Business Lending Landscape Jeremy Brown, CEO RapidAdvance
Alternative Lending Overview What is Alternative Lending Industry Size and Players Products and Product Migration Usury and Legal Structures North American Merchant Advance Association Regulatory Concerns
Jeremy Brown, CEO RapidAdvance Founder of RapidAdvance, 2005 100+ employees Institutionally financed by Wells Fargo Sold to Rockbridge Growth Equity in 2013 RGE is private equity arm of Dan Gilbert Dan owns Cleveland Cavaliers basketball team, Quicken Loans, Horseshoe Casinos One of founding members of Industry Trade Association
What is Alternative Lending? Short term uncollateralized financing to small business – generally 12 months or less Not distressed businesses. Business owners often have other types of financing including commercial mortgages, lines of credit, equipment leases, etc. Daily Remittance – either daily debit ACH or split credit card processing A few companies offer longer terms up to 24 months with daily remittance, and a few offer a weekly payment option. Recent development Two Primary Products Today: Merchant Cash Advance and Business Loan Loan/Advance Amounts from $2500 - $1mm. Typical average is $25k - $35k with a repayment period of 6-8 months Data intensive underwriting. Decision in 48 hours, fund in 3-5 business days. Average FICO 620+/-, will fund 500 FICO and sometimes below Opportunity capital, not desperation capital
Industry Size and Players 2006-2007: Generally accepted that the industry was approximately $300mm - $500mm annual funding volume Today: $3bb and growing Biggest companies are CAN Capital, On Deck, Kabbage, AmeriMerchant, RapidAdvance, Merchant Cash and Capital, Business Financial Services Some of the larger companies have a specific focus or niche Total number of companies in the hundreds including private pools of capital Brand names have entered the industry American Express PayPal Intuit Google Square
Merchant Cash Advance First Product Offering Recovery by credit card split, bypassing the merchant’s bank account, paid directly to funding company Generally applicable to storefront retail (restaurant, dry cleaner, florist, hair and nail salon, etc.) Businesses characterized by low/no collateral No fixed term. Period of recovery depends on merchants credit card processing. Estimated term typically 6-8 months Purchase and Sale of future credit card receivables. Risk of bankruptcy or business closure on the funding company “Receivables” don’t exist at the time of financing to merchant Potential for fraud – divert credit card processing to second processor, switch credit card processor Not a loan. Well established in law. No personal guarantee of repayment “Bad boy” guarantees are customary Independent Sales Offices (“ISO”) or brokers drive a significant portion of funders originations
Term Business Loan Fixed Term, typically 6-12 months Applicable to all businesses and SIC’s Personally guaranteed by majority business owner Recovery by daily debit ACH on the business checking account Potential for fraud – block or reduce daily debit ACH Fixed fee typically charged on amount loaned, not an interest rate Compliance with state usury laws Independent Sales Offices (“ISO”) or brokers drive a significant portion of funders originations
Usury and Legal Structures MCA is not a loan, purchase and sale transaction Has been class action litigation in California over recharacterization Several large settlements from class actions in the mid 2000’s Contracts need to be written properly to conform to purchase and sale structure Cannot have PG’s, fixed term, acceleration language
Usury and Legal Structures Term business loan must meet state usury requirements for business loans 2 approaches. Rent-a-bank, e.g. Webbank and export rates Subject to OCC oversight, audit, and compliance State by State compliance Licensed lender where required Requires state by state roadmap In house compliance and legal review Type of borrower (sole prop, partnership, LLC, Corporation) can affect usury rules State of origination and amount of loan can affect usury rules
NAMAA North American Merchant Advance Association (NAMAA) Trade association for alternative lenders offering MCA and short term business loans Founded 2006 by Daivd Goldin, Jeremy Brown, 6 others Originally a legal defense group Formed in response to AdvanceMe (CAN Capital) business patent litigation After successfully overturning AMI business patent, focus is on protecting members interests and sharing data David is President, Jeremy is VP. Professionally managed
Regulatory Concerns B2B transactions, not covered by the CFPB mandate Sec 1071 of Dodd-Frank may require alt lender providers to report loan data to the government Only oversight tool the CFPB has regarding small business lending Increasing awareness of product set. Inquiries from Congress; presentation to the Federal Reserve Federal Reserve interested in getting more data on the industry Increasingly positive PR legitimizing alternative lending as a source of capital for small businesses, albeit expensive NAMAA partnering with Electronic Transactions Association (ETA) lobbyist to update the Alternative Lending whitepaper NACHA rules may impact business loan product as returns on daily ACH debits typically exceed guideliness Pressure will come from banks and bank regulators for the bank customers and their practices
Business Lending Landscape David Goldin, CEO AmeriMerchant
Alternative Lending Overview Build vs. Partnering The Dos – Being A Responsible Lender The Don’ts – What Not To Do Stacking Current Dangers Of The Industry Choosing The Right Partner
David Goldin, CEO AmeriMerchant Founder of AmeriMerchant, 2002 170+ employees Privately Held Headquartered in New York City One of the founding members and President of the North American Merchant Advance Association (NAMAA), a 501c non-profit trade association for companies that provide alternative financing to businesses.
Build vs. Partnering Build A lot of capital and infrastructure required if building a reputable platform. Underwriting, Risk/Collections, IT, Customer Service, Legal/Compliance Technology can be very expensive. Industry Knowledge Brokers will “dump garbage” to the New Kid On The Block Takes years to learn the “underwriting tricks of the trade” even with experienced personnel. Large capital investment required to partner with a bank to offer business loans in all 50 states. Can get into legal trouble if products aren’t structured properly. Competing against a lot of large players in the space including many with institutionalized capital.
Build vs. Partnering Partnering Leverage an existing alternative lender’s back office / technology platform. Can be more profitable by paying a servicing fee / having the partner funder provide a % of capital for each deal (Both parties have skin in the game). Lower default rates with an experienced funder. No learning curve. The business isn’t as easy as it seems – plenty of companies large and small have entered and exited due to defaults. Most reputable funding companies are keeping up on the latest aspects of the industry. Large capital investment required to constantly upgrade technology and infrastructure, can be better to “rent” Origination platforms that are primarily sales/marketing have a lot of value to plug into a larger player’s platform during industry consolidation.
The Dos Being A Responsible Alternative Lender Full Disclosure of Fees on your merchant agreement Being responsible on the % of monthly sales being repaid by the merchant each month. Do not put the merchant into legal trouble (or your company) with their current alternative lender by not paying off a merchant’s balance in full directly to their existing alternative lender (don’t rely on the merchant to pay it off) – a/k/a Stacking. “Police Your ISOs / Brokers” – understand what they are telling the merchants and what additional fees they may be charging the merchants. Make sure your merchant agreements don’t violate any laws (eg. For merchant cash advances – true personal guarantees in states that would exceed usury limits, balloon payments, etc.)
The Don’ts What Not To Do Recapturing too much of the merchant’s gross sales each month Stacking Trying to enforce personal guarantees on non-recourse products Paying Off Another Provider without the merchant netting a substantial portion of your capital – “musical chairs” Have Control – it’s not about what you fund a month, it’s what you collect back a month. Anyone can “fund” a deal, collecting it back is the hard part. Don’t let just any ISO/broker sell for you, you may be liable for their actions and even indemnification doesn’t do much as many referral sources have no assets. They are representing your company/brand in the marketplace.
Stacking A practice in recent years whereby one funder provides additional capital to a merchant without paying off their existing balance with their existing lender. Puts the original provider’s money at risk. Puts the merchant at risk. Can be violating UCC filings / tortious interference. Litigating by companies being stacked on has already begun. Stackers tend to be smaller, less reputable and non-institutionalized players. Typically higher risk merchants are stacking. Stacking violations are starting to be charged to merchants. Stacking can hurt the chances for a merchant to get renewed by their existing funding provider who is typically offering lower cost money with a longer repayment period.
Current Dangers Of The Industry Huge Increase In Fraud Historically we would see suspected fraudulent bank and/or credit processing statements several times a month. Now it’s a few a day. Increase in ISOs/Agents submitting doctored statements on behalf of the merchant. ISOs / brokers now shop a deal “until it’s dead” Not uncommon to see submissions with 5-10+ alternative funding company credit pulls over the last 30 days. Can be challenging to differentiate the difference between merchants “legitimately shopping around” and “educated applicants” who have been declined elsewhere and their issues have been “magically cleaned up” –eg. Manipulating the landlord reference. Several funding companies “overpaying” ISOs and referral partners commissions for market share. (Good for ISOs/referral partners in the short term) ISOs/referral partners – interests are not aligned at times with a funder. Best strategy here is to have ISOs/referral partners put some of their own capital into each deal so they have skin in the game.
Choosing The Right Partner More experience in the industry, the better. A Partner That Believes In Best Practices. If participating on deals with your own capital, understand the potential partner’s historical loss rates. Financial Stability – if losses get to high, not profitable, etc. your commissions and/or capital invested in deals can be at risk. Doesn’t have a reputation for “stealing deals” from its referral partners. Proper Systems / Technology. Proper Licensing / Legal Documents. Adequate support staff to support not just your partnership, but your merchants.