Google Culls Online Lenders – Pay or Else?
March 15, 2016Can you become one of the biggest or most successful online lenders without Google? A search layout update may be inadvertently culling the herd.
In late February, Google eliminated ads from the right side of the page while adding another layer to the top and bottom. When factoring in features like site links, the effects on organic search has been devastating. Non-paid links are now entirely below the fold for many commercial keywords, which means users may limit their selections entirely to ads. Here’s an example of a full screen browser window on a Macbook Air when searching for Business Loans:
Brad Geddes, a Google Adwords marketing author, expert and consultant, has said the Click-through rate (CTR) on this new 4th ad placement is skyrocketing. “Depending on the keyword, position 4 is going to have a 400%-1000% CTR increase,” he said on Webmaster world. And while side links and bottom links were never a huge factor anyway (less than 15% of click-throughs), Geddes believes a consequence of this change is that fewer ad slots means higher cost bids to rank on the 1st page. “Companies with thin margins are going to have a lot of words fall to page 2,” he wrote.
In summary: Fewer ad placements, higher costs per click, decreased likelihood of organic click-throughs.
And the online lending industry is already feeling the burn. Several funders and ISOs on the commercial side have told AltFinanceDaily in confidence that the online lead gen battle has been lost or that they have been temporarily sidelined by the increase in costs. At least one funder is refocusing their efforts entirely on the ISO channel after a horrible experience with Pay-Per-Click.
And it’s not just the costs, it’s the quality of leads, they say. The searchers clicking their expensive ads and running up their bills sometimes literally meet none of the qualifications their ads stipulate. Yet many searchers click anyway, rendering the ads’ carefully scripted messages moot. One study might explain why that is. In it, users spent around .764 seconds considering the first paid search result and a total of only 4.5 seconds scanning the first five results. That’s not a whole lot of time to read each ad, digest them and consider whether or not there’s an appropriate fit.
On one industry forum, ISOs have reported that the cost of acquiring a merchant cash advance or business loan deal from Pay-Per-Click is ranging from $700 to $1,200. “PPC for premium keywords as high as $40 at times. Ugly. Real ugly,” one user wrote. Another user wrote, “It’s not just Adwords that is saturated. The whole market is saturated. Lenders and the onslaught of new brokers are making it tough. Lenders with programs like Funding Circle and Kabbage, and with all the advertising money in the world to burn and get direct traffic.” And still another believes that online ads are simply inviting the lowest hanging fruit. “Internet leads have the highest level of fraud,” said one sales manager.
Notably, many of the top 8 funders are only competing for a limited number of competitive keywords or may not even be running Adwords at all. PayPal and Square for example, focus only on their existing payment processing customers despite being “online lenders.”
It’s too early to tell what effects Google’s ad changes will have on the online lending industry, though a couple of companies who were paying just enough to extract clicks from side ads have indicated the change is for the worse and they have suspended their campaigns.
The natural alternative to paid search, organic search, is seldom discussed anymore as a realistic strategy these days, in part because the rankings might be rigged anyway.
One irony that’s pervasive in the online lending industry is that borrowers are being targeted offline where it’s potentially more affordable. In a discussion thread that garnered 76 posts last fall, ISOs and funders suggested that direct mail, referrals, UCCs, cold calling, radio and even going out and shaking hands, were pegged as “what’s next” for marketing. Pay-Per-Click was only mentioned once and only in the context of it being something that had long ago been made too expensive for small and mid-size companies.
The cost of making these things work might be why so many funders are hoping that brokers can figure it out. “We decided that the best way to grow is to build relationships to avoid the overhead, compliance, training and manpower that a sales team would require,” said Nulook Capital’s Jordan Feinstein in an interview with AltFinanceDaily last month.
With Google becoming even more competitive now though, perhaps United Capital Source’s Jared Weitz summed it up best. “Marketing is getting more expensive and only the ones who can afford to pay can play,” Weitz said.
OnDeck Regains Their Swagger in Q4 Earnings Call – Lends $1.9 Billion in 2015
February 23, 2016
OnDeck’s chief executive Noah Breslow and chief financial officer Howard Katzenberg brimmed with confidence in their Q4 earnings call, assuring investors that it’s full steam ahead. After two previous quarters of profitability and getting no love from the market for it, they’re back to doing what they know best, growing.
OnDeck loaned a record $557 million in Q4, an increase of 51% year-over-year. Despite market fears of an impending economic downturn, the company is just not seeing signs of the alleged doom in the performance of their loans. “We are not seeing weakness in our portfolio at this time,” Breslow said.
Later in the call they reemphasized that their early warning systems are not setting off any alarms. In fact, they said, origination growth is their main goal in 2016. “We currently believe we can grow annual originations by 45% to 50% in 2016,” Katzenberg said.
OnDeck reminded investors that their unique model is specifically built for economic downturns. Among their strengths are their short duration, pricing spreads and daily payments, they said. Those attributes (which are sometimes criticized by consumer groups today) will serve as the backbone of sustainability if the economy goes south.
Also coming back into the fold are outside brokers, which they refer to as “Funding Advisors.” OnDeck spent a lot of time recertifying those relationships in 2015 and the bulk of the effort associated with that is over, they said. The percentage of loans generated from brokers rose from 18.6% in Q3 to 20.1% in Q4.
They also rebuffed speculation that they were giving up their business model in favor of becoming a bank technology service. While they admitted finding value in the partnerships they’ve formed, particularly with JPMorgan Chase, their core business is and will continue to be lending to small businesses. According to Katzenberg, 2016 will have two key objectives however, “One, launching and refining our pilot program with Chase, and two, continuing to build out our infrastructure to add and support additional partners that understand the small business capital assets problem and are willing to invest in a great customer experience.” They expect to see bank service revenues really begin to scale in 2017 and 2018.
Breslow said in regards to the Chase deal, “Chase will be able to offer almost real-time approvals in the same or next day funding a dramatic improvement over a traditional loan process that might take weeks. Chase will hold the loans, which will be priced like bank products on their balance sheet and OnDeck will earn servicing and platform fees based on volume.”
Their 15+ Day Delinquency ratio was down.
Their partnerships with Minor League Baseball and Barbara Corcoran have been very successful.
They lent $1.9 billion in 2015 across the U.S., Canada, and Australia.
Steal A Deal, Go To Jail – MCA Broker Takes Fight Over Backdoored Deals To Law Enforcement
February 22, 2016
A suspicion over stolen deals has led to the arrest of a sales agent, AltFinanceDaily has learned.
It’s yet another case of a deal slipping out the back door, one that resulted in handcuffs, according to multiple sources familiar with the matter. AltFinanceDaily obtained evidence of the arrest, which happened earlier this month, and confirmed the identity of the individual charged.
A sales agent’s ill-fated meeting with law enforcement began when an MCA brokerage suspected their hard-fought applications were being rerouted to a third party by way of a New York based funding company they usually submit to, according to one source. To confirm these suspicions, they submitted at least one funding application that was tagged with a specially designated phone number that they possessed. The tactic would allow them to do a clean trace on their deal by seeing who called upon that number, multiple sources confirmed.
Sure enough, someone other than the funding company reached back out to them, not knowing it was a trap. Unfortunately, that call wasn’t conclusive enough to connect it to the funder, according to one source. The sales agent attempting to snatch the deal wasn’t employed by the funder and the funder wasn’t sure how the sales agent was getting the deal in the first place. Somehow this guy was getting data he wasn’t supposed to be getting and the funder wanted nothing more than to make sure their integrity remained intact, a source said.
The victimized brokerage set their sights on the rogue sales agent and together with the cooperation of the local police department, apparently staged a sting operation. The rogue agent allegedly attempted to sell the stolen deal data to an undercover cop who was assisting with the case.
The suspect was charged with criminal possession of computer related material, a Class E felony, and released on recognizance three days later, according to arrest records obtained by AltFinanceDaily. The penalty for such a crime can earn an offender up to 4 years in prison.
The funding company and brokerage are reportedly both relieved to have gotten to the bottom of the issue. Notably, in this case of deals slipping out the back door, it was the alleged recipient of the stolen deals that was charged. The hole that allowed him to get those deals in the first place has apparently resolved itself, sources said.
In the September/October 2015 issue of AltFinanceDaily Magazine, interviewed MCA brokers agreed that the industry should police itself when it comes to backdooring. One brokerage, although not one that was named in that article, apparently took that advice literally when they enlisted the police to assist them.
All the sources to this story agreed that the arrest should serve as a warning. Backdooring deals has to stop, they concurred.
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The name of the accused and the names of the sources in this story were kept anonymous because it’s an ongoing criminal matter. The suspect is innocent until proven guilty.
OnDeck Loans Record $557 million in Q4, But Reports $4.6 Million Loss
February 22, 2016
OnDeck funded a record $557 million in Q4 2015, generating $67.6 million in revenue. That came at a cost because they reported a $4.6 million GAAP net loss.
All told however, they loaned $1.9 billion to small businesses in the U.S., Canada and Australia for the full year of 2015.
A record $201.9 million of loans were sold through OnDeck Marketplace® in Q4.
Provision for loan losses during the fourth quarter of 2015 decreased to $20.0 million, down from $20.4 million in the comparable prior year period. The Provision Rate in the fourth quarter of 2015 was 5.6% compared to 6.7% in the comparable prior year period.
OnDeck was up nearly 5% for the day in the hours before earnings were reported. The company has regained some public favor after a partnership with JPMorgan Chase was announced in December. Still, critics have pointed out that the company’s last few positive quarters were dependent on their ability to sell existing loans off their balance sheet to book the necessary revenue to show a profit.
OnDeck has seemingly now returned to their original plan, growth over profits.
In Q3, origination growth had slowed. They reported a profit of $3.7 million on $482 million worth of loans originated. During that quarter, reliance on third party brokers slowed, dipping to 18.6% of their deal flow, but OnDeck CEO Noah Breslow hinted that they may have reached a floor in that ratio. That channel could stabilize and even grow a little bit, he said.
Q4 indeed saw a resurgence to 20.1% from the brokers.
The effectiveness of direct mail marketing was hotly debated in the 2015 Q2 Q&A, but seemed to have relaxed in Q3.
OnDeck’s share price was still down by more than 50% from their IPO, a factor that has potentially contributed to the postponement of other online lending IPOs.
‘Year of the Broker’ Gives Way to ‘Year of the Reduced Commission’
February 21, 2016
Many brokers just starting out in the alternative funding space may be in for a rude awakening. It’s not that the ‘Year of the Broker’ is over, per se, but 2016 certainly represents a new chapter for newbies—one in which getting rich quick and succeeding over the long-haul will be much more difficult.
“It’s the ‘Year of the Leader’ now. Fresh brokers coming into our space will have to work harder to set themselves apart, and it will be harder for many of them to make the money they once did,” says Amanda Kingsley, chief executive of Sendto, a Palm Bay, Florida-based firm that assists companies in the alternative finance industry with referral marketing and operational growth programs.
Funders today remain hungry for deals and are still paying relatively high rates to bring in new business. Yet there are several competitive realities putting a damper on a new broker’s earnings power.
“A few years ago, individual brokers could be making $20,000 or even $40,000 a month. Now those numbers are much more difficult to reach unless brokers have a unique lead generation method or their own money to participate in the deals,” says Zachary Ramirez, a vice president and branch manager in the Orange, California office of World Business Lenders, a New York-based lender.
Most funders today allow brokers to charge merchants between 8 and 12 points above the buy rate, with some allowing as high as 15 to 20 points, according to industry participants. But to win business amid a flurry of competition, brokers are being forced to take a lower cut on many deals. Not only are there more brokers to compete with, but merchants are also savvier—and more price-conscious—about alternative funding products than they were several years ago.
For higher quality deals, there’s another force at play driving down what sales reps can earn. That’s because a handful of large funders are instituting caps on what brokers can charge top-quality merchants. “They want to make sure that the price that’s charged to the merchant is fair,” says Stephen Sheinbaum, founder of Bizfi, a New York-based funder that has not instituted these caps.
Together, these competitive realities mean that sales reps, on average, are making much less than they did a few years ago. For example, on high quality deals, brokers might only be able to make 3 to 8 points per deal on average. For lower quality deals, on the other hand, brokers might make as much as 15 to 20 points.
So far, the changing economic tide hasn’t discouraged new sales reps from jumping in. In fact, the market is still hot for new brokers who continue to pour into the market at a torrid pace, buoyed by rampant media attention and aggressive advertising by funders and large brokerage houses. “I think it’s even worse now,” says John Tucker, a solo broker since 2009 who also blogs for DeBanked. “They’re signing up anybody with a heartbeat and a pulse.”
Clinging to Misperceptions
Despite the overcrowding issue, industry watchers expect new brokers will continue to flood in as alternative funding continues to gain traction. Many of these new brokers, however, won’t be around very long. That’s because many of them are coming into the space, especially from other sales-oriented jobs, thinking it’s easier than it is. “I think many people are going to come into the space, fail and leave bloodied and bruised,” says Ramirez of World Business Lenders.
Indeed, there are many new brokers who are still holding on to outdated notions about the business. Some are primed to think that they can easily make 10 points on a $100,000 deal and if they do that once a month, they have the potential to make $120,000 a year. “It’s just not as easy as it’s promoted to be,” says Tucker, who owns 1st Capital Loans in Troy, Michigan. Even Tucker, a seasoned broker, frequently has trouble connecting with merchants nowadays because they are inundated with sales pitches. They’ll hang up on him as soon as he makes it clear he’s a broker because they are getting so many calls from competitors, he says.
William Ramos, owner of Right Away Funding in Phoenix, Arizona, recently worked with a new broker who was convinced he was going to make $5,000 a week from the get-go. Ramos tried to manage his expectations by explaining he’d first have to learn the business and be persistent if he hoped to make that kind of money.
Ramos says the broker took his advice by asking lots of questions and working hard over the next six months. He’s not making what he had originally hoped, but he is up to about $5,000 a month, says Ramos, the former president of Staten Island, New York-based Supreme Capital Group, which he sold in 2015 to open a new firm.
In talking to new brokers, Nathan Abadi president of Excel Capital Management in New York, a lender and MCA funder, also sees a lot of misconceptions about what they think they can make and how easy it will be. It becomes problematic when the reality doesn’t match up with their expectations. For instance, he recently hired a used car salesman who worked for his company for about two months before they parted ways. The broker thought that because he had sold so many cars in the past, he could easily apply that to alternative funding. But he didn’t want to take the time to thoroughly learn about the new product set. He was just trying to ink deals based on cost, which is no longer a viable strategy, Abadi explains. “Customers know what the rates are. They’re not just applying with one person,” Abadi says.
The first month, the new broker closed a $175,000 deal based on a lead he was given and with Abadi doing the bulk of the legwork. After that, the broker got a few more deals, but he couldn’t do it on his own without significant support from the firm. A big problem was that he didn’t understand the math behind the deals he was pitching. “If merchants ask you a question and you can’t answer it properly, you’re done. The deal’s over. Not enough people are taking the time to understand the market as a whole,” says Abadi, whose firm is in the process of hiring new brokers for its internal sales force.
Edward Siegel, founder and chief executive of Fundzio LLC, a funding company in Fort Lauderdale, Florida, says he still sees plenty of new brokers who come into the business believing they can easily close a deal for $50,000, make 10 points and sustain that type of income. “The market has changed. The cost of capital has gotten a lot lower for the customer, and since there are more brokers in the marketplace they are willing to take a lesser amount just to get the deal to the finish line,” he says.
A lot of brokers come into the industry all gung ho and then flounder when they see how hard it really is. Siegel says he’s seen them submit deals for a few months and then realize they were living a pipe dream and leave the industry. “It’s not easy, especially in a competitive marketplace, especially when 10 other brokers might be knocking on that same guy’s door,” he says.
Nearing the breaking point
Andrew Reiser, chairman and chief executive of Strategic Funding Source, a New York-based funder, says that many brokers are operating under a false sense of security. “We’re in a strong economy in our space largely because of lack of other available sources of capital from larger institutions. When a market is very forgiving, mistakes are easily absorbed and swept under the carpet.”
He believes it’s going to get even harder for brokers over time, likening the situation with brokers today to that of stockbrokers a few decades ago. People used to be inundated with calls from stockbrokers at firms of all sizes about this stock or that one. Now many small brokerage houses have disappeared and larger firms have moved away from cold calling. Instead they are focused on money management and proving their prowess as specialists.
“You can’t be all things to all people serving a market this size,” he says.
Survival Strategies
Kingsley of Sendto says she receives many questions from new brokers about how to compete effectively, and it’s not an easy answer. Having a niche product, though, can help. “If you can learn how a particular industry works along with appropriate deal placement, you can develop a really good client base. It helps when presenting your clients to funding companies and you will build a more professional relationship,” she says.
Tucker, the broker with 1st Capital Loans, notes that UCCs and Aged Leads are outdated marketing tactics and says most new brokers don’t have enough industry knowledge to critically think to create new strategies for survival. “All they will end up doing is burning through the little capital that they do have and be out of the business within 12 to 18 months,” he says.
Having good training is critical for new brokers to survive, according to Mike Andriello, president of Cushion Capital Corporation in Poughkeepsie, New York. “I think that if brokers focus on the nature of the industry, actually pick the business owners’ minds and learn their business as best as they can, they will have a lot of success. It’s not all about making the biggest commissions; it’s about having the biggest client book,” he says.
Ramirez of World Business Lenders believes brokers can do better for themselves long-term by syndicating because it’s a way to make more money. “I don’t think it’s a long-term strategy if a broker’s not participating in his own deals,” he says.
Granted, some funders make it easier for brokers to participate than others do, but Ramirez believes brokers should seize opportunities to earn interest income over the life of the loan. So, for instance, on a $100,000 loan, instead of earning a $20,000 commission upfront, a broker might be able to apply that money to the deal and earn $26,000 or $28,000 over the life of the loan.
Of course, this strategy won’t work well for brokers living paycheck to paycheck. “But if you don’t need the commissions right away, you can roll the commissions into deals and increase your earnings exponentially,” he says. “Because of rising acquisition costs and decreased commission averages per deal, being forced to participate, or syndicate, is the natural evolution.”
Gearing for the Future
To be sure, industry watchers believe there is still ample opportunity for new brokers with drive and ambition to enter the space. “Successful brokers will always have a place in the ecosystem,” says Sheinbaum of Bizfi.
But there’s a general consensus that from now on these brokers will have to work harder than they have in the past to thrive. Says Andriello of Cushion Capital: “2016 will be the year of who was smart enough and made the right business moves to stay progressing and growing. It will also be the year a lot of funders and brokerage firms close shop.”
Over time, the changing economic reality will continue to set in. While it will be harder for individual brokers, it’s best for the industry when new sales reps understand the realities of the market and how to compete effectively. “You want the smartest people in the space. The more well-educated they are about the products and the processes, the better off everyone is,” Sheinbaum says.
Despite everything, it’s still a great time to be getting into the industry, provided you have the right mindset and proper resources behind you, according to Ramos of Right Away Funding. “If you’re just coming in and you just want to collect your weekly check, now’s not a good time to be a broker. It’s a great time for people who are hungry, motivated and determined to make something out of it.”
The Dual Aura of Fora – How Two College Friends Built Fora Financial and Became the “Marketplace” of Marketplace Lending
February 16, 2016A recent Bloomberg article documented the hard-partying lifestyle of two young entrepreneurs who struck it rich when they sold their alternative funding business. The story of their beer-soaked early retirement in a Puerto Rico tax haven came complete with photos of the duo astride horses on the beach and perched atop a circular bed.
But two other members of the alternative-finance community have chosen a different path despite somewhat similar circumstances. Jared Feldman and Dan B. Smith, the founders of New York-based Fora Financial, are about the same age as the pair in that Bloomberg article and they, too, recently sold an equity stake in their company. Yet Smith and Feldman have no intention of cutting back on the hours they dedicate to their business or the time they devote to their families.
They retained a share of Fora Financial that they characterized as “significant” and will remain at the head of the company after selling part of it to Palladium Equity Partners LLC in October for an undisclosed sum. Palladium bought into a company that has placed more than $400 million in funding through 14,000 deals with 8,500 small businesses. It expects revenue and staff size to grow by 25 percent to 35 percent this year.
The deal marks Palladium’s first foray into alternative finance, although it has invested in the specialty-finance industry since 2007, said Justin R. Green, a principal at the firm. His company is appointing two members to the Fora Financial board.
Palladium, which describes itself as a middle-market investment firm, decided to make the deal partly because it was impressed by Smith and Feldman, according to Green. “Jared and Dan have a passion for supporting small businesses and built the company from the ground up with that mission,” he said. “We place great importance on the company’s management team.”
Negotiations got underway after Raymond James & Associates, a St. Petersburg, Fla.-based investment banking advisor, approached Palladium on behalf of Fora Financial, Green said. RJ&A made the overture based on other Palladium investments, he said.
The potential partnership looked good from the other point of view, too. “We wanted to make sure it was the right partner,” Feldman said of the process. “We wanted someone who shared the same vision and knew how to maximize growth and shareholder value over time and help us execute on our plans.”
It took about a year to work out the details of the deal Feldman said. “It was a grueling process, to say the least,” he admitted, “but we wanted to make sure we were capitalized for the future.”
The Palladium deal marked a milestone in the development of Fora Financial, a company with roots that date back to when Smith and Feldman met while studying business management at Indiana University.
After graduation, Feldman landed a job in alternative funding in New York at Merchant Cash & Capital (today named Bizfi), and he recruited Smith to join him there. “That was basically our first job out of college,” Feldman said.
It struck Smith as a great place to start. “It was the easiest way for me to get to New York out of college,” he said. “I saw a lot of opportunity there.”
The pair stayed with the company a year and a half before striking out on their own to start a funding company in April 2008. “We were young and ambitious,” Feldman said. “We thought it was the right time in our lives to take that chance.”
They had enough confidence in the future of alternative funding that they didn’t worry unduly about the rocky state of the economy at the time. Still, the timing proved scary.
Lehman Brothers crashed just as Smith and Feldman were opening the doors to their business, and all around them they saw competitors losing their credit facilities, Smith said. It taught them frugality and the importance of being well-capitalized instead of boot-strapped.
Their first office, a 150-square-foot space in Midtown Manhattan, could have used a few more windows, but there was no shortage of heavy metal doors crisscrossed with ominous-looking interlocking steel bars. The space seemed cramped and sparse at the same time, with hand-me-down furniture, outdated landline phones and a dearth of computers. Job seekers wondered if they were applying to a real company.
“It was Dan and I sitting in a small room, pounding the phones,” Feldman recalled. “That’s how we started the business.”
At first, Smith and Feldman paid the rent and kept the lights on with their own money. Nearly every penny they earned went right back into the business, Feldman said. The company functioned as a brokerage, placing deals with other funders. From the beginning, they concentrated on building relationships in the industry, Smith said. “Those were the hands that fed us,” he noted.
By early 2009, Smith and Feldman started raising capital from friends and family members so that they could fund deals themselves. About that time, they developed a computer platform to track the payments they received from funding companies where they placed deals.
Smith and Feldman’s first credit facility came from Entrepreneur Growth Capital. The stake enabled them to begin handling deals on their own instead of passing them along to funders. At the same time, they expanded their computing platform to handle entire deals.
From there, Smith and Feldman expanded their computing capability to help with accounting, underwriting and other functions. A combination of staff and outside developers guided the platform’s evolution. Today, three full-time in-house tech people handle programming.
Smith and Feldman emphasize that they don’t consider Fora Financial a tech company, but Green said the company’s platform helped cinch the deal. “We view Fora Financial as a technology-enabled financial services company,” he maintained.
While building the platform and expanding the business, Fora Financial secured mezzanine financing from Hamilton Investment Partners LLC, a company that bases its investments on the strength of management teams. “I am industry-agnostic,” said Douglas Hamilton, managing partner and and cofounder. “Dan and Jared are one of the best young teams I have encountered in my 35 years of doing private investing.”
Meanwhile, Fora Financial moved six times to larger accommodations. The company’s 116 employees now occupy 26,000 square feet in Midtown, with half of the staff working in direct sales and the other half devoted to back office, underwriting, finance, IT, customer service, collections and legal duties.
Seventy percent of the company’s business flows from its inside sales staff and the rest comes from ISOs, brokers and strategic partners, Feldman said. “Most of the industry is the opposite,” he noted.
Finding salespeople presents a challenge in New York, where they’re in great demand. “We’ve invested a lot of money in finding the right salespeople,” Feldman said. “We also have to make sure that we’re right for them.” The sales staff includes recent graduates and experienced people from other sectors of financial-services or other businesses, Feldman noted.
“We don’t hire from within the industry,” Smith added. “From Day One, we’ve been training our staff our way and not bringing in tainted brokers.” That way, the company can make sure salespeople hew to the company’s ethical approach to business, he maintained. It’s part of creating a company culture, he said.
The Fora Financial culture also includes strict compliance with state and federal regulation because until recently Smith and Feldman owned the entire company, Feldman said. “Regulatory compliance is a core value with us and has been for some time,” he noted, adding that it’s also resulted in conservatism and due diligence.
Those traits have not gone unnoticed, according to Robert Cook, a partner at Hudson Cook, LLC, a Hanover, Md.-based financial-services law firm that has worked extensively with the company. “Fora was one of the first clients in this small-business funding area that took compliance to heart,” Cook said. “As time has gone on, we’re seeing more and more companies make compliance part of their culture, but Fora was one of the early adapters in this area.”
Top management at alternative finance companies often talk about compliance, and the discussion too often ends there and doesn’t filter down through the ranks, Cook said. But that’s not the case at Fora Financial, he maintained. “It’s throughout the organization,” he said of the company Smith and Feldman founded. “From a compliance attorney’s standpoint, that’s always a great sign.”
Nurturing a penchant for compliance and dedicating a company legal and compliance department to pursuing it became a factor in Palladium’s decision to become involved with the company, Feldman said.
The focus on compliance also spread to the way Fora Financial brings brokers on board, Smith said. The company scrutinizes potential partners carefully before taking them on, he maintained.
“We probably missed out on some business as the industry grew because we were more cognizant of doing things the right way, but that paid off in the long run and some of our competitors have followed suit,” Smith said.
Compliance first became particularly important when Fora Financial added small-business loans to their initial business of providing merchant cash advances. They began making loans because lots of businesses don’t accept cards, which serve as the basis for cash advances.
On a cash basis, the current portfolio is 75 percent to 80 percent small-business loans. Loans started to surpass advances during the fourth quarter of 2014. The shift gained momentum after the company began funding through its bank sponsor, Bank of Lake Mills, in the third quarter of 2014.
Growth of loans will continue to outstrip growth of cash advances because manufacturers, construction companies and other businesses usually don’t accept cards, Smith said. If a customer qualifies for both, Fora Financial helps decide which makes the most sense in a specific case, Feldman added.
“We don’t sell our loans – we carry everything on the balance sheet and assume the risk,” Feldman said. “If it’s not good for the customer, it’s going to come back and hurt the performance of our portfolio over time,” he noted.
That thinking helped the company recognize the importance of adding loans to the mix. “We were one of the first companies (in the alternative-finance industry) to get our California lending license,” Feldman said. The company obtained the license in 2011 and got to work on lending. Offering loans required some retooling because the underwriting criteria differ so much from those in the cash advance business, Feldman said.
With the help of several law firms, they made sense of regulation from state to state and began offering the loans one state at a time, Smith said. “We wanted to make sure we rolled it out the right way,” Feldman noted.
As the company was changing, Smith and Feldman saw a need to rebrand. Initially, they called their company Paramount Merchant Funding to reflect their merchant cash advance offerings. When they added small-business loans to the mix, they used several additional names. Now, they’ve brought both functions and all of the names together under the Fora Financial brand. Fora means marketplace in Latin and seems broad enough to cover products the company might add in the future, Feldman said.
Smith and Feldman are contemplating what form those future products might take, but they declined to mention specifics. “We’re constantly getting feedback from customers on what they need that we’re not currently delivering,” Feldman said. “We have ideas in the pipeline.”
Despite changes in the business, Smith and Feldman have managed to remain true to timeless values in their personal lives. Smith grew up near Philadelphia in Fort Washington, Pa., and Feldman is a native of Roslyn, N.Y. Both now reside in Livingston, N.J. and occasionally ride the train together to work in New York. Smith is married and has two children, while Feldman and his wife recently had their first child.
“We’re at it everyday,” Feldman said of their work-oriented lifestyle. “When we’re out of the office, we’re traveling for work. So is the rest of the team. We’re only going to go as far as our people.”
And what about that other pair luxuriating in the Caribbean? As Feldman put it: “New Jersey is a long way from Puerto Rico.”
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Learn more about Fora Financial at www.forafinancial.com
California Lending License Process Isn’t Easy, State Painfully Slow on Paperwork
February 15, 2016
Quarterspot recently became a licensed lender in California. And it wasn’t quick, according to Quarterspot’s EVP Mike Green. It took much longer than a year, he says. Their CFLL license # is “603-K646”, but you can’t confirm that with California’s registry because the database hasn’t been updated in 42 days.
Welcome to the State that apparently has an abundance of resources to launch inquiries into marketplace lenders, but little time to work with the ones eager to operate in full compliance.
California attorney Paul Rianda told AltFinanceDaily back in December that it can take months just to get a reply on a lending license application. And when they do reply, they’re sticklers over details. “I have experienced a situation where the examiner rejected an application because the name of the company was incorrectly spelled on the application,” Rianda wrote. “The name of the company was submitted on the application with ‘Inc’ instead of the complete ‘Inc.’ at the end of the company’s name.”
Yellowstone Capital’s Isaac Stern said it took them 15 or 16 months to get their license and required a lot of legal help from law firm Hudson Cook LLP. The cost, including lawyers’ fees came to about $60,000. “Man, it was like pulling teeth to get that license,” Stern told AltFinanceDaily last year.
Tom McCurnin, an attorney for Barton, Klugman & Oetting LLP, disagrees. In an op-ed he wrote for Leasing News to counter a story published by AltFinanceDaily, McCurnin wrote, “I would point out that the process of obtaining a California license is awfully easy, and involves a small filing fee and a bond.”
But for those not from the leasing industry, “easy” is not a word that comes to mind. “They’ll take away your license if you even sneeze the wrong way,” Stern previously told AltFinanceDaily.
Worse, a change in the law regarding the payment of referral fees has led to a flurry of questions from lenders and commercial finance brokers alike. Law firm Hudson Cook LLP and Patrick Siegfried of the Usury Law Blog, both even had to weigh in on the issue. (See: Can California Lenders Pay Referral Fees to Unlicensed Brokers? | California Finance Lenders Push Legislative Agenda in Response to Growth of Alternative Small Business Finance Industry)
And even more confusing, is whether or not a license can be transferred. In February of 2015 for example, LoanMe Inc was ordered by the Department of Business Oversight to stop using what they claimed was another company’s lending license. But then a month later, the order was paused upon receiving “additional information” and then withdrawn.
As it stands with the State’s marketplace lending inquiry, 14 lenders have to respond by March. Among them is Kabbage Inc., Prosper Marketplace Inc., Avant Inc., On Deck Capital Inc. and Social Finance Inc., according to the Wall Street Journal.
Neither Kabbage or OnDeck are licensed California lenders from what AltFinanceDaily could ascertain. But both would be legally eligible to make loans in the State through their chartered bank relationships.
“These online lenders are filling a need in today’s economy, and we have no desire to squelch the industry or innovation,” said DBO Commissioner Jan Lynn Owen in a December announcement.
In the meantime, being a licensed lender in the state is being perceived as a competitive advantage. Quarterspot for example, wants brokers to know that they can do loans in California now. Of course, after having waited painfully long to become licensed, it’s disheartening for them to see that the state hasn’t even updated their records since January 4th.
AltFinanceDaily attempted to reach out to the California Department of Business Oversight a week ago to find out why their data was so slow to be updated. Nobody responded.
After CEO Exit, California State Probes Zenefits
February 12, 2016
The California Department of Insurance will investigate the San Francisco-based human resources software startup Zenefits after the exit of its head Parker Conrad earlier this week, amidst a regulatory compliance scandal.
Zenefits sells cloud-based human resource software for payroll, talent management and health insurance. The startup, founded in 2013, was touted to be one of the fastest growing companies in Silicon Valley with marquee investors like Andreessen Horowitz, Institutional Venture Partners and Fidelity Management.
The company, valued at $4.5 billion, let health insurance reps fake the mandatory 52-hour training course that is legally required to sell insurance. “After they faked the training course, sales reps were directed to sign a certification, under penalty of perjury, that they had spent the required 52 hours doing the work,” according to Buzzfeed News.
California Insurance Commissioner Dave Jones, in a statement, revealed that the department started probing Zenefits last year. “The recent resignation of Zenefits’ CEO Parker Conrad is an important development, but it does not resolve our ongoing investigation of Zenefits’ business practices and their compliance with California law and regulations,” said Jones.
The company’s COO David Sacks (pictured at right) has replaced Conrad as the CEO.
The Zenefits scandal brings to light Silicon Valley upstarts’ tendency to play fast and loose with regulation and compliance.
