Star Fundraiser For 1 Global Capital Settles With The SEC
July 15, 2019
Henry J. “Trae” Wieniewitz, III was charged by the SEC on Monday for his role in allegedly selling unregistered securities in two companies, 1 Global Capital (the now defunct merchant cash advance provider) and Woodbridge Group of Companies (a purported real estate lending business revealed to be a $1.2 billion ponzi scheme).
“Wieniewitz and Wieniewitz Financial raised more than $11.4 million and reaped approximately $500,000 in commissions from unlawful sales of Woodbridge securities, and raised more than $53 million and obtained approximately $3 million in commissions from unlawful sales of 1 Global securities,” the SEC stated.
Wieniewitz was not a registered broker-dealer nor associated with a registered broker-dealer.
A settlement was announced simultaneously. “Wieniewitz and Wieniewitz Financial settled the SEC’s charges as to liability without admitting or denying the allegations, and agreed to be subject to injunctions, with the court to determine the amounts of disgorgement, interest, and penalties at a later date,” an SEC statement said.
Wieniewitz was not alone in selling investments in both 1 Global and Woodbridge.
Separately, the owner of Woodbridge and two former directors of the company were recently charged criminally.
No criminal charges have been brought to date in the 1 Global Capital saga. That could change. 1 Global Capital revealed in 2018 that it was being investigated by the US Attorney’s office. That along with the SEC investigation prompted the company to file for bankruptcy. The SEC subsequently brought civil charges.
Documents filed in the SEC case against 1 Global’s former owner, Carl Ruderman, have since revealed that at least one former employee had been approached by the FBI about the operations of 1 Global.
Last month, it appeared Ruderman and the SEC were heading towards a settlement.
One notable fact about 1 Global Capital is that the company participated in the largest merchant cash advance in history at $40 million. That transaction has become a point of significant controversy and litigation. The recipient of those funds, a conglomerate of car dealerships in California, have shut their doors.
So God Made a Farmer, But Who’s Financing The Farms?
May 1, 2019
Most mornings, farmers and ranchers wake up worrying about uncooperative weather and volatile commodity prices. Just the same, they pull themselves out of bed to spend the morning tinkering with crotchety machinery or wrangling uncooperative livestock. When they break for lunch, the kitchen radio alerts them to trade wars with distant countries and the unintended results of federal regulation. As they make their way back outdoors for the afternoon’s work, they can’t help but notice another new house taking shape in the distance as suburban sprawl encroaches on the fields and pastures. By evening, their thoughts have turned to their need for short-term capital and how the local banker seems increasingly wary of providing funds.
It’s that last challenge where the alternative small-business funding industry might be able to help, says Peter Martin, a principal at K-Coe Isom, an accounting and consulting firm focused on the ag industry. “If you as a farmer need operating funds and you can’t get them from a bank, you don’t have a lot of options,” he says. “Historically, nobody outside of banks has had much interest in lending operating money to a farmer.”
The result of that reluctance to provide funding? “I can’t tell you the number of calls I get to say, ‘Hey, I need $100,000 and I need it in a couple of days because of X, Y, Z that’s come up,’” says Martin. “We don’t have a place that we can send those people to. You could make a lot of quick turnaround loans in rural America.” What’s more, it’s a potential clientele that makes a lot of money and prides itself on paying back what they owe.
Martin’s not alone in that assessment. While farmers enjoy abundant long-term credit to buy big-ticket assets, such as land and heavy machinery, they’re struggling to find sources of short-term credit for operating expenses like labor, repairs, fuel, seed, feed, fertilizer, herbicides and pesticides, notes Mike Gunderson, Purdue University professor of agricultural economics.
But remember that nobody’s saying it would be easy for alt funders to break into the agricultural sector. City folks accustomed to the fast-paced rhythms of New York or San Diego would have to learn a whole new seasonal business cycle. Grain farmers, for example, plant corn and soybeans in April, harvest their crops September or October, and may not sell the grain until the following January, says Nick Stokes, managing director of Conterra Asset Management, an alternative-funding company that places and services rural real estate loans.
That seasonality results in revenue droughts punctuated by floods of revenue – a circumstance far-removed from the more-consistent credit card receipt split that launched the alternative small-business funding industry. Alternative funders seeking customers with consistent monthly cash flow won’t find them in the agricultural sector, Stokes cautions.
And while the unfamiliarity of farm life might begin with wild swings in cash flow, it doesn’t end there. Operating in the agricultural sector would require urbanites to learn the somewhat alien culture of The Heartland – a way of life based on hard physical labor, the fickle whims of the weather, and friendly unhurried conversations, even with strangers.
Even so, the task of mastering the agricultural funding market isn’t hopeless, and help’s available. Experts in agricultural economics profess a willingness to help outsiders learn what they need to know to get involved. “Selfishly, the first place I’d love to have them reach out to is me,” Martin says of alternative funders. “I’ve been writing and thinking for years about the importance of getting some non-traditional lenders into agriculture.” He would have “no qualms” about featuring specific prospective funders in a column he writes for one of the nation’s largest farm publications.
It also requires meet-and-greets. During the winter, when farmers aren’t in the fields, funders could make connections at trade shows, Martin advises. “Word would get around rural America really quick,” he predicts. Networking with advisers such as crop insurance agents, agronomists and ag CPS’s – all of whom deal with farmers daily – would also help funders find their way in agriculture, he contends.
Investors who are curious about extending credit in the agricultural sector could rely upon Conterra to help them locate customers and help them service the loans, says Stokes. He can even help acclimate them to the world of agriculture. “If they’re interested in investing in agricultural assets – whether that be equipment, real estate or providing operating capital – we would enjoy the opportunity to visit with them,” he says.
GETTING STARTED
Alt funders could begin their introduction to the agrarian lifestyle by taking to heart a quotation attributed to President John F. Kennedy: “The farmer is the only man in our economy who buys everything at retail, sells everything at wholesale and pays the freight both ways.”
“Agriculture is a very different animal,” Martin notes. He sometimes presents a slide show to compare the difference between a typical farm and a typical manufacturer of the same size. At the factory, revenue ratchets up a bit each year and margins remain about the same over time. On the farm, revenue and margins both fluctuate wildly in huge peaks and valleys from one year to the next.
The volatility makes it difficult to manage the risk of lending, Martin admits, while noting that agriculturally oriented banks still have higher returns than non-ag banks, according to FDIC records. “You have to go back to 2006 to find a time when ag banks didn’t outperform their peers on return on assets,” he says. “What this tells us is that, generally speaking, ag borrowers are better at repaying their loans,” he asserts. Charge-offs and delinquencies in ag portfolios are lower than in other industries, he says.
Many of the nation’s farms have remained in the same family for more than a century – a stretch of time that’s seldom seen in just about any other type of business. Besides making potential creditors comfortable that a particular operation will stay in business, the longevity of farms provides lots of documents to examine – not just tax records but also production history that’s tracked by government agencies. A particular farmer’s crop yields, for example, can be compared with county averages to calculate how good the borrower is at farming.
Debt to asset ratio on the nation’s farms stands at about 14 percent, which Martin views as “insanely low.” But that’s not the case on every farm. Highly leveraged farms have ratios of 60 percent or even 80 percent when farmers have grown their businesses quickly or encountered debt to buy land from their parents, he says. Commodity prices are low now, but farms with 14 percent debt to asset ratios still don’t have a problem, even in hard times. Farmers deeply in debt, however, have little ability to climb out of the hole. The latter are using operating capital to fund losses.
Farmers with debt to asset ratios of 10 percent have little trouble finding credit and aren’t going to pay anything other than bank rates, Martin says. The target audience for non-traditional funding are farmers who are having trouble but will be fine when commodity prices rebound. Another potential client for alternative finance would be farmers who are quickly increasing the size of their operations when opportunities arise to acquire land. Both groups need funders willing to contemplate the future instead of demanding a perfect track record, he maintains.
Farmers generally need loans for operating capital for about 18 months, according to Martin. “Let’s say I borrow that money, get my crop in the ground, harvest that and I may not sell my grain right after harvest,” he says. The whole cycle can easily take 18 months, he says. Shorter-term bridge lending opportunities also arise in situations like needing a little extra cash quickly at harvest time. Farmers usually have something to put up as collateral – like producing 50 titles to vehicles or offering up some real estate, he says.
An unsecured loan – even one with high double-digit interest – could succeed in agriculture because no one is offering that type of funding, Martin says. Small and medium-sized farms would probably benefit from funding of $100,000 or less, while larger farms might sign up for that amount but often require more, he notes.
LAY OF THE LAND
The Farm Credit System, a nationwide quasi-governmental network of borrower-owned lending institutions, provides more than a third of the credit granted in rural America. That comes to more than $304 billion annually in loans, leases and related services to farmers, ranchers, rural homeowners, aquatic producers, timber harvesters, agribusinesses, and agricultural and rural utility cooperatives, according to published reports.
Congress established the Farm Credit System in 1916, and the Farm Credit Administration was established in 1933 to provide regulatory oversight. “All they’re doing is lending money to agriculture,” says Martin.
However, the system can go astray in the eyes of some observers. An arm of the Farm Credit System called CoBank lends to co-operatives and other rural entities. At one point Verizon Wireless became a borrower from CoBank, which angered some observers because the system was supposed to be helping rural America, not corporate America, Martin says.
That anger arises partly because the federal government doesn’t require Farm Credit to pay income tax, which enables it to lend at lower rates, Martin says. “Part of the allure of borrowing from Farm Credit is you can typically borrow cheaper,” he notes. “You’d be very hard pressed to find a farmer who over the years hasn’t had some interaction with Farm Credit.”
Observers sometimes fault the system for what they perceive as a tendency to extend credit only to those who don’t really need it, notes Purdue’s Gunderson. People working for the system believe they’re doing a good job of supporting agriculture, he says, noting that the system is charged with the responsibility of helping new and young farmers.
Another entity, the Federal Agricultural Mortgage Corp., also known as Famer Mac, works with lending institutions to provide credit to the agricultural sector. It’s a publicly traded company that serves as a secondary market in agricultural loans, including mortgages. It purchases loans and sells instruments backed by those loans and was chartered in 1988. Conterra, the alternative-funding company mentioned earlier in this article, -works with Farmer Mac and financial institutions to make real estate loans to farmers and ranchers in financial distress. The loans are designed to help borrowers get back on their feet in three to five years so that they would then qualify for regular bank loans.
Then there are the ag lending divisions at the large banks such as Wells Fargo, Chase and the Bank of the West, Martin says. “Lots of these big national banks are doing at least some ag lending,” he says. “Some, obviously, have bigger ag portfolios than others.”
Some regional banks focus on agriculture, Martin continues. “When you get into the middle of the corn belt, there are going to be some regional banks where traditional ag lending’s a huge part of what they do,” he says. Local banks in small towns get involved, too. “Most small community banks are going to have some kind of ag lending portfolio,” Martin notes. Hometown bankers can provide operating capital to some farmers, but only to those who haven’t experienced recent hiccups in revenue or expenses.
THE NON-BANKS
“Then you get into the non-bank lenders,” Martin observes. “A really good example of this is John Deere,” the tractor and equipment manufacturer. The company provides a tremendous amount of capital to rural America through equipment lending and also through other credit facilities, he says. In fact some observers estimate that John Deere is the largest lender to agriculture. Even so, the company usually doesn’t provide enough non-equipment credit to become the only lender a farmer would use, he says.
The same holds true with other lenders to agriculture, Martin says. Co-operatives, for example, lend money to agriculture even though they’re not banks. Typically, they begin by extending credit for products like seed, fertilizer or pesticides and then start making additional credit available to farms and ranches. In recent years, a large co-operative called CHS loaned hundreds of millions of dollars in addition to selling products on credit. Some large CHS loans went bad caused a ripple effect throughout the cooperative structure, Martin maintains. Other co-ops have looked at CHS and wondered if they’re moving too far outside their core competency. So now many co-ops are tying funding to products they’re selling.
Some other non-bank lenders have shown up in agriculture, and they fall into two categories, Martin says. One group is making real estate loans in agriculture, so their loan programs are geared to farmers looking to buy land or anything that can be secured by land. Conterra and Ag America are examples. Farmer Mac lends a lot of money against farmland, as well. So farmers who have agricultural land have a lot of access to capital and a lot of lenders who want to provide it, he says.
The second group of non-bank lenders is providing operating capital. “That is a very, very small club,” Martin says. “There’s really not anybody doing this on a regular basis – with just one or two exceptions.” Probably the biggest name among the exceptions is Ag Resource Management, usually known as ARM, he continues. ARM places a value on the potential productivity of a famer’s land. Then it looks at the crop insurance the farmer’s able to buy to protect the investment in that crop. ARM then lends part of the value of that crop insurance.
Let’s say a farmer can grow $10 million worth of crops, according to ARM’s projection,” Martin says. “You can get crop insurance to cover 80 percent,” he continues. “For a total crop failure, you will get $8 million for that crop.” Using a formula based on type of crop, location and type of crop insurance, ARM will lend some amount less than $8 million. “Their collateral is pretty rock solid,” Martin observes.
ARM uses a system to make sure farmers use the funds only for expenses related to growing the crop they’re using as collateral. “Their risk of not getting a crop in the ground that qualifies for the insurance is next to nothing,” Martin says. ARM offers differing interest rates, depending upon risk, in at least the high single digits or double digits, and they also charge fees. “So you’re going to be paying a lot, but they are the lender of last resort in agriculture right now,” he says, adding that ARM operates multiple offices has grown quickly.
Through lenders like ARM, the agricultural sector’s becoming familiar with alternative finance. But much remains to be done if alt fin pioneers want to venture into the sector. Those who do will encounter a complicated credit landscape, but one that offers opportunities for anyone willing to learn about unfamiliar business cycles and lifestyles.
Tips For Trade Show Success
February 14, 2019
Conference season will soon kick off, but many attendees are at a loss at how to score big at these events. Without a doubt, trade shows and conferences offer participants a prime opportunity to boost brand exposure, make professional connections and increase sales.
But there’s also a lot of behind-the-scenes work required to turn these events into successful business endeavors. While the playbook won’t be the same for every company, here are some tried-and-true tips to help attendees get the most out of conferences.
Start by determining which conferences to attend. With dozens to choose from, it’s not realistic from a budget, time or value perspective to hit every conference, says Jim Larkin, who manages events for OnDeck. Companies should select conferences based on which ones make the most sense for their goals and objectives. Not all conferences will offer the same benefits to every company or industry professional, frequent conference attendees say.
Ideally, management teams should meet early in the year to weigh the pros and cons of each conference, against the backdrop of the company’s budget. Some factors to consider include where and when the conference is being held, which of your competitors, prospects and customers are likely to attend and how many employees it makes sense to send, if any. “Budgets drive everything and you want to be smart with spending money,” says Janene Machado, Director of Events for AltFinanceDaily, whose flagship conference, Broker Fair, is scheduled for May 6 in New York. “You need to be strategic about why you are attending a particular conference,” she says.
It’s essential to plan ahead for each conference to make the most out of the event. This includes carefully combing through the agenda, scheduling meetings ahead of time and getting acquainted with the physical layout of the event space. If more than one company representative is attending, it’s also important to coordinate their activities in advance to avoid duplicating efforts and to maximize productivity.
“You have to make your own luck at these conferences,” Larkin says.
Most events have an online or mobile agenda and networking portal that are open to participants at least a few weeks beforehand. Bookmark the sessions you would like to attend, build your wish-list of people you would like to meet and start requesting meetings as soon as possible, says Peter Renton, co- founder and co-chairman of LendIt Fintech, which has an upcoming conference scheduled for April 8 and 9 in San Francisco. “Last year we helped to enable nearly 2,100 meetings at our USA event, and most of those meetings were organized through our networking portal,” Renton says.
Don’t delay when it comes to setting up advance appointments because schedules can fill up quickly, says Monique Ruff-Bell, event director for Money20/20 USA, which will take place in Las Vegas from Oct. 27 through Oct. 30. “Identifying the right contacts beforehand, reaching out and establishing what you’d like to achieve in a short meeting will make your time much more productive,” she says.
It’s fine for attendees to leave some time in their schedule for impromptu meetings as well; just be sure to fill those slots, says Ken Peng, head of business development and marketing at Elevate Funding. “No one should ever be asking, ‘what are we doing next?’ You should know,” he says.
It’s also a good idea to plan ahead for a dedicated meeting space so you’ll have a convenient, comfortable and quiet space to conduct meetings, seasoned conference attendees say. This can be especially important at big conferences where thousands congregate. For those who don’t want, or can’t afford, to pay for a meeting room, it’s a good idea to find a quiet restaurant or coffee shop outside the busy convention center area where you can have quiet, uninterrupted, productive conversations in a relaxed environment, says Larkin of OnDeck. Don’t choose the heavily frequented coffee shop next to the hotel where meetings are sure to be disrupted by heavy foot traffic, he says. “Get away from the noise, the hustle, the chaos. Quiet is king.”
Conferences can be expensive, so it’s important to make the right decisions with the available budget. For instance, companies don’t have to miss out on promotional opportunities just because the highest level of sponsorship is out of reach for their budget. Instead, look for creative ways to make an impact without breaking the bank, says Stephanie Schlesinger, director of marketing for LEND360.
Schlesinger suggests that would-be sponsors have an open conversation with conference organizers about what they can afford to spend and what they hope to reap in return for their marketing dollars. She offers the examples of companies that have sponsored popcorn breaks, pens and pads of paper, badges, lanyards and other marketing materials. “There could be opportunities to do something very unique. By brainstorming together we can think of outside-the-box opportunities to really make an impact for your brand,” she says.
Another cost consideration is where to stay. Though it can be tempting to save a few bucks by bunking off-site, that’s not always the most prudent decision, frequent conference attendees say.
“Time is really valuable at these shows and events. If you’re staying off-site you have to battle everybody for the cab line, and the increased expense of commuting can offset any cost savings,” says Sheri Chin, chief marketing officer at BFS Capital. Also, staying on-site “gives you more flexibility when unscheduled things come up,” she says.
If staying on premises isn’t an option, conference attendees should make extra efforts to spend considerable time in the bar or lobby of the conference site, says Jeffrey Bumbales, marketing director at Credibly. People will come in and go and it’s an easy way to start conversations, he says.
Conferences typically consume a lot of energy, so Eden Amirav, chief executive and co-founder of Lending Express, recommends participants try to catch people well before they are running on empty. As the conference goes on, it becomes harder to engage people because they also get drained, he says. Typically conference doors open a few hours before the first sessions begin, and this can be an especially effective time to network, Amirav says.
Arriving early also allows participants to find their way around. Ruff-Bell of Money20/20 USA recommends participants walk through the entire event space upon arrival to get their bearings. “Many of these large conferences can be overwhelming, and knowing where to go will help with your time management,” she says.
Bumbales of Credibly also recommends conference attendees pack their schedule tightly—even though it might mean activities extend late into the evening. Instead of calling it quits at 6 p.m. he recommends conference attendees plow through and host evening meetings over dinner or drinks. Even though a participant may be tired, it’s best not to miss these important networking opportunities, he says.
The proper conference mindset includes knowing there’s a good chance sleep won’t be plentiful. To accommodate, Bumbales tries to ensure he’s well-rested before a conference. He also makes sure to pack protein bars and non-perishable snacks for replacement meals as needed throughout the conference in case he needs to eat on the go. The goal is to hit the ground running and be able to focus entirely on conference-related business, he says.
Although numerous social opportunities abound at conferences, not everyone takes advantage. Certainly not everyone is as comfortable approaching strangers. But it’s important for conference- goers to try to break out of their shell whenever possible, industry professionals say. When he first started going to conferences, Gary Lockwood, vice president of business development at 6th Avenue Capital, says he found it difficult to strike up conversations with strangers because it took him out of his “comfort zone.” But he forced himself to make the extra effort, and it has served him well. He says that some of the best connections he’s made have come from these chance meetings at breakfast, lunch or during random breaks.
Although attendees don’t always stay on-site for meals, Peng of Elevate Funding recommends people stick around during these times, if possible. He finds these meals a good opportunity to chat with others in a comfortable setting as opposed to the more strained conversations that can happen when someone approaches him at an exhibitor booth. These informal conversations offer a better chance to build a rapport with someone and learn—in a non- pressured environment—about what the other person does, he says.
Bumbales of Credibly says elevator time offers another opportunity for chance meetings that can turn into business opportunities. Most times, he prefers to take the stairs, but not at conferences. Elevators can be great for short, yet productive conversations. He likes to position himself next to the elevator buttons, which gives him an opening to break the ice. He says he’s had a few business opportunities arise as a result of elevator conversations.
It’s also important not to monopolize anyone’s time says Machado of AltFinanceDaily. Everyone is there to meet as many people as possible, so she recommends keeping conversations quick, meaningful and relevant.
When he’s talking to someone for the first time, Lockwood of 6th Avenue Capital tries to listen more than he speaks. “I want to listen a little more than I talk in the beginning so I can tailor the conversation to what they need.”
While not every exchange will be fruitful, it’s important to recognize that any conversation could lead to future business; even a commercial real estate broker who has no present connection to merchant cash advance can be a potential partner or resource at some point, Lockwood says.
It’s also a good idea to keep your business cards handy at all times. Bumbales says he’s been in several situations when people don’t have them available, which makes exchanging information more awkward. “It’s a lot less awkward to exchange business cards then it is to ask for someone’s cell phone number,” Bumbales says.
Because each day is so jammed- packed with information, it’s a good idea to take notes so you don’t lose track of important details, says Ruff-Bell of Money20/20 USA. Each person will have his own system, but effective note-taking becomes important for recapping the event back in the office and for sending post-event follow-ups to new contacts. “At the end of each day, go through your notes and clean them up, ensuring you’ll understand the key points and important details weeks later,” she says.
Some conference participants fall short when it comes to following up with new connections they’ve made, but this can be a grave mistake. Follow-up emails are most effective when they are personal, says Peng of Elevate Funding. He recommends attendees jot down a few notes on the business card of each person they meet to jog their memory later on about their conversation. Then, weave details of the conversation into the follow-up email, so the correspondence won’t seem cold, generic or canned, he says.
Remember, conference-goers will be meeting hundreds of other people at the conference, Ruff- Bell says. “Ensure your follow-up is prompt, effective, and most importantly, memorable,” she says
Even though the setting is social, conference attendees need to be mindful about maintaining proper decorum at all times. This is a seemingly obvious rule of thumb that people sometimes forget, conference participants say.
“You’re there for work first, play second,” Peng says.
Professionalism also dictates that attendees and exhibitors should be where they are supposed to be at appropriate times. Peng recalls a conference he attended last year where one of the exhibitors left its booth unmanned for most of the conference. There’s no way to know where an interaction at these booths can lead in terms of new business or face-time with existing clients.
“It’s not doing the company any favors” by passing up the opportunity, he says.
Why RapidAdvance Is Now Rapid Finance
February 7, 2019
RapidAdvance has officially changed its name to Rapid Finance.
“The term ‘advance’ is out of favor these days,” said founder and Chairman of Rapid Finance Jeremy Brown. “It also doesn’t reflect who we are as a company or what our brand is. We put our clients in a variety of different financing solutions including factoring, term loans and equipment leasing. ‘Advance’ is very narrow and old school. ‘Finance’ represents where the company has evolved to and where we’re going.”
The company’s logo is also new, but Brown said that they purposely retained the same color scheme to make the change as seamless as possible.
“Before we had an arrow through the word ‘rapid,’” Brown said. “I think the three squares [in the new logo] represent an arrow head so that there’s continuity with the old logo.”
Consistent with the rationale for the company’s name change, Brown said that their business is about 85% term loans and only 15% merchant cash advance, healthcare cash advance and bridge loans. Through partners, Rapid Finance also provides their customers with access to SBA loans, factoring, asset based loans, commercial real estate and lines of credit. By the second quarter of this year, Brown expects that they will offer their own line of credit product.
Rapid Finance is broadly diversified by business type, according to Brown. He said that no business category accounts for more than 25% of their business. As for acquiring new business, Brown said that 60% comes from partners/brokers and 40% comes from their internal direct marketing efforts.
Brown said that Rapid Finance, which employs about 200 people, has hired about 25 over the last six months. Most of the hires were in the technology and sales departments, both internal sales and sales reps who work with ISO partners. He also said they expect to fund between $550 and $600 million this year.
Founded in 2005, the company’s employees are divided between its headquarters in Bethesda, MD and another office in Detroit, MI, which houses Rapid Finance’s direct sales and marketing teams.
Get The Affidavit or Waive It? Examining Confessions of Judgment
February 1, 2019
Caton Hanson, the chief legal officer and co-founder of the online credit-reporting and business-to-business matchmaker Nav, says that his Salt Lake City-based company would not associate with a small-business financier that included “confessions of judgment” in its credit contracts.
“If we understood that any of our merchant cash advance partners were using confessions of judgment as a means to enforce contracts,” Hanson told AltFinanceDaily, “we would view that as abusive and distance ourselves from those partners. As a venture-backed company,” Hanson adds, “we have some significant investors, including Goldman Sachs, and I’m sure they would support us.”
Steve Denis, executive director of the Small Business Finance Association, which represents companies in the merchant cash advance (MCA) industry, says that, as an organization, “We’ve taken a strong stance against confessions of judgment.”
He reports that his Washington, D.C.-based trade group is prepared to work with legislators and policy-makers of any political party, regulators, business groups and the news media “to ban that type of practice.
“We’re fighting against the image that we’re payday lenders for business,” Denis says of the merchant cash advance industry. “We’re trying to figure out internally what we can do to stop that from happening and we have been speaking to members of Congress and their staff.”
“Confessions of judgment,” says Cornelius Hurley, a law professor at Boston University and executive director of the Online Lending Policy Institute, “are to the merchant cash advance industry what mandatory arbitration is to banks. Neither enforcement device reflects well on the firms that use them.”
These are just some of the reactions from members of the alternative lending and financial technology community to a blistering series of articles published by Bloomberg News on the use—and alleged misuse—of confessions of judgment (COJs) by merchant cash advance companies. The series charges the MCA industry with gulling unwary small businesses by not only charging high interest rates for quick cash but of using confession-laden contracts to seize their assets without due process.
The Bloomberg articles also reported that it doesn’t matter in which state the small business debtors reside. By bringing legal action in New York State courts, MCA companies have been able to use enforcement powers granted by the confessions to collect an estimated $1.5 billion from some 25,000 businesses since 2012.
“I don’t think anyone can read that series of articles and honestly say what went on were good practices and in the best interest of small business,” says SBFA’s Denis, noting that none of the companies cited in the Bloomberg series belonged to his trade group. “It’s shocking to see some companies in our space doing things we’d classify as predatory,” he adds. “As an industry we’re becoming more sophisticated, but there are still some bad actors out there.”
A confession of judgment is a hand-me-down to U.S. jurisprudence from old English law. The term’s quaint, almost religious phrasing evokes images of drafty buildings, bleak London fog, and dowdy barristers in powdered wigs and solemn black gowns. (And perhaps debtor prisons as well.)
Yet while the legal provision’s wings have been clipped—the Federal Trade Commission banned the use of confessions of judgment in consumer credit transactions in 1985 and many states prohibit their use outright or in such cases as residential real estate contracts—COJs remain alive and well in many U.S. jurisdictions for commercial credit transactions.
Even so, most states where COJs are in use, such as California and Pennsylvania, have adopted safeguards. Here’s how the San Francisco law firm Stimmel, Stimmel and Smith describes a COJ.
“A confession of judgment is a private admission by the defendant to liability for a debt without having a trial. It is essentially a contract—or a clause with such a provision—in which the defendant agrees to let the plaintiff enter a judgment against him or her. The courts have held that such a process constitutes the defendant’s waiving vital constitutional rights, such as the right to due process, thus (the courts) have imposed strict requirements in order to have the confession of judgment enforceable.”
In California, those “strict requirements” include not only that a written statement be “signed and verified by the defendant under oath,” but that it must be accompanied by an independent attorney’s “declaration.” If no independent attorney signs the declaration or—worse still—the plaintiff’s attorney signs the document, the confession is invalid.
But if the confession is “properly executed,” the plaintiff is entitled to use the full panoply of tools for collection of the judgment, including “writs of execution” and “attachment of wages and assets.”
In Pennsylvania, confessions of judgment are nearly as commonplace as Philadelphia Eagles’ and Pittsburgh Steelers’ fans, particularly in commercial real estate transactions. Says attorney Michael G. Louis, a partner at Philadelphia-area law firm Macelree Harvey, “They may go back to old English law, but if you get a business loan or commercial lease in Pennsylvania, a confession of judgment will be in there. It’s illegal in Pennsylvania for a consumer loan or residential real estate. But unless it’s a national tenant with a ton of bargaining power—a big anchor store and the owner of the shopping center really wants them—95% of commercial leasing contracts have them.
“And any commercial bank in Pennsylvania worth its salt includes them in their commercial loan documents,” Louis adds.
Pennsylvania’s laws governing COJs contain a number of additional safeguards. For example, the confession of judgment is part of the note, guaranty or lease agreement—not a separate document—but must be written in capital letters and highlighted. One of the defenses that used to be raised against COJs, Louis says, was that a contractual document was written in fine print “but we haven’t seen fine print for years.”
Other reforms in Pennsylvania have come about, moreover, as a result of a 1994 case known as “Jordan v. Fox Rothschild.” Says Louis: “It used to be lot worse. You used to be able to file a confession of judgment and levy on a defendant’s bank account before he knew what happened. It was brutal. But after the Fox Rothschild case, they changed the law to prevent taking away a defendant’s right of notice and the opportunity to be heard.”
Because of that case, which takes its name from the Fox Rothschild law firm and involved a dispute between a Philadelphia landlord renting commercial space to Jordan, a tenant, the law governing COJs in Pennsylvania requires, among other things, a 30-day notice before a creditor or landlord can execute on the confession. During that period the defendant has the opportunity to stay the execution or re-open the case for trial.
Defenses against the execution of a COJ can entail arguments that creditors failed to comply with the proper language or procedures in drafting the document. But the most successful argument, Louis says, is a “factual defense.” Louis cites the case of a retail clothing store renting space in a shopping center that has a leaky roof. In the 30-day notice period after the landlord invoked the confession of judgment, the tenant was able to demonstrate to the court that he had asked the landlord “ten times” to fix the roof before spending the rent money on roof repairs. In such a case, the courts will grant the defendant a new trial but, Louis says, the parties typically reach a settlement. “Banks generally will waive a jury trial,” he notes, “because they don’t want to take a chance of getting hammered by a jury.”
A number of states, including Florida and Massachusetts ban the use of confessions of judgment. That’s one big reason that Miami attorney Roger Slade, a partner at Haber Law, advises clients that “there’s no place like home.” In other words: commercial contracts should specify that any legal disputes will be adjudicated in Florida. “It’s like having home field advantage in the NFL playoffs,” Slade remarked to AltFinanceDaily. “You don’t want to play on someone else’s turf.”
He has also been warning Floridians for several years against the way that COJs were treated by New York courts. Writing in the blog, “The Florida Litigator,” Slade—a native New Yorker who is certified to practice law there as well as in Florida counseled in 2012: “If you live in New York, a creditor can have your client sign a confession of judgment and, in the event of a default on a loan, can march directly to the courthouse and have a final judgment entered by the clerk. That’s right—no complaint, no summons, no time to answer, no two-page motion to dismiss. The creditor gets to go right for the jugular.”
In addition, because of the “full faith and credit clause of the U.S. Constitution,” Slade notes in an interview, a contract that’s enforced by the New York courts must be honored in Florida. “Courts in Florida have no choice,” Slade says. “It’s a brutal system and it’s unfortunate.”
In December, two U.S. senators from opposing parties—Ohio Democrat Sherrod Brown and Florida Republican Marco Rubio—introduced bipartisan legislation to amend both the Federal Trade Commission Act and Truth in Lending Act to do away with COJs. Their legislative proposal reads:
“(N)o creditor may directly or indirectly take or receive from a borrower an obligation that constitutes or contains a congnovit or confession of judgment (for purposes other than executory process in the State of Louisiana), warrant of attorney, or other waiver of the right to notice and the opportunity to be heard in the event of suit or process theron.”
But with a dysfunctional and divided federal government, warring power factions in Washington, and an influential financial industry, there’s no telling how the legislation will fare. Meantime, the New York State attorney general’s office announced in December that it will investigate the use of COJs following the Bloomberg series. And New York Governor Andrew Cuomo has declared support for legislation that will, among other things, prohibit the use of confessions in judgment for small business credit contracts under $250,000 and restrict judgments by New York courts to in-state parties.
But if New York State or Congressional legislation are adopted it can have “unintended consequences” to merchant cash advance firms in the Empire State—and to their small business customers as well—asserts the general counsel for one MCA firm. “Losing the confession of judgment will be removing what little safety net there is in a risky industry,” the attorney says, noting that the industry has roughly a 15% default rate.
“It is not as powerful a tool as the Bloomberg news stories would have you believe,” this attorney, who spoke on the condition of anonymity, told AltFinanceDaily. “The suggestion seems to be that the MCAs can use the confession of judgment to get back the total amount of money due—and then some—while leaving a trail of dead bodies behind. But that’s not the case.
“What is much more likely to be the case,” he adds, “is that MCA companies try to get the defaulting merchant back on track. And—probably more than we should and only after we’ve tried to reach out to them and failed—do we then reluctantly use the COJ as a last resort. At which point we hope we can recover some part of our exposure. The numbers vary, but the losses are always in the thousands of dollars. These are not micro-transactions.
“What’s going to happen,” he concludes, “is that It will not make sense for us to work with those merchants most in need of working capital. The unfortunate reality is that businesses who don’t have collateral and can’t get a Small Business Administration product will be left out in the cold.”
All of which prompts BU professor Hurley to argue that the “Swiss cheese” system of financial regulation among the 50 states continues to be a root cause of regulatory confusion. Echoing Miami attorney Slade’s concern about New York courts’ dictating to Florida citizens, Hurley likens the situation governing COJs with the disorderly array of state laws governing usury regulations.
In the 1978 “Marquette” decision, the U.S. Supreme Court ruled that a Nebraska bank, First of Omaha, could issue credit cards in Minnesota and charge interest rates that exceeded the usury rate ceiling in the Gopher State. Since then, usury rates enacted by state legislatures have become virtually unenforceable.
“The problem we’re seeing with confessions of judgment is a subset of the usury situation,” Hurley says. “One state’s disharmony becomes a cancer on the whole system. It’s a throwback to Colonial times with 50 states each having their own jurisdictions—and it doesn’t work.”
Hurley’s Online Lending Policy Institute has joined with the Electronic Transactions Association and recruited a phalanx of “academics, non-banks, law firms and other trade associations as members or affiliates” to form the Fintech Harmonization Task Force. It is monitoring the efforts by the 50 states to align their regulatory oversight of the booming financial technology industry which was recently recommended by a U.S. Treasury report.
Tom Ajamie, who practices law in New York and Houston and has won multimillion-dollar, blockbuster judgments against “dozens of financial institutions” including Wall Street investment firms, also argues for greater regulatory oversight. He urges greater funding and expansion of the powers of the Consumer Financial Protection Bureau to rein in “the anticipatory use” of confessions of judgment in commercial transactions.
However, notes Catherine Brennan, a partner at Hudson Cook in Baltimore, the job of protecting small businesses is outside the agency’s mandate. “The CFPB doesn’t have authority over commercial products as a general rule,” she explained in an interview. “Consumers are viewed as a vulnerable population in need of protections since the 1960’s.” As a society “we want protection for households because the consequences are high. A family could become homeless if they lose a house. Or (they) could lose employment if they lose a car and can’t drive. And there is also unequal bargaining power between lenders and consumers.
“Large institutions have lawyers to draft contracts and consumers have to agree on a take it or leave it basis. So there’s not a lot of negotiation and government has decided that consumers need protections, including a (Federal Trade Commission) ban on confessions of judgment.”
But Christopher Odinet, a law professor at the University of Oklahoma and a member of Hurley’s harmonization task force, sees the efforts of the federal government and the states to grapple with confessions of judgment as further recognition that small businesses have more in common with consumers than with big business. The COJ controversy follows on the recent passage of a commercial truth-in-lending bill by the State of California which, for the first time, stipulated that consumer-style disclosures should be included in business loans and financings under $500,000 made by non-bank financial organizations.
He cites the close-to-home example of an accomplished professional who got in over his head in financial dealings. “I recently observed a situation where a family member who is a very successful and affluent medical professional was relying on his own untrained business skills,” Odinet says. “He was about to enter into a sophisticated and complex business partnership relying on his intuition and general sense of confidence in the other party.”
Odinet says that he recommended that his relative hire a lawyer. Which, Odinet says, he did.
How an SBA Lender is Managing Through the Shutdown
January 10, 2019
As a result of the U.S. government shutdown that started on December 22 of last year, hundreds of thousands of government employees have been working without pay. The shutdown has also temporarily stopped the Small Business Administration (SBA), a government agency, from operating. This means that obtaining an SBA loan, which is backed by the federal government, is no longer an option for American small business owners. (A lender cannot fund an SBA loan without the authorization of the SBA).
While most SBA loans are funded by banks, a fair amount are also funded by non-bank lenders, like Lendistry, for which 60% of its business came from SBA loans last year. In his 20 year career, Lendistry CEO Everett Sands remembers another government shutdown in 2013. According to data collected by The New York Times, the 2013 shutdown lasted 16 days. As of today, the shutdown has lasted 20 days, and the longest shutdown since 1976 was 21 days.
Sands told AltFinanceDaily that lenders like him are continuing to process the loans. However, they have to wait until the government re-opens before closing on any new loans. Since Sands and other SBA funders can’t close on the loans, they can’t yet generate money from them. Thankfully for Sands, he just recently started expanding his product offering.
“I think we feel a little bit calmer than we would have last year because we [recently] rolled out [new products,]” Sands said. “An express line of credit program, a traditional line of credit, an express term product, and a commercial real estate product. So these products will not only keep us busy, but will allow us to weather the storm.”
Sands said that his team has been calling its borrowers and asking them if they would like to wait for their SBA loan to be processed or apply for a different kind of loan. He said that about half have decided to wait and half have decided to shop for another loan.
While SBA loans have been put on hold, Sands said that a government shutdown like this will likely increase the demand for loans in general, particularly among government contractors who are not getting paid.
“Historically, when there’s been a government shutdown, employees get their backpay. The government contractors do not. They just get delayed and pushed back further,” Sands said. “Generally, when people do not receive money, because the bills do not stop, they’re going to turn to resources…like lending organizations.”
As for SBA loans, once the shutdown is over, there will be a backlog, Sands said. He said that the SBA generally approves their loans in two days or less, but thinks that the approval time will probably move to 5 to 10 days if the shutdown stopped yesterday.
Sands joins most of the country in hoping that the shutdown will end soon. As it relates to his business: “I think it’s important to be able to offer clients all products that should be available to them, [including] the longer term [SBA] products which equals better cash flow. And if you think about it as a lender, you want to put your clients in the best position to pay you back.”
Despite the shutdown, 2018 was a very successful year for Lendistry with SBA lending. The company closed 92 SBA loans totaling $17.5 million and they have only been approved for SBA lending since June 2017, and only in California.
Founded in 2014, Lendistry employs 23 people. They offer loans of up to $1 million to small businesses in a variety of industries from restaurants to healthcare providers.
How One Broker Moved from One-Man Home Office to 23 Person Shop
January 7, 2019Zach Ramirez started the brokerage company ZR Consulting from his home in Orange County, CA in June 2018. He was generating leads and making phone calls, often in a hushed voice because he was also looking after his six month old daughter.
“That was difficult, having a baby and with my life savings in the business,” Ramirez said.
But he had three brokers working remotely for him and things were working pretty smoothly. That number was growing by the time AltFinanceDaily profiled him in August.
His fledgling business was manageable until he got to six brokers. At this point, the 29 year-old Ramirez said his home office was starting to feel like a call center.
“All day, I was answering calls to help them,” Ramirez said. “‘Zach, I have a question about this merchant, Zach, can you help me close this deal?’ It gave me a ton of anxiety.”
Ramirez realized that it would be much easier to manage employees from a brick and mortar space. So he found the company an office.
“Technically, we could have stayed at home,” Ramirez said.
And he acknowledges that some brokers can make a nice living working from home.
“But I want to have the biggest ISO,” Ramirez said.
With this as his goal, he said it makes the most sense to have everyone under one roof. If he’s having a large meeting, he wants to know that everyone is paying attention and not driving or playing a video game as they could on a conference call.
“It was difficult to manage salespeople and to track everything, like how many leads we generated in one day? How many leads does it take for me to fund one deal? How much money does the average deal bring me?”
Having his brokers work remotely made keeping track of these numbers even harder. Ramirez still has a couple of people who work for him remotely, but he said that 95% of his employees, or 23 people, now work at their office in Anaheim, CA. Ramirez said that the office was much too big for them with just six people at the beginning.
“We could hear echoes bouncing off the walls,” he recalled.
But now with 23 people, mostly brokers and some support staff, Ramirez is actually planning to expand into an office next door.
“[As we grew in the office,] we just re-invested every penny we earned back into the company,” Ramirez said. “We upgraded our computers and furniture and we put people on W-2s. We gave our employees a 401k right away. I think it’s important to really treat your people right.”
Ramirez acknowledged that he can’t make changes to the business as quickly as he used to. With more than 20 people, he said that costs go up dramatically and therefore decisions have to be much more calculated.
“It takes time to move the ship,” Ramirez said, “and if you’re not careful, everyday can be consumed by the small stuff.”
That’s why he stresses the importance of delegating roles to others.
“It’s the only way to free up your time so you can focus on the bigger picture,” he said.
Now, he said that he very rarely speaks to funders anymore. He has two processors on staff whose job is to organize the paperwork from the brokers and send it to the funders. They organize the company pipeline, he said.
Ramirez said that it can be quite difficult to find the right mix of funders.
“Some funders who you think will be great turn out not to be and other funders who you’ve never heard of turn out to be real diamonds in the rough,” Ramirez said.
And like many brokers feel, Ramirez agrees that when it comes to funders, less is more.
“Having a very precise and small list of funders is incredibly important…because it simplifies your process [and] having a simple process is one of the keys to scaling your business,” Ramirez said.
Ramirez said that a common mistake brokers make is to test out a bunch of brokers all at once. He said that brokers need to try working with new funders intelligently, which means one at a time.
“When you bring on a new lender, you carefully watch every submission to them,” Ramirez said. “You want to make sure they’re not backdooring you. So usually you want to put your phone number and your email address in the contact info so you can catch them if they’re trying to be sneaky. [If they are,] they’ll call asking for the client and you know you only sent that deal to one lender.”
He’ll sometimes then pretend he’s interested and record the call. On about three occasions, he said that he has sent recordings like this to the backdooring lender and he’ll write “this is why I don’t send deals to you.”
Ramirez’s small group of trusted funders are OnDeck, National Funding, BFS, and Orange Advance.
As Ramirez expands, he says he only hires brokers by referral. He said that 90% of his business is short term business loans and MCAs, and 10% is SBA loans and real estate transactions.
Ramirez said that so far, ZR Consulting has originated $15 million in deals since inception and has earned $1.5 million in revenue.
How to Respond to Negative Press
January 3, 2019
Wondering what to do about negative press? AltFinanceDaily spoke to some Public Relations professionals about helpful techniques to manage the situation.
“When it comes to a negative story, we advise our clients to bridge back to something they are comfortable talking about,” said Bill McCue, Executive Consultant at Indicate Media.
Bill McCue, Indicate mediaMcCue said this is known as “bridging.”
“If you’re asked a question about something you don’t want to talk about for whatever reason, you can use transitional phrases like ‘You know that’s an interesting point, but what the real story here is…’ or ‘What we believe is truly the most important thing to talk about is…’ And just keep bridging from a topic you’re not comfortable addressing to a topic you are comfortable addressing.”
McCue noted that politicians and professional athletes are excellent at this. His favorite example is hockey players, who never talk about themselves. When they get a question about their own performance, they always “bridge” to something like the strength of another player or the coach or the entire team.
McCue also advises all clients, whether they’re overcoming negative press or not, to speak in simple terms, and avoid jargon or acronyms.
“Never assume that the reporter is an expert on your industry,” McCue said. “He or she might be writing about [multiple] topics throughout a given business day. Or they may have been writing about real estate last week and now they’re writing about small business lending…So never assume a certain level of expertise.”
Jason Geller, JMediaHouseIf your industry has gotten negative press, but your company in particular has not been targeted, Jason Geller, Founder of New York-based public relations firm JMediaHouse, said that no response is often the best response.
“Unless you have established clear goals and a message you must put out, or if the allegation is serious, the best response in most cases is nothing. Ignore it,” Geller said. “Don’t give the story life. By opting out you’ve robbed it of the oxygen it needs to continue on.”
Geller also said that if the reporting contained inaccurate information, then the company must first provide the correct information to the reporter or blogger. This, he said, “opens up a great opportunity to leverage the situation and strengthen your relationship with the journalist, and to allow him or her to get to know your company and clients better.”
If a given negative story is so bad that it truly warrants a response, Geller said that it’s critical first to research the writer or blogger before responding.
“What have they written about in the past? Do they have a history of putting out negative commentary? Have they had a bad experience with your product or brand? Once you have the answers to these questions, you’ll be able put together a much more concise and educated response,” Geller said.
