National Security Could Prove to be Alternative Lending’s Achilles Heel
December 11, 2015
While alternative lenders debate disclosure policies, stacking, and the cost of bad merchants, there’s a new regulatory threat taking root that no one seems to be able to slow down, national security. Ever since it was revealed that one of the two terrorists in the San Bernardino attack received a $28,500 loan from the Prosper Marketplace, government officials and the public at large are pointing fingers at online lenders.
House Financial Services Chair Jeb Hensarling said on Thursday that, “clearly the financing link to terrorism is a critical one.” As quoted by Politico, “everything’s on the table,” he said when asked about further scrutiny of online lenders.
His sentiment echoes other responses, some of which are clearly emotionally charged and accusatory. LendAcademy’s Peter Renton for example wrote, “I have had to answer such ridiculous questions as, is P2P lending going to become the new way for terrorists to get funding?”
With so much misinformation now floating around out there about online lenders, conspiracy theorists are even claiming that it would be impossible for someone earning $53,000 a year (As Syed Farook did) to get an unsecured loan for $28,000, the implication being that there is something more sinister going on. Of course those that work in the alternative lending industry, including myself personally as someone who invests on the Prosper Marketplace, know that’s not true.
But before the experts can be called on to answer the questions, those motivated to protect this country at all costs (with noble intentions) are rallying around swift and immediate consequences for online lenders such as Prosper.
“The issue may end up being whether marketplace lenders are too easy of a source of cash to finance terrorist attacks,” said Guggenheim Partners analyst Jaret Seiberg in a research letter.
In an article published by The Street, writer Ross Kenneth Urken basically likened Prosper Marketplace to Silk Road where bitcoins were used to buy drugs, weapons, and killers for hire.
Breitbart News, a right-wing news website, led in with an even bigger headline, San Bernardino: Has Islamic State Hijacked Consumer Loans?. It quickly sums up the story by insinuating that online lenders will become the funding tool of choice for ISIS. “The San Bernardino terrorists, Syed Rizwan Farook and his wife Tashfeen Malik, funded their killing spree with a debt consolidation loan, raising questions about whether terrorists might use popular consumer loans to fund their activities,” Breitbart wrote.
And the International Business Times argued that Utah industrial banks are aiding terrorism. “Meanwhile, industrial banks in Utah are taking full advantage of the lack of regulation in the peer-to-peer lending market while they still can, aiding potential terrorists along the way,” author Erin Banco concluded.
According to the WSJ, the House Financial Services Committee will examine whether new legislation is needed in online lending. They’ve also made inquiries to the Treasury Department about existing online lending regulations. Treasury Counselor Antonio Weiss’s previous remarks hinted that the Treasury up until recently was concerned about discriminatory lending practices more than anything else, but stressed that they were not a regulator in this area. Terror financing was not something they even addressed.
According to many sources, lawmakers are drafting up legislation on terrorism financing and expect to have something ready early next year. As for how that will impact online lenders is unknown. Right now, everyone’s still trying to figure out what just happened. Hopefully whatever is ultimately done is done intelligently.
Stop Being A Sub-Broker
December 10, 2015
In an industry with increasing competitive forces putting downward pressures on offer pricing, while simultaneously driving up demand for particular marketing channels (like SEO and quality data) which increases marketing costs, we are seeing massive downward pressures on profits. With this phenomenon occurring, you would have to wonder why in the world would anyone continually operate as a sub-broker today (willingly)? Are there any particular benefits to this, or is it just flat out non-sense? I wanted to explore this topic head on as we wrap up The Year Of The Broker.
THE VAST MAJORITY OF THE TIME, IT MAKES LITERALLY NO SENSE
There are times when I believe being a sub-broker makes some level of sense, but in my opinion those times (looking at our industry specifically) are very rare and most of the time being a sub-broker makes literally no sense based on the setup. The usual setup for a sub-broker is the same as a broker, which means you are going to be required to go out and spend money on marketing or other forms of lead generation to attract applicants.
Once you get those applications, you would forward them to the brokerage house so they can “close” the deal. A lot of sub-brokers believe this is some sort of grandiose deal, allowing them to as they say “free up time” to do other things. But this line of thinking makes literally no sense, because you have already done 98% of the work, which in our industry is just the consistent generation of high quality leads. Once you have done that and are doing that consistently, emailing the package over to a funder and chasing paperwork is the easiest part.
Why would you take only 25% – 50% of the commission structured on a deal, as well as most likely lose your ongoing renewal compensation, when you can instead take 100% of the commission, control your renewal portfolio and make renewal compensation going forward, which is the lifeblood of our industry?
LIES, LIES AND MORE LIES
Sub-brokers need to stop falling for the lies of larger brokerage houses which include the following:
“We are closers, you aren’t a closer, so let us handle it!”
This is rubbish. In our industry we don’t close, we are match-makers. The merchant comes to us looking for working capital, we pre-qualify their current standing and recommend a potential solution. If the merchant disagrees with the potential solution and we have nothing else that would work, the discussion ends. If the merchant agrees to the estimates and the product overview, we collect an application package to submit it to the funder that we believe can do an appropriately-priced deal. As long as we can get approval inline with expectations, everything moves forward on its own accord.
“We have access to special underwriting, platforms and pricing that you don’t have access to!”
More rubbish. When lenders get an A-paper deal, they give you A-paper quotes. When they get a B/C-paper deal, you get B/C-paper quotes. Look to establish a good relationship with a funder/lender. Let them know upfront that you are a small office so a smaller amount of volume will be coming through you. As long as you don’t have a high default rate, you will have access to the same systems, underwriters, base pricing, and innovative products of the funder/lender that the larger brokerage House has.
“We have access to special industry knowledge that you don’t have access to!”
More rubbish. With sources like AltFinanceDaily and other popular forums, the industry has been exposed. Everything you need to know, learn and be trained on has been covered. Also the assortment of direct funder and lender blogs/websites, media publications, and all of the like covering the industry, there’s no special industry knowledge that you can’t go out and attain on your own.
YOU MIGHT NOT EVEN GET PAID
Being a sub-broker might put you in a position of not even getting paid on new deal revenue as promised, as the large (or more experienced) brokerage is fully aware of your inability to truly challenge them legally or professionally.
- Sue If You Want, It Won’t Make A Difference: You can sue the broker for the $5,000 or so that they didn’t pay you on a couple new deals in Small Claims Court. But even though you can obtain a judgment, collecting on that judgment will be nearly impossible.
- Complain Online If You Want, It Won’t Make A Difference: You can also choose to damage their reputation online through posting various negative reviews, but do you think they will care? Go on the RipOffReport all you want, the largest merchant processing ISOs are all over those reports and that doesn’t do anything to stop their growth. The organizations getting these negative reviews will just say, “we serve thousands of clients and when you are as large as us, you are bound to have unhappy customers.” And that’s exactly what the brokerage house will say to their prospective merchants who bring up these negative review listings that you made.
BUT DOES BEING A SUB-BROKER “SOMETIMES” MAKE SENSE?
On very rare occasions do I believe being a sub-broker makes sense, and it includes if there’s some sort of initial training period and if the larger brokerage has significant marketing competitive advantages.
Training
So if you have zero experience, can’t spell Merchant Cash Advance, and believe you could benefit from a 6 month period with an established broker to show you the ropes, then being a sub-broker for a short period of time could make sense. However, I still believe that with the industry being exposed the way it is, you can train yourself and have to deal with insane non-compete agreements.
Marketing Competitive Advantages
So as a small shop, your marketing budget might be limited to $1k a month, whereas the larger brokerage is spending $20k a month and in a perfect world, might give you a deal where you can work with them without being required to generate your own leads.
They’ll claim to supply everything in terms of your dialer and warm leads, with funder networks already established. So all you have to do is come in, sit down, pick up the telephone, and sell all day to the warm leads coming in from their $20k in marketing. You don’t have to do any cold-calling. So you might be getting 50 leads a week that you convert to 12 applications, which you then convert to 4 new deals. If the average funding is $30k, then that’s $120k in funding with let’s say an average 6% commission that you would split 50/50 (3%/3%), giving you $3,600 per week which is $14,400 per month.
But we don’t live in a perfect world, now do we? Do you honestly believe the structure will be established as promoted? Such as more and more of the 50 leads you receive per week turn into mainly start-ups that don’t qualify for anything. Or, most weeks you don’t receive any warm leads at all, and are required to call UCCs, aged leads, or random listings out of the Yellow Pages, which are all horrible marketing mediums.
EITHER YOU GET IN ALL OF THE WAY, OR MAYBE YOU SHOULD GET OUT
If you are going to be in this industry, then properly set up your office, marketing plan, business plan, funder network and work your own deals. Get 100% of commission structured on new deals and control your renewal portfolio (the lifeblood of our business). If you are going to operate as a sub-broker, for the most part you are going to get a raw deal as we don’t live in a perfect world. We live in a world full of inefficiencies, “rah-rah” sales motivational speeches, and promises that don’t get kept.
Prosper Loan Linked to Terror – A Preliminary Assessment
December 9, 2015By now you have probably heard that one of the San Bernardino terrorists received a $28,500 deposit from WebBank.com two weeks prior to committing the attack. After Fox News broke that story, I may have been the first to publicly connect it to an alternative lender which was later revealed to be marketplace lender Prosper about 12 hours later.
As a Prosper investor myself, here are some things you should know:
The $28,500 deposit (if that was the exact true amount) would have been net of the origination fees. In all likelihood this was a loan for around $30,000 and the borrower only netted $28,500.
Those that have speculated that it would be impossible for someone making $53,000 a year (as Syed Farook did) to qualify for an unsecured loan of this amount are wrong. There are loans on the platform right now that fit these parameters. Online Lenders like Prosper and Lending Club are pretty aggressive with their lending.
The notion that Prosper somehow could’ve detected what the borrower planned to do two weeks later just isn’t possible. In lending, this is known as the asshole factor, meaning that even if the applicant meets all the criteria, they could just decide to be an asshole, and there’s no way to predict that.
There are strict laws in place to prevent all kinds of discrimination, meaning that even if Prosper had formed some kind of suspicion about the borrower, it may have been illegal to act on that suspicion. Such is the hypocritical paradigm of fair lending where factors that are measurable predictors of negative performance (or worse) cannot be legally used. Federal laws have purposely tried to create an environment where lenders make decisions on an objective basis they consider to be fair. In business lending for example, there is a law within Dodd-Frank that has not been implemented yet, but seeks to prevent loan officers from knowing the gender or even the name of the prospective borrower to protect them from subconscious discrimination.
Investigators have publicly announced that the terrorists were not on any watch lists and therefore there are no systems or checks that Prosper could’ve plugged into to have gotten the information.
Prosper and other alternative lenders already have Anti-Money Laundering Policies. I know this because I complained about Lending Club’s over a year ago.
The Wall Street Journal stated, “Only some nonbank financial institutions, such as mortgage lenders, are subject to Treasury rules requiring lenders to report suspicious activity to the government under the Financial Crimes Enforcement Network.” Maybe that’s true, but there is nothing suspicious about someone applying for a loan online who is not on any watch lists. I can’t think of anything that could’ve been suspicious unless they submitted fake pay stubs or forged documents.
“There’s no due diligence that’s done into how these loans are actually going to be used,” said Brian Korn, a partner at the law firm Manatt, Phelps & Phillips, LLP in the WSJ. This is true and at the same time related to anti-discrimination laws. Judging a loan applicant by their detailed monetary plans could potentially induce gender or ethnicity bias, even if subconscious.
There will be plenty of questions in the coming days from Americans, the media, and government officials about what alternative lenders are doing to make sure they’re not funding terrorists. Part of what they may learn is that for all the data that alternative lenders have at their disposal to make intelligent decisions on an automated basis, some of them cannot be legally used. They’ll also find out that there’s only so much that predictive analytics can actually predict.
It’s very unlikely that Prosper could’ve handled anything differently…
Bad Merchants: Lies, Fraud, and Hard Times
December 4, 2015
Critics seldom tire of bashing alternative finance companies, but bad behavior by merchants on the other side of the funding equation goes largely unreported. Behind a veil of silence, devious funding applicants lie about their circumstances or falsify bank records to “qualify” for advances or loans they can’t or won’t repay. Meanwhile, imposters who don’t even own stores or restaurants apply for working capital and then disappear with the money.
“People advertise on craigslist to help you commit fraud,” declared Scott Williams, managing member at Florida-based Financial Advantage Group LLC, who helped start DataMerch LLC to track wayward funding applicants. “Fraud’s a booming business, and every year the numbers seem to increase.”
Deception’s naturally on the rise as the industry continues to grow, according to funders, industry attorneys and collections experts. But it’s also increasing because technology has made it easy for unscrupulous funding applicants to make themselves appear worthy of funding by doctoring or forging bank statements, observers agreed.
Some fraud-minded merchants buy “novelty” bank statements online for as little as $5 and fill them out electronically, said David Goldin, president and CEO of Capify, a New York-based funder formerly called AmeriMerchant, and president of the SBFA, which in the past was called the North American Merchant Advance Association.
To make matters worse, dishonest brokers sometimes coach merchants on how to create the forgeries or modify legitimate records, Goldin maintained. Funders have gone so far as to hire private investigators to scrutinize brokers, he said.
But savvy funders can avoid bogus bank statements, according to Nicholas Giuliano, a partner at Giuliano, McDonnell & Perrone, a New York law firm that handles collections. Funders can protect themselves by remaining skeptical of bank records supplied by applicants. “If the merchant cash advance company is not getting them directly from the source, they can be fooled,” Giuliano said of obtaining the documents from banks.
Another attorney at the firm, Christopher Murray, noted that many funders insist upon getting the merchant’s user name and password to log on to bank accounts to check for risk. That way, they can see for themselves what’s happening with the merchant.
Besides banking records, funders should beware of other types of false information the can prove difficult to ferret out and even more difficult to prove, Murray said. For example, a merchant who’s nine or ten months behind in the rent could convince a landlord to lie about the situation, he noted. The landlord might be willing to go along with the scam in the hope of recouping some of the back rent from a merchant newly flush with cash.
Merchants can also reduce their payments on cash advances by providing customers with incentives to pay with cash instead of cards or by routing transactions through point of sale terminals that aren’t integrated onto the platform that splits the revenue, said Jamie Polon, a partner at the Great Neck, N.Y.-based law firm of Mavrides, Moyal, Packman & Sadkin, LLP and manager of its Creditors’ Rights Group. A site inspection can sometimes detect the extra terminals used to reduce the funder’s share of revenue, he suggested.
In a ruse they call “the evil twin” around the law offices of Giuliano, McDonnell & Perrone, merchants simply deny applying for the funding or receiving it, Giuliano said. “Suddenly, the transaction goes bad, and they deny they had anything to do with it,” he said. “It was someone who stole the merchant’s identity somehow and then falsified records.”
In other cases, merchants direct their banks not to continue paying an obligation to a funder, or they change to a different bank that’s not aware of the loan or advance, according to Murray. They can also switch to a transaction processor that’s not aware of the revenue split with the funder. Such behavior earns the sobriquet “predatory merchant,” and they’re a real problem for the industry, he said.
Occasionally, merchants decide to stop paying off their loans or advances on the advice of a credit consulting company that markets itself as capable of consolidating debt and lowering payments, Giuliano said. “That’s a growing issue,” agreed Murray. “A lot of these guys are coming from the consumer side of the industry.”
The debt consolidator may even bully creditors to settle for substantially less than the merchant has agreed to pay, Murray continued. Remember that in most cases the merchants hiring those companies to negotiate tend to be in less financial trouble than merchants that file for bankruptcy protection, he advised.
“More often than not, they simply don’t want to pay,” he said of some of the merchants coached by “the credit consultants.” They pay themselves a hundred thousand a year, and everyone else be damned. You continue to see them drive Humvees.”
Merchants sometimes take out a cash advance and immediately use the money to hire a bankruptcy attorney, who tries to lower the amount paid back, Murray continued. However, such cases are becoming rare because bankruptcy judges have almost no tolerance for the practice and because underwriting continues to improve, he noted.
Still, it’s not unheard of for a merchant to sell a business and then apply for working capital, Murray said. In such cases, funders who perform an online search find the applicant’s name still associated with the enterprise he or she formerly owned. Moreover, no one may have filed papers indicating the sale of the business. “That’s a bit more common than one would like,” he said.
In other cases the applicant didn’t even own a business in the first place. “They’re not just fudging numbers – they’re fudging contact information,” said Polon. “It’s a pure bait and switch. There wasn’t even a company. It’s a scheme and it’s stealing money.”
Whatever transgressions the merchants or pseudo-merchants commit, they seldom come up on criminal charges. “It is extremely, extremely rare that you will find a law enforcement agency that cares that a merchant cash advance company or alternative lender has been defrauded,” Murray said. It happens only if a merchant cheats a number of funders and clients, he asserted. “Recently, a guy made it his business to collect fraudulent auto loans,” he continued. “That’s a guy who is doing some time.”
However, funders can take miscreants to court in civil actions. “We’re generally successful in obtaining judgments,” said Giuliano. “Then my question is ‘how do you enforce it?’ You have to find the assets.” About 80 percent of merchants fail to appear in court, Murray added. Funders may have to deal with two sets of attorneys – one to litigate the case and another to enforce the judgment. Even merchants who aren’t appearing in court to meet the charges usually find the wherewithal to hire counsel, he said.
Funders sometimes recover the full amount through litigation but sometimes accept a partial settlement. “Compromise is not uncommon,” noted Giuliano. Settling for less makes more sense when the merchant is struggling financially but hasn’t been malicious, said Murray.
To avoid court, attorneys try to persuade merchants to pay up, said Polon. “My job is to get people on the phone and try to facilitate a resolution,” he said of his work in “pre-litigation efforts,” which also included demand letters advising debtors an attorney was handling the case.
But it’s even better not to become involved with fraudsters in the first place. That’s why more than 400 funding companies are using commercially available software that detects and reduces incidence of falsified bank records, said a representative of Microbilt, a 37-year-old Kennesaw, Ga.-based consumer reporting agency that has supplied a fraud-detection product for nearly four years.
“Our system logs into their bank account and draws down the various data points, and we run them through 175 algorithms,” he said. “It’s really a tool to automate the process of transferring information from the bank to the lender,” he explained.
The tools note gross income, customer expenditures, loans outstanding, checks returned for non-sufficient funds and other factors. Funders use the portions of the data that apply to their risk models, noted Sean M. Albert, MicroBilt’s senior vice president and chief marketing officer.
Funders pay 25 cents to $1.25 each time they use MicroBilt’s service, with the rate based on how often they use it, Albert said. “They only pay for hits,” he said, noting that they don’t charge if information’s not available. Funders can integrate with the MicroBilt server or use the service online. The company checks to make sure that potential customers actually work in the alternative funding business.
MicroBilt is testing a product that gathers information from a merchant’s credit card processing statement to analyze ability to repay excessive chargebacks reflected in the statements could spell trouble, and seasonality in receipts should show up, he noted.
Additional help in avoiding problem merchants comes from the Small Business Finance Association, which maintains a list of more than 10,000 badly behaving funding applicants, said the SBFA’s David Goldin. The nearly 20 companies that belong to the trade group supply the names.
SBFA members, who pay $3,000 monthly to belong, have access to the list. According to Goldin, the dues make sense because preventing a single case of fraud can offset them for some time, he maintained. Besides, associations in other industries charge as much as $10,000 a month, he added.
Another database of possibly dubious merchants, maintained by DataMerch LLC, became available to funders in July, according to Scott Williams, who started the enterprise with Cody Burgess. It became integrated with the AltFinanceDaily news feed by early October, causing the number of participating funders to double to a total of about 40, he said. The service is free now, but will carry a fee in the future.
It’s not a blacklist of merchants that should never receive funding again, Williams emphasized. Businesses can return to solvency when circumstances can change, he noted. That’s why it’s wise to regard the database as an underwriting tool. In addition, merchants can in some cases add their side of the story to the listings.
Funding companies directly affected by wayward merchants can contribute names to the list, Williams said. About 2,500 merchants made the list within a few months of its inception, he noted. “We’re super happy with our numbers,” he said of the database’s growth.
Many merchants find themselves in the database because of hard times. Of those who land on the list because of fraud, perhaps 75 percent actually own businesses and about 25 percent are con artists applying for funding for shell companies, Williams said.
So far, only direct funders – not brokers or ISOs – can get access to the database, he continued, noting that DataMerch could rethink the restriction in the future. “We don’t want hearsay from a broker who might not know the full scope of the story,” he said.
DataMerch might grant brokers and ISOs the right to read the list to avoid wasting time pitching deals to substandard merchants, but the company does not intend to enable members of those groups to add merchants to the database, Williams said.
Williams sees a need for the new database because smaller companies can’t afford belonging to the SBFA. The association also tracks deals about to become final, which could prevent double-funding but makes some users uncomfortable because they don’t want to disclose their good merchants, Williams said.
Although dishonesty’s sometimes a factor, merchants often go into default just because of lean times, Jamie Polon, the attorney, cautioned. A restaurant could close, for example, because of construction or an equipment breakdown. “Were they not serving dinner anymore, or was there something much deeper going on?” he said. Fraud may play a role in 10 percent to 20 percent of the collections cases his law firm sees, he noted. More than 95 percent blame their troubles on a downturn in business, and the rest claim they didn’t understand the contract, he said.
To understand the downturn, it’s important to amass as much information about the merchant as possible, said Mark LeFevre, president and CEO of Kearns, Brinen & Monaghan, a Dover, Del.-based collections agency that works with funders. That information sheds light on a merchant’s ability to repay and could help determine what terms the merchant can meet, he said.
Timeliness matters because the sooner a creditor takes action to collect, the greater the chance of recouping all or most of the obligation, LeFevre maintained. When distress signals arise – such as closing an ACH account or a spate of unreturned phone calls – it’s time to place the merchant with a collections expert, he advised.
LeFevre’s company also traces a troubled merchant’s dwindling assets to help the funder receive a fair share. Funders can sometimes recover all or most of what they pay a collection agency by imposing fees on the merchant, he noted.
Pinning the collection fees to merchants in default makes sense because that’s where the guilt often resides, observers said. It’s part of balancing the bad behavior equation, they agreed.
JPMorgan Chase and OnDeck Partner Up
December 1, 2015
Coming soon, when small businesses apply at a Chase bank for a loan under $250,000, there’s a good chance that OnDeck will be doing all the work. That’s because JPMorgan Chase and OnDeck announced a strategic partnership earlier today that is expected to commence in 2016.
A comment earlier in the day by Jamie Dimon hinted that something was coming. “We haven’t announced it yet, we’re going to be doing a thing with one of these peer-to-peer, small-business lenders,” Bloomberg reported.
That caused peer-to-peer lending industry advocates like Peter Renton of LendAcademy to speculate who that might be. He originally bet on Lending Club but posited that it could also be OnDeck, Funding Circle, or Kabbage.
When I asked Lending Club on twitter if they were slated to be JPM’s partner, I received a public reply back from a VP at OnDeck saying that it would in fact be them. By then the news had already been released.
The SEC filing states, “JPM will use the Company’s small business lending platform and the OnDeck Score® to serve its small business customers” and adds that they’re still in the process of building things out and finalizing agreements.
OnDeck (ONDK) which closed at $9.01 before the announcement is expected to soar on the news for the Wednesday open.
Mr. Broker: Stop Helping ME, Compete With YOU
November 29, 2015
To quote comedian Dennis Miller, “I rant, therefore I am.” I know everyone is in the holiday spirit and I surely would hate to kill off that jovial mood, but I thought that it was time for Part Three of my Rants, this time on one of the most crucial elements of our industry, The Brokers.
A Look Back At Prior Rants
In Part One I looked at the merchants, and explored some of their questionable behavioral choices. These choices (which a lot of them could be considered flat out stupid) hinder professionals within our industry from truly assisting merchants with their alternative financing needs. These questionable behavioral choices included: not meeting basic deadlines, bank statements being out of order, not being able to find financials, having very bad credit, running the business on overdraft protection, excessive stacking, sending in fake statements/financials, and not disclosing liens, bankruptcies or landlord/mortgage issues.
In Part Two I looked at the funders/lenders and explored some of their questionable practices. These choices hinder broker shops from progressing forward in an industry that’s oversaturated and highly competitive. These choices included: having new deal requirements to keep renewal portfolios, having an incompetent process, allowing merchants to stack, still filing UCCs on good accounts, and 30+ day commission clawbacks.
Stop Helping ME, Compete With YOU
It’s now time for Part Three of the Rants. Mr. Broker, unlike with the merchants and funders where I pleaded with them to “Help ME, Help YOU,” I’m actually going to do the opposite here and plead with you to “Stop Helping ME, Compete With YOU.”
We all know why you are in this industry, you (like myself), believe there is still great opportunity for growth. But some of the things that you do Mr. Broker make it hard for me to figure out if you are competing with me for market share or helping me take market share from you. Please allow me to list some of the things that you do that make it difficult for me to figure out if you are truly against me.
Not Pricing Based On Paper Grade
I understand Mr. Broker, that you believe in the mythical smooth talking, walking, charismatic sales machine, you know, the guy that can sell fire in hell and ice to an Eskimo, but I’m sorry to inform you that no such person exists. If you believe you are going to close your A-paper client by pushing them your 6 month 1.35 factor rate cash advance using your smooth talking skills, then I will not feel sorry for you if your merchant were stolen away by another broker pitching him 6 months at 1.12 – 1.20, which is what I consider to be the proper pricing based on their paper grade.
Forgetting the Endgame
So Mr. Broker, you seem to believe that we are in the lead generation business and not the brokering business. We aren’t paid on lead generation, we are only paid when we successfully broker a deal. To successfully broker a deal, we must find an interested client and match them with a funder that’s interested in funding them. We aren’t paid just to get people to send back an application that we can’t fund anywhere.
So if you propose potential terms without pre-qualifying them just to get an application package back, don’t be surprised if they decide to work with your competitor, the other broker who took the time to pre-qualify them from the beginning.
UCC Marketing
Mr. Broker, it’s understandable that you decided to open up shop in our industry because you heard about something called UCCs, but I know that you will soon figure out that the UCC Boom is Over.
Using Outdated Marketing Tactics
Speaking of UCCs, Mr. Broker why must you only rely on outdated marketing tactics, including UCCs and aged leads, leading to said merchants having 25 calls per week about funding to where they hang up in your face if you even mention you are from a funding company? Do you know that while you fight with 50 other brokers over the attention of one merchant (that doesn’t want to talk to any of you), there’s other brokers out there calling on data that nobody (or very few) people are calling on?
Not Running A Profitable Office
Every business must have a business plan and every business plan must have return on investment (ROI) projections. What are all of the estimated costs that you will have in acquiring a newly funded merchant? What are all of the estimated revenues that will come along with that, such as the new deal commissions, renewal commissions, merchant account conversion residuals, etc? Too many brokers have no idea what their costs are nor estimated revenues are to produce any type of true ROI forecasts. That begs the question, what kind of business are you running, Mr. Broker? It’s a wonder why so many offices fail, they don’t do any planning.
Not Properly Pre-Qualifying The Merchant
Why clog up your funder’s underwriting queue with applicants that have zero chance of being funded because either their cash advance balances are too high, credit scores are too low, bank statements are bad, they are in a restricted industry, or an assortment of other issues? Why not learn the underwriting criteria of your funder and then do efficient pre-qualification on your clients to where you can build a profile of them, estimate their paper grade, and determine if you even have a funder that could review them at this point in time? Or if the merchant is on the cusp of being eligible, help them get to that point. By not pre-qualifying the merchant, all you do is waste your merchant’s time which reduces the chances that they will work with you again in the future.
Submission Hot Shots
This goes with the situation from above. It’s already established Mr. Broker that you might not properly pre-qualify merchants which does nothing but waste their time, but you also hot shot them to 8 lenders. The key here, as mentioned, is that you have to efficiently pre-qualify the merchant to know where they stand and to know the 2 or 3 funders likely to approve them.
Final Word
I rant, therefore I am, as comedian Dennis Miller would say. I surely hope I didn’t kill off your jovial mood this holiday season. This has been the Year of the Broker, and my goal is to help the inexperienced and experienced smaller broker shops. So with that being said, I plead with you Mr. Broker to “Stop Helping ME, Compete With YOU” by no longer repeating these mistakes listed above.
Building An Alternative Lending Sales Profile
November 24, 2015
Merriam-Webster dictionary defines the word, independent, in a number of different ways, but one of the definitions provided relates this word to the concept of freedom. Most of us operate in this industry on an independent basis, which gives us a significant level of freedom that revolves around not having a boss, freedom to set our own schedules, freedom from being down-sized, freedom from office politics, but more importantly:
- freedom to craft our own business plans
- freedom to target our own market segments
- freedom to decide what we will sell
- freedom to create our own products
- freedom to negotiate our own market pricing
- … and freedom to innovate
With such high levels of freedom, you have to wonder why a lot of brokers in our industry don’t exercise such liberties? Why do we sell the same products (cash advances and alternative business loans)? Why do we use the same marketing tactics (UCCs and aged leads)? Why do we market, promote and sell to the same merchants (UCCs)? Why do we use the same “pitch”? Why do we submit to the same funders?
If we are truly independent contractors, why do we all look, act and sound the same?
As we continue The Year Of The Broker, I wanted to begin a discussion on a concept that integrates your capability of independent expression. It’s the concept of constructing an alternative financing sales profile. It allows you to display your level of true independence by pre-qualifying your prospective clients and recommending solutions that are different from the pack of brokers recommending the same “me too” solutions, seeking to submit the merchant to the same “me too” funders.
ARE YOU A “BROKER” OR NOT?
Are you paid only when you broker (fund) a deal?
If so, the generation of a financing lead or application in and of itself, doesn’t produce value as it doesn’t create revenue. Revenue is only created when you successfully broker a deal, which is to match a merchant with alternative funding needs and with a particular terms/conditions comfort range, with products funded by lenders whose pricing lines up with the particular comfort level of your prospective client.
As a broker, you are much more than a salesperson, you are more of a match-maker, an arbitrator, and an consultant. You can’t consult someone if you don’t know their current situation for one, and two, you can’t consult someone unless you have the resources to prescribe appropriate solutions.
See yourself more as a doctor than a salesperson, where as a salesperson has one or two products that he’s looking to “push” on a prospect using various tactics such as cost cutting and overcoming objections, a doctor isn’t trying to “push” anything out of the gate without firstly diagnosing the client through a series of questions. After said questions have been inquired and answers provided, the doctor creates a “profile” of said client and through his wealth of medication, he prescribes a couple of solutions to assist the client.
To help increase your chances of brokering (funding) your deals, you want to increase your level of pre-qualification and increase your level of product offerings, both of which will allow you to create firstly an alternative financing sales profile of your client, and then secondly allow you to go into your wealth of alternative financing products to prescribe an array of products.
EFFICIENT PRE-QUALIFICATION
Going forward, make sure to do serious pre-qualification to create an estimated risk profile as well as an estimated sales profile. You want to know all of the following: their credit, time in business, annual sales, cash flow situation, level of profitability, type of assets, outstanding commercial debt, any current tax or judgment liens, recent bankruptcies, and current status of commercial mortgage or commercial lease agreements.
From this information you are able to create an Alternative Financing Sales Profile along with an occupying Risk Profile for each product you will soon be recommending, to know which lender within that product category is best to serve your client.
YOUR WEALTH OF ALTERNATIVE FINANCING RESOURCES
So for example, say we have a restaurant owner that’s in need of $250k in working capital for expansion. You shoot him over the pre-qualification survey and receive the following: 700 FICO, 5 years in business, $1 million sales, zero NSFs/Overdrafts for 6 months, $10k average bank balances over the last 6 months, company has been profitable for the last 3 years, no tax liens, no judgment liens, no bankruptcies, current on commercial lease payment, outstanding debt that includes $25k on a credit card with $50k outstanding on a bank loan. The merchant’s commercial assets includes business equipment, free and clear, with appraised value of $150k.
As an alternative financing broker, you should have access to more than just merchant cash advances and alternative business loans, you should also have access to: merchant processing, equipment leasing, asset based lines of credit, inventory loans, SBA loans, business credit cards, factoring, purchase order financing, commercial mortgages and real estate hard money loans.
So based on the answers to the pre-qualification survey completed by the restaurant owner, in conjunction with his total financing needs, you might be prescribing an SBA loan, a merchant cash advance, and a sale-leaseback.
- You would seek to get him an SBA loan first and let’s just say he only gets approved for $50,000. So you guys complete the process to fund the SBA loan.
- Next, you would look at doing either a merchant cash advance for let’s say another $100,000 using split funding. You notice that his current processing rates are a little higher than market average pricing for Restaurants and show him a savings analysis with your interchange plus pricing structure with a 10BP mark-up that should be saving him $400 a year which is $1,200 over three years. So in the process of this you also convert his merchant processing over to one of your processing platforms that can handle split funding. Now you have raised $150,000 of the $250,000 funding goal that the merchant has in mind.
- Finally, you would look at doing a sale-leaseback on his pre-owned equipment that’s appraised for $150,000. With a 70% LTV, this comes to $105,000 in funding. Now you have successfully funded the merchant over $250,000 and in the process closed three different alternative funding products as well as converted over his merchant processing at the same time.
In an upcoming article, I will continue this discussion on pre-qualification by going into information on how this level of efficiency includes the creation of Risk Profiles that allow you to limit your submissions to your funders/lenders as to not clog up their underwriting pipelines with unnecessary submissions. It allows you to focus on submitting 10 applications and funding 5, instead of submitting 50 applications and funding 5.
Merchant Cash Advance is The Real Square IPO Story
November 22, 2015
Square’s debut on the New York Stock Exchange is being talked about as one of the more consequential IPOs of 2015. As a mobile payments company famous for both losing money and its founding by Jack Dorsey, Twitter’s CEO, the $2.9 billion valuation pales in comparison to its rival First Data that went public just a month before. First Data, which was founded in 1971, is worth five times more than Square with a market cap of $14.7 billion to Square’s $2.9 billion. But it’s Square that everyone’s talking about and not necessarily in a positive way. Cast as the poster child for runaway private market valuations in Fintech, Square’s Series E round just a year before had supposedly increased its worth to $6 billion.
Robert Greifeld, the CEO of Nasdaq, had warned people just weeks earlier about the validity of private market valuations. “A unicorn valuation in private markets could be from just two people,” he said. “Whereas public markets could be 200,000 people.”
And while Square’s IPO was relatively well-received, closing at 45% above its offered price, there’s an entire story beyond payments hidden in the company’s financial statements under the label of “software and data products.” That’s code for merchant cash advance, the working capital product they offer to customers that currently makes up 4% of the company’s revenue.
“Since Square Capital is not a loan, there is no interest rate,” states the company’s FAQ. That echoes what dozens of other merchant cash advance companies have been saying for a decade. “You sell a specific amount of your future receivables to Square, and in return you get a lump sum for the sale,” marketing materials explain.
Lenders that don’t approve of this receivable purchase model are lobbying politically against it, some of whom are well-known. Lending Club for example, is a signatory to the Responsible Business Lending Coalition’s Small Business Borrowers Bill of Rights (SBBOR), committing themselves to things like transparency and the disclosure of APRs even for non-loan products.
But disclosing an APR on a receivable purchase merchant cash advance transaction is not only impossible since there is no time variable, but would violate the spirit of the contract even if estimates were used to fill in the blanks. Nonetheless, Fundera CEO Jared Hecht, whose marketplace platform has also signed the SBBOR told Forbes in September that “small business owners have been sold by pushy salespeople, hiding terms, disguising rates and manipulating customers into taking products that aren’t good for them.”
Ironically, Fundera’s own merchant cash advance partners have not made any such pledge to disclose APRs. No one’s commitment is verified anyway. “Neither Small Business Majority nor any other coalition member independently verifies that any of these signatory companies or entities in fact abide by the SBBOR,” the group’s website states. This isn’t to say that their intent is misguided, there’s just very little substance to it below the surface.
For example, while the coalition has made some subtle and not so subtle digs about merchant cash advances over fairness and transparency, it’s the lending model used by some of the SBBOR’s signatories that is being challenged by the courts right now. Because of Madden v. Midland, Lending Club’s practice of using a chartered bank to originate loans could potentially be in jeopardy. The ruling was just appealed to the U.S. Supreme Court. At the heart of the issue is the ability to usurp state usury caps through the National Bank Act. For a company that has pledged to offer non-abusive products, it’s ironic that their model relies on preemption of state interest rate caps all the while reassuring their shareholders that there’s no risk because of their Choice of Law fallback provision. In truth, Lending Club uses a state chartered bank and not a nationally chartered bank and thus would be somewhat shielded in an unfavorable Supreme Court ruling.
Those concerned in years past that receivable purchase merchant cash advances were full of regulatory uncertainty had shifted towards the model that Lending Club uses since it was perceived to have more nationally recognized legitimacy. However, with that model seriously challenged, old school merchant cash advances are once again looking pretty good. That’s probably why publicly traded Enova International Inc. (NYSE:ENVA) bought The Business Backer this past summer. And it’s why Square skated through their IPO without much resistance to their merchant cash advance activities.
The story of Square was either that it was overvalued, that CEO Jack Dorsey couldn’t handle running two companies, that they were losing money, or that their deal with Starbucks was a mistake. Meanwhile Square has processed $300 million worth of merchant cash advances, a product that doesn’t disclose an APR since it’s not a loan. “Nearly 90% of sellers who have been offered a second Square Capital advance cho[se] to accept a repeat advance,” their S-1 stated.
“If our Square Capital program shifts from an MCA model to a loan model, state and federal rules concerning lending could become applicable,” it adds. And right now partly due to Madden v. Midland, the loan model looks pretty shaky. Square proved many things when they went public on November 19th and one was that merchant cash advances are just the opposite of what critics have argued in the past.
Battery Ventures’ general partner Roger Lee told Business Insider, “the [Square Capital] product itself will have unique advantages in the market, and it’s a big market.”
