Grooming The Best Sales Reps
August 22, 2018The best sales reps have a lot in common – they’re smart, honest, likable, well-organized, thick-skinned and hungry for success. They navigate the difficult early days of their careers in the alternative small-business funding community by persevering despite long hours, countless outbound telephone calls and meager commissions.
“Persistency is really, really the key – putting in the time,” says Evan Marmott, CEO of Montreal-based CanaCap and CEO of New York-based CapCall LLC. “It’s not always easy, but you’ve got to stay late, make the phone calls, send the emails and do the follow-ups. It’s a numbers game.”
Being relentless counts not only when pursuing merchants but also when matching merchants with funders, Marmott emphasizes. “If they can’t get an approval one place, they’re going to shop it out until they get approval someplace else so they can monetize everything that comes in,” he says.
“It’s all mindset and work ethic,” in sales, according to Joe Camberato, president at Bohemia, N.Y.-based National Business Capital. His company works to create a culture that supports the right mindset by working with a firm called “Delivering Happiness.” Together, they forge to a set of core values based on integrity, innovation, teamwork, empathy, and respect for fellow employees, clients and clients’ businesses.
National Business Capital employees learn to live those ideals by working and playing together on the company volleyball team, through work with local and national charities, and at company mixers and staff picnics, Camberato maintains. “We adapt and change, and we’re committed to helping small businesses grow,” he says of the company culture, “and we have fun while doing all that.”
Likeability helps build relationships with customers, says Justin Thompson, vice president of sales for San Diego-based National Funding. “People will do business with people they like and trust,” says Thompson. “It’s really about establishing a relationship first and then establishing quality discovery.” From there, presentation and execution become paramount, he says.
Methodology can make the difference between success and failure in sales, observes Justin Bakes, co-founder and CEO of Boston-based Forward Financing LLC. “Have a defined process and stick to it,” he advises. A well-organized approach inspires trust among clients, establishes and maintains a great reputation; and fosters understanding of the customers’ needs, wants and business operations that help the rep choose the right financing option and appropriate funder. Using technology to wrangle multiple leads and high volume counts for a lot, too, he says.
It’s all part of the consultative approach to sales, says Jared Weitz, CEO of Great Neck, N.Y.-based United Capital Source. Long ago, sales reps may have succeeded by mimicking carnival barkers, sideshow pitchman and arm-twisting medicine-show peddlers. Thankfully, those days have ended – if they ever really existed. Most of today’s successful salespeople earn clients’ respect by becoming knowledgeable, trusted business consultants, says Weitz.
THE CONSULTATIVE SALE
“Someone calls, and there are two ways of handling a deal, right?” Weitz asks rhetorically. Using one method, a salesperson can say, “We’ll fund you this much at this rate today – are we good?” he says. The other way calls for understanding the client’s business – how long has it been open, does it make more cash deposits or credit card deposits, would it be best-served by an advance, a loan, an equipment lease or a line of credit, how much can it afford in monthly payments?
Establishing how the merchant intends to use the funding plays a crucial role in the consultative sale, Marmott agrees. Objections can arise when a merchant learns that receiving $100,000 this week will require paying back $150,000 in four or five months, he notes. So it’s essential to demonstrate that using the money productively will more than pay for the deal. A trucking company can realize more income if it deploys two more trucks, or a restaurant can increase revenue by placing another bar outside for the summer, he says by way of example.
“A lot of salespeople ask a business owner what they need the money for,” observes Thompson. “The merchant says, ‘Inventory,’ and the rep stops right there. I train my reps at National Funding to go two or three clicks deeper.” Examples abound. When does the merchant need the inventory? From whom do they order it? How long does it take to ship? How long does it take to turn it over? What are the shipping terms?
The consultative approach can require salespeople to pose a lot of open-ended questions that can’t be answered yes or no, according to Thompson. Ideally, the conversation should adhere to the 80-20 rule, with the client talking 80 percent of the time and the sales rep speaking 20 percent, he asserts, adding that “a lot of times it’s reversed in this industry.”
Sometimes, however, salespeople should set aside the time-consuming consultative approach and instead find funding for a merchant as soon as possible. That’s true when the business owner can make an opportune purchase of inventory or when it’s time to acquire a competitor quickly. More often, however, it pays to take the time to understand the merchant’s needs and search out the best type of funding for that particular case, top sales people maintain.
Much of the alternative small-business finance industry has caught on to the importance of the consultative approach to sales as the array of available alternative financial products has grown beyond the industry’s initial offerings of merchant cash advances, according to Weitz. The days of scripted pitches and preplanned rebuttals to objections have ended, he says. Today, management trains reps for success.
THE RIGHT TRAINING
Are top salespeople born that way? “Some people hit the ground running, but sales can be taught – that’s for sure,” Weitz says. “The tougher thing to teach is integrity.” Much of the training process focuses on learning the products to enable a rep to make a consultative sale and shoulder financial responsibility, he maintains.
Believing that some people are born to sell provides a crutch to avoid learning what really works, according to Bakes. Training can teach a smart, motivated person how to succeed, he maintains. They don’t have to be born that way.
However, some people do seem born to exert influence, which can translate into sales prowess, says Thompson. Still, those born with a strong work-ethic can overcome other deficiencies, he notes. The work ethic drives them to “come in every day,” he notes. “They’re organized and disciplined. They follow the National Funding philosophy, and they make a ton of money.”
National Funding trains salespeople to view their craft as being defined by two broad elements – art and science, Thompson continues. The science proves easier to master and includes asking the right questions to learn about the customer and the deal. The hard part, the art of the sale, consists of getting to know the business owner, building a relationship and demonstrating expertise. In one example, that’s based on learning how many trucks are in the fleet, whether they’re long-haul or short haul and whether they use dumpsters versus box trailers, he says.
Beyond those important basics, training should be ongoing because selling techniques change slightly as new products and systems emerge, according to Weitz. “One of the things I like about being a broker is the ability to pivot and add another arrow to your quiver,” he says.
Salespeople at United Capital Source talk sales among themselves almost nonstop, which amounts to daily sales training, Weitz observes. That can take the form of describing a challenge and explaining how to overcome it, he notes. A particularly good idea merits an email to the group to share the new piece of wisdom. It’s a matter of constantly refining the approach.
Training can help sales reps understand the businesses their clients run, according to Marmott. Knowing the margins in a restaurant, for example, can help the salesperson explain that the increase in revenue from an expansion will quickly pay the cost of capital, he notes.
Training should teach new employees how business works because common elements arise in enterprises ranging from dog grooming to asphalt paving, Thompson notes. There’s inventory, marketing, employee expense, payroll taxes, insurance and 401k’s in almost any business. “We teach all that to the reps,” he says. Then after conversations with thousands of merchants, reps have a solid foundation in the workings of businesses.
National Business Capital’s formal two-week classroom training usually lasts three hours a day, focusing on systems, guidelines, product, general business principles and the company’s processes, says Camberato. Teachers include the sales management team, company culture leaders and the managers of IT and Tech, Marketing, Processing, and Human Resources.
New hires spend much of their time working with mentors for the first six months and a team leader who works with them indefinitely, Camberto continues. The company sometimes hires in groups and sometimes hires individually, he notes.
National Funding provides three eight-hour days of regimented classroom training on the fundamentals to each of the four groups of 12 to 17 hired each year, says Thompson. The classes cover processes, sales strategy, marketing and the lender matrix. Next comes three months of working with a sales manager dedicated to working with the class. After a total of nine to 12 months, management knows which reps will succeed.
Some shops operate on the opener-closer model, with less experienced salespeople qualifying the merchant by asking questions like how long they’re been in business and how much revenue they bring in monthly, Marmott says. If the merchant qualifies, the newer salesperson who’s working as an opener then hands off the call to an experienced closer to complete the deal. Good openers become closers, but opening isn’t easy because it requires lots of calls, he notes.
National Funding doesn’t use the opener-closer approach because the company believes reps should Participate “from cradle to grave,” Thompson says. “They hunt the business down, build the relationship and handle the transaction from A to Z.” East Coast shops often focus on cold calling and use the opener-closer model, while West Coast shops tend to invest more in marketing and reject the opener-closer method, he noted.
But where do these top salespeople come from?
THE RIGHT BACKGROUND
Prospective sales reps who have just finished college should have a grounding in communications or business, Weitz believes. Experience in sales and a familiarity with dealing with merchants helps prepare reps, he notes. Job history doesn’t have to be in the finance industry. Someone who’s sold business services in a Verizon store or worked for a payroll company, for instance, has been dealing with small-business owners and may succeed more quickly than those without that background.
Sales experience in other industries counts, Bakes agrees, especially in businesses that require dealing with a large number of leads. “Organization and process is just as important as being born with the traits of a salesperson,” he opines.
Life experience that breeds a positive attitude can prove vital, says Marmott. That’s especially important in the beginning when a new rep might take home a paltry $300 in the first month. Later, when the rep has a $50,000 month, he or she will see that their optimism wasn’t misplaced, he declares.
GUYS WHO ARE HUNGRY”
“The biggest thing I look for is guys who are hungry,” Marmott maintains. I don’t need somebody with a doctorate or a master’s degree or even a degree,” he says. “I need somebody who is going to put the work in.” Of a roomful of 25 new reps, two or three will succeed and stay on the job, he calculates. “You get to eat what you kill. If you’re not killing anything, you don’t get to eat.”
“We look for potential candidates who come from backgrounds of rejection,” says Thompson. Their previous sales experience has taught them not to take the answer “no” personally. “It’s part of the business and you continue to move on.”
Although most regard the financial services industry as a white-collar pursuit, “it has blue collar written all over it,” Thompson says, referring to the work ethic required for success. But it’s not just the volume of work. Sixty good phone calls generate more business than 300 mediocre calls, he emphasizes.
GETTING UP TO SPEED
Succeeding at sales requires taking the time to form relationships, understand guidelines, become familiar with lenders and acquire a working knowledge of how clients’ businesses operate, Camberato says. How long does it take? “It’s a solid year,” he contends while conceding that most who succeed operate at a fairly high level before then.
Others disagree about what constitutes being up to speed and how much time’s necessary to achieve it. “I’ve seen it take 30 days, and I’ve seen it up to 120 days,” says Weitz. “The hope is that it’s within 60.”
A salesperson should start feeling better after 30 days and should start feeling good after 60 days, Marmott says. Management can usually identify the strong and the week reps within two to three weeks, he says. “You get the lazy ones that drop out, the guys who aren’t making any money, the ones who aren’t putting the effort in,” he says. “The first two weeks are the toughest because you’re learning the product and how to sell it.”
“It depends on the person,” Bakes says of the time needed to begin selling successfully. “It takes time. It is not something that will just happen overnight.” About six months should suffice to become confident as a closer, he estimates.
Even when sales reps hit their stride, some outsell others, Marmott notes, citing the 80-20 rule that 80 percent of the business comes from 20 percent of the salesforce. Outbound sales to merchants who may feel beleaguered by offers of funding requires more effort than when a merchant makes an inbound call to seek funding, he adds.
And even the best salespeople need great marketing and tech support from the their companies, sources agree.
INVESTING IN SALES
A shop just starting out might have a marketing budget as low as $2,500 a month, which won’t do much more than pay for direct mail pieces that might prompt a few potential clients to pick up the phone, Weitz says. With a little more money to spend, a shop can begin buying leads, he notes. “Don’t break the bank before you understand what formula works for you,” he advises.
“The key to sales is marketing,” says Marmott. “You can be the best sales guy but if you don’t have anything qualified to call or follow up with, it’s a waste of time.” Social media doesn’t work as well for business-to-business contact as it does for business-to-consumer marketing, he says. Pay per click and key words have become more expensive and isn’t as cost-effective as it once was, especially for smaller shops, he contends. Mailers can work but require heavy volume and repetition, he says, adding that could mean at least 25,000 pieces and at least three mailings.
Besides allocating marketing dollars, companies can invest in sales by paying new sales staffers a salary instead of forcing them to rely on commissions to eke out subsistence during the tough early days. National Business Capital pays a salary at first and later switches reps to commissions and draw, Camberato says. “An energetic person interested in sales can plug into our platform, get trained and do very well,” he continues. “We believe in you, as long as you believe in us.”
National Funding provides recruits with a salary and commissions so that they have enough income to get by and still reap rewards when they help close a deal, Thompson says.
Investment in technology can help salespeople set priorities, eliminate some of the drudge work in the sale process, measure the sales staff member’s success or lack of success, and provide a consistent experience for customers, notes Bakes. “Because of the way our technology is set up we can hold people accountable,” he adds.
Every salesperson and every shop should organize the workflow by using a lead-management system or customer relationship management tool (CRM) – such as Zoho or Salesforce –instead of operating with just a spreadsheet, Weitz says.
Brokers can invest in sales through syndication, which means putting up some of the funds involved in a deal. Forward Financing favors syndication in some cases because it aligns the salesperson and the funder, thus demonstrating the sales rep’s belief in the validity of the deal and ensuring a willingness to continue servicing that customer, Bakes says.
Some shops offer monthly bonuses for outstanding sales results, but Weitz believes awarding incentives weekly makes more sense. With a monthly cycle, some reps tend to slack off for the first week or so because they believe they can make up for lost time later. With weekly rewards, there’s not much room for downtime, he notes.
Whatever form investment takes, it can help build a sterling reputation and a free-flowing “pipeline.”
THE RIGHT REPUTATION
“Reputation is huge,” especially for repeat business and referrals, Marmott says. Once a merchant has received funding, a blizzard of sales call can follow. Treating customers right by maintaining ethical standards and helping them during hard times can guard against defection to a competitor touing low prices, he says.
Reputation requires differentiation, which usually occurs online, by email or over the phone, notes Bakes. Factors that enhance reputation include referrals by satisfied customers and real-world testimonials from actual customers and good ratings on social media sites, he says.
While it’s still uncertain what role social media plays in the industry’s reputation-building efforts, it appears that text messages elicit quick responses if the client has agreed to communicate with the company via that format, Bakes says. He notes that unwanted text messages won’t work. Email messages provide more information than text messages but seem less likely to prompt response, he says.
THE RIGHT GOAL
So, where does the effort to succeed at sales lead? It’s the foundation for building “the pipeline” – the name given to the flow of renewals, referrals and leads that makes every day not just busy, but busy in a productive and profitable way. As a rep’s pipeline takes shape, the cost of acquiring new business also goes down, Marmott says. “It just grows from there,” he says of the successful salesperson’s endeavors at building a pipeline of business. It’s what successful salespeople seek.
The Seven-Minute Loan Shakes Up Washington And The 50 States
August 19, 2018
It takes seven minutes for Kabbage to approve a small-business loan. “The reason there’s so little lag time,” says Sam Taussig, head of global policy at the Atlanta-based financial technology firm, “is that it’s all automated. Our marginal cost for loans is very low,” he explains, “because everything involving the intake of information – your name and address, know-your-customer, anti-money-laundering and anti-terrorism checks, analyzing three years of income statements, cash-flow analysis – is one-hundred-percent automated. There are no people involved unless red flags go off.”
One salient testament to Kabbage’s automation: Fully $1 billion of the $5 billion in loans that it has made to 145,000 discrete borrowers since it opened its portals in 2011 were made between 6 p.m. and 6 a.m.
Now compare that hair-trigger response time and 24-hour service for a small business loan of $1,000-$250,000 with what occurs at a typical bank. “Corporate credit underwriting requires 28 separate tasks to arrive at a decision,” William Phelan, president, and co‐founder of PayNet—a top provider of small-business credit data and analysis – testified recently to a Congressional subcommittee. “These 28 tasks involve (among other things): collecting information for the credit application, reviewing the financial information, data entry and calculations, industry analysis, evaluation of borrower capability, capacity (to repay), and valuation of collateral.”
A “time-series analysis,” the Skokie (Ill.)-based executive went on, found that it takes two-to-three weeks – and often as many as eight weeks—to complete the loan approval process. For this “single credit decision,” Phelan added, the services of three bank departments – relationship manager, credit analyst, and credit committee – are required.
The cost of such a labor-intensive operation? PayNet analysts reckoned that banks incur $4,000-$6,000 in underwriting expenses for each credit application. Phelan said, moreover, that credit underwriting typically includes a subsequent loan review, which consumes two days of effort and costs the bank an additional $1,000. “With these costs,” Phelan told lawmakers, “banks are unable to turn a profit unless the loan size exceeds $500,000.”
According to the National Bureau of Economic Research, the country’s very biggest banks — Bank of America, Citigroup, J.P. Morgan Chase, and Wells Fargo—have been the financial institutions most likely to shut down lending to small businesses. “While small business lending declined at all banks beginning in 2008,” NBER’s September, 2017 report announces, “the four largest banks” which the report dubs the ‘Top Four’—“cut back significantly relative to the rest of the banking sector.”
NBER reports further that by 2010—the “trough” of the financial crisis—the annual flow of loan originations from the Top Four stood at just 41% of its 2006 level, which compared with 66% of the pre-crisis level for all other banks. Moreover, small-business lending at the “Top Four” banks remained suppressed for several years afterward, “hovering” at roughly 50% of its pre crisis level through 2014. By contrast, such lending at the rest of the country’s banks eventually bounced back to nearly 80% of the pre-crisis level by 2014.
That pullback—by all banks—continues, says Kenneth Singleton, an economics professor at Stanford University’s Graduate School of Business. Echoing Phelan’s testimony, Singleton told AltFinanceDaily in an interview: “Given the high underwriting costs, banks just chose not to make loans under $250,000,” which are the bread-and-butter of small-business loans. In so doing, he adds, banks “have created a vacuum for fintechs.”
All of which helps explain why Kabbage and other fintechs making small business loans are maintaining a strong growth trajectory. As a Federal Reserve report issued in June notes, the five most prominent fintech lenders to small businesses—OnDeck, Kabbage, Credibly, Square Capital, and PayPal—are on track to grow by an estimated 21.5 percent annually through 2021.
Their outsized growth is just one piece—albeit a major one—of fintech’s larger tapestry. Depending on how you define “financial technology,” there are anywhere from 1,400 to 2,000 fintechs operating in the U.S., experts say. Fintech companies are now engaged in online payments, consumer lending, savings and investment vehicles, insurance, and myriad other forms of financial services.
Fintechs’ advocates—a loose confederacy that includes not only industry practitioners but also investors, analysts, academics, and sympathetic government officials—assert that the U.S. fintech industry is nonetheless being blunted from realizing its full potential. If fintechs were allowed to “do their thing,” (as they said in the sixties) this cohort argues, a supercharged industry would bring “financial inclusion” to “unbanked” and “underbanked” populations in the U.S. By “democratizing access to capital,” as Kabbage’s Taussig puts it, harnessing technology would also re-energize the country’s small businesses, which creates the majority of net new jobs in the U.S., according to the U.S. Small Business Administration.
But standing in the way of both innovation and more robust economic growth, this cohort asserts, is a breathtakingly complex—and restrictive—regulatory system that dates back to the Civil War. “I do think we’re victims of our own success in that we’ve got a pretty good financial system and a pretty good regulatory structure where most people can make payments and the vast majority of people can get credit.” says Jo Ann Barefoot, chief executive at Barefoot Innovation Group in Washington, D.C. and a former senior fellow at Harvard’s Kennedy School. But because of that “there’s been more inertia and slower adoption of new technology,” she adds. “People in the U.S. are still going to bank branches more than people in the rest of the world.”
Barefoot adds: “There are five agencies directly overseeing financial services at the Federal level and another two dozen federal agencies” providing some measure of additional, if not duplicative oversight, over financial services. “But there’s no fintech licensing at the national level,” she says. And because each state also has a bank regulator, she notes, “if you’re a fintech innovator, you have to go state by state and spend millions of dollars and take years” to comply with a spool of red tape pertaining to nonbanks.
At the federal level, the current system— which includes the Federal Reserve, Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC)—developed over time in a piecemeal fashion, largely through legislative responses to economic panics, shocks and emergencies. “For historical reasons,” Barefoot remarks, “we have a lot of agencies” regulating financial services.
For exhibit A, look no further than the Consumer Financial Protection Bureau created amidst the shambles of the 2008-2009 financial crisis by the 2010 Dodd-Frank Act. Built ostensibly to preserve safety and soundness, the agencies have constructed a moat around the banking system.
Karen Shaw Petrou, managing partner at Federal Financial Analytics, a Washington, D.C. consultancy, is a banking policy expert who frequently provides testimony to Congress and regulatory agencies. She wrote recently that the country’s banking sector has been protected from the kind of technological disruption that has upended a whole bevy of industries.
“The only reason Amazon and its ilk may not do to banking, brokers and insurers what they did to retailers—and are about to do to grocers and pharmacies,” she observed recently in a blog—“is the regulatory structure of each of these businesses. If and how it changes are the most critical strategic factors now facing finance.”
Cornelius Hurley, a Boston University law professor and executive director of the Online Lending Policy Institute, is especially critical of the 50-state, dual banking system. State bank regulators oversee 75 percent of the country’s banks and are the primary regulators of nonbank financial technology companies. “The U.S. is falling behind other countries that are much less balkanized,” Hurley says. “Our federal system of government has served us well in many areas in our becoming a leading civil society. It’s given us NOW (Negotiable Order of Withdrawal) accounts, money-market accounts, automatic teller machines, and interstate banking. But now it’s outlived its usefulness and has become an impediment.”
Take Kabbage, which actually avoids a lot of regulatory rigmarole by virtue of its partnership with Celtic Bank, a Utah-chartered industrial bank. The association with a regulated state bank essentially provides Kabbage with a passport to conduct business across state lines. Nonetheless, Kabbage has multiple, incessant, and confusing dealings with its bank overseers in the 50 states.
“Where the states get involved,” says Taussig, “is on brokering, solicitation, disclosure and privacy. We run into varying degrees of state legislative issues that make it hard to do business. Right now we’re plagued by what’s been happening with national technology actors on cybersecurity breaches and breach disclosures. We are required to notify customers. But some states require that we do it in as few as 36 hours, and in others it’s a couple of months. We’ve lobbied for a national breach law of four days,” he adds, which would “make it easier for everyone operating across the country.”
Then there’s the meaning of “What is a broker?’” says Taussig, who as a regulatory compliance expert at Kabbage sees his role as something of an emissary and educator to regulators and politicians, the news media, and the public. “The definitions haven’t been updated since the 1950s and now we have wildly different interpretations of brokering and solicitation,” he says. “The landscape has changed with e-commerce and each state has a different perspective of what’s kosher on the Internet.”
Washington State is a good example. It’s one of a handful of jurisdictions in which regulators confine nonbank fintechs to making consumer loans. In a kabuki dance, fintech companies apply for a consumer-lending license and then ask for a special dispensation to do small-business lending.
And let’s not forget New Mexico, Nevada and Vermont where a physical “brick-and-mortar” presence is required for a lender to do business. Digital companies, Taussig says, would have to seek a waiver from regulators in those states. “Many companies spend a lot of money on billable hours for local lawyers to comply with policies and procedures,” Taussig reports, “and it doesn’t serve to protect customers. It’s really just revenue extraction.”
All such restraints put fintechs at a disadvantage to traditional financial institutions, which by virtue of a bank charter, enjoy laws guaranteeing parity between state-chartered and federally chartered national banks. The banks are therefore able to traverse state lines seamlessly to take deposits, make loans, and engage in other lines of business. In addition, fintechs’ cost of funds is far higher than banks, which pay depositors a meager interest rate. And banks have access to the Fed discount window, while their depositors’ savings and checking accounts are insured up to $200,000.
The result is a higher cost of funds for fintechs, which principally depend on venture capital, private equity, securitization and debt financing as well as retained earnings. And that translates into steeper charges for small business borrowers. A fintech customer can easily pay an interest rate on a loan or line of credit that’s three to four times higher than, say, a bank loan backed by the U.S. Small Business Administration.
Kabbage, for example, reports that its average loan of roughly $10,000 typically carries an interest rate of 35%-36%. It’s credits are, of course, riskier than the banks’. The company does not report figures on loans denied, Taussig told AltFinanceDaily, but Stanford’s Singleton says that the fintech industry’s denial rate is roughly 50 percent for small business loans. “Fintechs have higher costs of capital and they’re also facing moderate default rates,” notes Singleton. “They’re not enormous, but fintechs are dealing with a different segment. Small businesses have much more variability in cash flows, so lending could be riskier than larger, established companies.”
Even so, venture capitalists continue to pour money into fintech start-ups. “I’ve gone to several conferences,” Singleton says, “and everywhere I turn I’m meeting people from a new fintech company. One of the striking things about this space,” he adds, “is that there are lot of aspiring start-ups attacking very specific, very narrow issues. Not all will survive, but someone will probably acquire them.”
Contrast that to the world of banking. Many banks are wholeheartedly embracing technology by collaborating with fintechs, acquiring start-ups with promising technology, or developing in-house solutions. Among the most impressive are super-regionals Fifth Third Bank ($142.2 billion), Regions Financial Corp. ($123.5 billion), and BBVA Compass ($69.6 billion), notes Miami-based bank consultant Charles Wendel. But many banks are content to cater to familiar customers and remain complacent. One result is that there’s been a steady diminution in the number of U.S. banks.
Over the past ten years, fully one-third of the country’s banks were swallowed whole in an acquisition, disappeared in a merger, failed, or otherwise closed their doors. There were 5,670 federally insured banks at the end of 2017, according to the Federal Deposit Insurance Corp., a 2,863-bank, 33.5% decrease from the 8,533 commercial banks operating in the U.S. in 2007.
It does appear that, to paraphrase an old expression, many banks “are going out of style.” In recent years there have been more banking industry deaths than births. Sixty-three banks have failed since 2013 through June while only 14 de novo banks have been launched. In Texas, which is known for having the most banks of any state in the country, only one newly minted bank debuted since 2009. (The Bank of Austin is the new kid on the Texas block, opening in a city known as a hotbed of technology with its “Silicon Hills.”)
One reason there’s so little enthusiasm among venture capitalists and other financial backers for investing in de novo banks is that regulators are known to be austere. “If you’re a company in the U.S.,” says Matt Burton, a founder of data analytics firm Orchard Platform Markets (which was recently acquired by Kabbage), “and you tell regulators that you want to grow by 100 percent a year – which is the scale you must grow at to get venture-capital funding – regulators will freak out. Bank regulators are very, very strict. That’s why you never hear about new banks achieving any sort of scale.”
But while bank regulators “are moving sluggishly compared to the rest of the world” in adapting to the fintech revolution, says Singleton, there are numerous signs that the status quo may be in for a surprising jolt. The Treasury Department is about to issue (possibly by the time this story is published) a major report recommending an across-the-board overhaul in the regulatory stance toward all nonbank financials, including fintechs. According to a report in The American Banker, Craig Phillips, counselor to Treasury Secretary Steven Mnuchin, told a trade group that the report would address regulatory shortcomings and especially “regulatory asymmetries” between fintech firms and regulated financial institutions.
Christopher Cole, senior regulatory counsel at the Independent Community Bankers Association—a Washington, D.C. trade association representing the country’s Main Street bankers—told AltFinanceDaily that, among other things, the Treasury report would likely recommend “regulatory sandboxes.” (A regulatory sandbox allows businesses to experiment with innovative products, services, and business models in the marketplace, usually for a specified period of time.)
That’s an idea that fintech proponents have been drumming enthusiastically since it was pioneered in the U.K. a few years ago, and it’s something that the independent bankers’ lobby, whose member banks are among the most threatened by fintech small-business lenders, says it too can support. Treasury’s Phillips “has said in the past that he’d like to see a level playing field,” the ICBA’s Cole says. “So if (regulators) are going to allow a sandbox, any company could be involved, including a community bank. We agree with him, of course, because we’d like to take advantage of that.”
In March, 2018, Arizona became the first state to establish a regulatory sandbox when the governor signed a law directing that state’s attorney general (and not the state’s banking regulator) to oversee the program. The agency will begin taking applications in August with approval in 90 days, says Paul Watkins, civil litigation chief in the AG’s office. Watkins told AltFinanceDaily that he’s been most surprised so far by “the degree of enthusiasm” from overseas companies. With the advent of the sandbox, he adds, “Landlocked Arizona has become a port state.”
The OCC, which is part of the Treasury Department, may also revive its plan to issue a national bank charter to fintechs, sources say (EDITOR’S NOTE: This had not yet been implemented before this story went to print. The OCC is now accepting such applications) – a hugely controversial proposal that was put on ice last year (and some thought left for dead) when former Commissioner Thomas J. Curry’s tenure ended last spring. At his departure, the fintech bank charter faced a lawsuit filed by both the New York State Banking Department and the Conference of State Bank Supervisors. (Since then, the lawsuit was tossed out by the courts on the ground that the case was not “ripe” – that is, it was too soon for plaintiffs to show injury).
Taussig, the regulatory expert at Kabbage, reports that the Comptroller of the Currency, Robert J. Otting, has promised “a thumbs-up or thumbs-down” decision by the end of July or early August on issuing fintechs a national bank charter. He counts himself as “hopeful” that OCC’s decision will see both of the regulator’s thumbs pointing north.
The Conference of State Bank Supervisors, meanwhile, has extended an olive branch to the fintech community in the form of “Vision 2020.” CSBS touts the program as “an initiative to modernize state regulation of non-bank financial companies.” As part of Vision 2020, CSBS formed a 21-member “Fintech Industry Advisory Panel” with a recognizable roster of industry stalwarts: small business lenders Kabbage and OnDeck Capital are on board, as are consumer lenders like Funding Circle, LendUp and SoFi Lending Corp. The panel also boasts such heavyweights in payments as Amazon and Microsoft.
Working closely with the fintech industry is a “key component” of Vision 2020, Margaret Liu, deputy general counsel at CSBS, told AltFinanceDaily in a recent telephone interview. CSBS and the fintech industry are “having a dialogue,” she says, “and we’re asking industry to work together (with us) and bring us a handful of top recommendations on what states can do to improve regulation of nonbanks in licensing, regulations, and examinations.
“We want to know,” she added, ‘What the main friction points are so that we can find a path forward. We want to hear their concerns and talk about pain points. We want them to know the states are not deaf and blind to their concerns.”
The Underwriters – How A Small Team Is Turning Underwriting Into Big Business
March 13, 2018
A keen eye can spot a good deal. And for New York-based Central Diligence Group, an underwriting-focused company founded in 2015 by four partners, it has been a boon for business. The company has lately been providing its underwriting expertise to a wider variety of clients, including some outside the MCA space.
“We started to gear towards a more underwriting-centric model [where] a deal would come in, we underwrite it once, we assess the risk, we determine what box it would fall under and where it would qualify, and depending on what that pedigree of information [was], we would essentially [fulfill] the full underwriting [job,]” said Nick Gregory, one of the founding partners at Central Diligence.
Initially, the company provided underwriting services mostly to smaller funders, syndication brokers and ISO clients that service MCA merchants in the construction and trucking businesses, among others. But close to three years later, its roster of clients is far more diverse.
Over the past six to eight months, Central Diligence has been working with a west coast-based credit card processing company with a portfolio of over 100,000 clients, according to Andrew Hernandez, another Central Diligence partner. The credit card processing company has just built out its own MCA product, but they don’t have an underwriting team, which is where Central Diligence comes in. Hernandez said that this company, the identity of whom he could not disclose, just renewed its contract with them.
Another unique client is an institutional investor, with offices in New York and Dallas, that just formalized a new working relationship with Central Diligence over the last week to go beyond just underwriting and into the realm of funding and servicing. According to Hernandez, this client is looking to make investments in MCA at the higher end of the market.
“In our space, $50,000 to $250,000 is pretty easy to come by, but $250,000 to $1 million, not so much,” Hernandez said. “So they see that there’s a gap with small businesses…and they’re using us to do [due] diligence [on companies.]”
Finally, Central Diligence is finishing an agreement with another unconventional client, an overseas mortgage company with interest in MCA. According to Hernandez, it is looking to execute a kind of beta test in the U.S. and then take the business model to Europe if it works.
In addition to the four founding partners, who work as underwriters, there are four additional underwriters and two junior underwriters for a total of ten on staff.
Hernandez attributes these new opportunities to the reputation they have built in the MCA space, including the 10+ years of experience that each of the founding partners have.
“Because of our experience and history in the space, a lot of our relationships have been built because of our credibility,” Hernandez said. “That’s the most important.”
Banks Set Sights on Small Business Loans Under $100,000
December 13, 2017BOSTON – One of the oldest lenders in the nation had a hand in developing technology intended to enable banks to win back the small business loan market from alternative lenders.
A tech incubator at Boston-based Eastern Bank, founded in 1818, has spun off Numerated Growth Technologies Inc., a startup that developed an online platform designed to identify and contact small businesses eligible for loans of up to $100,000.
Numerated Growth, which was founded in March, developed its tech in Eastern Labs and has generated about $100 million of volume since 2015. The model, which features real-time approval, is based on the tact banks first took with pre-approved credit cards in the 1990s, Numerated CEO Dan O’Malley told AltFinanceDaily.
“We’re just taking the same rules and applying them here,” he said. “And by the way, that’s what customers want.”
Numerated Growth, which employs 26 workers, came out of stealth mode in May with a $9 million seed funding.
O’Malley, Eastern Bank’s former chief digital officer, said Numerated is now selling the platform to other banks but declined to disclose the specific number. The cost per bank depends on the number of loans being processed, he said.
The average business loan is $40,000 and they can be approved and funded within five minutes of the business completing the online agreement.
Numerated Growth’s real-time platform could be considered loan origination software on steroids. But such software essentially enables a bank to enter an applicant’s information into a digitized system to assist in the approval process. Alternative lending startups have been improving on that model for several years. Competitors in that space include nCino Inc., Decision Lender (Teledata Communications), PerfectLO and defi solutions, LoanCirrus.
But loan origination software is very crowded and startups are constantly launching to reduce the time it takes to approve a loan without increasing the number of defaults.
“Banks need to do things that are counter to each other,” David O’Connell, a senior analyst for the Boston-based Aite Group LLC, told AltFinanceDaily. “There’s a need to do a fast money transaction, but doing it diligently without making any bad loans.”
Combining the marketing and approval process is a credible approach because it keeps them on the same page in terms of targeting the most likely prospects. As a result, the number of “false positives” is lower, O’Connell said.
Instead of developing their own small business loan platforms, some banks are referring borderline borrowers to alternative lenders. But that can cause problems for the bank if the customer service doesn’t measure up to the bank’s standards and customers associate shoddy service with the entity that referred them, O’Connell said.
The best option is to develop in house. “Banks need to go as deep into the alternative lending market as they can with their own infrastructure and brand,” he said.
Because of its low value compared with other types of bank business, small business loan origination is one of the last remaining areas of banking to be targeted with innovation. “There’s not a huge price point,” said Kevin Tweddle, executive vice president for innovation and technology at the Independent Community Bankers of America.
Loan origination startups are trying to make such deals worth the bother. Yet the best tools tend to be developed by banking industry people because they understand the regulatory restrictions and integration factors, he said.
The goal of loan tech tools is two-pronged: make the approval process more efficient and make it convenient for borrowers. And so far, no software developer has risen above all the others to capture majority market share, Tweddle told AltFinanceDaily.
“It’s just too early; there’s too many of them still coming out,” he said. “We’re in the early innings of a nine-inning game.”
Market metrics
Banks can’t afford to ignore the demand for alternative lending tools.
In May, the University of Chicago’s Polsky Center for Entrepreneurship and Innovation reported that the alternative finance market slowed but continued to grow during 2016 in the United States, Canada, Latin America and the Caribbean. The market’s value reached $35.2 billion — a 23 percent increase compared with 2015.
More than 200,000 businesses used online alternative funding sources during 2016. In the United States, marketplace and peer-to-peer consumer lending accounted for the largest share of market volume with $21 billion in the U.S. last year, a 17 percent increase. Balance sheet business lending was the second-largest model in the U.S. with $6 billion originated, the report found.
In Latin America and the Caribbean, marketplace and peer-to-peer business lending was the largest alternative finance segment with $188.5 million last year, a 239 percent rise versus 2015.
The same principles fueling the car-sharing business are being applied to peer-to-peer lending. As a result, adoption is growing as people view the credibility of peer lenders on an equal level of traditional experts, said David Wong, senior director of the innovation and acceleration lab at the Chicago-based CME Group Inc.
“Whether P2P markets reach or exceed the size of the incumbent market platforms (ala Uber and Airbnb), or not, they are driving rapid innovation and new dimensions of competition across industries,” he said.
Early adoption
Industry observers agree that small business loans haven’t seen enough innovation from the banking industry because of its size compared with commercial lending and real estate deals. As a result, it has a long way to go to shorten the time it takes for approvals and improving the customer experience, O’Connell said.
“Banks that fail to embrace automation for their commercial lending lines of business will lose the valuable relationships, loan outstandings, and fee-based income abundant in the commercial and industrial market,” he said.
After the 2009 global financial crisis, bank regulations tightened and data sets were required to be available and analytics-ready, providing another compelling need for commercial loan origination systems, O’Connell said.
No dominant players have emerged because neither traditional banks nor alternative lenders have figured out the best approach that satisfies both the lender and the customer, O’Connell said.
“Businesses don’t want money right away but they do want a quick and easy process,” he said. “My data tells me that in addition to providing underwhelming turnaround time, no particular lender has an edge over another. Nobody has it right.”
At Numerated Growth, O’Malley said the “initial wake-up call” signaling that a change was needed came in 2013 when Eastern Bank noticed solid small business customers paying off loans from alternative lenders such as On Deck Capital Inc. and LendingClub Corp. The pattern suggested that there was an unmet customer need.
Numerated Growth’s platform is designed to enable banks to proactively aggregate the data they need to identify prospective borrowers instead of requiring business owners to collect the data and present it to banks, O’Malley said.
“We’re making the banks do the work,” he said. “The same process that transformed the credit card industry will transform the financial products industry.”
The Voice of Main Street – Small Businesses Share Their Experience With Non-bank Finance
October 18, 2017
If she hadn’t scored the $250,000 loan through Breakout Capital in 2015, Jackie Luo says, the commercial-software firm she heads in Baltimore could not have made the “strategic hires” and purchased the new server to support additional customers and maintain the company’s 30% growth rate.
“Without that infusion of capital” from the McLean (Va.)-based lender, says Luo, chief executive at E-ISG Asset Intelligence, the software solutions provider would have been hard-pressed to deploy the “bandwidth and capacity” necessary to meet burgeoning demand.
And demand there is. Luo says billing for her company’s services helping more than 100 businesses and government agencies improve operational efficiency by keeping tabs on multiple assets — human, financial and equipment — topped $1.5 million last year, up from $1 million in 2015. This year, moreover, E-ISG is on track to collect nearly $2 million.
Meantime, she says, the $250,000, 10-year note at 6% interest she obtained with the help of Breakout was both a good deal and convenient: she reports securing the financing in three weeks, compared with the six months that a commercial bank would likely have taken. In addition, she’s been able to forge a better relationship with Breakout than with a faceless financial institution.
“We are a small business,” she says, “and we’d be just one in a million at a big bank like Wells Fargo. They wouldn’t give us much attention.” With Breakout, Luo adds: “I have the freedom to make decisions about infrastructure investments without worrying about the short-term. And I don’t have to deal with people second-guessing me.”
Had she not gotten the financing, moreover, “I would not be able to pay myself,” she says. “I’d have to use my salary as working capital.”
Luo is not alone. Her company’s story of finding much-needed capital from a nonbank financial company is increasingly common. It has always been challenging for small businesses to obtain credit from a big bank — roughly a financial institution larger than $10 billion in assets. But the small and community banks that have been the lifeblood for small businesses have also been winding down their small-business lending as well, according to a March, 2016, working paper published by the Federal Reserve Bank of Philadelphia.
“As recently as 1997, small banks, with less than $10 billion in assets, accounted for 77% of the small business lending market share issued by commercial banks,” co-authors Julapa Jagtiani and Catharine Lemieux write in “Small Business Lending: Challenges and Opportunities for Community Banks.” However, the market share dropped to 43% in 2015 for small business loans with origination amounts less than $1 million held by depository institutions.
“The decline is even more severe for small business loans of less than $100,000,” they add, “where the market share for small banks under $10 billion declined from 82% in 1997 to only 29% in 2015.”
The Philadelphia Fed study notes that alternative nonbank lenders are filling a widening gap. “By using technology and unconventional underwriting techniques, many alternative lenders are competing for borrowers with offers of faster processing times, automatic applications, minimal demands for financial documents, and funding as soon as the same day.” And the Fed study finds that it’s likely that nonbank lenders, which are growing rapidly, are having a positive effect by “increasing the availability of credit, particularly to newer businesses that do not have the credit history required by traditional lenders.”
Meantime, the Small Business Administration reports that small businesses remain essential to the health of the U.S. economy. Businesses with fewer than 500 employees account for 55% of overall employment in the U.S., according to the agency, and are responsible for creating two out of every three net new jobs. Which means that alternative funding sources — which do not, it is worth noting, depend on depositors’ money, as banks do — are playing an increasingly important and largely unrecognized role in the country’s economic fortunes, notes Cornelius Hurley, a law professor at Boston University and executive director of the Online Lending Policy Institute. “They’re still a small percentage of the overall lending picture,” he says of nonbank financial companies, “but they’re an emerging force and a lot of small businesspeople certainly depend on them. If they disappeared tomorrow,” he adds, “a lot of businesses would be wiped out too.”
To find out what is happening in the real world, AltFinanceDaily interviewed small business owners around the country: among others, a Houston sports medicine provider, a Connecticut restaurateur, a Midwestern truck hauler, and a Maryland hardware-store owner. Some recounted being shunned by banks because of poor credit while others registered unhappiness with traditional financial institutions as inconvenient and impersonal. While some who turned to alternative lenders admitted they would have preferred not to be paying dearly for borrowing or for cash advances, most said the tradeoff was worth it.
The existence of alternative lenders has made it possible for these businesspeople to meet payrolls, pay contractors and suppliers even when business was slow or billings stalled. Customers with alternative funders – in addition to Breakout’s customers, AltFinanceDaily spoke to clients of Pearl Capital Business Funding and Merchants Advance Network– also reported that they were able to purchase or replace equipment and maintain inventory, hire additional employees and accept new customers, pay for upkeep and upgrades of their business’s physical plant, and make other expenditures necessary to keep operations up-and-running.
Jason, for example, who heads a family business in Louisiana manufacturing and selling pesticides (and who asked to be identified only by his first name), reports that his suppliers began demanding that he pay in advance for chemical feedstock after he took a “financial hit following a nasty divorce.”
The roughly $1 million (annual sales) business — which was started by his parents back in 1960 — furnishes chemicals mainly to cotton farmers and homeowners in Louisiana and Texas, most of whom purchase the company’s products through feed and hardware stores. Jason says he spends a substantial amount of time on the road handling sales and distribution.
His suppliers not only require him to pay for the chemicals upfront but, following his divorce, they now insist upon larger purchases as well. Following the departure of a previous lender, he says, Breakout stepped in with an $80,000, 12-month loan in March, 2016, which he was able to repay within six months. This was followed by a $60,000 borrowing in March, 2017, which he again paid down early – in 90 days, Jason says – and the account manager at Breakout “went to bat for me and gave me an additional discount for early payment.”
Had Breakout not provided external funding, Jason says, he would have been “wiped out.” He adds with feeling: “It would have meant the end of me.” And sinking the fortunes of the company would also have spelled job losses for five employees, including both his son, who works part-time, and his sister, the business’s co-manager. “Now I’m out of the hole,” he says.
In Houston, Anna, co-owner of a physical therapy and sports medicine concern, was interviewed in August just before Hurricane Harvey loomed on the horizon. “We’d been around for four years and growing rapidly,” she says, asking to be identified only by her first name, and “we couldn’t keep up with the growth.”
Anna recalls that a few years ago (she is vague about the exact dates) the company needed $50,000 to $60,000 to add equipment and staff to meet the growing demand. Because of some “ups and downs” in her business and credit history, however, a bank loan was out of the question. “My credit wasn’t the best,” Anna says, “and we had not been in business the five-to-seven years that most banks want.” She began casting about for financing and quickly saw that factoring would not be a suitable choice for a business like hers, which depends heavily on third-party payments from health insurance providers. “Companies using factoring are taking money based on credit card payments,” she says, “and we’re not a restaurant or a bar. So we can’t pay a percentage of every transaction.” Typically, she notes, getting paid by an insurance company involves a “90-day turnaround.”
Anna went online, did some research, and talked to three or four nonbank lenders searching for the “right kind of company.” That led her to Breakout. “What I really liked about them is that they did a lot of due diligence on our field,” she says. “They did their homework, asking us: ‘What are your collections and payroll? How much outstanding debt do you have?’ They also asked to see our actual bank statements.”
Despite the high level of due diligence that Breakout performed, Anna says, it only took “maybe three or four days” for the loan to be approved and for the money to land in her bank account. Before long, she was off to the races. With the added capital, she hired three more employees – bringing the employee headcount to 18 — purchased more gym equipment, made payroll, and paid off miscellaneous expenses.
The added capacity and fortified staff, meanwhile, enabled the company to “almost triple its volume,” the entrepreneur says. And not only did the financing “put me in a good financial place,” Anna adds, but after repayment, Breakout made it possible for her to effect a merger with a competitor by approving a second loan for about $30,000. “The best thing about Breakout,” she says, “has been the communication. One time I did need to make a payment two or three days late. But I just called (the account manager). I was very surprised because these kinds of companies are seen as a last resort. But it was like they were investing in us.”
John Speelman, who owns Poolesville Hardware in Poolesville, Md., can boast a raft of five-star Yelp reviews online. “Extremely helpful and friendly service, surprisingly good selection (and) the complete opposite of a big box hardware chain,” raves one customer. “It is so rare to find a well-stocked store that has helpful personnel—makes this store a real gem!” says another fan.
For his part, Speelman attributes much of his hardware store’s popularity to the financing arrangement that he’s been able to work out over the past eight years with Merchants Advance Network, a Fort Lauderdale (Fla.)-based alternative funder. “It takes money to make money,” is one of his pet aphorisms.
Located roughly 35 miles west of the White House, the hardware store boasts a clientele who tend to arrive in BMW’s rather than the pickup trucks that predominated a decade or so ago in this exurban community of some 5,000 denizens. Whatever their class background, though, they’re looking for items that are not a good match for an online purchase. “People don’t buy a toilet plunger, a can of paint or picture-hanging stuff online,” Speelman says. “Because they want to do that today,” he says, “they won’t order with Amazon.”
“One industry that has not been impacted” by online merchandisers, he adds, “is the garden center. They’ll buy a garden hose, weed killer and seeding,” he explains of his regular customers. “And light bulbs” while they’re there, he adds. “We’re like the 7-Eleven — a convenience store.”
To guarantee that convenience, Speelman pays cash-in-advance for most of his inventory, and banks have not been helpful. He contrasts the relationship he has with Michael Scalise, the chief executive at Merchants Advance, with loan officers at commercial banks. “It’s hard to get a loan for anything in retail,” he says. Never mind that he maintains “a high credit rating and I never bounce a check,” he went on. “There are no more local banks. At M&T Bank, all the managers I knew are gone and there’s always a new teller. The banking industry is a revolving door.” So he opts for capital from Merchants Advance “when I need 30-40-50 grand in a day, I use Mike’s money” even though the cost can be as steep as 25%, he says. If he doesn’t have something in stock – specialty items like ammo boxes, a Sugarplum tent, as many as 32 packs of size D batteries, metric measuring tapes – he can put in a special order with suppliers. But he prides himself on the full panoply of wares on his shelves. “You can’t sell from an empty cart,” is another of his favorite sayings.
Lori Hitchcock, who also draws capital from Merchants Advance, is manifestly displeased with the banking industry. She’s an owner with her husband of Hitchcock Trucking, the couple’s 60-year-old family business, which is located on a ten-acre tract in Webberville, Mich., situated between Detroit and Lansing, the state capital.
Of her experience with banks, Hitchcock says: “At the time we went with (Merchants Advance), banks weren’t lending. And they’re still not lending. We’re considered high-maintenance and high-risk. Banks don’t want a bunch of trucks” should they foreclose on a loan, she observes. “If you’re a farmer, they can take all your land. Great! In this crazy world you live in, it’s hard to get the banks interested.”
The Hitchcock family’s fleet of ten Peterbilt semis hitch up to more than 20 trailers and truck bodies – flatbeds, dump trucks, vans, and refrigerated trucks or “reefers” – and haul grain, sweet corn, onions, celery, fertilizer, and soft drinks across the Midwest. Most recently, she says, the family business took out $80,000 from Merchants Advance to expand its fleet and buy another reefer trailer and a backhoe. “Out here in the country, you always need a backhoe,” she says.
To satisfy her lender, the company makes daily ACH payments. “I’m not going to lie and say that things aren’t tight,” she says. “It is a burden. You just have to have constant cash-flow – which we do have. And it’s important to have good relationships…I can usually tell three weeks in advance if (making payments) is going to be challenging. So it all comes down to being loyal to people.”
Whatever the struggle to keep up with debt payments, it beats using her own money. “My husband and I are raising a family,” Hitchcock says, “and it’s nice having the cash so you’re not putting your personal earnings into the company.”
In Manchester, Conn., a stone’s throw east of Hartford, Corey Wry says that he wouldn’t be able to operate his two, highly rated restaurants just off Interstate 84 – Corey’s Catsup & Mustard and Pastrami on Wry – if he didn’t have funding from Pearl Capital, a New York (N.Y.)-based alternative funding company. A graduate of Johnson & Wales University in Providence, a restaurant-and hotel school, Wry describes himself as “a culinary guy” whose first love is serving food that’s both innovatively prepared and delicious. He candidly admits that his credit hit “rock bottom” after a confluence of untoward events.
Last year, a third restaurant in town, Chops & Catch, that he and some partners had “bootstrapped” had to shut down after six years of operation. Despite generally favorable reviews for such creative fare as the “lobsterburger,” the surf-and-turf themed restaurant was a money-loser. He was also struggling to pay off credit cards. And he’d been late more than once on car payments.
At the same time, Wry was in the process of moving Pastrami & Wry — a deli whose moniker is wordplay on his last name – to a new location. Both the general contractor and electrician were “over-budget” on that project, he says. Meanwhile, Catsup and Mustard, a hamburger spot, needed to be spruced up. Says he: “It was getting busier and the original seats were worn. I had a hole in a booth big enough to swallow someone.”
He approached a few banks for a loan and “it did not seem like it was going to happen,” he says. “Then I got a cold call from one of these financiers. Some of them had super-high rates. When you have bad credit but need to make capital improvements you do what you have to do.”
He’s accessed more than $100,000 from several alternative funding sources, including Pearl – from which he reports getting merchant cash advances for $30,000. But hard as it is to meet the obligations, which typically require a daily ACH payment, the financing has made renovating the burger place possible. Moreover, he’d still be on the hook with plumbers and other contractors – all of whom are local tradesmen and would likely be paying him personal visits until they were repaid — for the relocation of Pastrami & Wry.
“Business is good,” says Wry, who at 40 is single, often works 15-hour days, and says that he doesn’t have time for a girlfriend, much less a wife and family. “I’ve still got $3,200 on the books with the electrician,” he adds, “which means that I won’t be able to purchase a deli slicer. I have to plan these things out…”
James McGehee, a partner at the boutique accounting and tax-preparation firm McGehee, Davis & Associates, which is located in the Denver suburb of White Ridge, reports that the firm took a merchant cash advance from Pearl Capital, among other financiers, to bridge the gap between tax season and the rest of the year when billings invariably diminish. “Our overhead is pretty high,” he explains. “We’ve added two employees. We’ve been expanding on what we were doing, adding tax and accounting clients.”
A very conservative, sober-sounding man, McGehee explained that his credit was nonetheless “trashed” after he suffered from health problems five years ago. “Major stuff,” he says, “it was open-heart surgery.” The medical ordeal meant that he could not work for a time and had trouble paying his bills. “Some family members helped me through the mortgage and utilities payments and I ended up in arrears and in credit card debt,” he says.
All of which made an alternative source of financing his firm’s only option. “I’m not sure how we heard about Pearl,” he says. “I think they just happened to call. We took out [$11,000]. It was not a huge amount. We also borrowed $9,000 from another entity. We paid it all back during tax season. The terms were pretty steep,” McGehee adds.
“But when you need the money for cash-flow,” he explains, “you just absorb it. You grin and bear it. When you need the money, you need the money.”
How LendingTree and SnapCap Crossed Paths
September 25, 2017
LendingTree in recent days revealed the acquisition of online platform for small business lending SnapCap’s non-lending assets in a $21 million deal, including $12 million upfront and $9 million in contingency payments. The deal gives online lending marketplace LendingTree more scale in the small business market ahead of what could shape up to be recovery in 2018.
J.D. Moriarty, LendingTree Chief Financial Officer, told AltFinanceDaily that SnapCap’s 20 employees will stay in Charleston, and the brand will remain intact. “For them, their employer just got both a whole lot more stable and scalable. As with anything we acquire, we will keep the brand in place and test it to see what is most effective,” said Moriarty.
LendingTree has been connecting small businesses with lenders since 2014, and the latest deal reflects a strategy to add scale.
“It’s a bit of what you might call an acqui-hire. LendingTree is growing quickly and scaling. We hired a really good team in SnapCap that will basically be our way of scaling in small business,” said Moriarty.
LendingTree is lifting its profile in the small business segment amid an industry transformation that is thinning the pack and has seen some players shifting gears entirely.
“Small business lending might do very well in 2018. And we are investing now to grow the base of our business. On a macro level, we expect our business to do well in 2018 regardless. But if small business lending recovers and suddenly you see companies like OnDeck doing well, we will benefit from that. But we position any acquisition assuming that the market doesn’t recover and the deal still must be attractive to us, even if the market continues to struggle.”
Moriarty went on to provide a glimpse into the financial structure of the deal.
“Last year, SnapCap set up a special purpose vehicle (SPV), which was funded by outside capital with which they would actually make loans. There’s a balance sheet aspect to that business we are not acquiring. But it was a small percentage of their business,” Moriarty explained.
Inside the Marketplace
LendingTree is largely known as a marketplace for mortgage loans where they represent about 50 percent of comparison shopping for mortgages. “That is how people think of us for sure,” said Moriarty. The revenue drivers have expanded in recent years, however.
For instance, mortgages used to account for 90 percent of revenue. Today, based on the most recent quarter, less than half of business originates from mortgages while the balance is in personal loans, credit cards, home equity, small business and auto loans.
LendingTree is no stranger to acquisitions, having done five such deals since June 2016. “What we’re trying to do is to build other marketplaces where people want to comparison shop,” said Moriarty.
But growth by acquisition is not their only growth strategy. “We’re growing period,” said Moriarty, adding that organic growth has been very good but small business in particular is a tough market to scale.
One of the recent deals, the acquisition of CompareCards a year ago, led them to gain market share in the credit card space. That deal also led LendingTree to SnapCap. CompareCards founder and president Chris Mettler and his wife own more than a one-third equity stake in SnapCap.
“SnapCap was introduced to us through Chris. He’s now a LendingTree employee. The introduction was absolutely from him. But it’s very consistent with our strategy, which we have conveyed to the market. We will continue to make small, accretive acquisitions and that will help us to gain scale in certain businesses and diversify,” said Moriarty.
Hybrid Model
While LendingTree and SnapCap both facilitate loans to the small business community, they take slightly different approaches to get there. “SnapCap’s core business is not unlike ours, meaning they are essentially finding high quality leads for lenders,” said Moriarty.
SnapCap uses a concierge model in which customers have a broker experience. They talk to someone at the company who helps them to identify a lender.
“LendingTree will be bigger and more scalable through both the traditional LendingTree model and SnapCap’s concierge approach. We will simply be able to serve lenders more effectively. If I’m a lender making small business loans, this is a pretty good thing.” he said.
SnapCap, meanwhile, is looking forward to the very same scale that LendingTree is targeting.
“The mission of SnapCap has always been to serve small business owners with access to funding. LendingTree’s leading online lending marketplace combined with SnapCap’s successful concierge model will enable us to serve an even wider range of business owners,” Hunter Stunzi, co-founder of SnapCap, told AltFinanceDaily.
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.
Transcript of CFPB Hearing on Small Business Lending
May 10, 2017Transcript of the CFPB hearing from earlier today courtesy of: https://www.captionedtext.com/client/ViewTranscript.aspx?EventId=3263140&ParticipantId=ad67099c-16c3-40cf-885a-7e0a1468a30f
Event ID: 3263140
Event Started: 5/10/2017 1:50:29 PM ET
Please stand by for real time captions.
We are delighted that you were here and we are delighted that you are in the city of Los Angeles. We are grateful to have the Honorable Mike fewer. City attorney for the city of Los Angeles. The Honorable Commissioner Jan Lynn , Commissioner of business oversight and California’s Attorney General. We are grateful to be representatives of the small business Association and the Federal Reserve.
That we tell you about what you can expect today. You will hear from city attorney Mike fewer and then Commissioner Jan Lynn and the attorney general. You will hear from the consumer bureaus director Richard Cordray. Following the remarks David Silberman the acting deputy director and associate director to four markets and regulations will frame the discussion with the panel of experts. There will be an opportunity to hear from members of the public. Today’s field hearing is being live streamed at Today’s field hearing is being live streamed@consumerfinance.gov.
Let’s get started. Los Angeles city attorney Mike Fuehrer has long been one of California’s lighting — leading lawmakers. As his chief since July 2013. He has brought an innovative problem-solving focus to the office that combines tough and effective execution with creative initiatives to improve public safety and the quality of life throughout the city. His efforts have also sparked change throughout the state and the nation. Under the city attorney’s broad authority Mister fewer has secretly — frequently secured. He announced in historic settlement against Wells Fargo for opening unauthorized customer accounts. He and the CFPB joined forces to get restitution for its customers, put protections and place and in penalties. Previously he served as majority policy leader and chair of the judiciary community worry — he authored the homeowners Bill of Rights. You may now have the floor. [ Applause ].
Thank you. The introduction was longer than remarks. That was generous. Thank you. I want to on behalf of all of us welcome our director Richard Cordray to our city. Just a word about the collaboration. I was extremely proud of the work of our office, some of whose lawyers are here with us today. In pursuing the Wells Fargo littered — litigation. That aesthetic evolution — catalytic affect. And want to underscore, there is no way that litigation could have had the profound impacted has had without the deep collaboration with the consumer financial protection Bureau under Mister Cordray’s leadership. We also worked with the leader of the office of currency. This collaboration was essential. In that regard, I must say while we’re here in Washington, their efforts underway to either diminish the authority of the CFP be or eradicated altogether. I have the opportunity to be in Washington including discussing how we should work together to ensure the continued viability and strength of the CFPB. Director Cordray leadership has been remarkable and it’s been instrumental in protecting consumers across the nation. I would say, anybody who cares about consumer protection should be standing up and loudly denouncing efforts to undermine the CFPB. I did a radio interview this morning cuppa I did get some applause. [ Applause ] that applause was for Richard and his team. I was interviewed this morning on the radio and I was asked, the purpose of which was not about this but the commentator shifted to what was happening here today and said to me, do you think in light of what’s happening in Washington, the attacks on the CFPB , is a Trump administration to business friendly? Given this is the focus on small business, I want to focus on that. We should all be business friendly. That is a key role for government to play. Being business friendly does not mean protecting businesses violate the rules, at the expense of consumers. Being business friendly does not mean protecting businesses who violate the rules who are in competition with those who play by the rules. That’s what being business friendly means, supporting businesses who are playing by the rules to do better. Which is why I am pleased to be here, as we focus on access to capital and other issues that focus on small businesses, especially those in disadvantaged areas of our nation. With this is my special assistant, Capri Bad Axe. — Mattox. Capri is in charge of my office outreach to the business community. We are working to connect businesses that are trying to improve and expand and hire more people, especially in disadvantaged areas to capital and training on how they could do better. I am eager to hear what more we need to know and what more we need to do, to assure that small businesses can succeed, especially in neighborhoods of our city and our nation, where we should be compelled to do better. Everybody who wants a job should have access to a job. Our small businesses are the way that we will assure that an America, we are a nation where the dignity of work is elevated to a place where it needs to be. Thank you Mister Cordray. You will be hearing from two other partners with who I am extremely proud to share this room today. I am eager to learn more today so we can do better. Thank you very much.
Map grant — [ Applause ]
Thank you for your remarks. Our next speaker is Jim Leonard 01. — Commissioner Jan Lynn . She was appointed in 2013 and previously’s served as the Commissioner as the Department of corporations appointed by the Governor in December 2011. Part two that Ms. Selin was that — Commissioner Owen was a manager at Apple ink from 2009 two 2010. Vice president at J.P. Morgan Chase, state director of government industry affairs at Washington Mutual from 2002 through 2008 and executive director of the California mortgage bankers Association from 2000 until 2002. She also has extensive experience in public service. She was acting commissioner of the Department of financial institutions from 1999 until 2000 after serving as deputy commissioner from 1996 to 1999. She also said as exactly director of California investment network program after serving several years as consultant to the Senate, state banking community. Commissioner Owen you have the floor. [ Applause ]
Every time I hear that introduction, I think holy moly I am really old. I will spend a few minutes to think my partners, Mr. Feuer, the attorney general and my partner in crime Director Cordray. I want to give you some data. We have done some data collecting. We get some information that I think is important for you to look at as we discussed this issue the Department of business oversight overseas over 360,000 licensees from banks, credit unions, mortgage lenders, pay day lenders, securities brokers, dealers and investment advisers. Also, we supervise franchisees and we approve proposed state securities permits. Our job is daunting, exciting and rewarding. With my partners, it is truly a challenge I wake up and want to do every morning. In 2015, California’s GDP surpassed $2.5 trillion. Hence, were the six largest economy in the world. That same year our non-bank licensees reported to us that they originated 400 that they originated 412 that they originated $412 billion in loans, in California. That’s more than the total of 35 states GDP. These non-bank lenders make more than 78% of their loans to commercial enterprises. Most of which are small businesses. California is home to more than 3.8 million small businesses. These firms employing 50% of California’s workforce and drive our economy. Our small businesses are respected globally for their innovation and their fortitude. The vast majority employee 500 or fewer workers and collectively make up 99% of all the businesses in California. Two years ago the U. S. small business administration reported California leads the country in several different categories. The number of small business employees, 6.5 million. The number of self-employed individuals, 2.5 million. The number of self-employed minorities, 1.1 million. The number of self-employed women, 900 973,000. According to the U.S. Census Bureau, California leads the nation with 1.6 million minority owned businesses. LA County leads the nation with 55% of local businesses, minority owned, more than half of those by Latinos. California is also proud to be the nation’s greatest number of women owned businesses, nearly 1.5 million. Women owned firms employing more than 1 million people and generate more than 200 222 $222 billion in annual revenue. Women-owned firms is larger than the number of employees, because many are one-woman ventures and many women owned more than one firm or multiple firms. To assist them, the governor created an office to service California’s single point of contact for economic development and job creation efforts, especially for small businesses. Affectionately, this department is called goby is. — Last week to Governor proclaimed May to be the small business month in California. California’s is the nation’s leading market for online landing. We are home to headquarters for several most prominent players in the sector. Lending club, Prosper, a firm, funding Circle and others. I bring up online lending because from 2010 until 2014 companies reported online consumer and small business financing activity increased over 900% to $2.3 billion. State regulators are getting a bad rap. The industry says that a state-by-state regulatory system is too costly and carries too much compliance risk and inhibits innovation. State regulators do not totally agree with these criticisms. I will tell you, we do acknowledge the companies have some legitimate concerns about the state system and we are moving to address them. As the state’s main financial regulator, let me tell you what I expect from the sector as it stands today. In many ways, we treat them no different than any other licensee we expect the same from all of our licensees, compliance transparency accountability, sound financial practices and most important, fair and honest treatment of our consumers. No one should think that they can gouge small business borrowers are any consumers, because they operate online. I know the CFPB agrees that regulators will work hard to keep up with technological innovations and consumer protections will be as sharp and clear as ever. As the bank regulator or financial services regulator, I am committed to serving the needs of California’s small business community and to being a partner to small business stakeholders in California. We welcome your feedback. Call us, call me. Let me know what you are thinking and what we can do to help. Thank you. I look forward to a fruitful day. [ Applause ]
Thank you, Commissioner Owen for the generous remarks. Our next speaker is Xavier Becerra. He is the 33rd attorney general of the state of California and is the first Latino to hold the office in the history of the state. The state’s chief law enforcement officer, Attorney General Xavier Becerra has decades of experience serving the people of California through appointed and elected office. He has fought for working families, the vitality of Social Security and Medicare programs, and issues to combat poverty among the working poor. He is also championed the states economy by promoting and addressing issues impacting job generating industries such as healthcare, clean energy, technology and entertainment. Attorney General Xavier Becerra previously served 12 terms in Congress as a member of the U. S. House of Representatives. While in Congress, Attorney General Xavier Becerra was the first Latino to serve as a member of the powerful committee on Ways and Means. He served as chairman of the house Democratic caucus and was ranking member of the Ways and Means subcommittee on Social Security. Prior to serving in Congress, Attorney General Xavier Becerra served one term in the California legislature as a representative of the 59th assembly District in Los Angeles County. He is a former Deputy Attorney General with the California Department of Justice. The attorney general began his legal career in 1984, working in the legal services offices representing the mentally ill. Attorney General Xavier Becerra, you have the floor. [ Applause ]
I have to make sure I take her wherever I go. I love the way she pronounces my name, Xavier Becerra. I don’t even say it that well. I know that Director Cordray hired her for more than the fact that she can pronounce my name . We are thrilled that you are here representing us on behalf of the consumer financial protection Bureau on the West Coast, the forward leaning movement of America. I want to say a few things, I have to cheer the man who is our quarterback when it comes to providing consumers, whether you are a small business person, an immigrant family trying to navigate your way through this country or you are a recent graduate from college, hoping to open up your rings. Richard Cordray is our quarterback. We should do everything we can to make sure he can take the team down the field and scored touchdowns all of the time for the men and women who want to make America work. If Richard Cordray succeeds as our director of June 20, he is keeping doors open and that’s all we need. You talk to almost anyone and all they want to know, is there some predictability behind what they will do whether it’s taxes, regulations, the business climate — if they have a way of knowing how to get there they will do it. It’s the uncertainty that causes the real difficulties for small businesses. Richard Cordray is a guy who make sure that that door remains open and we can all shoot for that point on the horizon. We have an obligation to help our quarterback comic he has been spectacular even under some of the most difficult circumstances. I am thrilled that Mike Feuer is my partner in crime. That word is used often, in this case it is really true. I love committing crime with Mike Feuer. He knows how to do it well. We are very fortunate in Los Angeles to call him our city attorney. He is served us in so many different places. He does it so well. Whenever I am with Mike Feuer, I feel like the marathon runner that just came in the top 10 and Mike is the Ironman contestant who does the triathlon like nothing and just passes me by. It’s hard to keep up with them, he is the best. Commissioner Owen, thank you for what you do for giving us the perspective so that we need to know why California is so important not just to us but to the nation. You have made it clear why the numbers count, but why the people make the numbers count. I just want to mention the micro, it is this, it’s you if you have a business, if you do spend — defend small businesses or people like my parents who started their own business, not knowing what they were getting into. My father had a sixth grade education my mother did not come until she was a teenager. They did it. They knew the micro of starting a business. They bought a small house and they rented it and then they bought another and rented it. Before you know it, they were making more in retirement than when they were both working. I consider myself a small businessperson. Island for my parents. I know this, I don’t have time to navigate everything going on in the business world. It’s like “Ghostbusters”, who are you going to call? When it comes time to making sure your business is doing okay, Consumer Financial Protection Bureau and Richard Cordray is who you call. We need them to be there for us every step of the way. The Attorney General’s office will do everything to partner with the consumer financial protection Bureau with our partners at the state level, Commissioner Owen and all those at the state who work on behalf of the people and with our city attorneys and district attorneys who try to protect does daily. We need your help. This is where these types of workshops and forums are so important. The get to connected to the people who are willing to help. My job is to enforce the laws for 40 million bill bill — people in the state of California. We have a very robust consumer protection division in the Attorney General’s office. One of the people who are just hired to be my special assistant, dealing with the issues involving consumers is Ellie Bloom, whom I stole from the Consumer Financial Protection Bureau. Yes. She is here. I also have Alyssa I had of the external affairs, so we can reach out to people and find out what you need us to know. Under the Constitution of the state, I have the authority to begin independent investigations of any activity where Californians are impacted and harmed. I intend to use that authority to the hilt. On behalf of the people of this country, who are like my parents, who worked very hard and were able to establish a business and now I’ve done so much to make it — in the past college was unknown to the family and to make it in the past, that forever we will only dream of being able to do things for our kids and make it something that’s in the past to believe like my father as a young man could not walk into a restaurant because of a sign that said no dogs or Mexicans allowed. That is all in the past. California’s forward leaning. One of the reasons we have succeeded is because we do not stop, we do not look back, we understand this is a tough place to do business. Our environment makes it difficult for businesses to establish her, our air and water are tough to keep clean. We must impose requirements on the gasoline we pump into our cars on how much we can put into this LA basin before gets a polluted your kids cannot go out and play or they get asthma. 40 million people, that is tough to organize. All of that we do, we’re high-cost state and we are high quality as well. That requires a lot of effort on the part of all those willing to work with quarterback Richard Cordray to make sure we keep those doors open. That’s our job. No that you got the Chiefs on form is — chief law enforcement officer of Los Angeles with you, the person the Governor has appointed to make sure businesses have the opportunity to have those doors open and Commissioner Owen with you. Know that the Attorney General is willing to work with them and with you but most importantly, I will do everything I can to make sure that regardless of Washington we don’t abandon our quarterback at the can — Consumer Financial Protection Bureau . We know what success means when you have Richard Cordray fighting for you. We won’t stop scoring and we will work with Richard Cordray to make sure everyone in America benefits the way California has by having a forward leaning policy in the way we do with consumer issues and help our people. Thank you, Director Cordray. They think all my colleagues and I thank you for knowing it was important to be here this morning. Have a great day. [ Applause ]
Thank you, Attorney General Xavier Becerra. I am now extremely pleased to introduce Richard Cordray. Prior to his current role he led the CFPB’s enforcement office, he served on the front lines of consumer protection as Ohio’s Attorney General. In this role he recovered more than $2 billion for Ohio’s retirees, investors and business owners and took major steps to protect its consumers from fraudulent foreclosures and financial predators. Before serving as Attorney General, he served as an Ohio State Representative, Ohio Treasurer and Franklin County Treasurer. Director Cordray . [ Applause ].
Thank you. My football career peak in the seventh grade, I do remember Vince Lombardi saying that when the going gets tough the tough get going. It’s great to be here with three of our closest and most productive and for me personally, our most dear partners anywhere in the country. I think them all for being here. I think them and their teams for the work they have done, are doing and will continue to do with us to stand up for Americans who expect and deserve the right kind of support and protection for their government officials. Thank you. Thank you all for coming it’s good to hear — be here today the Consumer Financial Protection Bureau is announcing an inquiry into ways to collect and publish information about the financing credit needs of small businesses. Especially those owned by women and minorities. We are aware of the role they play in the our lives. Small businesses dropped the — drive the economic engineering. It is estimated they’ve created two out of every three job since 1993 and they now provide work for almost half of all employees in the private sector. We perceive large gaps in the public’s understanding of how well the financing credit needs of these entrepreneurs are being served. As you probably know, the Congress provided the consumer bureau with certain responsibilities in the area of small business funding. There is a strong logic behind this. When I served as the Ohio Attorney General we recognize the need to protect small businesses in nonprofits by accepting and handling complaints on their behalf, just as we did for individual consumers. And approach that proved to be very productive. The line between consumer finance and small business finance is quite blurred. We heard that at a roundtable this morning with community and consumer advocates. Or than 22 million Americans are small business owners and have no employees. According to data from the Federal Reserve, almost 2/3 of them rely on their business as their primary source of income. This is embedded in many people’s lives. Congress has charged the consumer bureau with the responsibility to administer and enforce laws including the equal credit opportunity act. Unlike others, it governs not only personal learning but some commercial lending as well. We have now conducted a number of supervisor examinations and small business lending programs at financial institutions. Through that were learning about the challenges they face in identifying areas where risk may exist and were assisting them developing the property to manage that risk. In the Dodd Frank Wall Street Reform and consumer priest — protection act Congress took a further step to learn more about how to encourage and promote small businesses. To determine how well the market is functioning and facilitate enforcement of the fair lending laws, Congress directed the Bureau to develop regulations for financial institutions that went to small businesses, to collect information and report. The request for information will be released and asks for feedback to help us understand how to carry out this directive in a way that is careful, thoughtful and cost-effective. We have considerable enthusiasm for this project. In my own case, I’ve seen how small business financing can have a number — economic impact. I will tell you a story, when I served as a treasure of Ohio, we had a reduced interest loan program to support job creation and retention by small businesses. The way the program worked was that the state could put money on deposit with banks at a below market rate of interest in this deposit will send link to the same size loan to a small business and a correspondingly below-market rate. This link to posit has been authorized more than 20 years earlier but it had fallen into the disuse. At its core, the program maintenance. Small businesses are often in need of financing to update and expand. Often not at large amounts of money, if they can get an expensive financing they can fertilize their ideas for growth and be more successful. We diagnosed this program and found after its initial success it had become too bureaucratic. We heard from both banks and businesses that the program which was the paper-based was so slow and cumbersome, nobody wanted to bother to use it. We changed it. We put the process online, rebranded it and made specific commitments to those who wanted to participate. We told them they could fill out an application and less than 60 minutes and promised they would have a yes or no answer within 72 hours. That was not easy. It required very close coordination with the bank that took heart. We did it and the Grow no program took off. Only $20 million was advocated but in two years we deployed more than $350 million helping 1500 small businesses create and retain 15,000 jobs across the state. It was also exciting to see how the businesses were able to use the loan funds. I can recall a construction business that needed a loan to about — bike a piece of equipment. They got the money, the got the equipment and they thrived. I recall a manufacturer that needed money to turn their factory sideways to utilize more space and employ more people. We found the put, revenue and jobs. I recall a company in Western Ohio that started as a caterer and begin to make their own tents for events. They recognize they might succeed is tentmakers and needed financing to bid on a project with the U. S. Defense Department. We got them that loan, they got the bid and they were named as one of the 500 fastest growing businesses of the year. The moral of this story is business opportunity, especially those for small businesses often hinge on the availability of financing. People have immense reserves of energy and imagination. Nowhere is that more true than in the state of California. Human ingenuity is the overwhelming power that allows human beings to reinvent the future and make it so. These forces unleashed what Joseph Schumpeter called the gales of creative construction a constantly mold our economic life. Innovation has sharpened our nations edge for generation after generation. When credit is unavailable, creativity is stifled. To make the meaningful contributions that are capable of making to the economy, small businesses particularly women and minority owned need access to credit. Without it they cannot take it vantage of opportunities to grow. With small businesses so deeply woven into the nation’s economic fabric it is essential that the public along with small business owners themselves can have a more complete picture of the financing that is available to this Key Center — sector. We are releasing a white paper today that lays out the limited information we currently have about key dimensions of the small business lending landscape. According to census data and depending on the definition use, there an estimated 27,600,000 small businesses in the United dates. We estimate that together they access $1.4 trillion, that’s trillion not billion in credit. Businesses owned by women and minorities play an important role in the space. Women-owned businesses account for over one third, 36% of all non-farming private sector firms. The 2012 survey of business owners, the most recent indicates that women-owned firms employed more than 8.4 million people and minority owned firms employed more than 7 million people. Those are huge numbers by comparison in 2014 fewer than 8 million people were employed in the entire financial services sector. That was the big paragraph on the facts and figures, I was inspired to get through it by you Commissioner Owen. When small businesses succeed they send ripples of energy across the economy and throughout our communities. 2013 study by the Federal Reserve Bank of Atlanta found that counties with higher percentages of the workforce employed by small businesses showed higher local income, higher employment weights and lower poverty rates. In order to succeed they need access to financing to smooth the cash flows for current operations, meet contingencies and invest in their enterprises to take advantage of opportunities, as they arise. Another study found the inability to obtain financing may have prompted one in three small businesses to trim their workforces and one in five to cut benefits. Unfortunately, much of the available data on small business lending is to dated or two spotty to paint a full picture. Especially, those owned by women and minorities. We do not know whether certain types of businesses or those in particular places may have more or less access to credit. We do not know the extent to which mall business lending shifting from banks to alternative lenders. Nor do we know the extent to which the credit constraints that resulted from the great recession persist and to what extent. The beige book produced by the Federal Reserve is a survey of economic conditions that contains huge amount of anecdotal information about business activity around the country. It has no systematic data on how small businesses are fearing and whether they are being held back by financial constraints. Given the importance of small businesses to our economy and the critical need to access financing if there are to prosper and grow the Porton to fill in the blanks and the how-to’s on how they can engage. That is why Congress required institutions to report about applications in accordance with regulations to be issued to the consumer bureau. That is why we are here today. The inquiry we are launching is the first step towards crafting this mandated rule to collect and report on small business lending data. To prepare for the project we’ve been building an outstanding team of experts in small business lending. We are enhancing our knowledge and understand based on our equal credit opportunity act complaints work with small business lenders just helping us learn more about the credit application process, existing data collection processes and the nature and extent and management of fair lending risk. We have learned more work on the reporting of home loans under the home loans mortgage act which has evolved considerably. At the same time, we recognize a small business lending market is much different from the mortgage market. It’s more diverse in its range of products and providers which range from large banks and community banks to Marketplace lenders another emerging players and the Ventech space communities play an outsized role in making credit available. Unlike the mortgage market, many small business lenders have no standard underwriting criteria or widely accepted models for scoring. For these reasons and more we will proceed carefully as we work toward meeting our responsibilities. We will seek to do so in ways that minimize the burden’s on industry. I request for information released focuses on several issues, we wanted to determine how best to define small business for these purposes. Despite the importance of these firms to our economy, the surprisingly little consensus on what constitutes a small business. The small business administration and overseeing federal contracting sometimes looks at the number of employees, receipts and applies different thresholds for different industries. For our part the consumer bureau thinks about how to put — develop a definition that’s can this — consistent and can be tailored to the purposes of collecting data. We looking at how the lending industry define small businesses and how that affects the credit application process. Having this information will help us develop a practical definition that advances our goals and aligns with the common practices of those Inland to small businesses. Second, we want to learn more about where small businesses seek financing in the kind of loan products made available to them. Our research tells us term loans, lines of credit and credit cards of the all-purpose products used most often by her small businesses. They make up an estimated three fourths of the data in the small business finance a market, excluding the financing of merchants for service providers extend to their customers to finance purchases. We want to find out if other important financing sources are being tapped by small businesses. Currently we have limited ability to measure accurately of the prevalence of wonders in the products they offer. We also want to learn more about the roles that Marketplace lenders, brokers, dealers and other third parties may play in the application process. At the same time, we are exploring whether it’s specific types of institution should be exempt from the requirement to collect and submit data on small business funding. We are seeking comment about the categories of data on small business lending that are currently used, maintained and reported by financial institutions. In the statue, Congress identify specific uses of information that should be collected and reported. Include the amount and type of financing applied for, the size and location of the business, the action taken on the application and the race, ethnicity and generate — of the owners. The reporting of this information would provide a major boost in understanding small business funding. At the same time, were sensitive to the fact that various institutions may not currently be collecting and reporting all of this information. We understand that the changes imposed will create implementation and operational challenges. We will look into clarifying the precise meaning that some of these require dellavedova — data elements to make sure they are understand and reported. We will be considering whether to add a small number of additional data points to reduce the possibility of misinterpretations or incorrect conclusions working more limited information. To this and were seeking input on the kinds of data different types of lenders are currently considering in their application process as well as any technical challenges posed by collecting and reporting this data. We will put all of this information to work and think carefully about how to fashion the regulation mandated by Congress. Finally come of the request for information seeks input on the privacy implications that may arise from disclosure of the information that’s reported on small business funding. The law requires the consumer bureau to provide the public with information that will enable communities come a government entities and creditors to identify community development needs and opportunities for small businesses come especially those owned by women and minorities. We are also authorized to limit the data dismay public to advance privacy interest. We will explore options to protect the privacy of applicants and followers and the Compostela — confidentiality. The announcement we are making today and the work we are doing cure reflect central tenants of the consumer financial protection Bureau. Were committed to evidence-based decision-making. We aim to develop rules that need our objectives without creating unintended consequences or burdens. We went to see a financial marketplace that offers fairness an opportunity not just to some, but to all. The marketplace it does so without regard to race, ethnicity, gender or any other element of our fabulous American mosaic. Small businesses are powerful they supplied jobs, teach skills and service backbones of the community. We need to meet obligation to develop data that will shed light on their ability to access much-needed financing. It is essential to their growth and prosperity and therefore to the growth and prosperity of us all. What Cicero observed an agent Rome, still holds true today. He said, nothing so cements and holds together all the parts of our society is faith or credit. Our communities depend on both of these precious things just as much today. As we launch this inquiry want to remind you that we value the feedback we get. We take it seriously, consider carefully and integrated into our thinking and our approach as we figure how to go forward with his work. We ask you to share thoughts and experiences to help us get there. We thank you for joining us here today. Thank you. [ Applause ]
Thank you Director Cordray. I would now like to invite the panelists to take the stage. While they are doing so, I will introduce them. David Silberman is the bureaus act in director and associate director to her. Cheryl Parker Rose Sirs at the assistant director for the bureau’s office of intergovernmental affairs. Grady Hedgespeth serves as the assistant director for the bureau’s office of small business lending markets. Our guest panelist include Elba Schildcrout , East Los Angeles Community Corporation . Makin Howell , Main Street Alliance . Josh Silver, Kate Larson , U.S. Chamber of Commerce . Todd Hollander , Union Bank and Robert Villareal , CDC Small Business. David.
Thank you. I can still say good morning but just barely. I am David Silberman the acting deputy director and associate director for research marketing regulations. It’s a pleasure to be here and share this portion. As you’ve heard, we will hear from a number of respected panelist consumer advocates and industry participants. Each panel member will give us some background and provide perspective. We will then post questions to our panelist and engage in discussion. The panel discussion will be followed by public testimony. Before we begin, let me frame the issues we will talk about. Is Director Cordray noted, and as we discussed today in the white paper we released. Small businesses play a key role in fostering community development and fueling economic growth both nationally and in their local communities. To do so, these businesses and particularly women and minority owned be fair and equal access to credit to allow entrepreneurs to take advantage for the opportunities for growth. As the director explained in section set 10.7 one of the Dodd Frank act Congress amended the equal credit opportunity attack to require institutions to compile, maintain and report information concerning credit applications made by small businesses. Congress directed the bureau to it — issue a regulation to govern and report. The purpose is twofold, to facilitate enforcement of the fair lending laws and second to enable communities, governmental entities and creditors to identify needs and opportunities of women-owned, minority owned and small businesses. Is Director Cordray explained were in the early stages and were focused on outreach and research. Today’s hearing and the our five we issued our them Porton steps as we seek to enhance our understanding of the 1.4 train dollars small business financing to discharge our abilities. As context, I will provide — invite our panelist. They will each of 10 minutes for a statement and we will moderate a discussion with the panelists. We will start on my far left, Elba Schildcrout , East Los Angeles Community Corporation .
I am privileged to be here. I’m thinking of my mother on Mexican mothers today. I am privileged to be here and while we came here from Guadalajara. At East Los Angeles Community Corporation , we advocate for economic and social justice in the greater LA area by building grassroots leadership, developing affordable housing in providing access to economic development opportunities for low and moderate income families. In 2013 we began working with local businesses to preserve the vitality of the small business community. Our commercial corridor project is part of a strategic effort towards responsible community economic development by developing leadership connecting Rick and Morty businesses with technical assistance and hosting monthly meetings. We are empowering our business community to take ownership and be involved in their community. In 2015, we held a shared vision of economic stability and inclusive 50 for all residents including two brick-and-mortar businesses, street vendors and mariachi groups. To help them thrive, they need new resources such as micro-lending and lines of credit. Many rely on friends and families limited resources for loans. The also need case management to ensure they can make use of resources that already exist, such as technical assistance for writers and others doing business to support — business support services. It is through this relationship building with small business owners who are primarily Latino, immigrant, and women that we have learned of their needs and challenges. Some of these challenges have been difficult in getting credit from banks, especially small loans under $250,000, some of these owners need anywhere from $5000-$10,000 to get started. They also need data transparency to show which lenders are making loans and to which groups and where they are being made. We think things should partner and do joint outreach and address specific needs such as language access. The data should be segregated for Latino and other groups. Small business owners need greater protections to prevent discrimination. We’re excited and supportive of tran 20 ‘s efforts — tran 20 — we’re excited and we thank you.
Makini Howell , Main Street Alliance .
Hello. I am a member of the Main Street Alliance of Washington coalition of 2000 small business owners. I have been running my family’s business for 13 years. We have been in business for a total of 40 years, were a food service. I am six vegan restaurant concepts in Seattle. I employ over 40 people. I offer health coverage, I start my minimum wage at $15 an hour. I have grown our family business from grossing $200,000 in last year we close to $3 million. I did nothing without a bank loan. When I went into apply for a loan, I don’t know if it was because I was a woman or if it was because I was black. It could be any number of things that are risks for a banker. I understand when I speak to consultants that they had no concept of why it wasn’t doing stake and people would ask if I would ask fish. My menu is 100% plant-based. Anyone of these things I can understand would be a reach, not only did we succeed but I toured as Stevie Wonder’s personal chaff — chef in 2015. Nothing was possible without lending. We have to change our understanding around what can be successful. As opposed to framing it is let us collect data and let some well deserving minorities and women in, people of color and women are the majority of people that are providing jobs. They are the majority that are small business owners. Bankers and banks have to change their framing around who is deserving and who actually can provide jobs for the community. Small businesses are the engine of the economy. The engine of the economy currently is being run by people of color and by women. That Pinkie Master change. That lending will then change along with what is happening in Washington. Someone told me when you go into a bank they decide right away whether they will lend to you. That I dress well enough, Amite fallen off, — the change has to come from understanding who helps to run the economy. I would still love to get a small business loan. I haven’t tried because they don’t need money and I am 13 years in. I am attractive to a lender at this point that I don’t need money now. I needed money then. I won’t ask a bank for money now, in order to get to where I am, I had to use predatory lending, cash advances, my father gave me $10,000. I did get one from a community lender that took me months of rewriting my business plan to get that. It’s a challenge and I feel I would’ve been a $6 million company if I had gotten the lending necessary at the beginning. I had the education and the support necessary from the banks. That’s my story. Thank you.
Thank you. Josh Silver.
Good morning I’m senior advisor of the National Community Reinvestment Coalition. I thank you for this hearing today. There are some lending’s those lenders on the panel that may be encouraged to give you a loan after this. I think there are well-intentioned lenders. Last week USA Today reported a survey showing improved small business confidence. Things are looking up for small businesses after the great recession. Not so fast. The survey was sparse and on which businesses were surveyed. Research shows that women minority owned and very small-businessess experience difficulties growing because barriers accessing credit. Considered the following, women-owned firms are significant force but they remain small. 90% of women-owned small businesses have no employees other than the owner. Part of the difficulty women faces lack of credit. Just 5% of women-owned businesses use bank loans to start their businesses compared to 11% of mail and businesses. Minorities also faced difficulty starting and growing a small business. Nonminorities are twice as likely as minorities to own employer businesses. If minorities owned businesses at the same rate as nonminorities, our country would have 1 million additional employer businesses and more than 9.5 million additional jobs. Surveys have found that African American small businesses are more likely than a why don’t business to not apply for credit, due to fear of rejection. And CRC researchers from the smallest businesses, those with revenues below $1 million at the most trouble accessing credit. In 2010, 8% of these businesses received loans compared with 20% of all small businesses. Access to credit is critical yet inequalities in access contribute to overall inequality. NCRC found in a report that in 2010, the business funding let an economically distressed counties in Appalachia was 44% of national rates. The Woodstock Institute found that in Los Angeles and San Diego, businesses and minority census tracts were 31% of all businesses but they received only 21% of the loans under $100,000. A variety of reasons exist for these disparities, some due to the characteristics is also do two on — discrimination. In section 10.71 of the Dodd Frank act it will be on — they will draft a predecessor appearing in bills in the future. It requires data collection from lending institutions regarding demographic characteristic of small businesses including race and gender into report the data publicly. The active data collection and dissemination is a powerful motivator for lenders to increase responsible lending to underserved businesses. As Director Cordray says, former justice Louis Brandeis talks about sunlight and the electric light of data disclosure. No lender wants to be highlighted for shirking any part of the community and they want to get up to speed with the lenders that are doing a better job. Use data for a spur of competition. We have saying that data drives a movement for economic justice. In the arena, better data will respond — result in more employment and more wealth building in underserved communities. Isn’t that what we are about? Making capitalism work. Thank you.
Thank you. Kate Larson, U.S. Chamber of Commerce Good afternoon. As a proud Trojan I’m happy to be here today and LA. I would like to thank the Bureau for holding this hearing on this important issue and especially to Grady for their outreach over the past few months. They have been fantastic. We are excited to engage with them on the request for information. As previously mentioned, I’m the director at the U.S. Chamber of Commerce , the largest business Federation representing more than 3 million companies. We represent all small businesses and lenders. We have a unique perspective of seeing the entire picture of small business market and how it affects the end-users. More than 96% of business come when he said fewer than 100 employees. Small businesses are the lifeblood of our economy. Not only to produce goods and services we depend on but to create jobs, provide stability to millions of Americans. Remarkably, 28 million mainstream institutions account for over half of the sales of the United dates, 55% of all jobs in the country and are responsible for 65% of all new job creation. I’m sure you can all recite these data. It is hard to overstate the importance of credit for small businesses and support their inventory, open locations and hire more employees, manage downturns and otherwise push forward. We asked the Bureau to conduct a comprehensive sound report on potential barriers to small business lending in the United it’s including regulatory burdens that it may fully understand the credit products used by small businesses, inform forthcoming rulemaking to ensure it promotes, not inhibit small business funding and propose a tailored rule to include not only necessary business and products but also fulfilling the well-meaning purpose of statute. We hope the SPA will also lend their expertise in this area. Unfortunately, small business lending is not fully recovered from the great recession. The most recent small business credit survey that was mentioned jointly conducted by the Federal Reserve banks found cash flow remains a challenge for small firms, only half of applicants were seen — received financing and 18% received nothing. 32% had to delay expansion as a result of the shortfall. 21% had to reach into their personal finances. This is not okay. Much of this and I know we will all have differing opinions. We think it’s due to post crisis over regulatory overhaul and increasingly risk adverse financial institutions, that have to meet safety and soundness and know your customer requirements when issuing alone. Asked — as we begin the fact-finding process we hope to consider the true spirit of the statute and include in the definition to be tailored to only the most vulnerable populations, specifically the SBA definition of 500 employees does not seem small at this juncture. Every small business has different needs and approach credit differently. This market is different than the mortgage lending and data collection is not close to the home mortgage disclosure act. It’s a misnomer. The needs are different and small business lending is a complex market with many sources. Depending on the needs of the small business, owners may turn to friends and family, home equity lines of credit, credit cards, SBA loans,’s private loans or a combination of multiple sources. Larger and middle-market firms get more complicated. This is why the definition needs to be tailored. Employee training will be incredibly complicated, given the sources of business credit. Home-equity credit officers issuing a HELOC, flight attendants and a credit card, a trucking company offering leasing for trucks, retail clerks offering branded credit cards, they may not understand they will have to capture small business lending data. Without a firewall, — it will be difficult to create a firewall between the employee accepted credit application and the one making the underwriting decision. Without a firewall institutions will violate the equal credit opportunity act. That will be more difficult at smaller institutions. Business representatives applying for loan, if this applies to more than just the owner of the business, may not have the information to create confusion and prolonged credit application. They may not know how much they have for annual revenue or the other data points. It is unfeasible for lenders to know if the business changed in status. That is a hurdle. It will be impossible for institutions to report individual credit transactions. My wonderful mother who drove 2 1/2 hours to be here is a small business owner. If she’s buying something on a credit card for her business, is that also going to be the same thing as home goods? That is difficult way if you are going credit by credit transaction. In conclusion, we think the Bureau for soliciting information but stressed the importance of the Bureau conducting a sound, robust study on the roadblocks inhibiting small business lending, including potential regulatory considerations. To understand where small businesses are attaining credit and where they are not, ensure the rulemaking will not curtail the sources and an environment where access to small business credit is constrained, it’s imperative we energize that marketing encourage growth. I appreciate the opportunity to stuff I and thank the Bureau for its approach. Look forward to working together and I’m happy to answer any questions.
Thank you. Todd Hollander from Union Bank.
Hello. I am also currently serving as the chairman for the small business community for the consumer bankers Association and a serve on the California bankers Association. I’m proud to represent all the groups in this testimony. We wish to express our appreciation for the collaborative and transparent manner in which the CFPB — tran 20 is under Katy — undertaking these rules. The environment, private lending groups and lenders share a common goal. We want to provide loans to small businesses to help generate jobs, tax revenues and economic growth and prosperity. Lent to all market segments without bias or discrimination enable identification of business and community development needs, ensure regulatory has the ability to hold lenders comfortable and avoid saddling lenders with rules that are unnecessarily costly to implement and execute and that could generate misleading data or curtail access to needed capital. In terms of the current small business lending environment the CBA seen signs of improvement. Members say charge-offs and delinquencies have decreased from the great recession and are currently at all-time lows. SBA programs are still vital. In 2016 they had to record your exhausting their appropriation of $30 billion. From the peak in 2008, small business lending saw a steady decline until early 2011. Small business lending has seen sharp decline, while the Elba Schildcrout proved it is still significantly less than prior to the downturn as evidenced by utilization rates. Historically, 40%. I’ve been doing this for almost 30 years, I’ve worked for large banks and I’ve worked for community banks. Between those you could, usually when you loan to a large population you could set your watch by 40% utilization in that population. After 2008, we saw those rates come down and businesses weren’t borrowing what they had available. Postrecession we have more conservative population of business owners then we had going in, they felt the pain of firing people they felt the pain of downsizing and those things. Not only is the lending environment important, the optimism that businesses feel when they are confident, they feel economic growth and borrow and by and do all the things they need to do. Small business credit card utilization is also declined yearly since 2008 but one. New accounts have been well below levels in the past. FDIC numbers reported decline from 2008. In our view, there’s a miss conception that the decline and small business lending. If banks don’t lend money we don’t make money. Our job is to deploy capital and we want to continue to do that. We noted a decline in demand on such loans. The next her to will be the 10.71 action while the CBA supports the goals we believe they should keep in mind that although it mandates the role it is not a can to data collection on others — lending products such as mortgages. The CFPB needs to take great care in the creation of these regulations. We are pleased to see that they are pursuing formal information gathering processes to ensure it is well-informed which will enable it to put forth regulations that the mandated proffering requirements while avoiding costly and burdensome regulations that could be drier cost and less credit available. Specific to the challenges the notion that some old that business lending parallels nicely to residential mortgages is misplaced. Residential lending has the same collateral type and business collateral types can vary. Residential lending has with rare exceptions, consumers as applicants and businesses have all sorts of applicants limited liability sky missiles — sole proprietorship’s, all of these things run the gamut of borrowing and lending business owners have a much shorter and varied duration than mortgages. 3 to 5 years as opposed to 1530 years. — The address of the business had come up with have to unofficial owner the applicants to be debated and have no easy answer. Residential mortgages typically have wanted to borrowers. Small businesses have multiple borrowers, large partnerships, and that also runs the gamut. These challenges must be considered when constructing these loans and it’s daunting and twofold. Determining which data fields to collect that will yield meaningful conclusions from the small business lending community is likely to be more challenging. In light of these issues and current lending trends, to streamline credit processes in order to extend credit with greater speed to qualified applicants, the CBA and member institutions cannot stress enough the importance of a well-balanced to avoid overly extended data requirements. While the CFPB has discretion under 1071, in order to issue fair and achievable rules the result in these meaningful useful data, they may need to request from Congress changes to certain aspects of the rule. Examples of well-meaning definitions or requirements are outlined in the rule, but must be made optimum. First, primary address of the business whether it serves a business minority for the address of the borrowers regardless of the location. The definition of minority women, necessitates the determination of both ownership and earnings allocation. Access to this data including incidental access, unlike the mortgage-based is thickly prohibited for underwriters and in the event they do not those they do have access mandates disclosure to applicants. This is impractical and unnecessary. Thank you for the opportunity to testify and we look forward to continuing to work with you for a successful outcome.
Thank you. Robert Villareal . That’s what I said.
Thank you to all of you. We appreciate you coming to Southern California and Los Angeles. It’s important that you are here, in the city 50% of the businesses are minority owned and in the county it’s 55%. That’s five years old and we know those numbers have changed. It’s a greater amount. I am with CDC Small Business were headquartered in San Diego, that city that gave you that football team that you did not want. [ Laughter ] I am also the Executive Vice President there and the CEO of the bank or small business CDC of California that’s part of the CDC small business family. CDC Small Business finance is a 39-year-old company we are certified development company. We provide the SBA 504 product real estate lending product. We partner with banks such as Union Bank, we as an agent to 40% in the small business only puts 10% down. We’re NSBA community event is under. That is a program that allowed mission based lenders such as ourselves to do is seven a loans — the gentleman to my left created that when he was with the SBA and it’s had a wonderful impact on the small business and minority communities. SBA lenders do lesson 4% of their loans to African Americans across the country. Community advantage lenders to 13% of their loans to Latinos and African-Americans. It’s been a great program. We are the largest organization that does the both — we work in the states of California, Arizona, and Nevada. We are an economic development organization. While we’ve done $13 billion in lending, most of it is been through the commercial real estate area, $2 billion has gone to women, minority and veterans. To our non-504 program we are a micro-lender and at one point we had three different CD FIs and we have done $70 million in lending, particularly in Southern California. I am to the right of the banker. Might take will be different than that industry, I think it’s important that we are here. I think it’s important that those in the audience are here. I look forward to hearing from everyone in regards to why we’re here and why can 71 is important. Let me give you three reasons why I think it is important and why, as a state attorney Xavier Becerra said we need our quarterback and we need his support. Racial discrimination still exists. There was a study done by Utah State, BYU and Rutgers published in the Washington Post in June 2014, they took nine individuals, three African-Americans, three Latinos and three in close and gave them the exact same resume. Just them the same and went into banks. There was clear differentiation in the way the people of color were treated. It still exists in the world. More recently, I think Josh quoted the Woodstock Institute patterns of disparity that was done in January, they looked at Chicago, LA and San Diego and lumped in Los Angeles. He talked about the lack of lending in those census tracts. If there had been lending to the amount of small businesses in those census tracks that were of color, that was a 1.6 that was a $1.6 billion opportunity that was lost, for those census tracts in communities of color. Y 1071 is critical, all we have is that we can look at CRA, we don’t know who is getting or what individual’s are getting the loan. In 2015, there was $4.7 billion — this is reportable on the website. In the same year the SBA there were 750 loans for $136 million. In terms of units, the SBA was let’s then .5% — I’m looking at Michael and I was told him it was 4% and in dollars it was less than 3%. There was 99% of the loans going out in the County of Los Angeles, we don’t know who they went to. We can look at the census tracks and say they are praying all but — predominately minority, we can’t find out who they went to and with 1071, we will find out who applied and what happened to those individuals when they did not get the loan. I am for the folks here — I implore the folks here and my colleagues, this is important and it will take a lot of work. We must come to an agreement. It is very important that we take this mandated rule and implemented. We look forward to working with everyone here to get that done.
Thank you.
Thank you to all of the panelists. Might colleague Grady Hedgespeth and Cheryl Parker Rose will now ask the panelists some questions for further discussion. I get the first question Robert, talk about the challenges that financial institutions face when extending commercial credit to small businesses, particularly minority and women-owned.
I will try to be brief. There are lenders and there are a lot of reasons. I will base it on my 12 years of experience working at CDC small business, I had conversations with my colleagues and CDC Small Business finance just had a report done on Latino small businesses in the state of California . It was done for us by the national Association for Latino community asset builders and hopefully that will be public at the end of the month. While all small businesses face similar challenges, entrepreneurs that are women or are people of color have particular challenges. One is, record-keeping or financial documentation or it’s the lack there of. There could be a variety of reasons, maybe they are cash-based but it comes down to financial literacy. When I say that, I’m not saying that small businesses are financially illiterate. Far from that, with the challenge is that lenders whether you are a Union Bank or a small business finance have certain criteria and documentation that we require. We put people through some awful loops for a loan at the SBA. A lot of folks don’t have the background. Since mothers were used, I will use my father who came with a sixth grade education and ran two very successful businesses. He never received a loan from a bank. He never could have put together the documentation that I know my company asks for from someone. He was not financially literate, he just did not understand the way the system work. As lenders, it’s working with the small business and working around and educate and have the patience to get them through the process. Is a mission-based lender, we put money into paying business advisors to help individuals with that. The second one is also what’s known as a thin credit file or poor credit. Experience did a study that was released in September of last year that showed businesses, minority owned businesses, their business score was five points lower than a nonminority and their personal credit score was 15 points lower. A lot of lenders, one of the first questions asked will be what is your credit score? There is a threshold and if you are not at 680 and you are at 679, a lot will ask you to leave or they will not finance you. That is the challenge as lenders, how do we work with those that have a poor credit, that does not completely dictate their ability to pay and how do we look at other factors. The third and fourth are combined, I have learned from individuals and we have seen it, it takes just about as much money to underwrite and process and $50,000 loan than a $500,000 loan. If you are a profit driven organization, who are you lending to? As a mission-based lender we will work with those that want $5000 or $10,000, how do we build efficiencies with that and how do we deal with fintech? Those competitors are charging 94% and we of refined Tensed — refinance loans, how do we do that when they can answer someone in minutes and finance them within days. That’s difficult and that’s a challenge for reputable lenders who are trying to do right and treat people with respect.
Cheryl.
Josh, what are some of the current barriers to understanding the small business lending landscape?
Thank you Cheryl, current barriers lack of data. Longer answer, 1071 will mandate — I’m sorry it’s hard to swallow and talk at the same time.
Type of lender, large bank, small bank, non-bank, fintech, we need data on the mall because we need to know which ones are making responsible and sustainable loans. We need to know which needs more oversight. The literature talks about smaller banks being relationship lenders and getting to know the small business owner and having more flexibility in their underwriting. The bigger banks tend to use automated underwriting and some of the study suggest it’s a smaller banks that have an easier time reaching an underserved population. We haven’t had the data for the smaller banks for number of years. In the mid to thousands, the bank regulators exempted the smaller banks from community reinvestment act data reporting requirements. We need that to understand the market and to know who is making responsible loans to underserved businesses. I should say NCRC did a study for the Appalachian region and the smaller banks were 20% of the market in several states. It’s important to understand what they are doing. Loan type, this is huge, whether the loan is an origination, whether it’s a refinance, whether it’s a renewal, a line of credit, different credit needs are served by different loans. I talked about the community reinvestment act data which large banks report. This is the most systematic data that we have. There are significant limitations. You can’t — the reporting rules are strange, there is renewals be reported with originations, think it’s mostly originations but there are renewals in there as well and you can’t separate them and that clouds the understanding. Credit card lending is higher cost lending, it is needed. Term loans are also needed and basically there is a crude way to differentiate had a card lending from term lending in the CRA data. We need better data, there has been some SBA studies that have shown minorities rely upon credit card lending. If we had better data, we could use this spur of competition to encourage more term lending by traditional banks. Factoring, a form of high cost lending, the white paper and when you look at the number of transactions it looks like factoring was higher than term lending. We need more data on high cost lending, to make sure it’s not the new subprime lending that is actually stripping wealth instead of responsibly serving credit needs. Loan action, we need data on applications and denials, currently it’s only originations and to really know whether it’s unmet demand or is there low demand and what could be ways to increase the demand in some communities. Revenue size is huge, most small businesses have sales of less than $100,000 as shown in the white paper. The CRA data only tells you whether it’s above — whether it’s made above or below $1 million in revenue. I could go on. We need data on reasons for denial, insufficient collateral, credit history, inadequate documentation, is the business too new, the zip and mentioned. I am not asking for the sky. I am asking for well-defined — there are statutory requirements like race and gender of the owner, the CFPB has some discretion data elements to add and if we do it carefully we can understand weather controlling if there are still disparities that need further investigation. Through robust collection, hopefully we can make American capitalism work better. Isn’t that what we are about? Shouldn’t there be a bipartisan consensus, better data and more transparency increases lending and ultimately people who are working hard and playing by the rules can provide. This should be beyond question.
Grady.
Todd, CBA are always very thoughtful in your remarks. You have mentioned some but what are the unique aspects to consider when you extend credit for commercial purposes or credits, what’s unique about that?
There are a few things that are unique when you extend credit to any small business, first is a complicated ownership structures and how you assess each ownership structure and determine the ability. The next is the difficulty in separating the ability and willingness to repay. As mentioned, especially for smaller businesses, the interrelated nature of their personal credit and business credit make it hard to separate. You would need to consider how they repay their debt after as part of the picture. Very collateral, a lot of lending that we do is unsecured. We don’t put EU cc file on the company. Some is partially secured. We take direct collateral in real estate. There are multiple purposes for the loans, we went for anything from working capital to fixed access — assets, it’s relatively straightforward. As I mentioned, the closely interrelated nature between the personal and business finances are hard separate. The last couple things are relative agent up the balance sheets of small businesses tend to be less deep and with less reliable data than large businesses. It becomes an art and the quality information is less. And as Roberto mentioned, the cost at which we need to process these economically and still make money for the bank and protect our depositors makes it difficult but not impossible to do.
Makini Howell , can you talk about small business owners and their access to credit to grow businesses.
Yes. My name is Makini Howell . It’s like zucchini. Could you repeat the question?
To small business owners have credit?
In my experience, I did not have access to a traditional bank loan. I had access to credit. I had access to a fintech loan, merchant cash advances, which is basically predatory lending. You purchase funds and if you need a $30,000 loan, you can purchase it for $15,000 and pay back $45,000. One question was how do reputable lenders come — combat that and they have to reconsider their bottom line and what they need to make off of a $50,000 loan and a $500,000 loan. When we raised the minimum wage, all business owners said to have a different understanding of their profit margin. If you really want to help, the predatory lenders have gotten a hold of the market, you have to rethink your profit margin as illegitimate lender. There is always available capital. It could bankrupt to, if you take that. If you have to pay it back in two or three months and that’s generous. Some of the problems around it by that you get junk fees which are anywhere upwards of $800 weekly or they will take payments daily. You can get borrowers paid in average of [ Indiscernible ] 44% of small businesses rely on credit cards are financing. Stalled growth, if you’ve taken a cash advance and you hit a slow season and you aren’t making money and your fixed assets those costs have not changed. That could tank your business. You still have to pay back this exorbitant loan and it’s not considered alone, it’s considered purchasing funds. You have to pay that back in addition to your fixed expenses. There is money available, it’s not necessarily the money that will help you grow your business. More than likely it will bankrupt your business.
Thank you.
My question is for Kate, what should small businesses be aware of in terms of accessing credit from financial institutions?
Thank you Cheryl, I will mimic a lot of what Robert said earlier. Documentation, documentation, documentation. You must know your business plan inside and out. Understand that institutions, it’s not that they just don’t want to give it credit, it’s that they have various stringent safety and soundness requirements that are from the regulators. We don’t want to relive the Great Recession. A lot of that was ability to repay, suppose it requires is — regulators are more strict about repayment. That is why we are concerned about maintaining access to credit, while giving it out and is saved in some manner. To small businesses, as prepared as possible with any financials or projections to give institutions the cover to explain to the regulators that we know this person is going to be able to pay this loan back. They cannot just say they seems nice and they have a great idea. It won’t work like that. I would say any documentation that you have available. And really understand your business planned and what would be right for you, is it Marketplace lending, traditional lending or SBA loans, that would be a good avenue for the Bureau and I would be happy to work collaboratively to identify those types of different credit. A lot of people don’t know what is available. That’s also a financial literacy piece.
Albert, what type of credit is available to owners who cannot access loans from traditional lenders?
It’s similar to what Makini Howell mentioned , the predatory loans including cash advances. They are similar to payday lending’s, some of the small business owners use personal credit and credit cards. They get into high interest credit card debt. There’s also loans from family members or friends. Some things that we have worked that along with members of the California reinvestment coalition and others, is looking at how we can expand and help the business owner with technical assistance and helping them with their credit score. A lot of times there is no dissension between personal finance, credit score and their business score. A lot of people are talking about financial literacy and it’s more that they need options and know how they stand and how that can be utilized. A lot of the availability loans can be made, they cannot be made by as much as we would like a lot of them need more funding and there needs to be more education about what is available. With us at East Los Angeles Community Corporation , we have social lending loan, it is for social loans, people lend and borrow to and from each other. We have done in partnership with the Bay area [ Indiscernible ], we have done small loans for them to improve their credit. There is no interest and there are no fees. They are lending to each other and it’s being reported to the credit bureaus. We are starting with some of the micro vendors so they can work towards credit. This comes with financial education, coaching and technical assistance, to help them get to the documentation were talking about. A lot of our people are small business owners are business immigrants and bilingual Spanish speakers. They trust our organization and others like us. We have earned their trust and they are able to come to us and we can speak to them in regards to their options.
One last question which we will ask all panelists and give you all a chance for closing remarks. I will ask you to keep your answers brief. What are the benefits and challenges to conduct small business lending data and make it available to the public?
It’s a good way to distinguish who the good and bad players are and we can see who is doing the loans and who is not into his potentially discriminated against. I see it as an opportunity. It will be an opportunity not only for the traditional institutions, they will see opportunities in new markets. Los Angeles County, 55% of the small businesses are minority owned. We don’t approach this completely as a challenge but as an opportunity to see where you can grow your market, in the next phase of your financial institution.
Todd.
There are definitely benefits to this and challenges. We do a lot of data collection. Whatever we do with the 1071 action, I caution that we not double up on the were getting to the cost. We need to establish a minimum set of data standards to take into account, we did a survey among the 60 banks that belonged to the consumer bankers Association in any would be surprised on how it they matched, if any. I caution you to take all those things into consideration. The risk of inaccurate or drawing a wrong conclusion from the data that’s extract and remains high. If we’re not careful in the way we disseminate the information and the way we interpret it, it’s not completely objective and we run the risk of increasing legal costs leading to incorrect conclusions with the output of the data and how it can be manipulated. In conclusion, it’s necessary and banks want to put capital in the hands of the people who will use it. The better the business community does the better the banks do. We just reflect the community we represent. We look forward to working with you to establish the right rules and thank you for the collaborative nature and engaging in this.
I will be brief. As stated the challenges that we have been looking at. This is a common goal. I totally agree with Director Cordray statement in his opening, when that it is unavailable, creativity suffers. We’re all working together to ensure there are — there is credit for the small businesses that need it. I would like to underscore that we hope to minimize the regulatory hurdles and decrease the cost of underwriting. After Dodd-Frank, the cost of underwriting for any commercial loan has escalated to about $7000 per loan. As was indicated, for $100,000 loan or a $4 million loan. We want to make sure that the hurdles that institution have to go through are minimized to get credit to the people who will repay and so we can grow small businesses. In terms of privacy, there are concerns about the publication in the day of data breaches, governmental agencies are not immune. That is always a concern. Re-identification, in terms of the different loans and there could also be an anti-competitive nature if the loans are re-identified. I am very excited to work with you going forward.
My grandparents were grocery store owners and started shortly after the Great Depression. I wonder how they did it. Did they get loans? If we had more information then I think we would have more economic — it would’ve helped the Great Depression. We are now in the years after the great recession and I want to caution some statements that were made. Overregulation is stifled a retarded lending. In the years before the financial crisis, it was the reverse. It was a lack of regulation the Federal Reserve board had on the books in 1994, they have the ability to curb abusive lending and they didn’t do anything. We all know about the lending beyond people’s ability to repay. We know that not only caused the recession but a global recession. Small business funding — I think has been under regulated. We don’t have the same consumer protections. Yes, it’s a balancing act. It’s a balancing act but if anything there is not enough regulation and oversight in the small business lending arena. More data will not stifle lending, it will not delay loan processing. We have had 40 years of experience with the home or just disclosure act — Homewood — yes, there are costs but even for financial institutions, the benefits outweigh the cost’s. They want to know how competitive they are doing. When the new data becomes available in March and you requested, it’s not consumer groups that are the biggest request these, it’s banks asking other banks so they can see how other competing in all markets. Data, if it’s done well and you have good information on loan terms and conditions, it makes the lending marketplace more competitive. Also, if you do it carefully you won’t get wrong conclusions are unnecessary litigation. We have had 40 years of come to experience, there have been instances where there has been agree just behavior — egregious behavior and it has been stopped before it continued to do damage. We won’t know what the extent of the egregious behavior is if there is no data. If there is more data, there will be less harmful behavior. Lastly, we have a lot of CRA small business data reporting that we can build on to make this — I think we lost $14 trillion in the recession because of abusive lending. If we had better transparency in the marketplace we could gain trillions of dollars in wealth. Thank you.
Makini Howell .
I think it’s a great opportunity to not only collect data, whether it’s a black women or an Asian man Representative flying — applying for loan. It’s an opportunity to create an understanding that education comes before literacy. To change the culture of lending, if we work on the culture of lending and understanding the engine that the people of color and women create for small businesses and understand how much money is sitting there, sometimes lost on the table. We understand that it’s not an unwillingness to pay back, there — the literacy and education must come prior to and that way you can lend safely to a community, understanding that they understand how to pay that money back.
We think the benefits will outweigh the challenges. There will be a better understanding in the market to help the government decide how to allocate resources and identify discrimination. This data is very important. There will be better and more lending once we know where this lending is happening. The evaluation of products are rich in the communities in need and with the right loan products. That is important and we don’t know that right now. Make assessments and address issues and inform policy.
This concludes the panel portion of our program. Please join me in thanking all of our panelists for thoughtful discussion.
Crap crap — [ Applause ]
Panelists, please take your seats. I will note turn it over to Zixta Martinez who will moderate the next portion of the hearing.
Thank you, David. I will now turn to one of my favorite parts which is to hearing from you all. An important part of how the Bureau helps consumer finance markets work is to hear from consumers, state and local partners and community advocates. One way that we gather feedback is through that such as these we have had events across the U. S. events across the U. S. You can submit is consumer complaint through our website www.consumerfinance.gov. Our website will walk you through. We take complaints and we also have another feature called ask CFPB, you can find answers to over 1000 frequently asked questions as well as additional resources. We have Spanish-language website. It provides access to central consumer resources and answers to consumers frequently asked questions. I encourage you to visit our website to learn more about the resources and tools to help consumers make the best decisions. It’s time to hear from members of the public that are here today, a number of you have signed up to provide comments and observations about today’s discussions. The public comment is an important opportunity for the consumer Bureau to learn into your about what’s happening in consumer finance markets in your community. Each person that has signed up to provide testimony will have two minutes to do so and what we hear is invaluable. We want to hear from as many of you as signed up. I encourage you to stick to the two-minute limit, so that everyone who signed up to provide comment has the opportunity to do so. Our first commenters are members of the federal and state community. I would invite Arthur Zaino with the Federal Reserve 10 San Francisco. Our staff will bring a microphone to you.
Melanie winter.
Hello. I’m with the community development group here in Southern California with the Federal Reserve Bank of San Francisco. The subject of data collection, with small business funding is something that between the local reserve banks and the board of governors in Washington is a very important concern. We have extensive data on the subject and in particular we have data around small business ownership and the connection to auto loan financing. Some of our great concern was happening with discrimination in that market, with funders of all sizes large and small and independent auto lease agents or lenders. We are here to listen to what is happening with the CFPB and to provide support and advice, as we do in our responsibility with 1071. Thank you.
Thank you. We appreciate the outreach and we look forward to engaging in substantive efforts with you. Round foam — R Fong.
Good afternoon. My comments on the need to continue to improve the collection of more detailed data. As the nation continues and the population we recommend the nation adopt the national content test for proposed minimums. We recommend these categories be applied in three areas including the home mortgage, small business [ Indiscernible ] and small business administration loans. The data will result in a better assessment of our community’s needs, better targeting of solutions from both public and private sector, greater access to services and capital for our communities small businesses and healthier Asian-American and native Hawaiian Pacific Islander communities. Thank you.
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