LendingClub Formally Ends “Peer” Aspect of Its Business, Proceeding With Radius Bank Acquisition
October 7, 2020
LendingClub is finally ending the “peer-to-peer” aspect of its platform for good. Earlier today, the company announced that it would cease offering and selling Member Payment Dependent Notes effective December 31st.
“Ceasing the Retail Notes program will allow LendingClub to redeploy capital and improve platform efficiency, enabling the company to help even more members as LendingClub progresses towards closing the Merger and becoming a bank holding company,” the company said in an official statement. “All Retail Notes outstanding as of the date the Retail Note program is ceased will be unaffected by the cessation of the program. Accordingly, with respect to such outstanding Retail Notes, LendingClub will continue servicing the corresponding member loans and information regarding such Retail Notes will remain viewable in the applicable Retail Note investor accounts.”
LendingClub rose to fame with its peer-to-peer model nearly a decade ago, but using retail investors to fund loans has been eroding over time. ‘Peers’ Are Almost Gone From Lending Club’s Funding Mix was the title of a February 2019 AltFinanceDaily story that highlighted this trend, for example.
Meanwhile, the focus on Radius Bank is a reminder that the announcement made nearly 8 months ago is still a work-in-progress.
“In connection with and in furtherance of the Merger, LendingClub has been in regular contact with federal banking regulators and, on September 25, 2020, filed an FR Y-3 application with the Federal Reserve to become a bank holding company,” the company said. “LendingClub plans to offer a full suite of products as a bank. This includes a high-yield savings account that will be initially exclusively available to its existing retail investors and will offer a compelling interest rate, as well as other products that take advantage of the marketplace to allow its customers to both pay less when borrowing and earn more when saving.”
Radius Bank was the subject of a major AltFinanceDaily Magazine story in 2017 titled Tech Banks: Will Fintech Dethrone Traditional Banking?
Amid Pandemic, Small Businesses Pivot to Sell Personal Protective Equipment
September 23, 2020
A number of small businesses—including those in the merchant cash advance industry—faced with little or no way to make money for months—have pivoted to selling personal protective equipment.
It’s no wonder businesses across the U.S. have shifted gears. With the pandemic raging, and consumers and businesses trying to return to some sort of normalcy, there’s high demand for these products, causing even businesses that previously had no connection to them to spring into action.
“It’s not my forte; I had to pivot just to make sure I could stay afloat before things turned around,” says John DiCanio, founding partner of Direct Merchant Funding in Bethpage, N.Y.
This past spring, at a time when everything in the MCA business stopped, he heard from a merchant in the medical supply field that masks were becoming very important. The merchant connected him to a contact in Hong Kong from whom he was able to buy hospital-grade and non-medical grade masks and sell them to local hospitals, local businesses and others.
DiCanio says he did it for a short time only—two months—which was enough to tide him over under his
regular business started coming back. Mask-making is still a big business and a lot of people are still doing it, but he prefers to stick to merchant cash advance, which he’s been doing for around 15 years. He says business has picked up enough that he no longer has the need to do anything on the side—and he hopes it stays that way.
Many funding industry participants are still selling these types of products, but it’s somewhat of a hush-hush business. Not everyone wants to talk about it for any number of reasons, including embarrassment and fear of looking weak to customers and business connections. Even so, small businesses that pivoted say they are doing the best they can to stay afloat—and there’s no shame in that.
Kat Rosati, founder of Apparel Booster in Riverside, Calif., a product development agency for luxury and socially conscious brands, began hand-sewing masks to help support her business that had been hit-hard by the pandemic.
She has manufacturing partners all over the world, and production was at a standstill for her various products. She couldn’t import fabric needed for the company’s various projects and a lot of production partners were forced to close. Luckily, she had a connection to a fabric mill in Pennsylvania that focuses on antimicrobial products that was willing to provide her with material.
She hired temporary workers to help her make masks, which she’s producing at a rate of about 150 a week. She sells them to consumers and small businesses. The revenue has helped defray overhead expenses, among other things. “It hasn’t been super profitable, but it’s definitely helped keep the business alive,” she says.
She had to furlough her four-person team because she can’t afford to pay them without regular client work coming in. Her husband, who works in the restaurant industry, was also furloughed. So whatever money she can bring in, helps. “I’m watching small business owners around me that haven’t made any kind of pivot close left and right,” she says. “The fact that I can keep mine alive makes it worth it for me.”
To be sure, small businesses pivot for all sorts of reasons, and it’s not always because they are struggling. Francis Perdue, a publicist and business consultant in Birmingham, Ala., began selling PPE products including gloves, kn95 masks, surgical masks, customizable cloth masks, child and adult-sized shields, suits, gowns and the Xenon Fever Defense machine which uses AI technology to measure skin temperature and detect potential fever. She says she saw a need for these types of products in local schools as well as in hospitals and clinics in predominantly black neighborhoods. She is still consulting, but doing this as a side gig while the need persists.
Another example is MORGAN Li, a retail and hospitality manufacturer in Chicago Heights, Ill. The company identified the need and opportunity to help businesses remain open or reopen to customers while abiding by new recommendations to support public health. Thus, the company began producing customized social distancing materials including sneeze guards, safety shields, signage and floor graphics for various businesses to remind employees and customers to comply with social distancing requirements, according to a spokeswoman.
More recently, Andy Rosenband, the company’s chief executive, saw another opportunity to help communities prepare for another critical stage—reopening schools. He created a line of personal protective equipment that specifically addresses the challenge of social distancing in schools to keep students, teachers and staff safe.
For some small businesses, the shift is likely to be a permanent one.
JB Herrera, founder of Perceptive Insights a San Diego-based small and medium business consulting and mentoring company, says his firm was growing, but PPE products offer the ability to create a broader impact and are likely to be more profitable than merely a consulting business.
He has clients in China and back in December when things were starting to get bad there, he realized that the problem could spread massively to the U.S., and if it did, 80 percent or more of businesses would be negatively impacted, in his estimation. Using his business expertise regarding supply chains and pre-existing and new contacts, his company shifted gears to introduce in March a line of FDA-registered products designed to create and maintain safe environments. The products include commercial and personal cleaning solutions, masks, light technology disinfectants, air filtration, and personal sanitizing kits.
Even before the pandemic, the PPE market was worth several billion, he says, and that’s likely to grow exponentially over the next five to 10 years. So much so, that he expects the new business line to represent 90 percent of his revenue for the next three years—at least.
“Even after the spike goes away, it’s still going to be a profitable business in its own right,” he says.
The SEC Already Suffered a Major Defeat in the Par Funding Battle – But Who is the Real Loser?
August 8, 2020
While the news media, regulatory agencies, and law enforcement are high-fiving each other over the course of events in the Par Funding saga (a lawsuit, a receivership, an asset freeze, and an arrest), there lies a major problem: The SEC already suffered a major defeat.
On July 28th, rumors of a vague legal “victory” for Par Funding circulated on the DailyFunder forum. The context of this win was unknowable because the case at issue was still under seal and nobody was supposed to be aware of it.
Cue Bloomberg News…
In December 2018, Bloomberg Businessweek published a scandalous story about a Philadelphia-based company named Par Funding. And then not a whole lot happened… that is until Bloomberg Law and Courthousenews.com published a lengthy SEC lawsuit less than two years later that alleged Par along with several entities and individuals had engaged in the unlawful sale of unregistered securities.
At the courthouse in South Florida, those documents were sealed. The public was not supposed to know about them and AltFinanceDaily could not authenticate the contents of the purported lawsuit through those means. According to The Philadelphia Inquirer, the mixup happened when a court clerk briefly unsealed it “by mistake” thus alerting a suspiciously narrow set of news media to the contents. AltFinanceDaily was the first to publicly point this out.
In court papers, some of the defendants said that they learned of the lawsuit that had been filed under seal on July 24th from “news reports.” Bloomberg Law published a summary of the lawsuit on its website in the afternoon of July 27th.
“It is fortuitous that the Complaint was initially published before it was sealed,” an attorney representing several of the defendants wrote in its court papers. “Otherwise, [The SEC] would have likely accomplished its stealth imposition of so-called temporary’ relief, that would have led to the unnecessary destruction of a legitimate business.”
The day after this, on July 28th, a team of FBI agents raided Par Funding’s Philadelphia offices as well as the home of at least one individual. Rumors about the office raid landed on the DailyFunder forum just hours later, along with links to the inadvertently public SEC lawsuit now circulating on the web.
The New York Post caught wind of the story and published a photo of an arrest that had taken place fifteen years ago, creating confusion about what, if anything, was happening. Nobody, was in fact, arrested.
The SEC lawsuit was finally unsealed on July 31st, along with the revelation that Par Funding and other entities had been placed in a limited receivership pursuant to a Court order issued just days earlier. The receivership order was a massive blow to the SEC. It failed to obtain the most important element of its objective, that is to have the court-ordered right to “to manage, control, operate and maintain the Receivership Estates.” The SEC specifically requested this in its motion papers but was denied this demand and others by the judge who leaned in favor of granting the Receiver document and asset preservation powers rather than complete control of the companies.
The language of the Court order was interpreted differently by the Receiver, who immediately fired all of the company’s employees, locked them out of the office, and then suspended all of the company’s operations which even prevented the inbound flow of cash to the company (of which in the matter of days amounted to nearly $7 million). The SEC did successfully secure an asset freeze order.
In court papers, Par Funding’s attorneys wrote that: “The Receiver’s and SEC’s actions are ruining a business with excellent fundamentals and a strong financial base and essentially putting it into an ineffective liquidation causing huge financial losses. In taking this course of action against a fully operational business, the key fact that has been lost by the SEC, is that their actions are going to unilaterally lead to massive investor defaults.”
The Receiver, in turn, tried to fire Par Funding’s attorneys from representing Par. Par’s attorneys say that the Receiver has communicated to them that it is his view “that he controls all the companies.”
“The SEC is simply trying to drive counsel out of this case, as an adjunct to all the other draconian relief that they insist must be employed to ‘protect the investors,'” Par’s attorneys told the Court. “Due Process is of no regard to the SEC.”
As lawyers on all sides in this mess assert what is best for “investors,” seemingly lost is the collateral damage that is likely to be thrust on Par’s customers. The Philadelphia Inquirer has repeated the SEC’s contention that Par made loans with up to 400% interest. Bloomberg News has called Par a “lending company” whose alleged top executive is a “cash-advance tycoon.”
A review of some of Par’s contracts, however, indicate that they often entered into “recourse factoring” arrangements. “This is a factoring agreement with Recourse,” is a statement that is displayed prominently on the first page of the sample of contracts obtained by AltFinanceDaily.
Parallels between the business practices of Par Funding and a former competitor, 1 Global Capital, have been raised at several junctures in the SEC litigation thus far. But some sources told AltFinanceDaily that in recent times, Par has been offering a unique product, one that is likely to create disastrous ripple effects for hundreds or perhaps thousands of small businesses as a result of the Receiver’s actions (even if well-intentioned).
The “Reverse”
Par offered what’s known as a “Reverse Consolidation,” industry insiders told AltFinanceDaily. In these instances Par would provide small businesses with weekly injections of capital that were just enough to cover the weekly payments that these small businesses owed to other creditors.
One might understand a consolidation as a circumstance in which a creditor pays off all the outstanding debts of a borrower so that the borrower can focus on a relationship with a single lender. In a “reverse” consolidation, the consolidating lender makes the daily, weekly, or monthly payments to the borrower’s other creditors as they become due rather than all at once. Once the other creditors have been satisfied, the borrower’s only remaining debt (theoretically) is to the consolidating lender.
Par does not appear to have offered loans but sources told AltFinanceDaily that Par would provide regular weekly capital injections to businesses that could not afford its financial obligations otherwise. Par, in essence, would keep those businesses afloat by making their payments.
That all begs the question, what is going to happen to the numerous businesses when Par breaches its end of the contract by failing to provide the weekly injections?
As the Receiver makes controversial attempts to assert the control it wished it had gotten (but didn’t), the press dazzled the public on Friday with the announcement that an executive at Par Funding had been arrested on something entirely unrelated, an illegal gun possession charge. The FBI discovered the weapons while executing a search warrant on July 28th but waited until August 7th to make the arrest.
It remains to be seen what the 1,200 investors will recover in this case or what will become of the Receiver in the battle for control, but sources tell AltFinanceDaily that the authorities are all fighting over the wrong thing.
They should all be asking “what’s going to happen to the small businesses when their weekly capital injection doesn’t come in the middle of a pandemic?”
Rapid Finance Resumes Funding
July 29, 2020Rapid Finance is funding again, according to posts made by the company on social media.
“Now that most states are in the process of beginning to function normally, many small businesses are back in operation and we’re excited to announce that we have resumed accepting NEW financing applications!”
Funding Circle US Lays Off 120 Employees
July 9, 2020Funding Circle US laid off 120 employees yesterday, according to a post shared by Ryan Metcalf, Head of U.S. Regulatory Affairs and Social Impact.
Reuters reported that the company will also centralize its technology development in the UK rather than have a separate US team going forward.
The US operation had largely been focusing on PPP lending and SBA 7(a) loans since the shutdowns occurred.
The announcement coincided with its UK business being approved to participate in the Bounce Back Loan Scheme.
Round Two of PPP Is Targeting Much Smaller Businesses
May 4, 2020
$79,000. That’s the average loan size reported in Round Two of the PPP so far. The figure is about a third of the average size approved in Round 1. Some of that is by the SBA’s design. On April 29th, the SBA disabled submission access to all lenders whose assets exceed $1 billion to prioritize small lenders and their small business customers.
Though the pause button for big lenders was only in effect for eight hours that day, it was recognition that the playing field had not been level in the first round. JPMorgan Chase, the largest lender in round 1, for example, had an average PPP loan size of $515,304 in that round.
It’s a competitive process for limited dollars. 5,400 direct PPP lenders have already participated in the second round. More than 80% of those have less than $1 billion in assets. Senator Marco Rubio, a champion of PPP, called the latest figures released by the SBA as “all good news.”
Square Capital, meanwhile, has taken small to the extreme. Their average PPP loan approval as of April 29th was just $16,000, according to stats published by Square Capital head Jackie Reses on twitter. But only 2,711 of the 38,000+ approved had received the funds so far.
Still, that average is significantly smaller than the average loan size of $73,000 approved by Ready Capital in Round 1, a non-bank lender that got widespread attention for approving more PPP loans than any other lender in the country. Those record-breaking numbers, however, led to delays in borrowers receiving their funds to the point where as of April 30th, the responsibility of funding those loans had reportedly transferred to Customers Bank.
OnDeck has also played a role in the PPP, though only as an agent despite being approved by the SBA to lend. That news, which was revealed last week in the company’s quarterly earnings call, is likely due to the company’s current predicament brought on by government-mandated shutdowns.
Canadian Small Businesses Face Tough Challenges As Government Passes Over Fintech
April 8, 2020
This week the Canadian government announced its coronavirus economic relief plans. Among them are two initiatives that aim to assist small businesses: the Canada Emergency Response Benefit (CERB) and Canada Emergency Business Account (CEBA).
The first of these is a wage subsidy that will cover up to 75% of a company’s payroll. The hope being that this will postpone the overcrowding and clogging of the Canadian unemployment benefits system, known as employment insurance. However this program appears to appeal to only certain types of businesses. With subcontractors not qualifying as part of payroll, there is the fear that CERB could leave many small businesses and startups that rely on freelancers unprotected. As well as this, there is a requirement that the company’s most recent month of revenue be at least 30% less than what it was at the same time the previous year. This specification again acting as an obstacle to startups and high growth businesses.
The second is a loan program that is capped at CAN$40,000 with 0% interest for the first two and a half years, and then 5% annual interest beginning January 1, 2023. There will be an opportunity for the remainder of the loan to be forgiven if the business has repaid 75% by December 31, 2022.
According to Smarter Loans’ Vlad Sherbatov, the situation in Canada mirrors what is happening in the US with regards to PPP. “There are very little details available about how people are going to apply to get the funds,” the President and Co-Founder explained. “Nobody knows what’s actually happening and nobody knows when business owners can actually anticipate to receive any funding.”
Expressing frustration that the Canadian government chose to ignore non-bank lenders in favor of allowing Canadian banks like BMO, RBC, and TD to distribute the funds, Sherbatov noted that it is the lenders who have the technology and processes to speedily disperse capital. “We did a survey that said almost 50% of business owners said they would shut down in less that four weeks without additional help … so it’s not that it’s just fine that there is help available, it’s how fast can [business owners] get the help, because every day that goes by makes the situation worse.”
Speaking to Kevin Clark, President of Lendified, he echoed Sherbatov’s concern.
“It’s all good that the government is making these decisions, but the capital has to move and the programs have to be in effect. So announcing these things is one thing, actually practicing them and executing them is another. There’s a time lag that could potentially put companies out of business and so, for us, it’s about trying to connect with a lot of these borrowers to say, ‘What can we do to help you with payments?’ But at the same time, we don’t want deferments for a long period of time because then our revenue base is challenged. So the fintech lenders all have significant challenges at hand, because defaults that move from within the normal course of between 5 and 10%, say now to between 15 and 25%, or even higher, are significant challenges for the operations of our business.”
Also a member of the Canadian Lenders Association, Clark is involved in the CLA covid-19 working group that was launched in March. Formed with the intention to assist the government’s approach to capital distribution, Clark was disappointed with the government’s decision to exclude non-bank lenders after the group reached out to both the Ministry of Finance and the Business Development Corporation of Canada. And with no government funding operation to assist, Clark, like many lenders in Canada, is turning toward his existing customers, hoping to keep their heads above water.
“What we’re all doing independently is trying to work with our customers to give them guidance on what is going on in Ottawa. And so most of us have made website adjustments to give some education to interested parties on what’s available in terms of subsidy. We’re trying to provide support to our customers through deferments and so forth, just as every lending institution is doing these days. It’s just that I think it’s harder for us and smaller firms that don’t have the margin and the wherewithal to withstand any sort of significant timeline in this situation. So it’s a little bit of week by week for us, trying to manage our own costs and so forth and keep our customer bases as happy and healthy as we can.”
$2 Trillion Senate Relief Bill to Pass Vote, Includes Small Business Funds
March 26, 2020
Senate leaders Mitch McConnell and Chuck Schumer have come to an agreement over a stimulus package that would inject $2 trillion into the US economy. With senators debating the bill at the time of writing, it is expected to pass. Said to be the largest and most robust rescue package in American history, the bill would see $300 billion go to the SBA for its 7A loan program.
“At last we have a deal,” McConnell said after negotiations wrapped up at 1:30am on Wednesday morning. McConnell later described the bill as “a war-time level of investment into our nation.”
According to Stephen Denis, Executive Director of the SBFA, who was closely engaged with the language being placed into the bill, certain small businesses who receive SBA loans may have their loan converted to a grant, depending upon how they aim to spend the financing. As well as this, Denis made clear that small businesses will be able to use these funds to pay any charges linked to an online small business loan or MCA.
“There’s different things that you can use the SBA money for,” Denis explained in a call. “Payroll support, obviously, including paid sick leave, medical, or family leave; costs related to health care; employees salaries; mortgage payments; rent payments; utilities. And then this is another thing that we got inserted into the bill, we wanted to make sure that businesses had the flexibility to use this funding to pay existing debt obligations that were incurred before the covered period. What this means is that if a business had taken out an MCA or a loan, that they could use this money to pay off the obligations.”
As well as allotting funds for the SBA, the bill provides for cash payments of up to $1,200 to be made available directly to individuals, $2,400 for married couples, and an additional $500 per child, which will be reduced if the individual makes more than $75,000 annually or if the couple makes over $150,000. $350 billion will also be made available to help small businesses mitigate layoffs and support payroll.
The most recent example of something akin to this bill is the Troubled Asset Relief Program (TARP) that was established to help financial institutions in the aftermath of the ’08 financial crisis. And with there being some surprise in retrospect to how TARP’s funds were ultimately used, there is concern about supervision of these funds.
When asked on Monday who would provide oversight for the program to fund businesses, President Trump replied with, “I’ll be the oversight.” However, since then White House officials have agreed in closed-door negotiations that an independent inspector general as well as an oversight committee will be instated to supervise the loans.
Despite stalling in the Senate several times throughout Wednesday, Denis is confident that the bill will be voted through the Senate, and following this, through the House.
“Never make a guarantee in Washington. That’s something I’ve learned in my career. But I think this is something that both sides, both Democrats and Republicans, recognize needs to get done right now. And I can’t imagine anymore political games after the agreement this morning.”
As well as this, Denis was eager to highlight that many funders and broker shops fall under the classification of a small business, and would be eligible for some of the funds promised by this $2 trillion bill; and that if you are wondering how you might access some of the relief package upon its passing through government, to reach out to him.
