says that the Uber Eats App Manager will show capital offers from Pipe that are customized based on restaurant revenue, cash flow, and business performance.
Uber joins Amazon, Walmart, Shopify, Intuit, Stripe, DoorDash, PayPal, Square, GoDaddy, Wix, Squarespace and others in offering a revenue-based financing product.
Revenue-based financing as a product type is available in but not limited to the US, Canada, Mexico, Chile, UK, Germany, Ireland, Spain, South Africa, Nigeria, India, Hong Kong, Netherlands, Australia, Japan, Brazil, Singapore, and more.
Legal Complexities in the Revenue-Based Financing Industry: An Analysis of Recent Court Cases
January 6, 2025Jeffrey S. Paige is the General Counsel of CFG Merchant Solutions. Visit: https://cfgmerchantsolutions.com
Navigating the intricate legal landscape of the revenue-based financing industry has become increasingly complex, with recent court cases providing profound insights into the sector’s regulatory dynamics. Amidst legislative shifts, litigation between funders and merchants, and public enforcement actions, three prominent court cases have recently emerged, each offering further guidance into the nuanced legal dynamics governing this innovative sector.
SBFA vs. DFPI: Constitutional Challenges to California’s Regulatory Framework
In the Small Business Finance Association (SBFA) vs. California Department of Financial Protection and Innovation (DFPI), 9th Cir., Case No. 24-50, SBFA challenged the constitutional validity and federal preemption of California’s Commercial Financing Disclosure Law. Central to SBFA’s stance is the contention that the state’s regulatory framework infringes upon the First Amendment rights of its members. SBFA asserts that the regulations compel its members to disseminate inaccurate disclosures to customers, while simultaneously prohibiting any communication that could rectify or clarify purportedly misleading information. Furthermore, SBFA contends that California’s customized interpretation of the Annual Percentage Rate (APR) conflicts with the federal Truth in Lending Act (TILA), potentially causing confusion among merchants. The DFPI moved for summary judgment to dismiss the complaint.
Updates and Nuances: Recent Ruling on SBFA vs. DFPI
On December 4, 2023, the trial level judge ruled in favor of the DFPI, granting their motion for summary judgment and dismissing the case.
First Amendment Argument: The judge disagreed with SBFA, concluding that the disclosures would help small businesses understand the costs and were neither misleading nor unduly burdensome.
Federal Preemption Argument: The judge deferred to the Consumer Financial Protection Bureau (CFPB)‘s authority to resolve preemption issues. In March 2023, the CFPB ruled that the Commercial Financing Disclosure Law (CFDL) does not conflict with TILA.
The SFBA has filed an appeal of the lower court’s grant of summary judgment with the United States Court of Appeals for the Ninth Circuit. On May 28, 2024, SBFA filed their appellate brief setting forth the facts on the record on summary judgment and their specific legal arguments, emphasizing the reversible errors made by the district court, particularly regarding the false and misleading nature of the compelled disclosures, the controversy surrounding the use of APR metrics on products (like receivables-based funding transactions) that APR was not designed to properly describe, and the lack of justification for the regulations. The preemption argument is not being raised on appeal. Following this, on June 6, 2024, the Appellee DFPI’s unopposed motion for an extension of time to file the answering brief was granted. The answering brief of the DFPI is now due on August 30, 2024.
Given these developments, SBFA’s challenge continues to underscore significant constitutional, substantive, and procedural issues within California’s regulatory framework.
The People v. Richmond Capital Group: Uncovering Predatory Practices
In the case of The People v. Richmond Capital Group, 195 N.Y.S.3d 637 (N.Y. Sup. Ct. 2023, unpublished slip copy), allegations of predatory practices have uncovered crucial legal considerations for revenue-based financing providers. Initially filed by the People in 2020, the court ultimately found for the People, holding that the Defendants in that case were “predatory lenders” making thinly disguised loans with usurious interest. The keys to this decision were the reconciliation duty (which was allegedly never performed by the Defendants despite the mandatory contract provisions and requirement that merchants submit bank statements to Defendants on a monthly basis), the fact that the transactions were explicitly based upon fixed repayment amounts with fixed repayment timeframes (as opposed to revenue based funding products, where remittance of the purchased receivables may vary in amount and duration along with the merchant’s revenue stream), contract provisions such as making a few missed payments or declaration of bankruptcy events of default (shifting the risk of loss off of the funder), and the fact that Defendants always referred to their products as loans, and not a bona fide purchase and sale of future receipts. The reprehensible conduct of certain Defendants who harassed, bullied, and made numerous fraudulent statements to their merchant customers certainly did not help their cause. In September 2023 and February 2024, the court issued further decisions addressing accounting and disgorgement of funds, but the core principles related to reconciliation and data remain the same. It’s unclear if Richmond Capital Group appealed any of these rulings.
U.S. Info Group, LLC v. EBF Holdings: Implications for ISO Behavior and Funder Accountability
2023 WL 6198803 (S.D.N.Y., 2003), a case out of the Southern District of New York involving New York law, involves allegations by a Plaintiff against a receivables-based funder similar to those in Richmond Capital, but with a very different set of facts, and a different outcome. U.S. Info Group attempted a civil Racketeer Influenced and Corrupt Organizations Act (RICO) claim against EBF Holdings, alleging that the receivables-based funding transaction at issue was a disguised usurious loan under New York law.
In September 2023, the court dismissed the case entirely on the funder’s motion to dismiss the third amended complaint. The judge ruled that U.S. Info Group failed to adequately allege facts demonstrating a “RICO enterprise” or widespread fraud scheme involving EBF Holdings and their affiliates. In addition, the Court re-iterated the major hallmarks of a true purchase and sale receivables-based funding transaction: (i) that the contract contained a reconciliation provision (and that the funder actually preforms reconciliations where warranted such that the provision is not illusory); (ii) that the risk of non-performance due to bankruptcy or declined revenue of the merchant always rests with the funder; and (iii) that there is no finite, fixed repayment term, which would be typical of a loan.
Legal Recommendations for Funders
Funders should consult with knowledgeable and capable attorneys in this area of law to establish and effectuate clear provisions in their contracts along with steadfast adherence to their contract terms and best practices.
As for the DFPI and California’s disclosure requirements, they remain the law of the land unless the final, unappealable decision of a court states otherwise. Thus, funders should consult with their attorneys to ensure strict compliance with California’s disclosure law and regulations.
In conclusion, the recent legal battles involving the revenue-based financing industry underscore the need for continuous vigilance, genuine commitment to proper contract terms and best practices in servicing those contracts, and adaptation to emerging regulatory paradigms, in order to ensure sustainable growth and legal compliance within this dynamic sector.
“Something’s Happened” – How a funding platform weathered a shocking crisis and is flourishing
June 21, 2024
“[The CEO] called me just before seven in the morning…but [he] would never call me at that hour, so I picked up the phone and he goes ‘Paul, something’s happened, it’s very serious.’ and I’ll never forget, he says ‘you need to take care of our company.'”
That’s how Paul Vega, Senior Operations Manager at Funders App, retold the story of a phone call he received in June 2021 that would shake up everything about the small business finance company he was working at. At the time, the business was known as 24 Capital, Funders App was a platform they were developing internally, and Mark Allayev who was the CEO, was riding high from having weathered all the uncertainties of startup life and the Covid era. With Vega having played a key role in that success and the business running smoothly, Allayev felt he had earned a much needed vacation and traveled to Europe with some friends.
“And it was just five days,” Allayev said. “But one of our friends had an event in New York and we just had to come back, and the only flight to New York was with a layover in Germany, in Frankfurt. So we got to flying and it was supposed to be a two hour layover in Germany, but came out to be an eight month layover in Germany.”
That’s when the fun and life as he knew it came to a grinding halt. The German authorities never let him get on a plane to the United States. Instead, he was placed under arrest when his name registered as a match with Interpol. Despite his insistence that it was all some misunderstanding, he was directed to a local jail and told he’d soon be extradited to the country that wanted him, Russia. Allayev, then 31 years old, who had been born in Soviet-era Tajikistan and at the time enjoyed dual American and Russian citizenship, had not been to Russia at all since he moved to the United States in 2015. He had, however, previously worked at a family business in Russia as a youngster that found itself ensnared in the unique political environment. Allayev said that his family’s business had been the victim of fabricated allegations and they had left as a result. As an American citizen he had enjoyed international travel for years without issue, and he had almost forgotten about it all. That is until this moment in June 2021 that would change his whole world view and send his family scrambling to save him. While those efforts would eventually enlist help from Democratic Reps. Debbie Wasserman Schultz of Florida and Greg Meeks of New York, Allayev was swiftly cut off from being able to manage his business and was no longer able to contact Paul Vega directly.
“I was aware of what had happened years ago with him and his family because he was transparent with me from the first day we met,” Vega said. That fateful phone call he received that morning lasted all of 3 minutes. “I was like, Okay, I guess this is what’s happening,” Vega recalled.
For Vega, the realization hit that the company had nearly two dozen employees at the time, all of whom depended on it for their livelihood, and all of whom were probably going to question the circumstances their boss was in. Nevertheless, crisis management is how Vega had been introduced to the business from the beginning. Vega started at 24 Capital in January 2020 with about six years of industry experience under his belt, with the objective of completely revamping the underwriting process.
“I think it was actually perfect timing, I think it was meant to happen that way,” Vega said. For instance, family members living across the globe had tipped him off that Covid was going to be much worse than the oblivious American media was making it out to be. Vega was also operating out of an office in New York City where a potential doomsday scenario was a lot easier to imagine than where Allayev sat in South Florida.
“When I first expressed this idea [to Allayev] of the possibility of the universe being shut down, I know that Mark was questioning whether he had made the right decision in bringing me on because here I am brand new to the company and I’m telling him that, ‘hey, the US is going to shut down,'” Vega said. Despite having come across as alarmist, Vega felt that it was better to act on his conviction and plan for the impossible.
“Behind Mark’s back I started to research the idea of remote work, and nobody knew what remote work was back then,” he said. Vega proceeded to set up staff with home computers and began testing out software they had never used before.
“By the time they shut down the city, we were well situated to just literally flip a switch and be able to process and run the business from home,” he said.
And ready they were because not only did the company never stop funding but it also never let anyone from the company go during that time. Through it all Vega and Allayev formed a really trusting relationship with each other, the kind that would only make survival of the company possible once Allayev was detained in Germany the following year.
As days turned into weeks and weeks into months, Allayev’s extradition to Russia seemed inevitable despite a growing lobbying effort to free him. Then Russia invaded Ukraine. Once that happened, the politics in Europe changed, and Allayev was suddenly freed in March 2022 and put on a plane back to the United States. The emotional journey and the circumstances that enabled his return became a big news story in the newspapers, one of many about people whose fortunes changed for better or worse as a result of the war.
Once he was reunited with family and had the opportunity to acclimate back into life, he looked toward his business, which he now had a newfound perspective on. “Before, all I cared about was just working and just living my own life,” Allayev said. “So I think what changed is me understanding that probably your family’s the most important part and you need to focus and spend more time with your parents, your siblings, all your loved ones. I think that’s the thing that really changed my mindset.”
Of course, it wasn’t as if this perspective was shaped by losing his business in the process, because it had somehow managed to continue running like normal during the eight months he was away, thanks to Vega. Even the employees stayed on, as everybody stood in supportive solidarity with Allayev.
“So one thing that I learned that was funny when I came back is that the company could be run without me,” Allayev said. “And I think that Paul and all the other team members did an amazing job, keeping everything in place and keeping the funding amounts pretty decent.”
Today, the brand Allayev and Vega are under is known as Symplifi Capital. The company’s internal infrastructure platform has also blossomed into its own publicly licenseable service known as Funders App for companies that want to be their own funders. Allayev says that Funders App provides technology, underwriting services, collections, accounting, servicing, distribution of funds, contracts, white label services, and more. It can be customized to provide just what one needs. A sizable number of companies are already using it, to the point where last year Funders App announced it had collectively originated $500M in funding to small businesses since inception.
“I think there’s so many talented kids and young people that have the vision to create their own companies but they just have absolutely no help and no backup,” Allayev said, “and this is what we want to create with funders. We want to help those people, we want to get them in, train them, help them, and provide them with the right tools, the infrastructure, and even with leverage, even the money because you need capital to become a funder.”
Allayev drew some of this inspiration from how he started in the business in late 2016, when he talked to numerous companies about what they could provide to help him launch his business and felt like nobody could provide all the pieces. As for the trajectory forward, their eyes are on efficiencies and growth.
“As you know speed is kind of the name of the game here,” Vega said. “If the typical lending house is taking three to four hours to put out an offer, make a decision, ask for additional information, our goal is to have a file from submission to funding in that three-to-four hour timeline where most people are just getting an answer back to the ISO. So we’re hoping to have the merchant funded in that timeline. And that’s going to create just a huge competitive advantage for us.”
That’s the kind of thing they’re working on today. The backdrop with what happened to Allayev is now just part of the company’s founding story. For Vega, there was never any question that it wouldn’t work out. Referencing the early months of Covid when companies were doing mass layoffs, he expected that Allayev would ultimately, through no fault of his own, do the same.
“[Allayev’s] the only person that I know in the whole industry that actually said, ‘I’m not doing that, I’m keeping everybody’ and kept his word,” Vega said. “That day he sold me. That’s a big portion of the reason why I have so much trust in him, because he’s a man of his word.”
