Ireland’s Alternative Finance Industry and the Coronavirus
May 18, 2020
As the effects of the coronavirus continue to slow down the American economy, around the world, many countries remain in lockdown, with their businesses having been halted. Be it to the north, south, east, or west, of the United States, the results are the same: money has stopped flowing. As such, we took the opportunity to follow up with some of the businesses that featured in our coverage of alternative finance in Ireland last Fall, hoping to see what differed and what was the same in their responses to the pandemic.
Despite differing in size and range of variety when compared to their North American counterparts, the Irish alternative finance and fintech industries have largely felt the same impacts from covid-19. Certain funders have stopped operations, others have become very cautious, and just like here, some businesses have turned to the government for help.
LEO, or Local Enterprise Offices, is an advisory network for small and medium-sized businesses, which provide guidance as well as offer capital. The Irish government has pointed to these as the point of contact for small businesses owners, with LEO providing microfinance loans of up €50,000. This figure being upped from the pre-coronavirus maximum of €25,000.
Rupert Hogan, the Managing Director of brokering company BusinessLoans.ie, explained that some businesses would be better going with LEO over banks and even some non-banks. Noting that non-bank lenders can’t compete with the rates offered by LEO and, just like in the US, banks can’t act with the speed that these business owners need.
Hogan, who describes the current situation as “The Great Lockdown,” said that banks “aren’t too helpful, even in the good times,” due to the high rejection rates that SMEs experience when looking for loans. In regards to merchant cash advances, he’s expecting, when the MCA companies reopen, that they’ll be funding at reduced rates, some doing as much as 50% less than their pre-coronavirus amounts.
Jaime Heaslip, Head of Brand Marketing at the MCA company Flender, explained that before the virus, the company was experiencing a period of productivity, with lending activity and amounts deposited being up from previous years. And despite the virus disrupting commerce, the former international rugby player noted that business owners are still coming to Flender for funds.
“We provide flexibility for people, there’s a lot of people coming to us to get contingency funds together,” he said over a phone call, commenting that as well as this, many businesses are looking for financing to move their operations online. “We’re trying to help SMEs get through this and provide as much help as possible.”
Beyond merchant cash advances, business continues to run, says Spark Crowdfunding’s Chris Burge. Being an investment platform, Spark is still active with businesses looking to get off the ground.
“We’ve actually found that we’ve still got a large amount of inquiries coming through,” the CEO and Co-Founder said. “Our pipeline of companies wanting to go onto the platform is very strong, and we’ve been engaging with them all and they’re very keen. They all need money, which, of course, hasn’t changed from before there was a crisis. And they still are needing money, they need that to expand as opposed to survive.”
When asked about changes made because of covid-19, Burge explained that their investor evenings have been disrupted. Previously an opportunity for the investors and investees on the digital platform to meet up personally and pitch each other, these 100-person gatherings are no longer an option. Instead, virtual webinars and assemblies are what Spark has started using to keep up communication between parties.
And on the subject of fundraising, Trezeo’s Garrett Cassidy said that it has become a nightmare under the pandemic. Disrupted communication channels and the inability to pitch to someone in the same room as you have been hurdles, but besides that, Cassidy assured me that Trezeo is still going strong.
Offering payment structures and benefit bundles to freelancers and the self-employed, Trezeo has seen some of its customer base drop off as unemployment sky-rocketed in the UK, its prime market. Despite this, as more and more people are beginning to go back to work, Cassidy says numbers are rising.
“Now we’re starting to see earnings pick back up again, some of them were the ones who were off work who are now coming back to work. So it’s been interesting watching that but the reality is that they’re also scared. They’re out working every day delivering parcels or food, depending on which, and just working really hard. It’s the most important ones who are paid the least and that have the least protection.”
Looking ahead, Trezeo has been working with the UK’s Labour Exchange to establish a new program that would see the creation of channels to help pre-qualify workers for certain positions. These workers would be pooled, and employers would be able to choose from them, streamlining the hiring process for both sides.
“They need money in their pockets, somehow, quickly,” Cassidy said of workers, whether that be by returning to work safely, or through some government assistance program, the CEO is adamant that people need to stay solvent.
Altogether, Ireland’s alternative finance industry, like others the world over, has been hit hard by the coronavirus’s economic effects. With the country’s phased lifting of the lockdown being plotted out over the course of the summer, the island nation may not see as quick a return to commerce as certain American states, but its fintechs and non-banks hope to stick around, by hook or by crook, as the Irish say, by any means possible.
The Pandemic, The Economy, and The Presidential Race
March 20, 2020Note from the Editor: In early February, I asked one of our regular journalists, Paul Sweeney, to look into the economy and the presidential race to size up the coming election season. As he was wrapping up his interviews over the span of a month, things took a startling turn, and COVID-19 came to the forefront and changed everything. This story is an amalgamation of reporting that started one way and quickly morphed into another. In light of how fast the situation is changing, we are publishing it now rather than waiting until early April to release it in print.
Chris Hurn, who heads an Orlando-area financial firm in Florida that specializes in small business lending, says he is witnessing fear and desperation among business owners whose stores, shops and enterprises have been thrown into a tailspin by the coronavirus pandemic.
“We’ve been overwhelmed with telephone calls and e-mails,” says Hurn, chief executive at Fountainhead Commercial Capital, a non-bank Small Business Administration lender which boasts more than $250 million in originations last year. “I’ve fielded over 300 inquiries from borrowers about these loans in just the last few days,” he added. “People are telling me that they’re being harmed and don’t know how they’ll make payroll. The SBA needs to act.”
What Hurn is experiencing in Florida is not just an isolated incident. Thousands of small businesses are under siege nationwide as Americans’ have gone into isolation in response to the pandemic, helping precipitate a full-blown economic crisis. As of March 17, the coronavirus – also known as Covid-19 – had leapfrogged across the globe since appearing in China in December, 2019, infecting people in 100 countries. There are now some 272,000 confirmed Covid-19 cases worldwide and close to 11,300 deaths, according to data compiled by scientists at Johns Hopkins University in Baltimore.
In the U.S., the number of cases has cleared 19,000 as of March 20, the death toll has climbed above 230, and coronavirus cases have been recorded in all 50 states. The Center for Disease Control reports that the number of cases are growing at 25-30% per day. But experts warn that, because of a lack of testing, the actual number of cases is certainly higher.
The outbreak is drawing comparisons to the worldwide influenza pandemic of 1918. Popularly known as the “Spanish Flu,” that virus may have claimed as many as 100 million lives, according to estimates by the World Health Organization. Medical officials say that persons 70 and older and those with underlying medical conditions, such as a weakened immune system, are most at risk in the current pandemic.
“What makes this disease so lethal,” says Rachel Scott, a family physician in Austin, Texas and the author of “Muscle and Blood,” a pathbreaking study of occupational diseases, “is that people in the vulnerable population who come down with the virus are prone to contract severe acute respiratory distress syndrome. In ARDS, the virus destroys the sacs in the lungs, preventing oxygen from being delivered into the blood stream. By the time people with severe ARDS are hospitalized and treated with a ventilator, it may already be too late.”
To blunt the accelerated pace of contagion, governors and mayors are putting restrictions on citizens by curbing gatherings and monitoring interactions. Governors in 44 states have forced restaurants and bars to close shop in an unprecedented regulation of U.S. citizens. Meanwhile, millions of Americans self-quarantined and self-isolated and re-examined how they interact socially, commercially and professionally. Increasingly draconian controls to moderate the trajectory of the outbreak are not only turning cityscapes into ghost towns from coast-to-coast but throwing a giant monkey wrench into the U.S. economy.
Treasury Secretary Steven Mnuchin has reportedly warned Congressional leaders that the unemployment rate could spike to 20%.
Former Labor Secretary Robert Reich has gone Mnuchin one better amid reports that 1.2 Americans had filed for unemployment insurance. In an interview on MSNBC Thursday, Reich said he feared that the unemployment rate is likely to hit that 20% mark in the next two weeks. “Eighty percent of Americans are living paycheck to paycheck,” he declared ominously. “We’re in a national emergency.”
The pandemic and the ensuing economic crisis is also casting a giant shadow over the 2020 presidential election. “It’s a black swan event that wasn’t anticipated by any of the candidates, and the reverberations for the election are going to be huge,” said Richard Murray, a political scientist and elections expert at the University of Houston.
For the past 50 years, political analysts have generally agreed, the condition of the U.S. economy was a key predictor – if not the key predictor – to the outcome of presidential elections. President Jimmy Carter, for example, had the bad fortune to preside over a problematic economy marked by oil-price shocks and energy shortages, mile-long queues at gasoline stations, and sky-high interest rates. There was even a new word — “stagflation” – coined for the phenomenon of stagnant growth and runaway inflation, recalls David Prindle, a government professor and expert on voting behavior at the University of Texas at Austin.
There were, of course, additional negative complications to Carter’s presidency. Most notable was the “Hostage Crisis” in which Iranian students attacked the U.S. Embassy in Teheran in the fall of 1979, held 44 American diplomats and aides captive for more than a year, and made Carter look hapless and helpless. Nonetheless, Ronald Reagan, a former governor of California and longtime matinee idol, hammered Carter mercilessly on the economy, demanding: “Are you better off than you were four years ago?”
Answering that question sent Carter packing to his Georgia peanut business. “In 1980, as in every election, there were multiple causes,” says Prindle, “but the deciding factor was the economy.”
A healthy economy can serve as a mighty bulwark against opponents in a president’s bid for a second term. In the mid-1990s, an expanding economy and relentlessly buoyant stock prices – a Dow Jones Industrial Average so robust in the mid-1990’s that Federal Reserve chairman Alan Greenspan famously admonished investors for their “irrational exuberance” – allowed Bill Clinton to sail to re-election. (The good times also buffered Clinton during the ensuing sex scandal involving White House intern Monica Lewinsky.)
As the election year of 2020 dawned, a decently performing economy seemed to be serving President Donald Trump’s cause. Before the World Health Organization declared the coronavirus outbreak a pandemic in early March, the U.S. economy was coming off 10 full years of job growth and the unemployment rate had sunk to 3.5 percent, its lowest level in 50 years. Wages were also rising by nearly 4 percent per annum, noted Aparna Mathur, a labor economist at the business-backed American Enterprise Institute in Washington, D.C. “The economy is not spectacular,” she said, “but everything is moving in the right direction.”
Since then, however, the economy has been slammed as an alarmed country reacted to the pandemic. The NBA and NHL closed down their basketball and hockey seasons. Major League Baseball called a halt to spring training. The NCAA initially declared that “March Madness” would proceed and that hoopsters would perform before empty arenas, but then it pulled the plug. Even professional golf, an outdoor sport, hung up its cleats, announcing that The Masters, played at Augusta (Ga.) National Golf Course in April and the crown jewel of professional golf, would be postponed indefinitely.
Almost overnight, colleges and universities shut down classrooms, emptied their dorms, and opted for online coursework. Some 33 million schoolchildren in 41 states have ceased attending school. Hundreds of companies, including Amazon and Microsoft in Seattle, a city hit hard by the coronavirus, are requiring their employees to “telecommute” by working at home on their laptops.
The CDC at first advised Americans not to cluster in groups of more than 25 people, then cut that figure to 10. Americans are being prodded to engage in “social-distancing” by avoiding shaking hands and separating themselves from others by a separation of three-to-six feet from others. San Francisco has gone still further, grounding cable cars, closing down clubs and bars and restaurants and effectively putting the city on lockdown.
The city of Boston called off its iconic St. Patrick’s Day parade, Broadway theaters dimmed their lights, and Starbucks forbade customers to sit down in its coffee shops. Major events like South by Southwest, the music and cultural festival in Austin, Texas, was canceled, depriving Texas’s capital city of some $350 million in economic activity.
Jilting the festival cuts deeper than the losses to airlines, hotels, bars, restaurants, and music venues, notes Alfred Watkins, a Washington, D.C.-based economist and chairman of the Global Solutions Summit, an international consulting firm. “You have all of these people in Austin who are running events and they’re hiring caterers for sandwiches and refreshments,” he said. “You have independent contractors like videographers and photographers, sound-equipment suppliers, Uber and Lyft drivers, hairstylists, and even freelance entertainment journalists — all of whom are no longer making money. For these entrepreneurs,” he added, “losing this event is a little like retailers missing out on the Christmas season. It’s when they make their money.”
The airline, travel, leisure, and tourism industries are in free-fall. Major cruise lines suspended bookings and cut short voyages after horrific reports of coronavirus outbreaks among passengers trapped at sea, temporarily putting a $38 billion industry in dry dock.
The conventions industry, which has come to a standstill after wholesale cancellations, remains a vastly under-appreciated sector of the U.S. economy, argues George Brennan, former executive vice-president of marketing at Arlington (Va.)-based Interstate Hotels and Resorts, the world’s largest independent hotel management company.
These mass gatherings are an unheralded engine of growth, he says, packing a bigger economic wallop than they get credit for. “Conventions typically draw anywhere from 2,000 to 25,000 people,” he said. “They run 6,000 to 8,000 attendees on average, and most can only be accommodated by the top 10-20 U.S. cities, which include Chicago, San Francisco, Las Vegas, Atlanta, New Orleans and Orlando.
“Conventions are often multi-dimensional,” he added. “Attendees usually spend three to five days in town. They often shop at clothing stores and other retailers. They’ll take in sporting events or, if they’re in New York, a Broadway play. They’ll go to attractions like the San Diego Zoo, or spend an afternoon on a golf course in Florida or California.”
Conventions generate a tremendous amount of commerce and revenues for vendors and exhibitors. As an example, Brennan cites his former employer, the hospitality industry. “At hotel conventions,” he said, “you’ll see people there selling curtains and sheets, soaps and towels.”
In addition, many trade groups – Brennan cites the National Association of Civil Engineers and the American Medical Association as examples – count on the annual convention as an important component of their organization’s annual revenues. “When you pay to attend,” he says, “a significant portion goes back to the association. The convention often covers the yearly salary for a group’s staff.”
Amid the dramatic behavioral changes, the stock market registered several days of panic-selling in March, capped by a record, single-day plunge on March 16: The Dow Jones index plummeted 2,997 points, the third-worst percentage loss in history. After flirting with the level at which the Dow was reading on Inauguration Day Jan. 20, 2017, the market continued see-sawing this week, herky-jerkying between mini-rallies and skids.
Hoping to prevent a coronavirus recession, the U.S. Senate adopted by an overwhelming, 90-8 bipartisan vote a $100 billion bill sent by the Democraticac-led House that expands free testing for the coronavirus, provides for paid sick leave and medical leave for some workers, and an emergency unemployment insurance and food assistance programs. The bill was signed late Wednesday night.
Meanwhile, Congress was taking up a monumental $1 trillion economic rescue plan proposed by the White House on St. Patrick’s Day (March 17) that included a bailout for the hotel and airline industries, help for small businesses, and $500 billion in direct cash payments to Americans households.
“We’re looking at sending checks to Americans immediately,” Treasury Secretary Steve Mnuchin said in a Rose Garden press conference at the White House on St. Patrick’s Day. By immediately, he added, “I’m talking about the next two weeks.”
The Trump Administration’s proposed help for small businesses has a strong supporter in Karen G. Mills, former SBA administrator and senior fellow at Harvard Business School. During her tenure in the Obama Administration, Mills was a troubleshooter in several crises including the Great Recession and Hurricane Sandy. “In a worst-case scenario with this virus contagion, getting loans to people through banks is not going to be fast enough,” she told AltFinanceDaily just before the White House drew up its rescue plan. “They’ll need direct loans to people and other aid. If we lose our small business economy, it will be catastrophic.”
So how will the pandemic and the state of the economy play out politically in the November, 2020 general election between President Trump and former Vice President Joseph Biden, the presumptive Democratic nominee? The result remains shrouded in the fog of the future, of course, but the election’s contours are coming into focus.
Having seen him through numerous scandals, impeachment, and a trial in the U.S. Senate, Trump’s political and electoral following has been put to the test. Yet his backers remain unshakably loyal in a way not seen in 80 years, observed the University of Houston’s Murray. “More people are dug in now than at any time since the 1930s,” he says, as roughly 43% of the electorate is firmly lodged in Trump’s camp. “Trump’s support has been remarkably stable.”
The business community is a key demographic in the pro-Trump cohort, notes Ray Keating, chief economist at the Small Business & Entrepreneurship Council, a Washington, D.C. advocacy group claiming 100,000 members. “We have not polled our membership,” Keating says, “but when you look at the data they overwhelmingly vote Republican. We find that support for Donald Trump is clear and substantial.”
Richard Yukes, a Las Vegas-based oilman and longtime entrepreneur who votes his pocketbook, will be pulling the lever for Trump in the November election. The reason? Trump not only presided over a robust economy for the past several years, Yukes says, but the president slashed Obama-era regulations imposed on his industry. “Government regulation and bureaucratic regulation often get mishandled and misdirected by federal bureaucrats and Trump is for less regulation,” Yukes says. “I think America works best with less regulation.”
The owner and operator of oil wells in Wyoming, Yukes benefited handsomely last year when Trump’s Environmental Protection Agency relaxed rules governing methane leaks. The oilman reckons that complying with the regulations had been costing him an extra $1,500 per well each year.
No matter how well the economy has performed in the past three years, however, the pandemic economy promises to be a “game-changer,” says political scientist Murray, and history shows that voters are likely to take stern measure of the incumbent president’s performance during any a crisis.
Trump’s initial response to the coronavirus reminds Murray of Woodrow Wilson’s reaction to the Spanish Flu pandemic in 1918 while World War I was still raging. “As the U.S. was approaching climactic battles in Europe, President Wilson suppressed the news of the flu and the story didn’t get out though eventually people knew about it,” Murray says.
Wilson’s deceit hurt Democratic candidates who were battered in the 1918 midterm elections, just a few days before the November 11 armistice. Two years later, after Wilson had a stroke, the Democratic presidential candidate got crushed in the 1920 election by Warren G. Harding, a Republican senator from Ohio.
After war and influenza, Americans voted enthusiastically for Harding’s promise of “normalcy.”
How Hot Is The Legal Cannabis Industry?
February 24, 2020
One gauge of the commercial excitement over legal weed, medical marijuana and cannabis’s byproducts could be witnessed at the Las Vegas Convention Center in early December where the Marijuana Business Conference & Expo was overflowing with 31,523 attendees.
Appealing to that audience—roughly the population of Juneau, Alaska—were more than 1,300 exhibitors who hailed from 79 different countries and touted products and services as varied as advancements in crop cultivation, medicinal breakthroughs, and innovative consumer products like marijuana-laden pastry.
That’s some 30% more than the 1,000 vendors who packed into the Central Hall in 2018 and about double the 678 who were showing off their wares in the smaller North Hall two years ago, reports Chris Day, vice president for external relations at Denver-based Marijuana Business Daily, which follows the cannabis industry and sponsored the Las Vegas trade show.
“In December, 2019,” Day declares, “we did not have to turn people away because we expanded. We had enough room for exhibitors but we needed both halls.” Unable to resist a boast, he adds: “We’ve been the fastest-growing trade show in the country three years running.”
One face in the December crowd was seasoned financial broker Scott Jordan, the Denver-based managing director of the Alternative Finance Network. He was occupying a booth accompanied by two attractive female models in fetching T-shirts emblazoned with the message: “How much would you borrow at zero percent?”
The young ladies’ arresting appearance and the message worked to the extent that “it got people talking,” Jordan says. As for the zero-interest rate, it’s not exactly free money. “I’ve got a product that puts together a line of credit,” he explains, “and after they receive the line of credit, it charges them a fee.”
As a broker, Jordan does the spade work of poring through a cannabis business’s financial statements and business model before he tees up a deal—typically between $250,000 and $750,000—to “a cadre” of 35 lenders in 10 states. He’ll ascertain whether the best funding option should be structured as equipment leasing, a working-capital loan, a revolving line of credit, project financing, or a real estate loan.
One recent cannabis deal that Jordan midwifed involved a “post-revenue, pre-profitability” manufacturing and processing company headquartered in Colorado. The financing, which closed in April, 2019, involved a pair of four-year term loans: one for $400,000 to refinance existing machinery, and a second for an additional $500,000 to acquire new laboratory equipment. Both credits carried interest rates in the “mid-teens,” he says, and were secured by the equipment.
Once the debt financing was in place, the manufacturing operation was “fully functioning,” Jordan reports, paving the way for the company to raise $30 million in venture capital financing. Jordan argues that “even if they pay a 10-20 percent interest rate, it’s better to preserve equity and finance through a normal type of loan. If you need an extraction machine or packaging equipment,” he adds, “why give up equity if you can finance it through debt?”
Jordan’s reasoning appears to sit well with clients and funders alike. Since 2014, he has brokered 85 transactions worth $33 million. He reckons that two out of three deals that he takes to funders meet with success. “My best year was 2015 because there were only a few competitors and I was the only guy on the block,” he says.
As the country steadily decriminalizes and legalizes pot, however, early market entrants like Jordan no longer have the cannabis business all to themselves. Thirteen states have legalized recreational marijuana for adults. These include California, Colorado, Oregon, Washington and Nevada in the West; Illinois and Michigan in the Midwest; and Massachusetts, Vermont and Maine in the East. Hawaii and Alaska permit it and, if you’re over 21, you can legally grow, smoke or ingest weed in the District of Columbia, but it cannot be sold commercially.
An additional 24 states have approved medical marijuana. While research on cannabis’s medicinal properties remains thin—largely because of objections by federal law enforcement—it is being prescribed for a range of maladies, including cancer, glaucoma, epilepsy, Crohn’s Disease, multiple sclerosis, nausea, and pain. [“The marijuana plant contains more than 100 different chemicals called cannabinoids,” according to WebMD. “Each one has a different effect on the body. Delta-9- tetrahydrocannabinol (THC) and cannabidiol (CBD) are the main chemicals used in medicine. THC also produces the ‘high’ people feel when they smoke marijuana or eat foods containing it.”]
Industry data assembled by MJBizDaily reflects both the broad acceptance of legal cannabis use and its increasing commercial popularity. U.S. revenues from legal weed and its byproducts are expected to clear $16.4 billion this year, a 40% growth rate over the $11.75 billion in estimated revenues for 2019. The legal cannabis industry now employs about 200,000 persons in the U.S., about the same number as flight attendants (120,000) and veterinarians (80,00) combined.
For more evidence that the cannabis market is hot look no further than the state of Illinois, where recreational marijuana went on sale Jan. 1, 2020. The Prairie State’s governor also pardoned some 11,000 citizens with criminal records for possession and the sale of low levels of marijuana.
“We’re showing that sales were close to $3.2 million on the first day of 2020,” says MJBiz’s Day. “Illinois is the big story right now,” he adds. “Anytime a new state opens up in the market, you’re seeing enormous pent-up demand and enthusiasm.”
Even as the cannabis industry takes giant strides toward public acceptance, the plant continues to face hostility from the U.S. federal government, which has criminalized its use for 80 years. Marijuana remains classified by the Drug Enforcement Agency as a Schedule 1 drug, keeping company with heroin, LSD and Ecstasy.
That designation has also made it hard for the cannabis industry to engage in simple financial transactions, much less obtain financing. “Despite the majority of states’ having adopted cannabis regimes of some kind, federal law prevents banks from banking cannabis businesses,” Joanne Sherwood, president and chief executive at Citywide Banks, a $2.3 billion-asset bank headquartered in Denver, testified to Congress last summer. “The Controlled Substances Act,” added Sherwood, who is chair of the Colorado Bankers Association, “classifies cannabis as an illegal drug and prohibits its use for any purpose. For banks, that means that any person or business that derives revenue from a cannabis firm is violating federal law and consequently putting their own access to banking services at risk.”
And despite the herculean efforts by the cannabis industry to soften its image, obtaining financing from traditional sources like pension funds, insurance companies and university endowments remains a daunting proposition as well, says David Traylor, senior managing director at Golden Eagle Partners. His four-person, boutique investment fund, which makes equity investments in up-and-coming cannabis companies, relies on wealthy individuals and family offices for the bulk of its funds.
“Capital is hard to come by for this industry,” Traylor says. “From day one, most venture capitalists have been staying out of it. It’s still illegal in many states and their limited partners are endowments like Harvard and Yale, which see marijuana as the antithesis of education.”
Sarah Sanger, chief financial officer at Oak Investment Funds, a real estate investment firm based in Oakland, says: “There’s a great deal of economic activity in California but it’s stymied by the lack of financing and difficulty with changing regulations. It provides an opportunity for really expensive debt from private investors willing to do due diligence.”
That absence of establishment financing has opened up a plethora of opportunities for alternative funders, and not just in agriculture and plant cultivation. While agriculture represents the bedrock of the industry there is no downstream product, of course, without the cannabis leaf— growing and harvesting cannabis is just one stage of the industry’s life cycle.
MJBiz’s Day notes, for example, that that the legal cannabis industry is regulated for safety, so growers must show that “the flower has no molds or contaminants.” That means that crops are subject to rigorous testing and decontamination, which requires both materials and expertise. To process the leaf and develop “infused products” by extracting cannabis-based oils entails the purchase and deployment of costly technology. Packaging and labeling along with tracking systems that, Day says, “are stricter than in other places” are also key components of the farm-to-market supply chain.
Meanwhile, in an ongoing effort to appeal to a fresh cohort of customers, Jordan notes, the cannabis industry continues to develop innovative uses for the plant. “There are so many applications and new products that keep appearing, like ice cream with marijuana, vaporizers, inhalers, and syrup,” he says. “Now, there are mints—something I hadn’t seen before—and different ways to ingest the product and get high and not look like a druggie.”
Jordan Fein, chief executive at Greenbox Capital in Miami, says his firm prefers to fund downstream companies selling cannabis products. “We do agricultural lending but it’s less attractive and harder to qualify the business. It’s not as tangible as a retail business which will have a website and product reviews. The same goes for edibles.”
Recent Greenbox Capital deals in 2019, Fein says, included one with merchant cash advances of $80,000 and $60,000 in growth capital to a Colorado dispensary. The operation put the money to work adding two retail outlets during the year, he says, bringing to four its total number of storefronts. In addition to cannabis flower, the dispensary sells “edibles, tinctures, lotions, and wax concentrates,” Fein reports. Both short term cash advances require regular ACH payments.
Greenbox Capital also made a $135,000 cash advance to a cannabis-testing laboratory in Southern California in August, 2019 for the purchase of sophisticated equipment. The company, he says, is doing $140,000-a-month in revenue and cashflow is strong and on the rise.
“Greenbox is always interested in higher risk deals,” Fein says, noting that banking services remain off limits to legal cannabis firms. “But we fund them for the same reason we fund lawyers and auto sales—things that most others will not do. There’s nothing wrong with risk,” he adds, “as long as you clearly assign a proper value to the deal and price to it.”
Steve Sheinbaum, a New York broker and chief executive at Circadian Funding, has unabashedly climbed aboard the cannabis bandwagon. “The market is exploding and it’s attractive to lenders because it’s a product people can put their hands on,” he says. “If I’m dealing with a grower, I can leverage real estate and usually there’s equipment. If they’re producing, there’s inventory and I can look at the income statement to see what kind of cash flow the business is generating.”
He recently brokered a $10 million loan for a licensed grower and distributor of medicinal marijuana in New England with monthly revenues of $3-$4 million. The credit bore a 17% annual percentage rate and a six-year maturity, he says. The deal was brought to Circadian by a private equity investor who was looking to grow the enterprise tenfold. The deal, which was interest-only, was secured by a second position on real estate and a lien on the borrower’s license. “The lender was comfortable with the interest-only loan,” Sheinbaum explains. “They can refinance in six years.”
In another recent deal, Circadian arranged an unsecured merchant cash advance for $300,000 to a Pacific Northwest technology company developing specialty, point-of-sale software for the cannabis industry. The firm showed monthly revenues of $300,000.
“It’s not federally permitted for cannabis firms to take payments from Visa, Mastercard or American Express,” Sheinbaum explains. “But this technology company is using debit or credit cards to pay for cryptocurrency which is stored on a prepaid card which customers can then use to purchase cannabis.”
The tech company had been struggling to find money and Sheinbaum took satisfaction in a deal announcement that went out in an e-mail to the industry. “Funding complicated deals is what gets our blood flowing,” Sheinbaum wrote. “Anyone can get a restaurant or dentist funded. No one needs help with that.”
Manny Columbie, a Miami-based senior funding manager at H&J Capital Group, an Orlando firm, reports funding agricultural and dispensary businesses in California, Colorado and Washington State. In the Evergreen State, he says, he recently provided funding to a woman who owned a marijuana-themed café connected to a cannabis dispensary. The deal went through after examining her recent bank statements and two years of federal tax returns.
“The best thing about lending to people in this industry is their ability to repay,” Columbie says. “They’re never lacking in funds.”
He provided more detail on a deal currently in the works involving a physician in Irvine, California, with an 800-plus credit score from the rating agency Experian and personal tax returns showing $2 million in annual income. The doctor, Columbie says, has been making transdermal patches infused with THC in addition to his medical practice and needs specialized equipment to lower his manufacturing costs to 55 cents per patch. The patches sell for $40-$60 apiece, Columbie says, depending on the THC content.
If the deal goes through and is approved by H&J’s credit committee, the physician would likely be extended a $350,000 loan with a 10-year maturity secured by the Chinese-manufactured equipment. Factoring in the doctor’s excellent credit and other positives, the interest rate on the credit could be as low as 5%-7%.
While the environment for legal cannabis seems to grow more favorable by the day, market participants urge funders to remain circumspect. One remaining fly in the legal cannabis ointment has been the persistence of an illegal black market. Estimates are that as much as 60% to 80% of the marijuana market in California is illicit, says Craig Behnke, an equity analyst at MJBiz.
Law-abiding businesses must also contend with overbearing regulators and high taxation. The California Department of Fee and Tax Administration recently jacked up its excise tax on cannabis to 80%, effective on Jan. 1, 2020.
And the state’s constabulary isn’t helping matters either, notes Sanger of Oak Funds. “There are going to be a lot of operators that end up being losers because of the regulatory environment,” she says. “Law enforcement is using all of its resources to make sure legitimate businesses are following the rules instead of clamping down on black market activity. That makes it harder for legitimate retailers to make money because people are still shopping in the black market.”
The recent collapse of the shares of publicly traded Canadian cannabis companies, which some blame in part on the illicit competition from the black market, also stands as a cautionary sign. Last August, the Motley Fool listed ten “Pot Stocks”—including Canopy Growth and Aurora Cannabis, both of which are listed on the New York Stock Exchange—that together lost a stunning $20 billion in market capitalization.
The drubbing that heedless investors have taken in the Canadian stocks reminds analyst Behnke of the debacle in dotcom stocks back in 2001-2002, but with a big difference. “The dotcoms were a brand-new invention and people had no idea how big the Internet companies would be,” he told AltFinanceDaily. “But cannabis has been around for a thousand years. I feel like it was a shame on investors and the companies. This shouldn’t have happened.”
Gold Rush: Merchant Cash Advances Are Still Hot
August 18, 2019
Last year, when Kevin Frederick struck out on his own to form his own catering company in Annapolis, the veteran caterer knew that he’d need a food trailer for his business to succeed.
He reckoned that he had a good case for a $50,000 small-business loan. The Annapolis-based entrepreneur boasted stellar personal credit, $30,000 in the bank, and a track record that included 35 years of experience in his chosen profession. More impressively, his newly minted company—Chesapeake Celebrations Catering—was on a trajectory to haul in $350,000 in revenues over just eight months of operations in 2018. And, after paying himself a salary, he cleared $60,000 in pre-tax profit.
But Frederick’s business-credit profile was so thin that no bank or business funder would talk to him. So woeful was his lack of business credit, Frederick reports, that his only financing option was paying a broker a $2,000 finder’s fee for a high-interest loan.
Luckily, he says, everything changed when he discovered Nav, an online, credit-data aggregator and financial matchmaker.
Based in Utah, Nav had him spiff up his business credit with Dun & Bradstreet, a top rating agency and a Nav business partner. This was accomplished with a bankcard issued to Frederick’s business by megabank J.P. Morgan Chase. Soon afterward, he says, Nav steered him to Kapitus (formerly Strategic Funding Source), a New York-based lender and merchant cash advance firm that provided some $23,000 in funding.
“They led me in the right direction,” Frederick says of Nav. “A lady there (at Nav) helped me with my credit, warning me that the credit card I’d been using had an effect on my personal credit. Then she led me to Kapitus, all probably within a week.”
Now, Frederick has his food trailer. He reports that its total cost—$14,000 for the trailer, which came “with a concession window, mill-finished walls, and flooring” plus $43,000 in renovations—amounted to $57,000. Equipped with a full kitchen—including refrigeration, sinks, ovens, and a stove—the food trailer can be towed to weddings, reunions, and the myriad parties he caters in the Delmarva Peninsula. In addition, Frederick can also park the trailer at fairgrounds and serve seafood, barbeque, and other viands to the lucrative festival market.
Meanwhile, the caterer’s funders are happy to have him as their new customer. The people at Kapitus, to whom he is making daily payments (not counting weekends and holidays), are especially grateful. “Nav provides a valuable service,” says Seth Broman, vice-president of business development at Kapitus. “They know how to turn coal into diamonds,”
Nav does not charge small businesses for its services. As it gathers data from credit reporting services with which it has partnerships—Experian, TransUnion, Dun and Bradstreet, Equifax—and employs additional metrics, such as cashflow gleaned from an entrepreneur’s bank accounts, Nav earns fees from credit card issuers, lenders and MCA firms.
The company has close ties to financial technology companies that include Kabbage and OnDeck, and also collaborates with MCA funders such as National Funding, Rapid Finance, FundBox, and Kapitus. “We give lenders and funders better-qualified merchants at a lower cost of client acquisition,” says Caton Hanson, Nav’s general counsel and co-founder, adding: “They don’t have to spend as much money on leads.”
As banks have increasingly shunned small-business lending in the decade since the financial crisis, and as the economy has snapped back with a prolonged recovery, alternative funders—particularly unlicensed companies offering lightly regulated, high-cost merchant cash advances (MCAs)—have been piling into the business.
And service companies like Nav—which is funded by nearly $100 million in venture capital and which reports aiding more than 500,000 small businesses since it was founded in 2012—are thriving alongside the booming alternative-funding industry.
Over the past five years, the MCA industry’s financings have been growing by 20% annually, according to 2016 projections by Bryant Park Capital, a Manhattan-based, boutique investment bank. BPC’s specialty finance division handles mergers and acquisitions as well as debt-and-equity capital raising across multiple industries and is one of the few Wall Street firms with an MCA-industry practice. By BPC’s estimates, the MCA industry will have more than doubled its small business funding to $19.2 billion by year- end 2019, up from $8.6 billion in 2014.
Bankrolled by a broad assortment of hedge funds, private equity firms, family offices, and assorted multimillionaire and billionaire investors on the qui vive for outsized returns on their liquid assets, the MCA industry promises a 20%-80% profit rate, reports David Roitblat, president of Better Accounting Solutions, a New York accountancy specializing in the MCA industry. Based on doing the books for some 30 MCA firms, Roitblat reports that the range in profit margins depends on the terms of contracts and a funder’s underwriting skills.
The numerical size and growth of the MCA industry is hard to ascertain, reports Sean Murray, editor of AltFinanceDaily (this publication), which tracks trends in the industry and sponsors several major conferences. “So much is anecdotal,” Murray says.
Even so, the evidence that MCA companies are proliferating—and prospering—is undeniable. Over the past two years, AltFinanceDaily’s events, which experience substantial attendance from the MCA industry, have consistently sold out, requiring the events to be moved to larger venues. In Miami, attendance in January this year topped 400-plus attendees, Murray reports, roughly double the crowd that packed the Gale Hotel in 2018.
Similarly, the May, 2019, Broker Fair in New York at the Roosevelt Hotel drew more than 700 participants compared with the sellout crowd of roughly 400 last year in Brooklyn. (Despite ample notice that this year’s Broker Fair at the Roosevelt was sold out and advance tickets were required, as many as 40-50 latecomers sought entry and, unfortunately, had to be turned away.)
The upsurge of capital and the swelling number of entrants into the MCA business has all the earmarks of a gold rush. “Everybody and his brother is trying to get a piece of the action,” asserts Roitblat, the New York accountant.
And there are two ways to hit paydirt in a gold rush. One way is to prospect for gold. But another way is to sell picks and shovels, tents, food, and supplies to the prospectors. “If you can find a way to service the gold rush, you can make a lot of money,” says Kathryn Rudie Harrigan, a management professor and business-strategy expert at the Columbia University Graduate School of Business. “It’s like profiteering in wartime.”
As Professor Harrigan suggests, cashing in on the gold rush by servicing it has parallels across multiple industries. Consider the case of Charles River Laboratories, which has capitalized on the rapid development of the biotechnology industry over the past few decades.
As scientists searched for biologics to battle diseases like cancer and AIDS, the Boston-area company began producing experimental animals known as “transgenic mice.” Informally known as “smart mice,” Charles River’s test animals are specially designed to carry human genes, aiding investigators in their understanding of gene function and genetic responses to diseases and therapeutic interventions. (The smart mouse’s antibodies can also be harvested. “Seven out of the eleven monoclonal antibody drugs approved by the Food and Drug Administration between 2006 and 2011,” according to biotechnology.com, “were derived from transgenic mice.”)
In the MCA version of the gold rush, a bevy of law and accounting firms, debt-collection agencies and credit-approval firms, among other service providers, have either sprung to life to undergird the new breed of alternative funder or added expertise to suit the industry’s wants and needs. (This cohort has been joined, moreover, by a superstructure of Washington, D.C.-based trade associations and lobbyists that have been growing like expansion teams in a professional sports league. But their story will have to wait for another day.)
Rather than being exploitative, supporting companies serve as a vital mainstay in an industry’s ecosystem, notes Alfred Watkins, a former World Bank economist and Washington, D.C.-based consultant: “A gold miner can’t mine,” he says, “unless he has a tent and a pickaxe.”
And in the high-risk, high-reward MCA industry, which can have significant default rates depending on the risk model, many funders can’t fund if they don’t have reliable debt collection. Many of the bigger companies, says Paul Boxer, who works on the funding side of the industry, have the capability of collecting on their own. But for many others—particularly the smaller players in the industry—it’s necessary to hire an outside firm.
One of the more widely known collectors for the MCA industry is Kearns, Brinen & Monaghan where Mark LeFevre is president and chief executive. The Dover (Del.)- based firm, LeFevre says, first added MCA funders to its client roster in 2012; but it has only been since 2014 that “business really took off.”
LeFevre won’t say just how many MCA firms have contracted with him, but he estimates that his firm has scaled up its staff 35%-40% over the past five years to meet the additional MCA workload. The industry, LeFevre adds, “is one of the top-growth industries I’ve seen in the 36 years that I’ve been in business.”
He also says, “People in the MCA industry know a lot about where to put money, but collections are not one of their strong points. They need to get a professional. It gives them the free time to make more money while we go in behind them and collect.”
If repeated dunning fails to elicit a satisfactory response, KBM has several collection strategies that strengthen its hand. The big three, LeFevre says, are “negotiation, identifying assets, and litigation.” He adds: “We have a huge database of attorneys who do nothing but file suit on commercial debt internationally. Then we can enforce a judgment. You don’t want someone who just makes a few phone calls.”
Because business has become so competitive, LeFevre says, he won’t discuss his fee schedule. As to KBM’s success rate, he says no tidy figure is available either, but asserts: “Our checks sent to our clients are more than most agencies because of our proprietary collection process.”
Jordan Fein, chief executive at Greenbox Capital in Miami and a KBM client told AltFinanceDaily: “We work with them. They’re organized and communicate well and they know to collect. They’re on the expensive side, though. I’ve got other agencies that I use that are cheaper.”
Debt-collection firm Merel Corp, a spinoff from the Tamir Law Group in New York, might be a lower-cost alternative. Formed in just the past 18 months to service the growing MCA industry, Merel typically takes 15%-25% of whatever “obligation” it can collect, says Levi Ainsworth, co-chief operating officer.
A successful collection, Ainsworth asserts, really begins with the underwriting process and attention to detail by the funders. “Instead of coming in at the end,” he says, “we try to prevent problems at the start of the process.”
For an MCA firm dealing with an excessive number of defaults, Merel sometimes places one of its employees with the funder to handle “pre-defaults,” for which it charges a lower fee. The collections firm has also built a reputation for not relying on a “confession of judgment.” Now that COJs have been outlawed for out-of-state collections in New York State, Merel’s skills could be more in demand.
Better Accounting Solutions, which has its offices on Wall Street, is another service-provider promising to lighten the workload of MCA firms by providing back-office support. The company is headed by Roitblat, a 36-year- old former rabbinical student turned tax-and-accounting entrepreneur. Since he founded the company with two part-time employees in 2011, it’s ballooned to some 70 employees.
Roitblat does not have all of his firm’s eggs in one MCA basket. His firm handles tax, accounting and bookkeeping work for law firms, the fashion industry, restaurants and architectural firms. Even so, he says, thirty MCA clients— or more than half his clientele—rely on the firm’s expertise, three of whom were just added in June. His best month was January, 2018, when six funders contracted for his services. “Growth in the MCA industry has been explosive,” he says.
MCA accounting work has its own vagaries and oddities. For example, because of the industry’s high default rate, Roitblat notes, a 10%-slice of every merchant’s payment is funneled into a “default reserve account.” And when an actual default occurs, credits are moved from the receivables account to the default reserve account.
Roitblat takes pride that his firm’s MCA work has passed audits from respected accounting firms like Friedman, Cohen, Taubman and Marcum LLP. Moreover, he has helped clients uncover internal fraud and, in one instance, spotted costly flaws in a business model. An early MCA client, Roitblat says, had no idea that “he was losing close to $100,000 a month by spending on Google ads.”
Better Accounting also keeps its rates low. The firm typically assigns a junior accountant to handle clients’ accounts while a senior manager oversees his or her work. “He (Roitblat) does a fantastic job,” says David Lax, managing partner of Orange Advance, a Lakewood (N.J.)-based MCA firm. “They understand the MCA business. And even if your business is small, they can set up the infrastructure and do the work more economically and efficiently than you can. You’d have to create the position of comptroller or senior-level accountant,” Lax adds, “to equal their work.”
Top-notch competence and low rates, Lax says, are not the only reasons he often refers Roitblat’s firm to fellow MCA companies. “The only thing better than their work,” he says, “is the people themselves.”
Whether it’s oil and gas, banking and real estate, construction, health care or high-technology—you name it—lawyers have an important role across nearly every industry. So too with the MCA industry where, as has been shown, there is an especially high demand for attorneys skilled at winning debt-collection cases.
To hear Greenbox’s Fein tell it, a skilled lawyer handling debt collection can write his or her own ticket. A talented attorney, he says, not only retrieves lost money and prevents losses, but enables the funder to “offer the product cheaper than the competition.
“We use a ton of attorneys in 35 states in the U.S. and in Canada,” Fein adds, “and you have no idea how many attorneys we go through until we find a good one.”
Until recently, much of the MCA industry’s success has resulted from a hands-off, laissez faire legal and regulatory environment—particularly the legal interpretation that a merchant cash advance is not a loan. The industry has also benefited from the fact that most credit regulation focused on consumer credit and not on business and commercial financings.
But now, as the MCA industry is maturing and showing up on the radar screens of state legislatures, Congress, regulatory agencies, and the courts, there is heightening demand for legal counsel. In just the past 12 months, California passed a truth-in-lending statute requiring MCA firms not only to clearly state their terms, but to translate the short-term funding costs of MCAs into an annual percentage rate. The state of New York, as has been noted, passed legislation restricting the use of COJs.
Moreover, notes Mark Dabertin, special counsel at Pepper Hamilton, a top national law firm based in Philadelphia, the state of New Jersey is contemplating licensing MCA practitioners. The Minnesota Court of Appeals recently determined in Anderson v. Koch that, because of a “call provision” in a funding contract, a merchant cash advance was actually a loan.
And, Dabertin warns, the Federal Trade Commission, which has the authority to treat a merchant cash advance as a consumer transaction—replete with the full panoply of consumer disclosures and protections—is training its gunsights on the industry. “On May 23,” Dabertin reports in a memo to clients, “the FTC launched an investigation into potentially unfair or deceptive practices in the small business financing industry, including by merchant cash advance providers.”
These pressures from government and the courts will only make doing business more costly and drive up the industry’s barriers to entry. Failing to stay legal, moreover, could not only result in punitive court judgments, but render an MCA firm vulnerable to legal action by their investors.
“It’s inevitable that the industry will evolve,” Dabertin says, and firms in the industry will have to self-police. “They will need to hire counsel and a compliance staff,” he adds. “You can’t just do it by the seat of your pants.”
2M7 Financial Solutions and the State of Alternative Funding in Canada
July 1, 2019
“What’s a cash advance?”
This is how Avi Bernstein, CEO of 2M7 Financial Solutions, recalled a typical conversation in 2008, when his company was founded in the Canadian market. According to him, customer knowledge of alternative financing methods was dismal, partly due to a handful of homogenous banks dominating the scene as well as a void of funders in the country.
Flash forward to 2019 and 2M7 is operating within a Canadian market that is much more trusting and knowledgeable of merchant cash advances, although it is not yet at the levels witnessed in the U.S.
“Low hanging fruit,” is how Bernstein describes the industry now, as small and medium-sized businesses are flocking to 2M7 and its contemporaries, which offer higher approval ratings and faster confirmation of funding than their more traditional counterparts. In fact, according to a 2018 study conducted by Smarter Loans, 24% of those Canadians surveyed stated that they sought their first loan with an alternative lender that year. As well as this, only 29% reported that they pursued funding from more established, traditional financial institutions and 85% of those that received financing confirmed their satisfaction.
Figures like these help to explain why the Canadian market has seen a rise in interest from foreign businesses in the previous five years. Greenbox Capital, First Down Funding, and Funding Circle are examples of those companies who have successfully implanted themselves within the market, a feat that Bernstein claims isn’t easy.
“It’s a different business,” he notes when comparing the market to that of the U.S. Listing the dissimilarities in market maturity levels, sales tactics, processing channels, and collection styles, as well as the currency exchange rate that’s to be considered, Bernstein says that he’s found those American funders who come to Canada unprepared never stay long enough to become a fixture of the industry.
Warning against half measures, Bernstein explains that “You’ve gotta put boots on the ground” if you want to succeed in Canada. Giving the impression that unless you’re willing to learn the rules applied in the market, hire people, and house them in an office north of the American border, Bernstein is keen to highlight what’s required of foreign companies looking with interest at Canada.
But it’s a risk-reward situation. The market is opening up as more funders enter it, and with the arrival of larger companies, such as OnDeck Capital, more resources are being devoted to raising awareness of alternative financing amongst Canadians.
Meanwhile, homogenous firms like 2M7 are continuing to grow in this developing market. Receiving an average of 200-300 applications for funds per month, 2M7 is capitalizing off opportunities by proving themselves to be open to a wider range of applications. Bernstein asserts that “we try to fund everything,” and that they keep an “open mind to every opportunity” that lands on their desk. Perhaps this is a mindset not shared by more conservative of funders in the industry, but, as Bernstein says, “we’re here, we’re funding, and we’re ready to rock n’ roll.”
You can meet Avi Bernstein and 2M7 at deBanked CONNECT Toronto on July 25th.
Are The Bankers Taking Over Fintech?
June 27, 2019
For Rochelle Gorey, the chief executive and co-founder of SpringFour, a “social impact” fintech company, mingling with industry movers and shakers at this year’s LendIt Fintech Conference was just what the doctor ordered. “I went mainly for the networking opportunities,” Gorey told AltFinanceDaily.
SpringFour, which is headquartered in Chicago, works with banks and financial institutions in the 50 states to get distressed borrowers back on track with their debt payments. It does this by digitally linking debtors with governmental and nonprofit agencies that promote “financial wellness.
The indebted parties—more than a million of whom had referrals that were arranged by Gorey’s tech-savvy company last year—constitute not only household consumers but also commercial borrowers. “Small businesses face the same issues of cash flow as consumers, and their business and personal income are often combined,” she says. “If their financial situation is precarious, it’s super-hard to get credit, a line of credit, or a business loan.”
Although Gorey felt “overwhelmed” at first by the throng of 4,000 conference-goers at Moscone Center West in San Francisco—roughly the same number as attended last year, conference organizers assert— her trepidation was short-lived. It wasn’t too long before she was in circulation and having chance encounters and serendipitous interactions, she says, with “all the right people at the workshops and at the tables in the Expo Hall.”
Armed, moreover, with a “networking app” on her mobile phone, Gorey was able to arrange targeted meetings, scoring roughly a dozen, 15-minute tete-a-tetes during the two-day breakout sessions. These included audiences with community bankers, financial technology companies, and “small-dollar” lenders. “And it went both ways,” she says. “I had people reaching out to me”—just about everyone, it seemed, appeared receptive to “finding ways to boost their customers’ financial health.”
Gorey’s success at networking was precisely the experience that the event’s planners had envisioned, says Peter Renton, chairman and co-founder of the LendIt Fintech Conference. Organizers took pains to make schmoozing one of the key features of this year’s gathering. Not only did LendIt provide attendees with a bespoke networking app, but planners scheduled extra time for meet-ups. “We had around 10,000 meetings set up by the app,” Renton says, “about double the number of last year.”
AltFinanceDaily did not attend the LendIt USA conference on the West Coast this year. But the publication sought out more than a half-dozen attendees—including several financial technology executives, a leading venture capitalist, a regulatory law expert, and the conference’s top administrators—to gather their impressions. While informal and manifestly unscientific, their responses nonetheless yielded up several salient themes.
The popularity—and effectiveness—of networking was a key takeaway. Most seized the opportunity to rub elbows with influential industry players, learn about the hottest startups, compare notes, and catch up on the state of the industry. Most importantly, the event presented a golden opportunity to make the introductions and connections that could generate dealmaking.
“My goal this year was to strike more partnerships with lenders and fintech companies,” says Levi King, chief executive and co-founder at Utah-based Nav, an online, credit-data aggregator and financial matchmaker for small businesses. “We had great meetings with Fiserv, Amazon, Clover Network (a division of First Data), and MasterCard,” he reports, rattling off the names of prominent financial services companies and fintech platforms.
James Garvey, co-founder and chief executive at Self Lender, an Austin-based fintech that builds creditworthiness for “thin file” consumers who have little or no credit history, said his goal at the conference was both to serve on a panel and “meet as many people as I could.”
Self Lender is in its growth stage following a $10 million, series B round of financing in late 2018 from Altos Ventures and Silverton Partners. Garvey reports having meetings with Bank of America and venture capitalist FTV Capital “over coffee” as well as F-Prime Capital, another venture capitalist. “It’s just about building a relationship,” he said of making connections, “so that at some point, if I’m raising money or want to partner, I can make a deal.”
There was a concerted effort to recognize women, as evidenced by a packed “Women in Fintech” (WIF) luncheon that drew roughly 250 persons, 95% of whom were women. (“Many men are big supporters of women in fintech and we didn’t want to exclude them,” Renton says). The luncheon was preceded by a novel event—a 30-minute, ladies-only “speed-networking” session—which attracted 160 participants, reports Joy Schwartz, president of LendIt Fintech and manager of the women’s programs.
At the luncheon, SpringFour’s Gorey says, “it was empowering just to see lot of women who are senior leaders working in financial services, banks and fintechs.” The keynote speech by Valerie Kay, chief capital officer at Lending Club, was another highlight. “She (Kay) talked about taking risks and going to a fintech startup after 23 years at Morgan Stanley,” Gorey reports, adding: “It was inspiring.”
The women’s luncheon also marked the launch of LendIt’s Women In Fintech mentor program, and presentation of a “Fintech Woman of the Year” award. The recipient was Luvleen Sidhu, president, co-founder and chief strategy officer at BankMobile, a digital division of Customers Bank, based near Philadelphia, which employs 250 persons and boasts two million checking account customers.
I am honored to be the 2019 Fintech Women of the Year and thrilled that @BankMobile won Most Innovative Bank. It’s very exciting to be recognized by @LendIt Fintech with this prestigious award and I congratulate the finalists in all the categories. https://t.co/qjADuKEMrB pic.twitter.com/hFJVFw1fLS
— Luvleen Sidhu (@LuvleenSidhu) April 11, 2019
BankMobile, which also won LendIt’s “Most Innovative Bank” award, has an alliance with Upstart to do consumer lending and a partnership with telecommunications company T-Mobile. Known as T-Mobile Money, the latter service provides T-Mobile customers with access to checking accounts with no minimum balance, no monthly or overdraft fees, and access to 55,000 automated teller machines, also with no fees. (At its website, T-Mobile Money describes itself as a bank and uses the slogan: “Not another bank, a better one.”)
The impressive salute to women notwithstanding, their ranks remained fairly thin: just 733 attendees identified themselves as “female” on their registration forms, LendIt’s Schwartz says, a little more than 18% of total participants. Seventy-five of the 350 total speakers and panelists—or 21%—were female. (Schwartz also reports that another 157 registrants selected “prefer not to say” as their sexual orientation, while 22 checked the box describing themselves as “non-conforming.”)
In LendIt’s defense, AltFinanceDaily, who caters to a similar audience, regularly reviews its readership demographics using several tools. They have consistently indicated that women make up 18% – 23% of the total, in line with what LendIt experienced at its most recent event.
By all accounts, many panels were informative, jampacked and attendees were engaged. King, who moderated a panel on regulatory changes in small business lending, which dealt with such topics as California’s commercial “truth-in-lending” law and controversial “confessions of judgment” laws, says: “They didn’t have to lock the door but the room was pretty full and people seemed to be paying attention. I didn’t see people studying their cellphones.”
The Expo Hall was teeming with budding fintech entrepreneurs, financial services companies and multiple vendors hawking their wares. But as numerous fintechs were angling to forge lucrative symbiotic relationships with banks, some participants—even those who were hailing the conference for its networking and deal-making opportunities—lamented the heavy presence of the establishment.
The banks’ ubiquitousness especially vexed Matthew Burton, a partner at QED Investors, an Arlington, (Va.)-based, venture capital firm and a veteran fintech entrepreneur. Before signing on with QED last year, Burton had been the co-founder of Orchard Platform, an online technology and analytics vendor for fintech and financial services companies which was purchased by fintech lender Kabbage.
Not only did bankers seem to playing a more prominent role at the LendIt conference, Burton notes, but “big four” accounting firm Deloitte had signed on as a major sponsor. “The energy level seemed a bit lower than in past years,” Burton told AltFinanceDaily. “It’s not like people were depressed but it wasn’t bubbling with excitement. A couple of years ago we thought all these new fintechs would replace the banks,” he explains. “Now the discussion is over how to partner and collaborate with banks. It’s not as exciting as when everyone thought banks were dinosaurs.
“I couldn’t really tell if there were more bankers attending this year,” Burton adds, “but it sure felt like it.”
King, the Nav executive, told AltFinanceDaily: “It was a little bit subdued. I don’t know if it was nervousness about the economy or politics, but the subject of risk came up more often in side conversations with venture-backed businesses and banks and alternative fintech lenders. One large bank we deal with,” he adds, “told me it’s spending most of its time working on risk.”
Cornelius Hurley, a Boston University law professor and executive director of the Online Lending Policy Institute who participated in a standing-room-only session on state and federal fintech regulation, declares: “I’ve been to three of their conferences, including one in New York, and I would say that this one did not have as much pizzazz. It may be that the industry is maturing.”
For his part—when asked whether there was a palpable absence of passion this year—LendIt’s Renton told AltFinanceDaily: “I would say that it felt more businesslike. Fintech has had a lot of hype and we have had conferences that were ridiculously over-hyped in 2015 and 2016. And in 2017 (the mood) was much more somber. This one felt optimistic and businesslike.”
There were 750 bankers in attendance, almost one in five participants. “The number of bankers was not up significantly” over last year, Renton says, “but the seniority of the bankers was higher. We worked very hard to get senior bankers to attend this year.”
Renton was bullish on the closer ties developing between nonbank online lenders and banks. That was reflected as well in the several panels exploring ways to develop partnerships between the two sides. He noted that a session called “How Banks are Matching Fintechs on Speed of Funding and User Experience” drew a heavy crowd. “It brought more bankers than we’ve ever had before,” Renton says.
Moderated by Brock Blake, founder and chief executive at the fintech Lendio, the panel was composed of three bankers: Ben Oltman, the Philadelphia-area head of digital lending and partnerships at Citizens Bank; Gina Taylor Cotter, a senior vice-president at American Express (the highest-ranking woman at the company); and Thomas Ferro, a senior marketing manager at Bank of America. “The banks came to LendIt not just to learn but to decide whom they’re going to partner with,” Renton says. “Fintechs need banks and banks need fintechs. That is the narrative you hear on both sides.”
(Asked whether any banks sponsored this year’s conference, Renton replied: “They are not sponsoring yet in any number but we are working on that.”)
OnDeck, a top-tier fintech lender to small-businesses in the U.S., which has been making forays abroad to Australian and Canadian markets, is an enthusiastic champion of the fintech-bank union. So much so that it claimed LendIt’s “Most Promising Partnership” award for the cooperative relationship it struck with Pittsburgh-based PNC Bank, which uses OnDeck’s platform to make small business loans. (Among the partnerships that OnDeck-PNC beat out: Gorey’s SpringFour, which was named a finalist in the competition for its association with BMO Harris Bank.)
“We were the first fintech lender to strike a true platform relationship with a bank,” Jim Larkin, head of corporate communications at OnDeck says, noting that the PNC deal follows on the New York-based fintech’s similar, innovative arrangement with J.P. Morgan Chase. “Others may do referrals,” he explains. “What we do is actually provide the underlying platform to accelerate a bank’s online lending capabilities. We deliver the software and expertise to construct the right type of online lending engine.”
Meanwhile, there was avid interest about the stock performance of publicly traded fintechs—for example, Square and GreenSky—both of which had seen their share prices tumble and then recover.
Burton noted that, among venture-backed firms, the most excitement seemed to be coming from Latin America. “Everyone was very bullish on a Mexican company, Credijusto, an alternative small business lender that was written up the in the Wall Street Journal,” he says. “It’s not going public yet but it had a large debt-and-equity raise of $100 million from Goldman Sachs. And SoftBank Group announced a $5 billion Latin American tech fund.
“There was a lot of talk,” he adds, “about how money was flowing into Mexico and Brazil.”
Ron Suber: ‘This Industry Will Look Very Different One Year From Now’
February 25, 2018
Ron Suber wears many hats. His official LinkedIn profile lists him as President Emeritus and Senior Advisor at Prosper Marketplace. Now you can add a new title to his repertoire – the Magic Johnson on fintech. That’s because when it comes to Suber’s legacy, he’s all about the passing game.
“I really enjoy the assist in basketball more than the score or the dunk and so I’m trying to be that leader of assists in our industry, Magic Johnson, if you’ll let me use that analogy … I want to be him for our industry and help everybody win and help the whole thing be bigger, but you have to give the ball to the people in the position where they can score and that’s what I’m trying to do,” said Suber in a podcast discussion with Lend Academy’s Peter Renton, who is also a co-founder of LendIt.
Since Suber stepped down as president of Prosper, his presence in marketplace lending and fintech only seems to have blossomed, which in hindsight may have been the plan all along. The godfather of fintech, as he’s also known, is in the midst of what he’s dubbed a professional rewiring, one that didn’t prevent him from participating in a podcast with Renton.
During the discussion, Suber didn’t shy away from any topic, fielding questions on everything from his investment portfolio, to Prosper, to travel and his views on marketplace lending and fintech. His travels have taken Suber to Patagonia and the straits of Magellan to his favorite Aussie city of Melbourne. Next up Suber plans to explore Africa, including Rwanda and Tanzania.
Suber on Aussie IPO Credible
San Francisco-based Credible, a consumer finance marketplace for millennials, just raised $50 million in an Australian IPO. Suber, who serves as chairman of the fintech, got to know Credible CEO Stephen Dash a few years ago. When Dash needed to raise money, Suber was the first to work with other fintech influencers including a group in Asia to invest $10 million in the company at a $40 million valuation.
Credible followed up with another equity round before deciding to IPO in Australia, where the market is different versus the United States or Hong Kong.
“We were able to meet with the asset managers, the family offices, and the superannuation funds and some of the pension funds in Asia, Hong Kong in particular, and throughout Australia who were very supportive of Stephen Dash, who is from Australia,” said Suber, adding that Credible was the biggest tech/fintech IPO in Australia last year.
Incidentally, Suber has also met with Australia Treasurer Scott Morrison, who sparked a meeting with Suber, Dash, US cryptocurrency exchange Coinbase and other members of the payments market to discuss how Australia can engage with young US entrepreneurs.
We asked Suber what to expect with crypto and lending, in response to which he told AltFinanceDaily: “Like the very early days of the internet, there were lots of dot-com companies with high valuations in the hype cycle, little revenue and unclear long-game solutions…think Amazon. Big winners emerged, and the majority lost money on the early bets. The same is true for cryptocurrencies. Enormous winners will emerge. In my opinion, the winners include CoinBase, Ripple and Ethereum.”
Suber on Prosper
While Suber has moved on from an executive role at Prosper, he remains engaged with the company and is close with the leadership team, including CEO David Kimball and CFO Usama Ashraf. Suber’s involved across the board, from customer acquisition, to business development and on the capital markets side of things as well.
“It’s again doing close to $300 million a month in originations, it has $100 million in cash it generates cash each quarter, it has its own securitization channel at this time in addition to the consortium … There’s a lot going on there including some product expansion, so there’s no shortage of things to do with Prosper, which I care a lot about,” said Suber.
Suber on Hindsight Being 20/20
Marketplace lending has had peaks and valleys along the way as it has matured from a nascent segment to essentially a transformational influence on the lending space, with its technology touching everything from the business model, to the borrower to the banks.
But if hindsight were 20/20, there are some things he’d do differently the second time around.
He pointed to Prosper’s acquisition of American HealthCare Lending, which he characterized as a “great decision,” giving the marketplace lender an opportunity to tap the healthcare borrower market. But as in any relationship, you can’t change each other.
“We changed American Healthcare Lending too much and tried to make it into something that it just couldn’t be with the point of sale financing. I think the lesson there is it’s great to do an acquisition, but you have to make sure you execute and keep it fresh and focused and successful once you get it,” said Suber, pointing to the acquisition of Tel Aviv’s BillGuard as yet another example of this.
Prosper also took on too much office space around the country.
“Perhaps we could have outsourced a little more instead of all the hiring. Clearly diversifying committed capital and maybe back then even using some of the capital we raised to do these own CLUB deal securitizations, which Prosper does now very successfully with its balance sheet,” he noted.
Suber also urged the marketplace lending market to showcase its technology and unique abilities as “tech-enabled finance companies” more. As the innovator that he is, Suber suggested there should be greater collaboration among marketplace lenders, comparing it to the airline industry. He explained:
“So, the airline industry is competitive, they’re competing for dollars and seats and people and talented pilots and the best planes, but the reality is they have to work together, they have to make sure that planes don’t crash and that the industry is on time and does lots of good things together… And that’s really what I think we can do better, a better job of as an industry is really working together, competing, but communicating and making sure everybody lands safely.”
Suber on Marketplace Lending
As the godfather of fintech, Suber is often looked to as a guiding voice on the status of the market. That’s why when he says the industry has advanced in innings, it’s revelatory.
“I think we’re in the home stretch, I think we’ve done the seventh inning stretch,” he said. Suber pointed to Asia, where the market has gone from 3,000 platforms to 50 and in the United States where it’s consolidated from 300 to fewer than 100.
“The mature are maturing,” he said,” pointing to a race in which some platforms are pulling away from others in terms of valuation, volume and the ability to engage the industry.
“The separation will continue,” he said. “The industry will look very different one year from now.”
Suber on His Investment Portfolio
If you’ve ever wondered which investment areas Suber believes represent the next opportunity, look no further. He’s “struck” by financial inclusion, in particularly a telecom play Juvo for which he’s an advisor and in which invested a few rounds. Juvo is looking to serve the unbanked in the developing world where they lack financial identities, internet access and smartphones. The company has partnered with the likes of Samsung.
“We talk a lot in the online lending industry about top down, super-prime and prime and near prime; this is my way of coming from the bottom up with technology and data and finance to be involved in financial inclusion. I’m really quite excited about that one,” said Suber.
He also likes startup Unison and the emerging fractionalization of the home equity market, which he characterizes as “the next big thing.” In addition to Suber, this market has attracted the likes of Marc Andreessen.
Suber has nearly 20 investments in private companies, including payment companies, financial inclusion and lending. He’s also become a debt investor to some online lenders, invoice finance plays among others. “I’ve really enjoyed the debt side of investing as much as the equity side,” he proclaimed.
Suber on Broader Fintech
In addition to marketplace lending, Suber is also a believer in the point-of-sale (PoS) solution and invoice finance companies, which he says are “fixing the way invoicing is financed and making it better, cheaper and quicker.” And in taking an overarching view of the market, he also likes the cleantech, pointing to solar fintech play Mosaic and a company called CleanCapital.
Suber on Rewiring
Suber is a big believer in rewirement, both in his personal life and in business. He defines it as “redesigning one’s life personally and professionally.” Before he applied it to his career, Suber and his wife Caryn pursued a rewirement in their personal lives, one that included selling their home and material possessions, buying a new home and traveling.
In 2017, he decided to do the same thing professionally to strike a better balance in his life. Since then, he’s developed a color-coded regiment by which to live, separating the hours of the week across categories including exercise = blue, personal = green, work = purple and teaching and managing his family office = red.
“There’s a lot of green on my calendar,” he said.
For those interested in rewirement, Suber has launched a blog on the topic, with the maiden couple of entries documenting the first 360 days and counting.
Many of Suber’s quotes here originated from his interview with Peter Renton. Renton is the co-founder of the LendIt Conference.
From Ineligible to 0% APR – Los Angeles Company Monetizes Startup Leads, Combats Stacking
November 10, 2017
Merchants have no shortage of options when it comes to accessing funding in today’s climate. And while MCAs and loan products have become more pervasive, one company’s solution is to reintroduce traditional financing in a strategic manner. Seek Business Capital finds credit card offers and credit lines for the credit-worthy who may not be eligible or ideally suited for a business loan.
Roy Ferman is an Australia transplant who runs the company out of the Los Angeles headquarters, miles from the usual domicile for alternative funders of Silicon Valley, New York and Austin.
“We liked LA from a perspective of the sunshine, but we also like being away from the rest of the funding industry. It gives us the ability to put our heads down and focus on what we’re doing and not worry about what anybody else is doing,” Ferman told AltFinanceDaily.
Seek Business Capital partners with MCAs and brokers on leads and recently expanded with a new hire in New York. Kunal Bhasin joined the company over the summer as vice president of business development. “We were traveling out there to meet with partners and doing redeye flights. Now someone is on the ground there training partners on how to better find opportunities to use our product,” Ferman said.
Basically, the company tells MCAs and brokers that the startup leads (those that are trying to start a business or have just started one), to send those deals to Seek Capital, instead of throwing them in the trash.
They recently adopted a fully automated underwriting product that delivers an instant decision for merchants though there’s an element of the human touch on the services side of the transaction.
“For us, the biggest driver is FICO. We take someone with a good FICO score but just started their business and we are still able to offer this person funding,” said Ferman, adding that the sweet spot is a credit score of 680 or higher. “Cash flow is always going to be a factor. For us, we’re predominantly based on FICO. Even still, FICO is one thing. That’s the body of the car. Sometimes we want to look under the hood and see what’s really going on,” said Ferman.
Economic Indicator
Seek Business Capital is industry agnostic though some of the more common sectors they work with are retail, restaurants and trucking. “What’s really interesting is we get a little bit of a sneak peek into emerging industries and local economies,” Ferman said.
For instance, when cannabis was legalized for recreational use in Colorado, they saw a spike in demand from “peripheral businesses” such as contractors that were building out the storefronts, security companies and restaurants amid a rise in tourism to the area.
A similar boom is expected in California when cannabis for recreational use becomes legal in the state in 2018 via Prop 64.
Zach Lazarus, CEO of San Diego-based A Green Alternative, a cannabis dispensary and delivery service, said: “You name it, it’s going up in California right now,” in response to Prop 64. He added there are desert towns and farm communities looking to embrace the boom, which he compares to the gold rush of 1849.
“It’s the service providers, architects, contractors, all these different niche needs are the people who are really going to benefit from the boom,” Lazarus said. Contractors especially need access to capital right away; they don’t generally get fully compensated until once the job is complete, and they need to purchase materials in the interim.
Lazarus said banks won’t loan to cannabis businesses and in his experience other lenders have been predatory in nature. He may just not have come across the right funder yet.
Anti-Stacking Tool
One of the problems that Seek Business Capital seeks to solve is that of merchants taking on too many positions. “We found two ways to provide our services. Our bread and butter and our historical performance has always been in startup funding. We’ve evolved to move more upstream with lenders and we’ve become an anti-stacking tool, if you will,” Ferman noted.
The problem with stacking is that it can put a major strain on the cash flow of the merchant and it put the first position funder at additional risk than what they originally agreed to underwrite.
“We offer 0% for the first 12 months. It’s very advantageous and we’re not crushing cash flow. We view it as an anti-stacking tool. There are few lenders and ISOs who use it, taking both our credit card position and the original term loan but protecting the merchant. The merchant gets all the money they need so they’re not interested in stacking,” said Ferman.
Seek Business Capital charges merchants a success fee of 9.9% of whatever funding they receive for them. Payment is made once the small business receives their funding and the merchant will typically choose to pay Seek Business Capital with the capital they receive from the credit extended to them.
Now they’re taking things to the next level with a data product that they plan to license to third party credit aggregators next quarter.
“We’ve seen everything from the credit profile, to income, to the approval rate, the approval score and the amount. We’ve taken all that data and analyzed $150 million worth of credit card approvals for big clients. We now have a strong indicator of which profile is going to get approved from which bank and how much,” Ferman explained.
A customer submits their details into Seek Business Capital’s decision engine, which generates an estimated approval or decline rate in real time. For instance, they might see that their approval likelihood is 25% for one card and 86% for another along with the estimated approval amount. It’s a soft credit pull so customers don’t have to worry about harming their credit. In addition to the decision engine there’s a recommendation engine that makes credit card suggestions to merchants.
Ferman said the biggest competition the company faces is a potential customer taking out a home equity line, dip into their 401(k) or borrow from friends and family.
