The Buck in Trucking
December 21, 2022
“If you don’t have the marketplace of lenders, yes, it can be problematic,” said Cheryl Tibbs, Owner/CEO at Equipment Lease Co about providing capital to the trucking industry. “If you don’t understand the trucking industry, it can be very problematic.”
In the last year, there has been an increasing interest in equipment financing. It was the primary topic of a panel discussion at Broker Fair and the subject of several sidebar conversations throughout the day and thereafter. For Tibbs, who lives and breathes equipment finance and trucking, she said she doesn’t see funding in that space slowing down.
“Every business that’s in business needs some type of equipment to operate,” said Tibbs. “Whether it’s a cell phone, a POS system, a car or truck, excavator, whatever it is, every business has some type of equipment. So I don’t see the industry slowing down at all.”
Tibbs, for her part, says that some companies in her lender network can provide a uniquely beneficial solution, a funding bundle that is part equipment finance and part working capital.
“Some of those customers may need that working capital for a down payment or if you’re buying a truck, for instance,” Tibbs said. “And this working capital comes in handy because if you know anything about trucking, the insurance on those things can be– I’ve seen it go as high as 60,000 a year, almost half the cost of a truck. So that working capital comes in handy.”
And the costs of trucks is in a state of flux. Jonathan Nelson, General Counsel at Dedicated Financial GBC, said the costs of used trucks is rapidly shifting.
“This month, you could get $20,000 for this particular used truck on the East Coast and next month, if you were to sell it on the West Coast, you might get $40,000,” said Nelson. “It’s very volatile at the moment.”
Evan Sowa, Senior Finance Manager at Everlasting Capital, echoed same.
“Depending on the geographical market, prices on the same truck can vary substantially,” he said. “Market prices are as high as I have ever seen them, up to 80% higher than similar units 4 years ago.”
Sowa continued by explaining that demand and prices in the used truck market have been booming but that they’re finally starting to cool off.
David Lee, CEO at North Mill Equipment Finance, said there are some issues in the wider trucking market right now.
“The trucking industry is facing a lot of challenges currently,” Lee said. “In addition to supply disruptions, and an inflation in used asset values and unavailability of newly manufactured equipment combined with significant increases in diesel fuel costs, a number of operators have felt tremendous margin pressure, with load rates having decreased, the cost of the equipment being higher, and the cost of operating the equipment via fuel being higher.”
A lot of those costs have not been able to be passed on to shippers, Lee added, and he said that they’re seeing a material increase in delinquencies and defaults amongst trucking operators.
Nelson at Dedicated, speaking on a much broader level of equipment finance, said that in general the industry has been able to escape the wave of defaults happening in other industries.
“We are a part of the National Equipment Finance Association and the Equipment Leasing and Finance Association to make sure that we understand issues and different trends that are happening in the equipment finance industry, because that’s where most of our clients are,” he said.
Tibbs, who’s a super broker, explained that she has seen lenders and funders tighten up their guidelines post covid.
“It’s not as easy to get plugged in with certain lenders,” she said. “It’s not as easy to get certain deals approved that we probably could have gotten approved pre-pandemic.”
Because of her experience and relationships, however, Tibbs is optimistic about the kind of deals she can get done, especially over newcomers who are at a disadvantage, explaining that she can finance pretty much anybody.
Evan Sowa at Everlasting summed up the state of things as such.
“Still funding trucks every day but the market is crazy right now,” he said.
AltFinanceDaily’s Top Five Stories of 2022
December 20, 2022
deBanked’s most read stories of 2022 are in and they’re a bit different from the hits of 2021. These were the results!
1. DoorDash Goes into MCA
It was nearly a tie for two stories related to the same company, DoorDash. Who would’ve thought? But in early 2022 the mega restaurant delivery service announced to the world that it was getting into the merchant cash advance business courtesy of a new funding industry challenger named Parafin.
Here’s what you may have missed as the biggest story of the whole year!
DoorDash Now Offers Merchant Cash Advances
DoorDash Expands its Cash Advance Program to the Dashers Themselves
2. Scandal
Not everyone had a good year. Some had to face the music. It was a close race between two stories for the 2nd spot but we’re only linking to one because the second involved a lawsuit that has since been dropped by the plaintiff.
Man Who Defrauded MCA Companies Indicted | This case is still ongoing.
3. The Demise of LoanMe
NextPoint Financial’s abrupt decision to wind down LoanMe after a celebratory acquisition of it was one of the biggest surprises of 2022. Very little information has been shared publicly about what led to it. Given NextPoint’s status as a publicly traded company, details could’ve been inferred from their regularly filed financial statements, but they’ve failed to file them for a whole year. Instead, they’ve provided regular investor updates that have communicated that they’ll eventually be forthcoming but they keep missing the deadlines they set for themselves.
LoanMe Has Stopped Originating Business Loans
NextPoint Financial Formally Announces End of LoanMe Business
4. The California Disclosure Law
Reality struck in 2022 as the 4 years of debate over California’s commercial financing disclosure law finally came to an end. It went into effect on December 9th. This story, published leading up to it, was the 4th most read of 2022:
Think The New California Disclosure Law is Just About a Disclosure Form? Think Again
This one, published two weeks ago, followed close behind:
Funding Companies Sue California Regulator Over Looming Disclosure Law
5. Reality TV
Technically, the first episode of Equipping The Dream was the most viewed content on AltFinanceDaily throughout all of 2022, but if we’re going just by stories, then this one, talking about its fast rise, placed 5th for the year:
Reality Show About SMB Finance Sales Rockets to The Top Spot
AltFinanceDaily’s Most Watched Videos of 2022
December 19, 2022deBanked TV continued its strong showing throughout 2022. For the second time ever, we’ve ranked the most watched videos for the year.
1. Equipping The Dream
AltFinanceDaily debuted a sales-based reality show called Equipping the Dream, a real inside experience of an equipment finance sales shop. Episode #1 was not only the most watched video on AltFinanceDaily for the year, it was the most viewed piece of content on AltFinanceDaily for the year period. Episodes 1-6 also managed to fall within the top 7 most watched videos for the year as well, all of them beating out every other single video except one. If you haven’t watched it, do you even work in small business finance sales?! Episode 1 | All Episodes Here
2. Merchant Cash Advance’s Big Day – The David Goldin Story
The only video to compete with episodes of Equipping the Dream was the documentary on David Goldin’s journey to winning a landmark patent lawsuit that allowed the merchant cash advance industry to grow into what it became. You can’t work in the industry and not know this amazing piece of history!
3. Banned From the MCA Industry
A discussion about an FTC settlement order banning individuals from the MCA industry was among the most watched videos of 2022.
4. Brokering Small Business Funding in 2022
AltFinanceDaily interviewed two small business finance brokers to gather their thoughts on the state of the industry.
5. Virginia Disclosure Law Discussed
On June 30, 2022, we at AltFinanceDaily discussed as much as we knew about the Virginia disclosure law one day before it went into effect. Are you complying with the law there?!
Fora Financial Surpasses $3 Billion Funded Since Inception
December 14, 2022
Fora Financial has surpassed $3 billion in funding to small businesses since inception, according to a post the company shared on social media. That was spread across 35,000+ businesses. The milestone coincides with a new look, which includes a new logo and website.
“Behind our new look, we’re making tons of operational refinements,” a blog post about the improvement says. “Fora Financial’s Capital Specialists are doubling down on their collaborations with customers to build creative, innovative funding solutions.”
Opportunities Still Ahead?
December 12, 2022
With the year coming to an end, it’s time to analyze what direction the industry is going in. Some professionals in the industry are feeling optimistic despite macroeconomic pressures and there’s a reason for that.
Gerald Watson, Founder and President of The Watson Group, said with the latest Employee Retention Tax Credit (ERTC), his company has been on a steady incline. The tax credit was designed for companies affected by Covid in 2020-21 as a refund against payroll taxes they’ve already paid and that’s where Watson comes in because it can take a while for business owners to actually receive those funds, as long as 6-12 months, he said. With the help of funding partners, Watson can make an advance to business owners on the ERTC upfront. Watson’s core business has always been factoring but when he saw this opportunity, he went for it.
“I think maybe looking ahead as we get into 2023 next year, I think the industry is going to be continuing to look for ways to expand its product base, and I think it’s likely that we’ll see more and more maybe of your larger lenders moving into things like some form of factoring, for example,” said Watson.
On the fintech side, CRO at Encapture Tyler Barron says he’s noticed a shift this year regarding certain lines of business but that their product has historically performed well regardless, even if the deal sizes get a bit smaller. Encapture is a platform that sells automated programs to financial service companies – primarily big banks – and they’ve noticed large, regional, and community banks investing more in technology, specifically ones that help them automate and cut costs.
“What we’ve kind of seen over the past year is, there’s definitely been a pullback, as it relates to certain lines of business, like anything related to mortgage this past year has completely dried up,” said Barron. “But we are still seeing financial institutions, both fintechs, large banks, regional banks, and community banks invest in technology.”
Back at Broker Fair in late October, Pooja Nene, Broker Relationships Manager at Balboa Capital, told AltFinanceDaily that she thought the industry was going in a good direction.
“I think with a lot of issues that we’ve had since 2020 our industry’s been holding up really well and there’s a ton of opportunities out there to get involved in different types of financing…” said Nene.
Overall, the demand for the products should continue.
“One thing about our industry is that people always need money; good times bad times, high interest rates, low interest rates,” said Gerald Watson. “There’s always going to be a demand for what we do.”
Weigh In: Should The New York Commercial Financing Disclosure Law Be Preempted by TILA?
December 7, 2022
The CFPB issued a statement on Wednesday to announce that it does not believe that New York’s commercial financing disclosure law is preempted by the Truth in Lending Act (TILA).
In a simple sense, the question of whether or not commercial finance companies can potentially disregard portions of New York’s commercial finance disclosure law on the basis that a similar federal law (TILA) has the superior claim to the legalities surrounding APR disclosures, has been answered by the CFPB. It says no. The agency believes that the two laws do not conflict with each other on the stated basis that TILA regulates “consumer purpose transactions” hence New York’s law is not preempted by TILA. At this time this is merely the CFPB’s “preliminary determination.” Now it is asking for the public’s thoughts on the matter.
“The CFPB is requesting comment on whether it should finalize its preliminary determination that the New York law – as well as potentially similar laws in California, Utah, and Virginia – are not preempted.”
The formal Request for Comment and instructions to submit comment can be found here.
The timing is a bit curious given that this issue has just been legally raised in another state. The deadline to submit comment to the CFPB is January 20, 2023.
Your Default Rate Is Too Low, And It’s Hurting You
November 22, 2022
There may be no word as terrifying to stakeholders in the merchant cash advance business than the term ‘defaults’.
In an industry where a significant portion of revenue is generated from daily or weekly automatic withdrawals from a merchant’s bank account, defaults can cause deep and lasting problems. Not only do they eat into profits, but they damage relationships with banks and processors- both of which are essential to the success of any merchant cash advance company. Defaults can also be contagious: if one merchant in a large portfolio decides to stop making payments, it can have a ripple effect that leads to other merchants doing the same thing.
All these are reasons why MCA companies go to great lengths to avoid defaults at all costs: they exhaustively screen merchants before approving them for funding and do all the due diligence needed to ensure they can follow realistic payment plans. They also attach a fee to every deal to cover the percentage of the deal they expect will not come back, and conventional thinking would be to aim to keep that number as low as possible.
That’s a lot of work to keep that default rate low, but what would you think if I were to contend your default rate is too low, and it’s hurting your bottom line?
Fear of defaults is paralyzing MCA funders and inevitably leading them to leave opportunities-and money- on the table.
Better Accounting Solutions has been the leading accounting firm in the MCA space for over a decade, and has seen this across the board:
Many MCA companies have adopted a risk-averse approach to avoid defaults, opting for sure-fire deals in higher positions, rather than taking calculated risks that could enhance their bottom line. In the name of capitalizing on low-risk deals with a lower chance of default, many companies choose to fund deals where they charge smaller fees than what they could be charging if they choose to fund deals others are wary of taking.
Let’s look at two deal examples for an example of my thesis:
Average Andrew is the perfect merchant for an MCA company. He is getting a $100,000 advance with a deal length of 7 months (140 days) and with his rock-solid history, his default rate is a meager 6%. The RTR on the deal is 44%, the UR fee is 7%, broker’s commission is 10%, meaning the profit on this deal will be $35,500- a net unit profit percentage of 35%, profiting $5000 a month. He is a great client, and a pleasure to work with.
Now let’s examine his buddy, Reformed Ricky. He’s made some mistakes in the past and now wants a business advance to grow the business he believes is The One. No one else wants to touch him, so you offer him a deal of $35,000. Because he is a riskier advance proposition, you can raise the RTR to 49%, and the UR fee to 12%. On a deal like this, the commission is around 14% and the default rate will be a whopping 18% on a merchant like this, but the profit to be made on this deal is $10,150- a 29% net unit profit, getting $3,383.33 monthly profit over the length of the deal.
Now, looking at the structures of both deals, why would I advocate that someone advancing Reformed Ricky instead of Average Andy? What’s the advantage of working with the weaker merchant over the perfect one?
It’s simple:
Because of his history, you can set the duration of Reformed Ricky’s deal to 60 days (3 months). That means according to the terms of his deal, your profit is 9.67% a month. You’ll be stunned to learn that when you break down your monthly profit on Average Andy’s deal, it is a considerably smaller percentage of 5.00%!
This means every month you’re making more back on the smaller deal, and are getting it to work for you by placing it into new deals and generating more income for you, because of its shorter term. If you’re only taking deals with longer outstanding balances, it will take you a considerably longer amount of time just to make a smaller profit percentage.
On top of this, we also have to account for the compounding effect you will quickly be seeing when you take these ‘riskier deals: because you’re earning more money per month due to the shortened duration of supposedly weaker deals, you will be able to turn it around more times per year, supercharging your growth quicker than what you’d be seeing you stuck to only ‘traditionally-safe’ deals.
I’m not advocating for funders and brokers to be irresponsible and create a new and much less entertaining version of The Big Short, throwing money around to people that don’t stand a chance of paying it back.
I am saying that they should consider funding merchants and positions they were wary of till now, and responsibly assessing the opportunities and upside for them at those positions.
Of course, this doesn’t mean that you should mindlessly funnel money into every deal that comes your way. You still need to be responsible and vet your investment opportunities carefully, and of course, if it turns out you’re picking the wrong deals and your default rate explodes, you will have to reevaluate your approach.
However, working from a place of fear is not the way to grow and thrive, certainly in this business. Moreover, by avoiding risk altogether, MCA companies are likely to become less competitive over time. After all, it’s only through taking risks and innovating that businesses can thrive in today’s rapidly changing world, especially in the rapidly evolving and growing MCA industry, where more and more people are seeking to find their niche.
A great number of successful investors in MCA companies have complained to me that their partners are too conservative with the deals they are choosing to fund and leaving too much capital in the bank, costing the investors higher facor rates instead of working for them.
This approach is a way to break away, and ahead, of the pack, because only by taking the opportunities others keep passing by will MCA companies be able to grow and compete in the long run.
How the Amazon / Parafin Merchant Cash Advance Deal Came to Be
November 2, 2022Back in December, Parafin, then a fintech startup with 20 employees, submitted a proposal to Amazon to roll out a potential Amazon merchant cash advance product. At the time, Parafin was little known to the general public and its surprise deal with DoorDash wouldn’t even become public until a month later.
The prospect of an MCA would not have been foreign to Amazon given that the company already offers direct business loans, lines of credit through Marcus by Goldman Sachs, and other loans thanks to a successful pilot with Lendistry. But the team behind Parafin were virtual unknowns in the merchant cash advance industry itself. The company’s 3 co-founders, including CEO Sahill Poddar, all hail from Robinhood, the investment app that became wildly popular especially with younger adults over the last several years.
Coincidentally, more than a dozen people employed by Parafin, including the co-founders, are former Robinhood employees, according to profiles reviewed on LinkedIn. It’s part of a trend, it appears, as other members of their team hail from well known Silicon Valley firms like Lending Club, Stripe, Funding Circle, Google, Amazon, Facebook, StreetShares, and more.
Ultimately, Parafin’s big bet paid off. On Tuesday, November 1st, Amazon announced that the Parafin team was the one it had chosen to debut its official merchant cash advance product.
“Amazon is committed to providing convenient and flexible access to capital for our sellers, regardless of their size,” said Tai Koottatep, director and general manager, Amazon WW B2B Payments & Lending, in the announcement. “Today’s launch is another milestone in strengthening Amazon’s commitment to sellers, and builds on the strong portfolio of financial solutions we already provide. This latest offering significantly expands sellers’ reach and capabilities, and broadens their access to capital in a flexible way—one that helps them control their cashflow, and by extension, their entire business.”
“We founded Parafin with the mission to grow small businesses, and we’re thrilled that we have the opportunity to do that by providing Amazon sellers with this merchant cash advance option,” said Vineet Goel, co-founder of Parafin. “It’s a privilege to count ourselves among Amazon’s suite of financial solutions, and we look forward to making a difference for Amazon.com sellers looking to expand their business.”
The product is already listed on Amazon’s website and was rolled out to some US businesses immediately. It will be available to hundreds of thousands of additional sellers by early 2023, the company claims.
Unique to an Amazon MCA is that funding amounts can start as low as $500 and go up to $10 million.
Amazon’s entrance into the merchant cash advance market coincides wih a unique moment in the product’s history as several states are in the midst of imposing strict regulations on their sale.
