1. Harvard Law School Presentation
December 7, 2016

2. SFS Business
We provide working capital to small businesses throughout the U.S.
Average financing is about $40,000 per deal
Repayment is usually within 9 – 18 months
Our typical client:
Has a FICO score in the low to mid 600’s
Has employees
Revenue of $500,000 - $2 million
Average factor rate is 1.34 over deal term to compensate for higher origination costs and default rates

3. Why SFS was Created
Large market - 17 million active businesses in the U.S. with lending needs of 6 million served by banks
Underserved by banks because:
Not credit worthy due to:
Unreliable or no financial statements
Many have unresolved tax liens
Many receive cash payments for services or products
High seasonality or high customer concentration issues
Small deal size is uneconomic for “old style” institutions
Timing to process and fund is within a few days, banks cannot operate this quickly
Regulators view our average customer as too risky to be funded by a federally- insured depository institution resulting in a higher equity charge

4. How Did SFS Obtain Capital?
Personal investment combined with “friends and family” in 2006
Obtained a high cost (17.25%) line of credit in mid- 2006
Raised $2 Million of Equity in late 2006
Raised $5 Million of Equity in late 2007 and obtained a larger line of credit at %
Raised $5 million of Equity in 2012 and refinanced our line of credit with a traditional bank (lowered our debt cost to 5.5%)
Raised $25 Million of Equity from Pine Brook Partners in 2014
Increased our Line of Credit to about $100 Million
Pine Brook Partners has invested an additional $15 Million of Equity since 2014

5. Regulatory Landscape
In no regulatory oversight as transaction was not a loan
Primary issue was the state-by-state usury laws for commercial business
As the industry grew, more regulation has entered the space:
Class action law suits against Rewards Network and CAN in California as contracts were interpreted as a loan. Cases were settled out of court
Is the contract a loan or a purchase of future receivables?
What actions have been taken?
Many companies started utilizing a “Bank Charter Partnership”
“Madden vs Midland” case is challenging this based on the “True Lender” concept
Operating in certain states and exporting “choice of law”
Certain states now require lender licenses
Other Regulatory Matters
OCC considering National Charters for Fintech Companies
Will the CFPB get involved in small business lending?
Brokers to be licensed
Risk models cannot include certain discriminatory data
TCPA