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Alternative Lending Becoming Less Alternative

August 23, 2015
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This story appeared in AltFinanceDaily’s Jul/Aug 2015 magazine issue. To receive copies in print, SUBSCRIBE FREE

alternative lendersAlternative funders are looking a little more like bankers these days, but that’s not to say they’re developing a taste for pinstriped three-piece suits and pocket watches on gold chains. They’re promoting bank loans, applying for California lending licenses and contemplating the unlikely possibility that one day they’ll obtain their own bank charters.

“It’s what everybody’s talking about,” said Isaac Stern, CEO of Yellowstone Capital LLC, a New York- based funder. “If it’s not in their current plans, it’s in their longer-term plans over the next three to five years.”

Funders promote bank loans to drive down the cost of capital, sell a wider variety of products, offer longer terms and bask in the prestige of a bank’s approval, said Jared Weitz, CEO of United Capital Source.

Loans allow for much more customization than is possible with merchant cash advances, noted Glenn Goldman, CEO of Credibly, which was called RetailCapital until a little less than a year ago. The name changed as the company began offering loans in addition to it original advance business. It’s now working with three banks.

While the terms don’t vary much with advances, borrowers can pay back loans daily, weekly, semi-monthly or monthly, Goldman said. Loans can also include lines of credit that borrowers draw down only when they choose. Interest rates on loans can vary, too, he said, and loans can come due after differing periods of time.

Besides that flexibility, loans also offer familiarity among merchants and sales partners – unlike the sometimes baffling advances, Goldman said, adding that “everybody knows what a loan is, right?”

Loans have so many advantages over advances that Credibly expects its loan business to grow more quickly than its advance business, said Goldman, who was formerly CEO of CAN Capital.

Those advantages are also encouraging other advance companies to form partnerships with banks to provide merchants with loans that aren’t subject to state commercial usury laws, said Robert Cook, a partner at Hudson Cook LLC, a Hanover, Md.-based financial services law firm.

“REGULATIONS MAKE FORMING OR ACQUIRING A BANK SO DIFFICULT FOR BUSINESSES THAT WANT TO MAKE SMALL LOANS AT HIGH RATES”

The advance company markets the loan to the customer, the bank makes the loan, and the advance company buys it back and services it at the rate the bank is allowed under federal law, Cook said. The bank doesn’t lose any capital, it takes on virtually no risk and it profits by collecting a few days’ interest or a fee, he noted.

Where the bank’s located can make a big difference. A bank based in New York, for example, can charge only 25 percent interest no matter where the customer resides, while New Jersey allows banks to collect unlimited interest anywhere in the country, Cook said.

But the partnerships funders are forming with banks could face a threat. The United States Court of Appeals for the Second Circuit ruled in May in Madden v. Midland Funding LLC that a non-bank that buys a loan cannot charge interest set where the bank is located but must instead charge interest according to the laws of the state where the consumer is located, Cook noted. That could mean a lower rate.

In Cook’s view the case was poorly argued, the decision was wrong and the ruling may be reversed, “but it has to trouble someone who is thinking about starting up a bank partnership,” he said.

The court was asked whether the rules that apply to a national bank also apply to the non-bank that bought the loan, Cook maintained. That’s not the question, he asserted. The argument should have been that the idea of “valid when made” should take precedence. It states that a transaction that’s not usurious when it’s made doesn’t become usurious if a party takes action later – like reassigning the note, Cook said.

“EVERYBODY KNOWS WHAT A LOAN IS, RIGHT?”

Meanwhile, offering bank loans isn’t the only way alternative funders are coming to resemble banks. Some are obtaining what’s formally called a California Finance Lenders License that enables them to make loans in that state.

California began requiring the license in response to lawsuits over the cost of advances. The state has published a licensee rulebook that’s about the size of an old-school New York phone book – the kind kids sat on to reach the dining room table, according to Yellowstone’s Stern, who completed the licensing process three years ago.

Getting the license took 15 or 16 months and required lots of help from the legal team at Hudson Cook, Stern said. The state investigated his back- ground and fingerprinted him. The cost, including lawyers’ fees came to about $60,000, he recalled.

“Man, it was like pulling teeth to get that license,” Stern said. Keeping it’s not easy, either. “We guard that thing fiercely,” he maintained. “They’ll take away your license if you even sneeze the wrong way.”

becoming a bankThe hassles have paid off, though, because Yellowstone now deals directly with California customers instead of sharing the profits with other companies licensed to operate there. What’s more, companies that don’t have licenses are sending business Yellowstone’s way.

Retaining the profits from loans is also prompting some funders to contemplate applying for their own bank charters. But Cook, the attorney from Hudson Cook, sees little or no chance of that happening.

Federal bank regulators are reluctant to grant charters to mono-line banks – institutions that perform only one financial-services function, Cook said. “It’s risky to put all your eggs into one basket,” he maintained.

Regulations make forming or acquiring a bank so difficult for businesses that want to make small loans at high rates, Cook said. “If that’s going to be their business plan, they’re not going to get a bank.” A state charter requires the approval of the Federal Deposit Insurance Corp., which isn’t likely, he noted.

Utah industrial banks and Utah industrial loan companies are insured by the Federal Deposit Insurance Corp. but aren’t considered bank holding companies, Cook said. However, that’s a regulatory loophole that may have closed and thus may no longer offer a way of becoming a bank, he noted.

Clearly, the complications surrounding bank loans, lending licenses and bank charters mean that becoming more bank-like requires more than a pinstriped suit.

This article is from AltFinanceDaily’s July/August magazine issue. To receive copies in print, SUBSCRIBE FREE

Participate in Alternative Finance? You Might Want to Start Watching the Supreme Court

August 19, 2015
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U.S. Supreme CourtA trio of cases before the Supreme Court could have far reaching effects on alternative small business finance. Here’s a rundown of what to watch.

1. Texas Department of Housing and Community Affairs v. The Inclusive Communities Project, Inc. (Decided June 25, 2015)

In this case, the Court was asked to decide whether a disparate impact claim—a legal theory that allows regulators to bring discrimination claims against a defendant even where no intentional discrimination is alleged—could be brought under the Fair Housing Act. Many observers hoped the Court would find that such claims could not be brought under the FHA and nearby limit their use under other federal statutes such as the Equal Credit Opportunity Act. The Court, however, found that disparate impact claims could be brought under the FHA.

How does this affect alternative lenders?

The Dodd-Frank Act gave the CFPB authority to enforce ECOA, which is one of the few fair lending laws that apply to small business lenders. Some legal observers believe that the CFPB could potentially bring disparate impact claims under ECOA against alternative funders that the Bureau believes have engaged in policies that have resulted in discrimination. The Court’s decision may embolden the agency to bring future actions.

2. Hawkins v. Community Bank of Raymore (To be argued October 5, 2015)

ECOA prohibits lenders from discriminating against applicants on the basis of race, color, religion, national origin, sex, marital status, or age. It also requires lenders to provide applicants notice of any adverse actions taken by the lender in relation to the applicants’ request for credit. The Hawkins case asks the Court to decide whether guarantors should be included in the definition of applicant.

How does this affect alternative lenders?

If the Court determines that personal guarantors are included in the definition of applicant, guarantors would be entitled to the same protections and disclosures as business applicants. Lenders would be required to provide the primary business applicant as well as each guarantor with the appropriate adverse action notices in the event of a decline. Implementing procedures to comply with this requirement could require significant investment from alternative lender.

3. Madden v. Midland Funding, LLC (Appeal expected soon)

This case has been widely followed given its potential effects on marketplace lenders that use banks to originate their loans. The Madden court held that the usury preemption provision of the National Bank Act did not apply to non-bank assignees. Midland requested that the 2nd Circuit rehear the case en banc but that request was denied last week. Midland now has 90 days from the date of the denial to petition the Supreme Court to review the 2nd Circuit’s decision.

How does this affect alternative lenders?

As it stands now, Madden is binding in the 2nd Circuit. If the Supreme Court declines to hear the case, the denial will confirm that Madden is settled law. In that event, observers will be closely watching to see what effect Madden has on litigation involving marketplace lending as well as the purchase and sale of bank originated debt in the larger secondary markets. A recent case out of California may provide some early indications.

Could The Debt You Bought on a Lending Marketplace be Null and Void?

August 17, 2015
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invalid marketplace loans?Lending Club and Prosper may have paved the way towards marketplace lending’s legality, but the recent Madden v. Midland ruling could jeopardize everything. Ratings agency Moody’s stated in a July 20th report that, “if interpreted broadly, interest rates on some loans backing marketplace lending ABS transactions could be reduced, or the loans themselves be void.”

Moody’s Alan Birnbaum goes on to explain in the report that non-bank entities that buy loans from banks may be subject to state usury laws. “Therefore, the loan buyer might not be able to charge and collect interest at the contract interest rate, while in the worst case a loan could be unenforceable,” he is quoted as saying.

Lending Club’s CEO addressed this case in the company Q2 earnings call and responded by saying they are protected by their choice of law provision. “Note that this particular case is getting challenged by a lot of players in the banking industry, including the American Banking Association,” he said. “And I think it’s an unusual case, but certainly that doesn’t come back to us in that the sense that we continue to rely on choice of law provision.”

Discussion of the case has been curiously sparse on the Lend Academy forum where Lending Club and Prosper investors often go to share risks and strategies.

Meanwhile an article published on Bloomberg paraphrased comments by Gilles Gade, the CEO of Cross River Bank, when it said, “Some investors have warned they may simply shun loans to borrowers in certain states, because they either don’t yield as much or could be affected by the decision.”

The decision is only binding in three states (New York, Vermont and Connecticut), but whether or not the decision will affect investor demand for marketplace loans in these states is yet to be seen.

Personally, when I learned the appeal request was rejected, I changed my LendingRobot account configuration to stop purchasing Lending Club and Prosper notes in New York going forward. However remote the odds of a Madden related disaster, I’d rather have borrowers default because I selected bad loans than a court rule that the loans never existed…

Are you thinking twice about buying securities backed by loans that are acquired by non-bank entities? Or is it business as usual? I’m interested to hear your thoughts.

Are Your Sales Agents or ISOs Up to Snuff? (Take Our Research Survey)

August 12, 2015
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If you enjoy reading AltFinanceDaily’s articles, please take the time to take our short survey:

Don’t see it embedded? Click here

Some background:

What started as a few sensational articles about practices in small business lending and merchant cash advance is now turning into a cry for a governmental crackdown by not only observers outside the industry but lenders from inside the industry itself.

feedbackStories that look like they’ve been written by consumer activist groups are being penned by your peers. Just recently, Fundera’s Brayden McCarthy submitted his thoughts to American Banker and the Huffington Post.

“As evidence,” he wrote. “One need only look to some lenders’ triple-digit interest rates, the proliferation of shady loan brokers and inadequate or nonexistent disclosure of price and terms. Some practices, such as brokers that brand themselves as impartial but take incentives to market certain lenders over others, resemble behavior seen in the run-up to the financial crisis.”

Along with the Treasury’s RFI, there is a mass lobbying effort to regulate the industry as fast possible. As Patrick Siegfried, Esq pointed out recently, former SBA Administrator Karen Mills recently urged the the CFPB to implement the Small Business Data Collection Rule of the Dodd-Frank Act, a law which could potentially outlaw the underwriting practices of the entire business lending and merchant cash advance industries.

There’s also been the publication of a Small Business Borrowers’ Bill of Rights and the formation of the Responsible Business Lending Coalition. And on Forbes, an interview with loan broker Ami Kassar described the industry as the wild, wild west.

As a long time participant and observer in the industry, (this is my 10th year now) I want nothing more than a bright and prosperous future for both my peers and America’s small businesses. I hope you’ll take two minutes to take our survey above.

Thanks!

Commission Chargebacks: The Good, the Bad and the Ugly

August 10, 2015
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This story appeared in AltFinanceDaily’s Jul/Aug 2015 magazine issue. To receive copies in print, SUBSCRIBE FREE

commission chargebacksImagine you’re a 20-something-year-old broker who’s just, in good faith, referred a merchant to a funder. You walk away with a few thousand dollars in your pocket, and you promptly spend it on rent and a celebratory steak dinner. Then all of a sudden…BAM! Just like that the merchant goes belly up and the funder’s knocking on your door to clawback your hard-earned commission money, which, of course, you’ve already spent.

For many brokers, it’s a familiar-sounding story—with an ending they’d like to rewrite. Their thinking goes like this: underwriters, not brokers, are the ones who are supposed to dig into a company’s finances before approving a deal. Underwriters, not brokers, are the ones who make the financial decisions about whether or not a deal can go forward. Therefore, underwriters, not brokers, should be responsible when deals implode.

“There are a lot of people who think there should not be commission clawbacks—that they’re unfair,” says Archie Bengzon, who runs the New York sales office for Miami-based Rapid Capital Funding, a direct funder. Bengzon was previously the president of Merchant Cash Network, an ISO in New York.

While there’s a fair amount of closed-door grousing by brokers, most funders are standing their ground—with only a select few companies kicking these controversial policies to the curb. More commonly, funders claim clawbacks, despite being hated by brokers, are a necessary evil. These funders say that without them, they’d stand to lose too much on bad deals and that they need a way to protect themselves from rogue brokers.

“There is a group of people out there who are trying to game the system,” says industry attorney Paul Rianda, who heads a law firm in Irvine, California.

The Case for Scrapping Clawbacks

“WHY DIDN’T THE UNDERWRITERS CATCH THIS?”

Brokers in favor of changing the status quo understand the need to prevent bad apples from smelling up the entire industry. But even so they believe that chargebacks are patently unfair to the honest majority of brokers who often make just enough to scrape by. In most cases, the brokers are typically young—18-to-26-year-olds trying to make money and learn the industry. They don’t have the financial resources that the funders do and the onus shouldn’t be on them if the deal they brought in—with good intentions—goes bust in a short time, according to the owner of a top-tier ISO/Hybrid in Staten Island, New York, who requested his name not be used.

This is especially true in cases where the underwriter took risks they shouldn’t have or decided to fund merchants in cases where they shouldn’t have. “It’s the underwriter’s job to protect the money that their company is lending out,” he says. “[Chargebacks] shouldn’t be going on in this industry.”

One solution might be for more ISOs to stand up to funders and refuse to send them future deals. That’s exactly what the Staten Island executive did a few years ago when a funder he repeatedly worked with tried to claw back his commission on a particular deal. He made a big stink and told them he’d never send them business again. It was enough of a threat to convince the funder to back off. “If more ISOs start saying that…then the funders will start sweating and change their contracts. Because it really isn’t fair,” he says.

For some brokers, however, taking such a strong position with funders is a risky strategy in a cottage industry where all the major players know each other and there’s no shortage of hungry young brokers willing to do business. So while these brokers don’t like losing money, they aren’t necessarily loudly crying foul either.

commission chargebacksMatthew Ross, managing member of Go Ahead Funding, a broker and funder in Basalt, Colorado, has been in the business for nine years. He’s only had one commission clawed back once in this time period—it was a commission for $1,500 on a $25,000 deal that went sour within a month, he recalls. He was upset at the time and felt the underwriter should have done more to vet the merchant who went belly up. “Why didn’t the underwriters catch this?” he remembers asking at the time.

Nonetheless, Ross was a lot calmer than some brokers might have been under the circumstances. For instance, he says he never threatened to stop sending the funder business as many brokers might have done. “I don’t necessary like it, but I understand it. I’m not going to fight it,” he says.

Some brokers are making their displeasure with the practice known by declining to sign contracts that contain clawback clauses. Nathan Abadi, founder and president of Excel Capital Management, a New York-based funder and ISO, says he either refuses to do business outright or he comes to a verbal agreement with a funder that he’ll wait two weeks for payment to make sure the deal has legs. “I meet them in the middle,” he says.

The reason he likes this approach is that it’s more palpable for brokers to lose paper commissions versus actual money that they’ve already been given and possibly spent. Otherwise, as a business owner working with numerous agents, it’s bad for business. “It causes an internal conflict because now you have to penalize the person who’s working for you,” Abadi says.

The Flip Side of the Chargeback Coin

Meanwhile, there’s a whole other camp within alternative funding—including some brokers—who feel chargebacks are important as a fraud-deterrent. Given the fact that the industry is still largely unregulated, many believe that funders need some type of fire retardant to prevent being burned by unscrupulous brokers.

“We think that they serve an important role,” says Stephen Sheinbaum, founder of Merchant Cash and Capital, a New York-based funder. “Most of our stronger referral partners do not object to it. It’s a way of aligning our interests with the sales force.”

About 60 percent of the company’s funding business comes from third-parties including ISOs; its direct sales force accounts for the other 40 percent.

Even some brokers concede that clawbacks can serve a valuable purpose. Sure, it’s aggravating to lose money, but they feel that without clawbacks the industry would be even more of a free-for-all than it already is.

“I can see both sides,” says Bengzon, the funder and broker. Wearing his broker hat, Bengzon has felt the sting of losing a commission once or twice in the 100 or so deals he’s done. But he still understands why funders—who take a big monetary hit when deals go sour—would want to protect themselves and require brokers to have some skin in the game.

“If we’re going to reap the rewards of a nice commission, we should also understand that it can still be taken away if a deal goes bad,” he says.

When he sends leads to funders, Ross of Go Ahead Funding says he does his best to make sure he’s sending only high quality merchants. He tries to vet them upfront—to the limited extent he can—in order to avoid problems later on. Clawback provisions serve as “an incentive for [brokers] to keep their eyes open,” he says.

Know What You’re Signing

About 80 percent of the agreements that come across the desk of Rianda, the industry attorney, have a 30-day clawback provision. But he’s seen some agreements that have longer time frames—60, 90 or even 120 days. Those types of contracts aren’t as common, but they’re out there.

It’s important for brokers to carefully read the fine print of a contract before signing on the dotted line. “It sounds obvious, but a lot of people don’t do that,” says Bengzon.

The shorter the clawback time frame, the less brokers tend to balk. “People don’t want to be paid on a deal and three months later they lose that commission, which they’ve already spent,” he says.

Bengzon believes a clawback that extends any more than a month is excessive. “I would never sign something greater than 30 days,” he says.

commission clawbackAccording to Sheinbaum of Merchant Cash and Capital, 30 days is an appropriate time frame to help weed out fraud without putting unnecessary burden on brokers who are sending legitimate business. “The purpose of the provision is to try and stop people from committing fraud at the outset,” he says.

David Sederholt, executive vice president and chief operating officer at Strategic Funding Source Inc. in New York, says clawback provisions in the contracts Strategic uses range from 30 to 45 days depending on the contract. He says he understands brokers don’t like them, but that it’s nonetheless important to have the provision in order to protect the funders. “There’s got to be some partnership involved here,” he says.

Clawbacks Not A Free-For-All

“IF SOMETHING GOES WRONG ON THE DEAL, THAT’S ON US. IT’S NOT THE BROKER’S FAULT”

Many funders recognize that there’s a fine line between protecting their business and cutting off potential revenue sources.

“You start clawing back commissions on every default, a broker will stop sending business,” says Ross of Go Ahead Funding.

Sheinbaum of Merchant Cash and Capital notes that clawbacks aren’t used as often as some brokers might think. He says out of 800 deals in a 30- or 31-day period, his company enforces its clawback policy only a handful of times each month.

He also points out that while the clawback policy is on the books, Merchant Cash and Capital looks at each situation individually. If it’s clear that the broker tried to defraud the funder, that’s one thing, he says. But, if for instance, a merchant has a heart attack and dies 20 days into a deal and can’t pay back the funds, Merchant Cash and Capital wouldn’t try to clawback the broker’s commission in that situation, he says.

Strategic Funding has only clawed back commissions once or twice in the past nine years, says Sederholt, the EVP.

The company works with a variety of brokers. Some have less than a 1 percent default rate and others have 12 percent to 14 percent default rates. As extra protection with brokers who have bad track records, Strategic Funding either declines to work with them at times, or has in place a stronger underwriting procedure with these deals.

Being more careful upfront is a better tactic than trying to go after commissions, which is extremely hard, Sederholt says.

Changing the Modus Operandi

While it’s not the industry norm, there are a few funders who have stopped using clawbacks, or are considering doing so, given all the headaches they can cause. Isaac D. Stern, chief executive of Yellowstone Capital LLC, a New York-based funder, says his company no longer tries to clawback commissions when deals go bust. The few times they tried to clawback commissions several years back, the brokers they went after were upset and threatened not to do business with them anymore. Yellowstone decided this approach was bad for business and that it would be more prudent to try something else.

“There’s too much competition, and if we were going to do clawbacks it would decimate our business,” he says. “It’s the broker’s job to bring in the deals. It’s our job to underwrite it. If something goes wrong on the deal, that’s on us. It’s not the broker’s fault.”

As protection, the contracts Yellowstone uses with brokers contain a provision allowing it to seek damages when fraud’s alleged. But in cases where brokers send what seems to be a legitimate deal that goes bad for something other than fraud, Yellowstone turns the other cheek. Yellowstone can afford to eat the $5,000 or $6,000 commission to ensure ongoing—and hopefully more positive leads—or so the thinking goes, according to Stern.

Overtime—if peer pressure continues to mount—it’s possible that more even more funders will decide chargebacks just aren’t worth the trouble. “I think the reason why some funders are moving away from [clawbacks] is because people are afraid of losing volume. Once one funder acquiesces, others will follow suit,” says Sheinbaum of Merchant Cash and Capital.

This article is from AltFinanceDaily’s July/August magazine issue. To receive copies in print, SUBSCRIBE FREE

Renaud Laplanche on Madden v. Midland

August 8, 2015
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Madden v. MidlandIn case you missed the comments by Lending Club’s CEO regarding the Madden v. Midland decision, we’ve got the transcript of it from the Q2 earnings call below. A brief of that case was published on AltFinanceDaily back on June 11th by lawyers from Giuliano McDonnell & Perrone, LLP.

Smittipon Srethapramote – Morgan Stanley
And do you have any comments on the Madden versus Midland funding case that’s going through the court system right now in terms of how it potentially impacts your business?

Renaud Laplanche – Founder & CEO
Yes, so we’ve seen that case that came out a couple of months ago. I think the –our take there is obviously the particular circumstances of the case are different from what we’re seeing on our platform. But in general what really helps us apply Utah law to most of our loans is really a couple of things. One is for the all preemption. And the second is choice of law provision in our contract. The Madden case really challenged the federal preemption but did not challenge the choice of law provision, so that’s really the – and we don’t need both, we need one of them. So we continue to operate in the Second Circuit district where that decision was rendered exactly as we did before and are relying on our choice of law provisions.

Note that this particular case is getting challenged by a lot of players in the banking industry, including the American Banking Association. And I think it’s an unusual case, but certainly that doesn’t come back to us in that the sense that we continue to rely on choice of law provision. If we were to see that the choice of law provision was getting challenged elsewhere which there’s no reason to expect at this point, we could also think of a different issuance framework than the one we’re using now where we would switch to a series of state licenses. And that’s in [indiscernible] we provided in our slide deck that shows that using the current mix we have about 12.5% of our loans that would exceed the state interest rate caps.

So that certainly would be [indiscernible] demand and we’d have to revise our pricing in certain states, but that certainly would be another option available to us if our choice of law provision and federal preemption was getting challenged in other states.

On July 28th, Attorney Patrick Siegfried pointed out that the Madden case could be the start of a chilling trend after a subsequent ruling in Blyden v. Navient Corp. In that brief, he wrote, “Blyden also demonstrates that debtors that become aware of subsequent assignments of their loans may be inclined to use the assignment event as a way to invalidate otherwise legitimate debts.”

First Comments to Treasury’s RFI Highlight the Importance of Marketplace Lenders Despite Higher Rates

August 4, 2015
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Treasury DepartmentThe first responses to Treasury’s request for information about marketplace lenders were posted online yesterday. While only 3 responses have so far been posted, comments from a number of alternative finance providers are expected.

The first response, however, came from Patrick Fitzsimmons, the executive director of Mountain BizWorks, a North Carolina-based community development financial institution. Mr. Fitzsimmons submitted an article published last month in The Citizen Times of Asheville, NC. The article details one small business owner’s efforts to obtain a business loan. After being turned down by banks numerous times, the owner was finally able to obtain financing from an online marketplace lender.

The article quotes a number of employees of CDFIs who criticized the rates charged by some online lenders. One CDFI employee went as far as to characterize the rates charged as “predatory”. In contrast, however, the business owner was—if not enthusiastic about—grateful for the assistance his business received from the online lender.

“It’s not deceiving. I knew what I was getting into,” he said of the loan. “I can’t say that OnDeck didn’t help my business because it did. To say it was great, though, would be an overstatement. For me, it was like getting a root canal: This is not going to be fun, but it’s what I need to do.”

Though the article is somewhat critical of rates charged, it highlights how important alternative marketplace lenders have become to the survival of many small businesses. As the quote above shows, marketplace lenders are, in many cases, the last lifeline available to businesses in need of working capital.

I expect the comments from industry participants to continue to emphasize the need for alternative sources of business capital. At the same time, the industry would be well served to take this opportunity to explain, in greater detail, why alternative product rates are higher than traditional bank financing as some community organizations do not fully appreciate the increased costs and risks associated with offering small business funding.

Have Your Marketing Response Rates Changed?

August 4, 2015
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direct mail marketingNotice anything different with your marketing response rates lately? OnDeck has…

During the OnDeck Q2 earnings call yesterday, company CEO Noah Breslow said, “there are no two or three competitors dominating this trend (direct marketing), but we know the sheer number of marketing solicitations targeted to small businesses has grown meaningfully over the last six months which impacts our response rates.”

The comments were interesting because while they opposed any correlation between the increased competition and their continuously declining interesting rates, it was an acknowledgement that they are not alone in their marketing efforts, nor are their marketing methodologies proprietary.

The comment was focused mainly on direct mail campaigns and Breslow argued their strategy was to “break through the clutter” and “better communicate our value proposition.”

“Competition for customer response remains elevated,” he later added.

OnDeck still managed to fund $419 million for the quarter, up only $3 million from the previous quarter, but a 69% increase over the same time period a year ago.

During the Q&A which was unfortunately not part of the recorded transcript so I will paraphrase as best I can from memory, a few analysts inquired deeper about the competition.

One wondered if their competitors’ marketing efforts were sustainable or if they were simply on a market share binge and would eventually go away. Breslow said there would probably be a combination of both, that some would continue to stick around long term and others might fall off. It was a safe answer because while some of their competitors may indeed have high acquisition costs, there are still profits being made and nobody should expect the competition to subside any time soon, if ever.

Breslow also shared that the competition was bidding up the price online, talking at least in part about Pay-Per-Click marketing.

OnDeck shed more Funding Advisors (brokers) in Q2 than they expected to because of their “re-certification program.” Brokers either didn’t make the cut or would not go through the program. Only 20.6% of their loans were originated by brokers in Q2 of this year as opposed to 30.8% during this time last year. Brokers brought in bigger loans though on average because they made up 28.4% of the dollar volume of loans originated this year. Last year at this time they made up 42.9% of the volume.

OnDeck has managed to grow despite their dwindling reliance on brokers and a marked increase in competition.

Have your direct mail and online advertising response rates changed recently? If OnDeck has taken notice, surely you must have too…

Update: You can read the full transcript of the call here, including the Q&A