The Real Impact on Small Business
May 22, 2014
It’s not easy being in the lending business. Just talking about money can make people uncomfortable. Bringing up how much money you have, don’t have, or wish you had is like bringing up politics at Thanksgiving dinner. It’s taboo in this society. It’s even rude to ask somebody how much they make a year. That’s one of two reasons why being a lender or loan broker is so difficult, you’re forced to dive head first into emotionally charged waters.
The second reason is telling an applicant ‘no’. It feels personal even if it’s not. “It’s just business,” the bearer of bad news will say, but it never feels that way. I know that firsthand through my experience as both a broker and an underwriter. Rejection is a painful experience for an applicant no matter how professional they are.
But sometimes you get to tell an applicant ‘yes’ and that can be an emotionally moving experience as well. Looking back, the only applicants I ever heard cry were the ones that got approved. Some of those approvals were expensive but they were given an opportunity in a world where up until that point, no one was willing to give them any opportunity at all. They were the forgotten businesses of America.
PayPal’s VP of SMB Lending recently said that he feels “blessed to be serving this higher need.” Blessed was an interesting word choice. Being able to support small businesses doesn’t just make him feel happy or hopeful or satisfied, it makes him feel blessed.
What is the real impact that alternative financing companies have on small businesses? Thanks to the funding companies who took the time to find out. Today, we can see for ourselves:
Above is just a small handful of the testimonials you can find on the websites of CAN Capital, Kabbage, RapidAdvance, Fora Financial, and Merchant Cash and Capital. Real businesses, real stories, real impact.
And there you have it…
Throw Out the 5 Cs?
May 19, 2014
The 5 C’s of lending? “Throw that book out” says Darrell Esch, VP of SMB Lending for Paypal. At the Federal Reserve Bank’s New York Small Business Summit last week, critics hammered away at the high rates being charged by some alternative business lenders.
In the first video below, PayPal’s small business loan program (which is a textbook merchant cash advance) is characterized as too expensive and not transparent.
APRs? Business owners don’t think that way, says Esch:
The transparency debate is a hot topic in alternative business lending. Merchant cash advance industry hater Ami Kassar pressed me on the transparency issue just last week over twitter, to which I conceded transactions structured as loans should clearly state an APR, even if that metric is not the most relevant or helpful.
What confuses me is Kassar’s belief that an APR represents the “real cost.” It is nothing more than an annualized metric. Many people understand APRs, but many do not. My point is that an APR is a mathematical formula that may or may not be relevant and may or may not be understood.
In fact, Bankrate.com’s loan calculator helps borrowers ascertain the true cost of their loans by helping them calculate what they really need to know, the total dollar amount to be repaid. And with that reality, alternative business lenders and their merchant cash advance counterparts are speaking the language of their clientele by making the dollar for dollar cost as transparent as possible.
After all, business owners regularly borrow at rates that exceed 3,500% APR via overdrafts.
Kassar claims that more than 50% of borrowers substitute MCAs for something else once they’ve learned the “real cost” of such financing. This implies that all of his clients have better options, a circumstance which generally isn’t true of small businesses that use merchant cash advances or high cost business loans. Deficiencies in Credit Score, Capital, or Collateral tend to disqualify them in the real world.
This debate leads us down the same road every time. Should businesses rejected by low rate lenders be banned from accessing credit because the options available to them now are too expensive? “No,” a critic would say. “They should just be charged a lower rate.” But considering the risk, could a lender survive drastic price cuts? With all the competition in today’s market, alternative business lenders have been slashing rates to as low as they can possibly get them… for now.
But to critics like Kassar, things like profitability are an afterthought. What’s profitability got to do with the price of a loan?
@financeguy74 @Reuters What does that have to do with the price of cheese ?
— ami kassar (@akassar) May 15, 2014
I wonder if his clients who have exhausted all their options choose a low rate SBA loan that they can’t get once he has educated them about the high cost of a merchant cash advance. Oh wait…
Esch suggested throwing out the 5 Cs. I don’t think that’s a good idea. It’s leeway that’s needed, not discarding the book altogether. That leeway comes at a cost.
Questioning the costs that alternative business lenders charge is a beautiful example of the free market at work. They’re an easy target for criticism, yet a badly needed component of the American economy. No harm can come from keeping them honest. But as Esch commented on how he feels about what he does, “I feel blessed to be serving this higher need.”
Is Alternative Lending a Game of Thrones?
April 8, 2014
It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us…
This blog has been many things over the years, all of it relative to who the reader was. It has encouraged and deterred, informed and confused, made people laugh or stoked their anger. The merchant cash advance industry it spoke of had been small. Annual funding volume was a billion or two or three, a blip of a blip on nobody’s radar. There was a sense of unity, a shared objective amongst competitors. They were guided by one dictum, “grow, but don’t rock the boat.”
But opportunity enticed everyone, the good, the bad, and the unexpected, and it brought a relatively peaceful chapter to an end. Winter is coming, Eddard Stark would likely say of the uncertainty that hangs in the air. Merchant cash advance has become a spoke in the alternative lending wheel that is spinning forward uncontrollably. Non-bank financing has become a worldwide phenomenon virtually overnight, setting the stage for the lords of funding to play a game of thrones. Investors with bottomless pockets are emptying them, government agencies are assessing the landscape or crafting responses, and journalists stand ready to shape public opinion.
This is a transformational moment in human history, perhaps bigger than what Facebook did for social media. Individuals are taking control of the monetary supply. Strangers pay each other in bitcoins, neighbors are bypassing banks for loans and lending to each other instead, and businesses are rising and falling with the funding they get from other private businesses. Winter is coming for traditional banking. The realm calls for a new king.
Wonga’s epic rise is being countered by both regulatory and religious resistance, and the man who dared the world to lend algorithmically has admitted defeat. Peer-to-peer lenders have encountered massive regulatory setbacks on their road to stardom and merchant cash advance companies are currently engaged in a civil war over best practices. Winter is coming indeed.
The Kings
Lending Club
In what is perhaps their first step towards an IPO this year, Lending Club is reducing transparency over its loan volume. Up until April 3rd, anyone could see how many loans they issued on a daily basis. Now this information will only be available quarterly. Peter Renton in his Lend Academy blog shared his belief that the move was entirely tied to the impending IPO. “Without this daily loan volume information their stock price will be less volatile and they will be able to “manage the message” with Wall Street every quarter,” Renton wrote.
OnDeck Capital
OnDeck Capital is also in contention for an IPO this year. A year ago a company executive hinted that becoming a public company would not be on the agenda for consideration until 2015, yet I am hearing rumors that they may make a late 2014 go at it. Such rumors hold weight in light of reports that they are cleaning up their ISO channel. Insiders on DailyFunder are saying that resellers with abnormally high default rates are in jeopardy of being cut off.
OnDeck Capital is unique in that outsiders chastise them for their rates being too high while insiders argue their rates are too low to be profitable. It’s a classic example of how tough the court of public opinion can be on a lender even if they are not getting rich off their loans.
Kabbage
Kabbage came and conquered the entire online space before anyone had a chance to blink. PayPal, ebay, Amazon, Etsy, Yahoo, Square, they claimed those territories for themselves and then launched an attack into the brick and mortar space. Kabbage’s secret value is their patents. They are a serious player on a serious path.
CAN Capital
CAN Capital’s greatest weakness is their lifespan. They’ve managed to stay on top after 16 years in the business but that makes them old enough to be Kabbage’s grandfather by today’s tech standards. As a pre-dot com era business, it’s impossible to argue against their sustainability. If anyone has alternative lending figured out for both the good times and the bad, it’s CAN Capital.
The Lords
The Government
Peer-to-peer lending has already been under strong scrutiny from the Federal Government. Lending Club and Prosper are regulated by the Securities and Exchange Commission these days, but they may never be free of oversight. Just two months ago, the Federal Reserve published a report on trends in peer-to-peer business lending. They hinted at further regulation.
As small business owners are increasingly turning to this alternative source of money to fund their businesses, policy makers may wish to keep a close eye on both levels and terms of such lending. Because such loans require less paperwork than traditional loans, they may be considered relatively attractive. However, given the relatively higher rate paid on such loans, it may be in the best interest of the business owner to pursue more formal options. More research is required to understand the long-term impact of such loans on the longevity of the firm and more education to potential borrowers is likely in order.
– a 2014 Federal Reserve study
The Merchants
Once upon a time nobody talked about alternative lending online except for the companies offering it. Merchants didn’t talk about it with each other or there were too few businesses to give rise to centralized discussions. Today, merchants communicate and compare notes:
Merchants discuss PayPal’s working Capital program: http://community.ebay.com/t5/PayPal/PayPal-Working-Capital-Loan-DONT-SIGN-UP/td-p/17630207
Merchants discuss Square’s merchant cash advance program: http://www.mrmoneymustache.com/forum/welcome-to-the-forum/square-to-offer-small-business-loans-at-exorbitant-interest-rates/
Merchants discuss Kabbage: http://community.ebay.com/t5/Part-time-eBay-Sellers/Kabbage-quot-loans-quot/td-p/3002329
OnDeck Capital’s 30+ Yelp Reviews: http://www.yelp.com/not_recommended_reviews/FOndxpkaBRP6LVIlOv6Dfw
Potential Lending Club borrowers make their cases: http://www.lendacademy.com/forum/index.php?board=3.0
The Machines
Are computers better predictors of performance than humans? Some people think so. This debate will play a pivotal role in the future of alternative lending.
The Media
Public opinion will be at their mercy.
The Vulnerabilities
Commissions
The bigger alternative lending gets, the juicier the stories become. Just last week, Patrick Clark of BusinessWeek dove head first into the reseller model, revealing insider commissions, the truth about buy rates, and the alleged antiquated practice of enlisting a broker to secure funding. On trial was a documented 17% commission, an example I believed to be an extreme case. For a long time commissions ranged between 5% and 10% on average. But there are some big names paying up to 12 points and others boasting of 14. All were topped by the mass solicitation I received a few days ago that promised a 20% commission. These kind of figures if they continue will become an easy target for journalists looking to portray the industry in a negative light.
Stacking
There is a raging civil war within the merchant cash advance community specifically over stacking. This is the instance that a merchant sells their future revenues to two or more parties at the same time, leading to multiple daily deductions from their sales. This debate is bound to spill out into the mainstream if it cannot be resolved on its own.
Technology
Some funding companies intend to license their automated underwriting technology to banks, potentially handing the keys of alternative lending’s greatest asset (speed) to traditional bankers. It is unlikely that banks would engage in some of the high risk deals that alternative lenders target but they could recapture the top credit tier borrowers that have been flocking away from them.
Also at stake here is the sustainability of algorithmic underwriting. There are critics that believe computers appear to make great decisions during good economic periods but suffer during downturns. Do the technology based funding companies have enough data to weather a future economic storm?
So many things are happening at once, that it’s impossible to know what fate awaits the realm. Will there be a new king or will alternative lending fall apart like a house of cards?
For those of us climbing to the top of the food chain, there can be no mercy. There is but one rule: hunt or be hunted.
-Frank Underwood
May the best man win.
2014 Starts off With a Case of Red bull
January 10, 2014
Woah, slow down there fellas. Let us digest one thing at a time. We’re not even 2 weeks into the new year and already we’ve learned that:
CAN Capital raised another $33 Million (but that they didn’t need it?)
Merchant Cash Advance was the the feature story on the front page of the Wall Street Journal. Seriously…
Bloggers are learning about this industry for the first time. They’re having a bit of trouble getting it right.
PayPal, which just recently kicked off its own merchant cash advance program (or as they call it, their Working Capital Program) has already issued 4,000 advances.
Regulators are freaking out over the use of social media information in loan approvals.
DailyFunder will begin mailing out the first alternative business lending magazine a week from today. It’s free so sign up!
No End in Sight for Alternative Lending
September 17, 2013
Which one of these three isn’t like the other two?
- Quicken Loans
- RapidAdvance
- Cleveland Cavaliers
It’s a trick question because as of September 16, 2013, All three are owned by Rockbridge Growth Equity, a Detroit-based private equity firm. RapidAdvance announced the acquisition over the news wire, shocking many people around the industry. The move opens RapidAdvance to the connections and prowess of Dan Gilbert, the 126th richest man in the United States. Gilbert is worth approximately $3.9 Billion, is the founder of Quicken Loans, and he owns 4 sports teams, including the NBA’s Cleveland Cavaliers.
Compare that to On Deck Capital board member Peter Thiel, who is worth $1.9 Billion and is the 309th richest person in the U.S. You may remember Thiel, the co-founder of PayPal and first investor in Facebook as participating in a series D round for On Deck Capital along with Google Ventures back in May.
These are truly some historic times. Two of the richest people on all of planet Earth have stock in the merchant cash advance industry. Does that tell you anything about the direction things are moving in? Think about that one again… Two of the richest men in the world have invested in the merchant cash advance industry.
Four years ago, an influential friend advised me that this industry would be eradicated by 2010. As told through The Bubble That Wasn’t, some people left the business prematurely fearing the best days of alternative lending were over. At present, it looks as if those best days are still yet to come.
The Rockbridge Growth Equity move comes less than a year after Steven Mandis bought into RapidAdvance. He will reportedly stay on as a shareholder.
On Deck Capital
In other news, On Deck Capital announced that they’ve raised another $130 million in debt financing, leveraging themselves out even further. ISOs in the industry report that they’re ON FIRE with approvals. Rumors about a possible IPO on the horizon are starting to pick up again but my sources tell me that isn’t likely to happen with On Deck for another 2-3 years.
Merchant Cash Advance Competition
June 3, 2013
If I had a dollar for every time someone told me that Kabbage wasn’t a competitor in the Merchant Cash Advance space, I’d have my own funding company. It’s been argued that they only care about Ebay or Paypal and that their business model revolved around strengthening Ebay’s PowerSellers for the good of Ebay. I never really believed that was the case.
On September 11, 2012 I wrote this about Kabbage:
Some people feel that they are not a serious challenger to the status quo and that their tactics, methods, and headlines are merely shock value fodder for the rest of us to laugh at while we all rant and rave about ACH deals being the hottest thing since Square. We believe Kabbage is a company everyone should keep an eye on.
Kabbage analyzes many pieces of data in their underwriting including how many facebook fans a business has or added. And as of 2 weeks ago, what do you think happened?
Kabbage expanded their cash advance programs to brick and mortar businesses… (BusinessWeek)
And so here we are with yet another fierce well-capitalized competitor, a company that isn’t struggling to add technology but is rooted in it. Not only that, but last I heard they don’t work with brokers or agents. They cut out the middleman, much like Square did with ISOs.
Which brings me to the next few companies to keep an eye on:
Amazon: People say that their goal is to finance Amazon retailers for the good of Amazon. Sound familiar? I admit that Kabbage wasn’t owned by Paypal but there was a solid relationship there. Is it that ludicrous to think that Amazon will enter the brick and mortar cash advance business?
Groupon: They’ve been sniffing around this industry for quite a while. Keep an eye on them.
American Express: They already have their own cash advance program for premium merchants that accept a high volume of amex transactions. Every six months or so, their standards loosen. It’s only a matter of time until they have enough data to loosen their standards even more and compete head to head with the rest of the alternative business lending industry and cash advance industry.
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Scott Griest, the CEO of American Finance Solutions wrote in Disruption in the Alternative Business Lending Space that when all the dust settles in a couple years down the road, there will be only 4-5 large alternative business lenders. Consolidation and competitive pressure will thin out the herd and the strongest will prevail. The question is, will those 4-5 funding companies be the grass roots companies that propelled the industry to where it is today or will it be the big mega-corporations who are looking at our the industry like a delicious snack?
In one of the most read ever articles of MPR, I made this prediction in The End of an Era:
2014 will eliminate the weaker firms that remain and by 2015, Merchant Cash Advance will no longer be a term that anyone uses. Big banks and billion dollar technology companies will go on to rebrand all that which the funding warriors of the last decade have worked so hard to establish. MCA will simply assimilate into other financial products. The metaphorical Sally, Joe, and Tom will probably still be in the business, but be working for companies like Capital One, Wells Fargo, and American Express.
We weren’t kidding…
Follow us at the ETA Expo
April 30, 2013May 3, 1:00am: I underestimated how easy it would be to make frequent updates. Wednesday was fantastic. I uploaded a couple dozen photos and updates all at once earlier today over on DailyFunder. As soon as the show was over, I found myself on Bourbon Street at the Discover party followed by the Priority Payments party. Both were a great time.
My Recap of the show is up now: ETA Expo Recap
Soul Mates: Merchant Cash Advance and Silicon Valley VCs
Original story about On Deck Capital’s investment from Google Ventures and Peter Thiel
My theory on why On Deck Capital took a paltry $17 million from Google Ventures and Peter Thiel
Photos and updates from the ETA
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May 1, 1:00am: Great start to the show this evening. Merchant Cash Advance providers and alternative business lenders continue to have a very strong presence in the payments industry. The booths I saw include: RetailCapital, NextWave Funding, Merchant Cash Group, On Deck Capital, Capital Access Network, Strategic Funding Source, American Finance Solutions, Swift Capital, MotherFund, and Principis Capital. GRP Funding and Paramount Merchant Funding are also on the exhibitor list but I didn’t spot their booths yet. That’s pretty substantial and it omits the major presence of Merchant Cash Advance companies that aren’t exhibiting. I bumped into Merchant Cash and Capital and walked the floor a bit with David Rubin of Capital Stack.
I met the guys behind Super G Funding which lends money against residuals. They’re great guys and they have such a unique role in the industry.
I think every funder I spoke with was quick to mention that they do 12 month deals and either offer direct debit repayment or will have it soon. The ACH train has disrupted the split-funding market pretty severely though many funders continue to do big numbers via split.
Nobody seemed to have an appetite for low FICO score deals (500s and below) except for Merchant Cash Group and Capital Stack which target the higher risk market intentionally. And when I say “don’t have an appetite for,” I literally mean when asking a funder if they do below 500 credit, the answer is some version of “HECK NO!!”
Overall tone, and perhaps its because opening night included open bar, but it was very optimistic. Most funders seemed intent on expanding and are eager to service as much business as possible. I definitely get that sense that there is a real focus these days on the bigger fish ISOs ($1 million+ in referral business a month). When newbie brokers enter the space, funders spend an enormous amount of resources developing them and many times they just don’t pan out. Either the brokers don’t have the capacity to do more than a handful of deals, or they just don’t “get it.”
If you’re a mom and pop ISO and you have just 1 or 2 deals a month, it’s more difficult these days to get time and attention from a funder. Capital is flooding into the industry and everybody wants partners that can produce volume. From a resource standpoint, the “1 and done” reps are not an efficient use of time.
Big ISOs have a lot of negotiating power at their disposal these days. In the last 7 years, it was good to be an ISO, then hard to be an ISO and now it’s good again. Many things in MCA have a weird way of going full circle. Hope to see you on Wednesday.
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Apr 30, 1:00am: 
Merchant Processing Resource will be publishing updates as often as we can from the ETA Expo in New Orleans. I am very excited to be down here. Earlier today I had the opportunity to eat beignets at Cafe Du Monde, visit the French Market District, and take a ride on the Natchez Steamboat on the Mississippi River. But starting Tuesday, it’s all business. A schedule of events can be found on the ETA’s website.
You can follow along with everyone else in town on twitter using #ETAExpo2013 or #ETAExpo13
and of course via the DailyFunder Merchant Cash Advance iPhone App.
Some pre-conference tweets:
ETA Expo 2013 on Twitter
pre-conference tweets
Storified by Sean M· Mon, Apr 29 2013 22:21:50
Here’s to learning, networking, and having fun!
– Merchant Processing Resource
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MCA Industry Continues Expansion
April 3, 2013
It’s said that one way to measure success or growth of an industry is to count how much capital is being raised. In that case, Kabbage and On Deck Capital have been on fire lately.
Early this morning, Kabbage announced they had secured a new $75 million line, after having just raised $30 million 6 months ago. The Forbes article announcement states that Kabbage has funded 60,000 deals to date and predicts to fund 100,000 deals in 2013 alone, a figure hard to comprehend considering that’s equivalent to the amount of transactions Capital Access Network has managed to do over the course of 15 years. I understand that Kabbage may do smaller, shorter term deals, but Capital Access Network has dominated MCA for a long time. Could Kabbage really do 100,000 deals this year? I’m unsure about this one.
Are traditional MCA funders missing out by letting Kabbage rule Ebay, Amazon, and Etsy unchecked? Is the Internet really that different than the brick and mortar market? Late last year, Amazon entered the financing market but for the purpose of strengthening their selling partners, so there are several reasons funders are tapping that market.
Paypal has been sitting on the sidelines and is perhaps considering jumping in the ring themselves. They are beta testing now with Ebay sellers.
Merchant Cash Advance is exploding in all directions. Did you hear that Yellowstone Capital funded $700,000 to a restaurant with the help of Strategic Funding Source? That’s a lot of money for a restaurant!
