Lights, Camera, Crypto-Transaction – How a Lending Journalist Raised Millions to Build Magic Lamps Through the Murky World of Initial Coin Offerings
November 15, 2017
This past July, the winner of the Best Journalist Coverage category at the 2017 LendIt Conference Awards, announced that he would be stepping outside of his journalistic endeavors to raise money for a futuristic lamp company. The product, dubbed Lampix, is described as a lamp with a projector, a camera, specifically placed light-emitting diodes (LEDs), and a cloud-enabled computer. On the company’s “Medium” blog, Lampix promises that the product is “designed to transform any flat horizontal surface into an interactive computer.”
The man behind Lampix, George Popescu (whose Lending Times news site competed against and beat out fellow finalist AltFinanceDaily at the LendIt Awards), makes for an interesting case study in alternative finance. That’s because Lampix shunned traditional capital-raising methods by relying on an Initial Coin Offering (or ICO), an unregulated blockchain-based corporate event which is similar to an initial public offering. Rather than purchasing shares, as is the case in an IPO, investors in an ICO receive digital tokens instead of shares. In August, Lampix raised $14.2 million through its ICO*.
Popescu’s name popped up again a few months after the LendIt award on a regulatory blotter in the UK.
In case details published by the UK’s Insolvency Service on August 1st, the agency announced that Popescu was disqualified from serving as a company director.
Mr Popescu breached his fiduciary duties to act in the best interest of Boston Prime Limited (“Boston Prime”) and/or failed to ensure that both Boston Prime, as the regulated firm, and him individually, as the approved person, complied with the Financial Conduct Authority (“the FCA”) rules and guidance.
$6.2 million was transferred out of the company to a company named FXDD. Boston Prime’s receiver is presently suing FXDD seeking the return of the funds to the company. Proceedings are ongoing. Mr. Popescu is not under investigation and there are no legal proceedings at this time against Mr. Popescu.
It’s an inauspicious beginning for someone financing the “lamp of the future” using an unregulated and controversial strategy. Even so, when its ICO concluded on August 19, Lampix declared its gambit a success after raising $14.2 million through the sale of its digital tokens, which are known as PIX.**
By mid-November, the market value of those digital tokens, which exist on the Ethereum blockchain, had dropped by 50%, causing Lampix investors to suffer losses of $7 million. Unlike shareholders in publicly traded companies, token buyers have few investor protections. It’s not clear they are even considered to be actual investors at all. Buried in the fine print of Lampix’s 85-page “white paper” – a convenient way to avoid the label of prospectus – is a disclaimer. “Buyer should not participate in the [PIX] Token Distribution or purchase [PIX] Tokens for investment purposes. [PIX] Tokens are not designed for investment purposes and should not be considered as a type of investment.”
Additional disclaimers, moreover, declare that the white paper is not a prospectus, that the tokens “are not securities, commodities, swaps on either securities or commodities, or a financial instrument of any kind.”
But the distinction has not deterred people from joining in the frenzy of buying digital tokens like PIX. So much so, TechCrunch reports companies employing this strategy had raised nearly $800 million by means of ICOs in the first half of 2017.
And the SEC is not exactly excited about ICOs. “Fraudsters often use innovations and new technologies to perpetrate fraudulent investment schemes,” a July 29 directive by the SEC states. “Fraudsters may entice investors by touting an ICO investment ‘opportunity’ as a way to get into this cutting-edge space, promising or guaranteeing high investment returns. Investors should always be suspicious of jargon-laden pitches, hard sells, and promises of outsized returns. Also, it is relatively easy for anyone to use blockchain technology to create an ICO that looks impressive, even though it might actually be a scam.”
On September 29, moreover, the SEC brought an enforcement action against REcoin Group, charging Los Angeles businessman Maksim Zaslavskiy and two companies he controls with defrauding investors “in a pair of so-called initial coin offerings (ICOs) purportedly backed by investments in real estate and diamonds,” an SEC press release said.
The SEC alleges that Zaslavskiy and his companies –REcoin Group Foundation and DRC World (also known as Diamond Reserve Club) — have been selling unregistered securities, and that “the digital tokens or coins being peddled don’t really exist.”
Meanwhile, telephone calls and an e-mail to the SEC seeking the federal regulator’s view on Lampix’s ICO drew a terse response from Ryan T. White, a public affairs specialist, who replied that the agency would “decline comment.”
Deborah Meshulam, a partner in the Washington office of law firm DLA Piper and a former SEC enforcement official, told AltFinanceDaily: “Regarding the lack of equity ownership, Lampix is seeking to establish that the tokens are not securities. Whether the SEC would agree should it decide to look into the offering depends on the facts and circumstances. The SEC staff would look past form to substance to assess whether the sale of the tokens constitutes an investment contract under legal standards. If so, then the SEC would view the Lampix offering as a securities offering. It may be that Lampix (or its lawyers) already vetted the offering with the SEC but I don’t know the answer.”
Popescu tells AltFinanceDaily in an e-mail interview, “We had to respect all securities rules and regulations of course, respect the Howey test and so on. There were no hoops to jump through as we are not trying to avoid anything or prevent anything. We honestly built a token to build a community to help us crowdsource (mine) pictures for all applications among which, Lampix.”
“Each PIX token,” the Lampix website explains, “will be used as a form of payment to picture image miners, voters and app developers or to purchase a Lampix, cloud computing and apps.”
Meshulam also notes that the June, 2017, date of the Lampix white paper pre-dates the SEC’s enforcement activity in this area. She adds, “The statement that ‘token sales or ICOs are not currently regulated by the U.S. Securities and Exchange Commission may be very literal in the sense that there is not a specific regulation, but the SEC has stated that, in the right situation, ICOs are subject to the US federal securities laws.”
Erin Fonte, an attorney in the Austin, Texas, office of Dykema Cox, and the leader of the firm’s regulatory & compliance group, says, “The ICO stuff is so up-in-the-air. The SEC is looking at it closely. But it’s fairly new. And some of them (ICO’s) have been tied to fraud and Ponzi schemes. If a client came to us (seeking advice), we’d want to vet the people behind the offering.”
But what of Lampix, the company that won the Augmented and Virtual Reality category of the South by Southwest (SXSW) Accelerator Pitch Event earlier this year in March – and put a pretty feather in the cap of Popescu?
Popescu’s resume is no doubt impressive. He holds a trio of master’s degrees in various scientific and technological disciplines, including one from Massachusetts Institute of Technology. And he is a serial entrepreneur who lays claim to having founded 10 companies: they include, according to his LinkedIn profile, online lending, a craft beer brewery, an exotic sports car-rental space, a hedge fund, a peer-reviewed scientific journal, and a venture-debt fund.
He’s charmed journalists like Forbes contributor Roger Aitken, who declared: “The founders (of Lampix)…believe that Lampix will impact humans as much as computers or smart phones in the future…Think Tom Cruise in Minority Report. Imagine your room in five years: you will be able to use any surface around you as if it was a computer. The ability to transform any surface into an interactive computer (augmented reality) is going to unleash applications we have not even conceived of.”
The Lampix website hyped its ICO with the aid of an infographic listing “active product inquiries” the company has in its pipeline, the likes of which includes Amazon, Apple, Samsung, Microsoft, Sony, IBM, BMW, Bloomberg, PwC, and the Aspen Institute. With all of these names seemingly lining up, it begs the question: Why did Lampix choose the controversial route of an ICO to raise capital?
But it’s hard to determine the seriousness of these corporate relationships. Florin Mihoc, Lampix’s Strategic Partnerships & Development Advisor, said he could not assist us with confirming any of them, citing the slow and cumbersome bureaucracy of dealing with Fortune 500 companies. He did invite us to try reaching out to some of them on our own, which we did.
Bloomberg is one of the few acknowledging a relationship with Popescu’s company. Chaim Haas, head of innovative communication at Bloomberg, told AltFinanceDaily that the New York-based media and financial communications company “collaborated” with Lampix. Bloomberg, he says, “has used Lampix hardware in its fellowship program (Bloomberg AR Fellows) as a prototype for augmented reality applications.” But Haas declined to elaborate on whether Bloomberg’s relationship with Lampix was more than an experimental one.
Edward Caldwell, director of public relations for East Coast markets and sectors at Pricewaterhouse Coopers, the Big Four accounting firm, declined to comment about Lampix. “We can’t discuss individual companies, clients or engagements,” he reports.
Douglas Farrar, senior manager for communications and public affairs at the Aspen Institute, told AltFinanceDaily that he could find no business relationship between Aspen and Lampix. “I have gone down quite a few rabbit holes here,” he said in an e-mail, “But I’m coming up empty.”
When Popescu was directly confronted about this, he wrote, “The companies would only figure [in the infographic] if they actually themselves reached out to us and we exchanged emails with somebody from that entity. Most of these entities have many people and most of the companies’ people will have no idea [that] somebody else in the company is talking to us.”
Telephone calls and e-mail requests for comment to Microsoft were not returned.
A spokesperson using BMW of USA’s official twitter account, however, responded to an inquiry by saying they were a customer of Lampix, “but only for office usage.”
Meanwhile, George Popescu has been on the sales trail. A case in point was his October 5, Youtube interview conducted by Ian Balina, a self-described influential investor in blockchain technology and cryptocurrency – and someone with a reputation as an industry promoter and evangelist. (Balina caters to the get-rich quick crowd and publishes how-to guides trumpeting promises like “How ICOs can make you a millionaire in 3 years” and “make millions with bitcoin.”)
Balina asked Popescu the softball question, could he show viewers a demonstration of the product? Popescu admitted he wasn’t prepared to do that and when he attempted to set one up on the fly, it didn’t work. The incident is notable because Lampix has been promoting the video through its social media network.
Popescu corroborates a number of details about the ICO, however. He confirmed the ICO price of a PIX token to be 12 cents, the US dollar price people had to pay per token. Cryptocurrency exchanges, where token speculators can buy and sell tokens online, show the trading value of a PIX token currently hovering around 6 cents, which translates into roughly a 50% loss in value.
Investors feeling hurt by such a loss can’t contest the purchase of PIX tokens with their credit card issuers. That’s because of a requirement that token sales had to be purchased with ether (ETH), the currency of the Ethereum blockchain. While ether is arguably similar to Bitcoin, it operates on an entirely different blockchain.
To participate in the ICO, in a Youtube video, Lampix also explained to purchasers, for example, how they could first buy ether with dollars through an online exchange known as Coinbase** before forwarding the ether to a digital wallet. Next, investors were instructed to send the ether from the digital wallet to a specially designated PIX address. An automated “smart contract” would then release the appropriate amount of tokens to the buyers’ digital wallets 31 days after the ICO was consummated.
It’s a byzantine procedure. And for investors – especially for those who are not exactly tech-savvy – the rigmarole makes it nearly impossible for them to recover their money should they feel buyer’s remorse. Neither the video nor the Lampix white paper mentions any buyer restrictions. Indeed, Lampix’s white paper specifies that “anyone” in the global market can participate. That means that an investor could theoretically be underage or a citizen of Iran or North Korea. (When asked what steps Lampix took with regards to KYC/AML, Popescu said, we “implemented the standard ones with partners specialized in it.”) Investors could even be citizens of the UK where Popescu is banned from being a company director.
And global they are. AltFinanceDaily interviewed Rudy (whose last name we are withholding), a graduate student who lives in Singapore that says he bought approximately $2,200 worth of PIX tokens during the ICO. The drop in value has gotten him so frustrated that he’s contacted securities regulators in the United States to investigate Lampix. Despite the caveat in the white paper that tokens are not an investment and should not be used for investment purposes, Rudy said he considered himself to be an “investor” and that his reason for buying the tokens was to sell them in the future for a profit.
Popescu, who wasn’t asked about Rudy’s experience specifically, told AltFinanceDaily that Lampix is not selling PIX tokens as an investment but rather to primarily build a community. “What people do with the tokens is their choice and we cannot prevent them,” he asserted.
English is not his first language but Rudy said, “I think that [the] SEC should regulate ICOs in the USA. There are no rules currently, teams can promise anything before the ICO and forget everything after the ICO. Things have to change, there should be legal pressure on crypto teams.”
Rudy added that he was “so enchanted” by Lampix’s ideas that he had promised himself not to sell the tokens for at least two years even if they were losing value. He conceded that he was not a tech expert. But, he says, the award at the SXSW competition was an important milepost to him.
AltFinanceDaily found 700 more people interested in Lampix on the company’s official Telegram channel. The chat history since September 20, which we were able to obtain, has been dominated by talk of the PIX token’s trading value. Those bemoaning the low price regularly use the term “investors” to describe themselves – never mind that the white paper specifies that PIX tokens are not supposed to be an investment or to be used for investment purposes.
The chat’s administrator, who uses the nickname Chester, identifies himself as a “community manager” at Lampix. At one point he too refers to PIX holders as investors. “Hey guys,” he wrote in the channel on October 1, “Lampix is a company, not a single person, we don’t do things that quick, but pretty quick and we try not to confuse our investors by telling you unconfirmed news. Be patient, things will be just fine.”
Laura Toma, another community manager for Lampix, responded to complaints about the depressed price in the channel by saying, “The issue is that people want to get rich in a month.”
Indeed, investors hound not only the community managers, but also Popescu himself, who frequently joins in on the chat and fields questions about the trading price of PIX. “You should care more about the company revenue, clients, users.” Popescu replied to one user.
“Are you serious?” a user calling himself Dante fired back. “We are investors, and we care about the return on investment.” Another user with rough English tells Popescu, “As you know, most people come to ICOs for short-term profit. We cannot deny it.”
Others keep the faith. “PIX will be the real Aladdin’s magic lamp,” writes one user. Another hyperbolically predicts the price will “fly out of the earth, fly to the moon, and finally fly out of the galaxy.”
There is very little discussion about the use of the product itself while numerous inquiries are written in Mandarin. “Lampix has a lot of Chinese investors,” writes one. Other users self-identified as citizens of Russia, Romania, and France. Meanwhile, Toma writes, “Yes, there are investors from USA as well.”
Despite the losses that investors have so far experienced with Lampix, among other concerns, Popescu isn’t limiting himself to just one ICO. According to his online statements, Popescu is connected as an “advisor” to another company engaged in an ICO. AirFox, a Boston-based start-up launched by two Google alumni, provides free data to mobile phone users in return for eyeballing advertising. In early October, Airfox’s ICO raised $15 million. But a month later its AIR tokens, which sold for two cents apiece during the ICO, had lost 75% of their trading value. That means investors in AIR, the company’s ICO ticker symbol (which is becoming an increasingly ironic moniker) have seen more than $11 million go up in smoke almost overnight.
Popescu says in their defense, “The AIR tokens are meant to solve a real problem, of remunerating people who watch ads in exchange of getting more data and minutes on their mobile phone. The ecosystem is still being worked upon, the product is not live. Once the ecosystem is live we will see what really happens. Until then the token is mostly being handled by speculators. The price can therefore vary widely and it doesn’t reflect their true value.”
Even as Lampix and AirFox have been racking up massive losses for investors, Popescu announced on November 5 in a LinkedIn post that he would be involved in five more ICOs.
Among them is DropDeck Technologies, at which Popescu is listed as the chair of the advisor board; its ICO is scheduled for November 21. Another company, Factury, for which he is listed as an advisor, is initiating its ICO on December 15.
He’s an ambitious man.
And his ICO familiarity hasn’t escaped the scrutiny of PIX investors. “I find it strange that you are directing 5 other ICOs,” writes one user in the Telegram chat on November 4. “To make Lampix big, this will require a CEO [who is working] full time working on the project.”
Popescu responds personally. “I am working full time on the project but people have asked me to advise on their ICOs and this grows Lampix’s notoriety a lot in the crypto space,” he writes. He offered further assurances that he wouldn’t be advising those companies’ projects beyond their ICOs.
In an email to AltFinanceDaily, he writes, “I run right now Lending Times, Lampix and Block X Bank only. The ICOs are just customers of Block X Bank. I have built about a dozen companies in 9 years, sold a few, closed a few. Each company has a team to help me, I am not doing this alone. For the ICOs I am more or less involved as an advisor / helping them project-manage their ICOs. How to run 3 companies? It’s about being effective, organized, delegating, partnering and being productive. Oh and I don’t watch TV, so maybe I have a few more hours per day than the average person. I do work long hours.”
Block X Bank, through which Popescu extends his efforts toward other ICOs, is described on the company website as “a boutique investment consulting company specializing in connecting blockchain projects with funding.”
In all of these ICOs, money is seemingly being created out of thin air. A consultant who was hired by AltFinanceDaily to help analyze the technical aspects of both ICOs and smart contracts determined that Lampix raised much more than just the $14.2 million in token sales. In addition to the 114 million PIX tokens sold to investors, our consultant explained, the company also issued 220 million tokens to itself. At the ICO price of 12 cents apiece, those tokens would theoretically be worth $26.4 million – a huge piece of the total ICO pie that Lampix could sell on cryptocurrency exchanges if it wanted to rake in even more money.
There’s a kicker too. At scheduled intervals over the next four years, the smart contract that made PIX tokens possible in the first place is slated to automatically create – and allocate – 330 million new tokens to Lampix. Thus, when Lampix raised $14.2 million in August, the company reserved $66 million worth of PIX tokens for their corporate use.
Popescu said in his e-mail to AltFinanceDaily that these company tokens are for “corporate usage like employee incentives, M&A, other company investments…etc.”
It’s a mind-boggling sum of money for the development of a futuristic lamp whose followers mostly seem to reside on internet chats like Telegram, reddit, and bitcointalk.org.
And this has occurred despite the company’s withholding any information regarding Popescu’s status in the UK. Balina, who interviewed Popescu on Youtube, told AltFinanceDaily he wished he had known about his disqualification in the UK. “This is definitely a big issue and I wish I would have known about it so that either my audience or I could have asked him this directly on the live stream,” he said.
AltFinanceDaily asked Paul Savchuk, Co-founder, CEO, and Chief Product Officer at Cryptocurrency Capital LLC, a US-based hedge fund that only invests in utility tokens as commodities, if Popescu’s ban in the UK would have been relevant information in the Lampix ICO. “Yes, that might be a red flag for us in some cases and require us to perform additional research,” he wrote in an emailed response. “We look at management very seriously – especially since a lot of projects are treated like startups and management is a key component to whether or not many of these ICOs can make it. We try to find such events and spot red flags whenever we conduct our due diligence research on ICOs. The reason: each project has something that needs to be improved. ‘Red flag’ – sometimes conversely can lead to a great opportunity when other market participants ignored it or were too skeptical.”
Mr. Savchuk further said, “Lampix is a perfect example of a coin that on the surface looks very promising, but when you dig a little deeper, you do find red flags that can dampen the excitement for this investment.”
And yet Savchuk spoke rather positively of the Lampix product after reading their white paper. “We believe the project is looking to change the current AR/VR tech industry,” he said, referring to augmented reality/virtual reality. “The project is promising for two reasons. First, they have multiple companies in their pipeline. Second, they have a legitimate product which they will manufacture and sell. They are one of the few blockchain products to offer a tangible product with the ability to disrupt the market.”
“Third,” he went on, “most companies have gaps in building a strong structure at the outset of their existence. Some have bugs in initial code that cause breaches in cybersecurity. Others release product with a low level of usability – the ones who are aware of such problems have a greater chance of success. We would prefer to see publicly known strengths and weaknesses of such companies. Management has to be transparent about their team and product no matter what. Whenever possible, we want to be in touch with the management team.”
With regard to the price drop, Savchuk said, “This is a danger for all purchasers of ICOs. Sometimes it’s caused by token purchasers (swayed by) fear and greed and (hoping for) easy money and fast money. I doubt somebody sold Apple Inc.’s stock right after its IPO. It is also very difficult to restrict exchanges from allowing massive pump and dumps. That’s not even mentioning the difficulty of measuring the value of tokens,” Savchuk concluded. “Consequently, such projects are struggling with low credibility. However, it also creates a possibility for those who believe in the idea and product on a long-term run.”
Popescu downplays the significance of the UK issue. The root of the debacle, he says, is the result of Boston Prime – the company he previously ran – being forced into bankruptcy by the actions of a company he is now suing called FXDD. “FXDD bought the companies and then bankrupted them and that’s why Boston Prime [went bankrupt],” he writes. “Myself personally and each company separately are suing FXDD for this. UK has archaic laws where if you are a director of a bankrupted company you get disqualified from being a director again for a time. Attorneys charge about 40,000 GBP to defend this automatic case and I weighed the pros and cons and decided to ignore it as I have no plans to be a director in the UK for time being.”
Investors unhappy with underperforming ICOs may be willing to challenge their legality. On October 25, for example, a class action lawsuit was filed against Tezos, a computer networking project that raised $232 million in one of the largest ICOs ever. In a complaint, the lead plaintiff alleges that, among other things, Tezos unlawfully engaged in the unregistered offer and sale of securities and fraud in the offer or sale of securities. “In July 2017, Defendants conducted an ICO in which they sold 607,489,040.89 tokens (dubbed ‘Tezzies’ or ‘XTZ’) in exchange for digital currency worth approximately $232 million at the time,” the complaint reads. The plaintiff, who purchased 5,000 Tezzies, feels he was misled about the company and the offering.
Internal squabbling at Tezos which has delayed the release of its product and the sheer amount of money at stake have put the company on the map with the mainstream media and business press. The New York Times, Wall Street Journal, and Fortune as well as news services Reuters and Bloomberg have all covered the allegations of fraud.
The day before the class action lawsuit was filed, moreover, a AltFinanceDaily reporter attended an explosive session at Money2020 in Las Vegas that saw Tezos co-founders, Arthur and Kathleen Breitman, attempting to give a status report of the company. A crowd that had gathered outside prior to the doors opening had attendees speculating whether the Breitmans “would actually show their faces” in the midst of all the drama.
To date, no lawsuits have been filed against Lampix despite the drop in the token’s value.
At a cryptocurrency/ICO meetup in NYC in October, a AltFinanceDaily reporter met with executives at one company preparing an ICO who said they would not allow American investors to participate because of securities-enforcement fears. Pressure is mounting in the Far East as well. Citing their illegality, Chinese regulators in September issued a blanket cease-and-desist order on all ICOs in their country. What that means for Lampix’s Chinese investors bears watching.
Popescu says that Lampix supports regulation in China. “Of course, all Chinese people have to follow Chinese regulation,” he writes.
Meanwhile, on the product front, Popescu says that right now a Lampix lamp can be purchased for $10,000, a tidy sum because they must be hand-made. “We plan to improve the manufacturing costs and then we’re planning to do a kickstarter early next year for around $500 [per] Lampix,” Popescu told AltFinanceDaily in his e-mail interview.
But for investors, it always comes back to the trading value of PIX. On October 25, one investor asks Popescu if the company will buy back its own PIX tokens at the ICO price to pump up their market price. “If you want a pump and dump please go to other companies,” Popescu responds. “We are here for 5-10 years to build a $100 billion dollar company and compete with Apple.”
And it all began with an ICO.
“ICOs also help with bootstrapping the user base – breaking the chicken and egg problem,” Popescu also explains in his e-mail to AltFinanceDaily. “In addition, given that Lampix is looking to crowdsource images, we prefer many different people hold PIX tokens rather than 2-3 VC funds. And last but not least I think tokens are better rewards for the community (liquid, mark to market, etc.) than illiquid instruments.”
Not everyone agrees that PIX is the most liquid instrument to grow the community. US Dollars come to mind, for example. “Let’s say I’m a customer,” one investor poses to Chester, a Lampix community manager. “I want to use the cloud computing service but then I see I have to pay with PIX. I have no experience in crypto and have no idea how to do that. I just want to use your service fast and don’t want to buy PIX coins first before I can make use of it. Will there be a fiat option?”
Chester is awed by the idea. “Well, you are so professional,” he writes. “Man, you are good. You are good, the question you threw just hit the spot seriously. I guess there is always something Lampix needs to figure out and choose the best solution. Technically speaking they are jolly good at this point, but it doesn’t mean it’s perfect.”
Chester, who assures him that he isn’t being sarcastic, goes on to refer to the investor who asked that fairly elementary question as a “big shark” that is “born to bite.”
It remains to be seen if the PIX “user base” shares the same philosophy as Lampix. Ian Balina, who interviewed Popescu on Youtube, separately asked his social media followers: “What’s the first thing you’re going to do once you hit your goals in cryptos?”
The responses fly in:
“Buying my Lambo”
“Travel to Paris”
“Buy an island”
“Buy my mum her dream home”
“Quit my job and start up something for me”
“Pay off mortgage and be financially free”
“Buy house in Miami, buy Lambo, enjoy life”
“Retire”
“Easy. Buy more crypto”
Meanwhile on Telegram, where investors continue to engage Lampix management on a daily basis, Dante offers a sobering reminder of what they’ve bought into, “We don’t have equity, we only have tokens,” he writes. “And we are taking a big risk.”
* The amount of tokens sold multiplied by the 12 cent ICO price doesn’t exactly match the dollar amount Lampix says they had raised. That’s because Lampix not only issued bonus tokens to buyers at each stage of their ICO but also because the market value of ether, which users had to convert to from dollars to buy PIX, had fluctuated when they reported how much they raised. Like Bitcoin, the value of ether is volatile.
** The smart contract Lampix wrote to launch Lampix’s tokens into existence specifically named them PIX tokens and dubbed their publicly identifiable symbol to be PIX.
*** Coinbase is a respected digital currency wallet platform based in San Francisco.
CFC on the Front Lines of the MCA Regulation Battle
November 6, 2017
As the US Senate attempts to reach a bipartisan agreement on relaxing some of the rules in the Dodd Frank legislation of 2010 that would treat banks more favorably, the MCA industry is having to fend off legislation and regulation of its own at the state and federal levels that could position funders in a similarly crippling position.
MCA regulation has been thrust into the spotlight for a number of reasons, not the least of which has been the Consumer Financial Production Bureau (CFPB). The CFPB is moving forward with the Dodd-Frank Section 1071 rulemaking process for data collection regarding small business lending, a sector of the market for which they do not have jurisdiction, sources say.
Front and center in the policy discussions has been the Commercial Finance Coalition (CFC), a merchant cash advance trade association that is coming up on its two-year anniversary in December. While federal policymakers appear to be listening, state legislatures have been a more difficult nut to crack.
The CFC’s Influence
In its short two-year history, the CFC has been one of the most vocal if not the most influential trade organization lobbying on behalf of the MCA industry, having attended 70 congressional meetings and having led advocacy efforts for the industry in the halls of Albany, Sacramento, Illinois and Washington, D.C.
Dan Gans, executive director of the CFC, has been the voice of the MCA industry on Capitol Hill and has been invited to testify in key congressional hearings. “For whatever reason, the CFC has really become the voice and has taken an active part in the so far successful advocacy efforts to educate and mitigate potential harm to our members’ ability to deploy capital to small businesses that need access,” Gans told AltFinanceDaily.
Most recently the CFC participated in a fly-in, one of two such events this year, to Washington, D.C. in which the association’s counsel Katherine Fisher of Hudson Cook, LLP testified.
In her testimony Fisher said: “The MCA and commercial lending spaces are sufficiently regulated by existing federal and state laws and regulations. Both MCA companies and commercial lenders must comply with laws and regulations affecting nearly every aspect of their transactions, from marketing and underwriting through servicing and collection.”
She went on to explain: “Even if they comply with every applicable law and regulation, small business financers must also be wary of the Federal Trade Commission’s powerful authority to prevent unfair or deceptive acts or practices.”
Fisher told AltFinanceDaily she received a “positive” response to her testimony from funders but has not heard anything from lawmakers.
Gans said Fisher did a fantastic job in articulating the needs and status of the industry.
“She presented a very good case as to why the industry is currently adequately regulated. We don’t feel there is a need for federal regulation. In some cases, less regulation would allow our members to deploy more capital and help more small businesses,” Gans said.
The sweet spot for MCAs, Gans explained, are transactions under $100,000 and probably in the $24,000 – $40,000 range. He said the industry does a fantastic job of being able to deploy financial resources to small businesses in a timely manner that neither banks nor SBA lenders can match. He’s not suggesting MCA is for everybody but for some businesses it’s an essential product that can help. There have been many success stories.
“Competition is all over the place. But that’s great for the merchant. The more options that merchants have, the more we can enforce best practices and more competitive rates. And the more we can keep the government from impeding people from getting into this space, the better off small businesses are going to be,” said Gans.
Setting the Record Straight
The CFC was formed with the mindset that the organization, which is currently comprised of CEOs of small- and medium-sized funders, would take a proactive rather than a reactive approach to industry regulation. In its two-year history the CFC has tasked itself not only with educating policymakers on the role of MCA funders for small businesses but also with undoing the misinformation and misconception surrounding the anatomy of an MCA.
“Unfortunately, because MCA uses the term cash advance in its product name, uninformed people will often confuse MCA as some form of payday lending. And so that has been one of our biggest challenges, educating members of congress and committees that there is absolutely no correlation between MCA products and what their views of consumer payday loans is,” said Gans, adding that the CFC has had to communicate that MCA is a version of factoring has been around for more than 1,000 years.
A common thread that the CFC has been able to weave with lawmakers has been the diverse geographical representation of both the trade group and the House and Senate.
“Most venture capital is deployed in a few spots – New York, California and Texas – and it’s a cliff to get to those three states. So, one nice thing that I take pride in is my members are looking all around the country regardless of the geographic location. That helps us with policymakers, most of whom are not from the New York City metropolitan area or Silicon Valley. It’s nice being able to look at them in the eye and tell them we care just as much about your district as you do,” he said.
The Road Ahead
The CFC has an ambitious long-term agenda, one that includes raising their profile in the industry and participating in events.
“I think one of the ambitions we have is to have an organization where funders and brokers can be at the same table and work though some of the issues impacting the industry and try to make sure people are doing things in the right and best way.”
The trade group is planning to partner up with AltFinanceDaily for Broker Fair 2018 and they’re looking to bolster membership.
“The industry has had a lot of free riders that are benefiting from our advocacy efforts but not supporting it. So, from my perspective, if you’re in this industry, particularly in the MCA space, we’d like to expand membership. If we grow our membership, we can do more things, engage more states and expand our lobbying team,” said Gans. “The more members we have, the more we can do to advance the ball and protect the interests of the industry.”
The CFC will need all the help it can muster given the fight ahead to fend off regulation particularly in Washington, Albany and Sacramento. “I think we could see some harmful regulations and potentially legislation over time. Some of those bad ideas that emanate in states have a tendency to percolate into Washington. If at some point there is a less business-friendly administration in the future, we could see all those ideas get some traction at the federal level,” Gans warned.
LendUp May Have a Leg-up
November 1, 2017
AltFinanceDaily recently sat down with LendUp CEO Sasha Orloff and COO Vijesh Iyer at an auspicious time. The company, an online lender that provides consumers with alternatives to payday loans and credit cards, is uniquely positioned in the wake of the CFPB’s 1600+ page Payday loan rule that was issued in early October.
And that’s not exactly an accident. Orloff says the company was founded (5 years ago) with the expectation that the CFPB would issue an eventual rule. “At the time, we had no idea what it was going to be but I could imagine that if they were going to write a federal rule that it would completely change the industry,” he said.
Orloff’s journey, as he tells it, began by reading Banker to the Poor, which inspired him to move to rural Honduras nearly 15 years ago to help the Grameen Foundation, a non-profit that focuses on providing loans and education to the poorest of communities. He was only 21 at the time. After a three-year tour, he moved on to roles at The World Bank, Citi, and finally starting in 2012, LendUp.
When LendUp was being envisioned, he explains, the smart phone was making it possible for consumers to access financial services outside of what was in their neighborhood and bank technology was the last thing that was going to become modernized.
“The CFPB rule was going to make it harder for banks to work with underserved consumers,” he says. “So we said let’s start a financial services company that focuses exclusively on the people that have the least amount of options and let’s start reinventing [these] products one at a time.”
And with that, they consulted academics, educators, government officials, and people from the industry. “How do you give somebody credit in an emergency fashion that can change it from a trap into an opportunity? And so we did that and it turned out the rule looked really similar to what we did,” he explains.
“I think there’s a lot of things they got right [about the CFPB rule],” he says in regards to how to eliminate debt traps. LendUp, for example, doesn’t allow customers to roll over their loans, they have to pay off their loans in full before they can consider borrowing again. Rollovers were a big sticking point for the CFPB when they published their rule last month. Their official announcement on the matter had stated that “many borrowers end up repeatedly rolling over or refinancing their [payday] loans, each time racking up expensive new charges. More than four out of five payday loans are re-borrowed within a month, usually right when the loan is due or shortly thereafter. And nearly one-in-four initial payday loans are re-borrowed nine times or more, with the borrower paying far more in fees than they received in credit.”
One piece of the payday alternative puzzle is in the underwriting. COO Vijesh Iyer, an alumni of both Capital One and PayPal, says “we basically use a variety of data sources, both the traditional bureaus and as what we call the non-traditional bureaus.” For the credit card product, LendUp will pull credit from a traditional bureau. “For the small dollar loan product we use non-traditional CRAs,” he says. Their team of data scientists tries to extract the most significant signals out of all of the data sources they have at their disposal. “That’s really valuable when you’re dealing with a subprime customer where the reason why someone could be underserved or subprime is very different. We all have different life stories and we’re really trying to figure out the differences which we get from multiple signals, multiple data sources.”
“The easiest person to convince that we’re a better product is an existing payday user,” Orloff says. “because it’s slightly cheaper at the beginning, it gets much cheaper over time. It has a lot more flexibility. It gives people for the first time the opportunity to report to the credit bureaus. It teaches you better financial behavior. You can do it on a mobile phone. You can get alerts and reminders…”
Meanwhile, payday borrowers always have to pay the same amount, Orloff contends. The loan terms don’t improve, he says. One notable advantage a LendUp borrower might experience is that when they first run into trouble with making a LendUp loan payment, they can get a few extra days leeway at no extra charge, which usually comes as a welcome surprise.
Granted, a LendUp loan’s APR can still look pretty steep. A calculator on their website offers an example of one that is 458.86% APR. Orloff says a part of understanding that is understanding what a consumer’s options are and what the costs to process the applications are. A 220% APR might only equate to something like $30 total in fees depending on what the loan terms are, he explains. Their borrowers don’t get paid in APR though he says, they get paid in dollars. “They care about what’s the total cost of credit in terms of dollars.”
“Our customers pay more than that on overdraft fees,” Iyer adds. “Every time they have a slight overdraft, even if it’s for a dollar, even if it’s 10 cents. Even if it’s two dollars. No one ever tries to evaluate what the APR for that is. But that is their fee and this is also a fee.”
But more than anything else, it’s about whether the borrower’s and lender’s interests are aligned, Iyers contends. Right now, LendUp believes they’re doing the right thing at the right time.
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This interview was conducted at Money2020 in Las Vegas
View From The C-Suite: Alternative Funding Execs Talk Shop, The Landscape, And The Future
October 30, 2017
Alternative funders have had a roller coaster 2017 with highs and lows that will likely be remembered as a high-stakes time for the industry, one in which the rubber met the road for many and the market landscape shifted for everyone from funders, to merchants to brokers.
Three C-Suite executives in the alternative funding space — Christine Chang, CEO of 6th Avenue Capital, Heather Francis, CEO of Elevate Funding and Torrie Inouye, National Funding president — spoke with AltFinanceDaily, offering their take on some of the industry shakeups, direction of the alt lending space and upcoming developments at their respective companies.
All three execs are embracing what appears to be shaping up as a bigger and better 2018 with plans on the horizon for new products, relationships and deals but also where there could be further shakeout as the shift in the industry landscape takes hold.
Industry Landscape
6th Avenue Capital, provides short-term funding to merchants that Chang describes as “high touch, high tech and fast.” The company is building an SEC RIA compliant infrastructure as Chang believes that MCA regulation will take place over the next several years. Chang said she is sympathetic to the banks and the onerous rules that they must follow, and whatever form the industry regulation eventually takes on, the company will be ready for.
A recent story in The Wall Street Journal points to community banks comprised of those with less than $10 billion in assets historically funding local merchants in what’s dubbed character-based lending. As the name suggests, the underwriting standard for the loans was tied to the character of the business owner, which the lender knew based on personal relationships in their own communities.
The financial crisis gave rise to greater regulation, driving a spike in that model and the rest is history. Small banks were forced to direct their resources toward risk management and compliance instead of adding more personnel to service loans. The WSJ quotes a small business lender that bears repeating: “When they created too big to fail, they also created too small to succeed.”
When that door closed, however, another one opened, creating the opportunity for alt lenders to service a niche that was getting left out in the cold.
“The alternative funding industry is here to stay. That’s good news for MCA and fintech in general. There’s a need for fast funding and there will continue to be a trend toward that,” said Chang.
Banks, meanwhile, have started coming to the fintech table to compete for deals. “We’re in the process of speaking to a number of banks, some quite large and some regional, that have expressed an interest. We think this is a great opportunity for them. The idea is that we’d help them to serve a population of clients that they would not otherwise be able to serve,” said Chang.
6th Avenue has had discussions about white labeling and customizing the platform for institutions. “We would run everything for them,” said Chang.
In addition to possible new banking relationships, 6th Avenue Capital, backed by a private family and institutional investors, will expand the business model to include more investors on its platform. “We are in discussions with a number of significant international investors. It’s in the works. We’re building an institutional infrastructure, so it was always contemplated,” she said.
Elevate Funding, whose is 100% referral-based and whose product suite is comprised of a trio of MCA solutions, is coming up on its three-year anniversary in December.
“When I created Elevate, I did it with the purpose of providing a product to high-risk merchants. That’s who we deal with. We’re not dealing with credit scores. There is a level of risk to who we work with. Elevate was created to provide a product that is going to fit their needs and also provide a product that doesn’t treat them like they’re high risk. That’s who we are,” said Francis.
Gainesville, FL-based Elevate recently hired Michael Gaura to spearhead a new MCA product that the company is rolling out in 2018. Francis held the details of the new funding product close to the vest, but she did offer her views on the direction of the MCA and alternative lending space.
“I see difficulty in the coming years, especially in 2018, for qualified lead flow. You have a lot of big banks that are getting into this industry. And that’s a lot of marketing dollars that you’re competing against.”
She points to JPMorgan Chase, American Express, Square and PayPal, saying they are “huge marketing dollar companies” with tremendous access to customers on their respective platforms.
“There’s going to be a shakeout of what can you reach, who can you reach, can you get them the first time? How do you engage them to where they only want to work with you and they’re not submitting 20 applications for every website they come across?”, Francis said.
San Diego, Calif.-based National Funding is a balance sheet lender whose primary product is loans, not MCAs. The broker factor has changed significantly for the lender in a very positive way this year. “We’re really seeing sizeable growth in our broker channel in 2017 and have designed a strong and consistent process for our broker clients” Inouye said. The leads have been driven by a variety of factors, not the least of which comes down to CAN Capital and Bizfi’s loss being National Funding’s gain.
“That’s a factor we can’t ignore. The broker community has rewarded us for being consistent and building those relationships and being a partner to them,” Inouye said. “We definitely saw an uptick in business when they left the space. I can say we’ve continually experienced sizeable growth in our broker channel year over year but 2017 was beyond what we had expected. It surpassed other years.”
Incidentally, National Funding was one of the earliest alt funders on the scene along with CAN Capital in the 1990s. CAN’s fate started unraveling about this time a year ago.
“It’s not positive when you see that happen in the industry. However, we are really focused on what we’re doing and the decisions we’re making internally. I think that’s why we’ve consistently had profitable growth over the years. We’ve stayed true to our underwriting principles and the market seems to have rewarded us. We were consistent and not erratic. Brokers know they can rely on us and feel confident that we would quickly fund their deal once we issued an approval,” said Inouye.
The Broker Effect
Elevate, a balance sheet funder, relies on outside brokers and referrals for deals. “I don’t find it a disadvantage for us not having an internal sales team. A lot of companies in this space have the ability for a chief marketing officer who focuses entirely on leads. Elevate isn’t there yet. Will we be there in five years? Maybe. Marketing can change by that time,” Francis said.
6th Avenue Capital welcomes relationships with brokers as well. “We have an in-house business development team that works with brokers. 6th Avenue Capital is also considering direct sales in niche strategies in its future,” said Chang.
6th Avenue Capital has a starter program in which there are no guarantees but considers businesses that have been in existence for less than a year and businesses with credit scores of 500 or more. Plus, they’re willing to do consolidations up to two advances.
In addition, 6th Avenue Capital is open to offering financing to brokers. “It’s really good in that there is an alignment of interests and allows brokers to participate in the deals they put forth. If they think the merchant is credit worthy and a terrific opportunity, they participate. Everyone has skin in the game and interests are aligned,” Chang said.
Technology
While technology is at the core of fintech, all three of the companies take a hybrid approach when it comes to credit underwriting comprised of a tech platform and the human touch, which perhaps keeps character-based lending alive in some form.
With respect to fintech, “6th Avenue Capital’s philosophy is that technology is a tool to supplement human underwriting. We use technology to detect fraud, manage workload processes and manage risk. We do not use technology to make our final decisions,” said Chang.
Specifically, 6th Avenue Capital benefits from research, artificial intelligence and predictive technology of its sister company Nexlend Capital. 6th Avenue Capital has customized Nexlend’s consumer lending algorithmic intellectual property, which uses machine learning and credit analysis with high speed execution to make better and faster decisions.
Elevate also takes a dual-approach to its underwriting process. “I believe in a hybrid method. You have to have someone looking at it, to have eyes on the paper at some point in the process. This doesn’t mean a computer system can’t help to weed out what might not meet the criteria, but I do believe there needs to be a person reviewing the files,” Francis said.
National Funding was started as an equipment leasing company. “We apply some principles we learned as a leasing company and take into account all of the attributes that go into that business in addition to FICO and cash flow,” Inouye said.
Automation is an area of technology that they continue to look to for innovation and process efficiencies. “We do serve our customers online, but we also provide a human contact as well. We deliver a loan experience that builds trust and confidence with customers. We try to deliver on what our customers want in the most efficient way,” said National Funding’s Inouye.
National Funding continues to look at construction deals and accepts them as a niche in their portfolio, which Inouye said differentiates the company. “It allows us to be more flexible and comfortable with certain industries that other lenders might stay away from.”
Corporate Culture
2017 has been a roller coaster year for fintech including alt funders. While there have been plenty of bright spots, there was also some fallout that left veteran players scrambling to salvage either their reputation, status as a funder or both.
SoFi has been at the center of controversies that resulted in the Mike Cagney leaving his chairman post with plans to step down as CEO. Most recently, the lender has removed its application for a bank charter, according to reports.
We asked Elevate’s Francis about it. “SoFi is a very big company. They’re to the level where the CEO has people to answer to. They have a checks and balances system they need to go through,” said Francis. “It worked, and they removed him.”
Francis maintains an open-door policy with her employees, and she says all you can do is focus on your house and keep your house in order. “My door is always open. That’s our office policy. They use that quite frequently; it’s a catch 22,” she said with a laugh.
Fintech and Diversity
Something else that all three executives have in common is that they are all women in top roles in fintech, an industry that isn’t known for its diversity.
6th Avenue’s Chang’s career includes working at a large institutional bank for six years. Out of 200 professionals, only four of them in her group were women. “At the end of the day, performance is the best differentiator. If you perform well, it presents unique opportunities. At 6th Avenue Capital, diversity is embraced. Our underlying merchants aren’t just one gender or color. Diversity helps us understand the needs of small businesses better, so we can provide fast and customized funding quickly,” she said.
Goodbye Liens and Judgments
October 28, 2017
Justice can require sacrifice. Take the example of a decision by the three major credit bureaus – Equifax, Experian and TransUnion – to stop including some liens and most judgments in their credit reports.
The change makes life a little less unfair for consumers who fell victim to reporting errors. Many invested precious time and large amounts of money trying unsuccessfully to correct their credit histories and restore their reputations.
But for the alternative small-business finance industry, omitting data on liens and judgments increases costs, creates extra work and can even give rise to an unsettled feeling in the pit of the stomach. “You’re not looking at a full credit report anymore, which is kind of scary,” one alt funder admits.
Yellowstone Capital CEO Isaac Stern provides an example to illustrate what’s at issue. “Imagine I’m the Ford Motor Co. and I want to do a lease with you,” he says. “But I don’t have the information that you happen to have judgments from Chrysler, Chevy and BMW, so I approve your lease. Imagine that! Without full information, how do you make accurate decisions?”
Operating without the data could prove dangerous, agrees David Goldin, who sold his U.S. Capify operations to Strategic Funding Source in January but still runs Capify UK and Capify Australia and remains open to U.S. opportunities. “The IRS could come in and seize credit card processing accounts and prevent the lender from getting paid,” he says. “Once you have a judgment a creditor could come in and freeze bank accounts.”
Fears aside, the change in reporting probably won’t dry up alternative small-business credit – even in the short run, Goldin predicts. Alt funders will adjust quickly, he says, noting that they can compare the old and new credit scores of long-time customers to spot patterns and apply those patterns to their calculations. The industry can also tap alternative sources of information.
Even with those reassurances, the transition would have been easier if the industry had more advance notice, alt funders say. “We found out July 31 when a Reuters rep emailed us and said this is going into effect tomorrow,” recalls Stern. “That was really weird – I’ve got to tell you.” Experian didn’t provide a heads-up even though Yellowstone is one of its largest New Jersey customers, he notes. “We were a little bit annoyed, but what are going to do?” Meanwhile, Goldin says he didn’t begin researching the situation until AltFinanceDaily asked him about it. “I don’t think anyone really knew about it” much in advance, he says.
But the industry is finding out and taking action. Yellowstone, for example, is performing a performing a workaround by integrating the judgments and liens section of the Clear investigative platform into the information underwriters see when they open a file, Stern says. The integration required a couple of weeks of hard work by the Yellowstone tech team, he notes.
Clear, which is provided by Thomson Reuters, amasses public records that can date back 20 years and can fill more than a hundred pages, he says, adding that you have to know where to look for the relevant information. “You have to dig through it,” he says.
In the past, Yellowstone performed a Clear report on most files just before funding them, Stern explains. Now, the Clear report is scrutinized more extensively and earlier in the process – before the file is approved. As a result, Yellowstone underwriters will have all the information they need, but it will take them a little longer to get it, he says.
Yellowstone incurred the expense of obtaining additional user licenses from Clear, which cost it $800 to $900 monthly Stern says. Experian now charges the same price for less information, he notes.
Accommodating the changes didn’t require more underwriters but it became necessary to hire four additional data entry clerks to input information until the integration with Clear was completed, Stern says. Now that Clear and the Yellowstone systems are working together, the four extra clerical workers will shift their attention to inputting data from the increasing number of applications coming into the company, he says.
Most Alt funders won’t need to employ more people in their underwriting departments because changes to their models will be automated, Goldin says. “I don’t think this is as much of a game changer as people think it is,” he says of the credit bureaus’ new approach to reporting.” It’s just one extra step. It’s more of a nuisance issue than a manpower issue.”
However, a challenge arises for underwriters because leaving out the liens and judgments will result in higher credit scores for some loan or advance applicants, Goldin says. That means some alt lenders may need to go to the trouble and expense of tweaking their risk models to compensate for the change in the scores reported by the credit bureaus, he maintains.
The impact may be greatest among alt funders who rely on quick online decision-making, Goldin says. Adding extra steps to the process increases the difficulty of maintaining the speed that provides a selling point and a source of pride for those companies.
While Clear is helping to fill the gap at Yellowstone, it’s not the only company providing much-needed data. LexisNexis Risk Solutions isn’t a credit bureau and will thus continue to disseminate information it gathers from courtrooms on lien and judgments, Goldin notes. Alt lenders who weren’t already using the vendor’s service or were using it only when an application reached a predetermined threshold will face added expense because of the credit bureaus’ decision, he says.
Indeed, LexisNexis Risk Solutions views the credit bureaus’ hiatus on some liens and judgments reporting as a business opportunity to increase its sales by supplying the missing data, according to Ankush Tewari, senior director of marketing planning in the company’s business services section. The company was already selling data on liens and judgments and anticipates selling much more of it, he observes.
For 15 years LexisNexis Risk Solutions has been selling RiskView Solutions, a product that contains liens, judgments and other information not generally found on credit reports, such as the assessed value of a consumer’s home or a list of a consumer’s professional licenses. It offers no data on loan repayment but its other information helps define a consumer’s creditworthiness and character, Tewari says. Lenders can combine that peripheral information with credit scores for a more complete customer profile that outperforms the credit score alone, he suggests.
And there’s more. LexisNexis Risk Solutions has reacted to the credit bureaus’ decision by creating RiskView Liens & Judgments Report, which lists only those two types of records. “The credit bureaus announced these changes a year ago, and we knew there would continue to have a need for that data,” Tewari says. The company prices the RiskView information based upon the transaction volume, he notes, so a lender pays less per transaction as volume increases.
With this emphasis on liens and judgments, one might well wonder who tracks down the information. Companies like LexisNexis Risk Solutions gather and disseminate public records on liens and judgments from courthouses throughout the United States, says Tewari. Over the years the company acquired some of its competitors and eventually was spun off from its sister company, LexisNexis, which built its name partly as an aid for lawyers researching cases, he notes.
For decades, LexisNexis Risk Solutions has been providing the credit bureaus with raw data not only on liens and judgments but also on bankruptcies, Tewari says. The bureaus have then parsed those files electronically and appended the data to credit reports, he continues.
Problems arose because the credit bureaus’ tech systems could not always link the court documents to the right person when the courts provided only a name and address, Tewari maintains. Courts often limit information in their records to those two identifiers because they’re reluctant to divulge additional identification that criminals could intercept and use to commit fraud, he says.
Tewari traces the bureaus’ inaccuracies in matching court records to the right people to what he calls the bureaus’ “DNA.” The bureaus are accustomed to receiving “clean” information from lenders on a regularly scheduled basis. Conversely, some of the LexisNexis Risk Solutions data, gathered from obscure places like county deed offices, may arrive in a form that’s far from clean, he notes.
However, that lack of court information or inconsistencies in the presentation of that information doesn’t pose problems for LexisNexis Risk Solutions because the company cleans the data before analyzing it. Tests indicate its linking methodology works accurately with just a name and address more than 99.9 percent of the time, Tewari contends. Thus, the company can establish that John Smith at 1234 Maple Street is the same person as John A. Smith at 1234 Maple Street, he says. He considers that linking technology the core of the company’s operations.
The information LexisNexis Risk Solutions can supply becomes vital to lenders because studies indicate that people who have a lien or judgment on file are twice as likely as people without them to default on a consumer loan and five times as likely to default on a mortgage, Tewari says. “The data didn’t become less important because the credit bureaus decided not to include it anymore,” he maintains. “It’s still just as predictive as it was.”
Meanwhile, other types of information can also help lenders make decisions, notes Eric Lindeen, vice president of marketing for ID Analytics, a credit risk and fraud risk management company that offers a credit score called Credit Optics, which it bases on a combination of traditional and alternative credit data.
Alternative credit data is defined as anything the credit bureaus don’t include in their reports, Lindeen says. Examples include the bills consumers pay for cell phones, utilities and cable television, he notes, adding that rent is also sometimes considered alternative credit data. The category also encompasses records from marketplace lenders.
A consumer’s tendency to pay those bills on time, late or not at all can reflect on creditworthiness, Lindeen maintains. That history becomes relevant for alt funders because the small businesses they serve constitute a hybrid of consumer and commercial credit, he says.
Using that data, ID Analytics can spot people who are good credit risks when the credit bureaus still consign them to “thin file” status — the limbo where applicants don’t have enough credit history to evaluate their creditworthiness, Lindeen maintains. About 60 percent of near-prime applicants qualify for credit when lenders factor in alternative data, according to an ID Analytics study he says. At the same time, alternative data can also expose weaknesses among individuals with excellent traditional credit scores, he observes.
Combining alternative data with traditional data has become more important with the bureaus’ decision to stop supplying data on liens and judgments, Lindeen says. Leaving out that data will raise some credit scores, and the effect will be strongest among near-prime individuals with good but not great traditional scores, he notes. With those consumers, a 10-point shift could make a big difference in qualifying for credit, he says.
“Even though it’s a small population, it’s a critical population,” Lindeen says of those newly minted prime applicants. They may number only one in a hundred of a particular funder’s portfolio, but they may advance to another risk pool and consequently invalidate a risk model, he suggests. Over time, risk managers will adapt to the change and oversee a “risk migration,” he predicts.
Overall, between 6 percent and 9 percent of consumers will see their credit scores rise because of the bureaus’ new policy, Lindeen estimates. The change usually won’t exceed 20 points, he says. Still, about 700,000 will see an improvement of 40 points or more, he continues. “That’s a significant increase for a nontrivial population,” he says. “It’s likely their performance will stay the same as their score goes up.”
A study by VantageScore Solutions, the company that provides the VantageScore credit scoring model to the credit reporting bureaus, projected scores would increase an average of 10 points for slightly more than 8 percent of the scorable U.S. population.
Those changes are characterized as “minimal” by Francis Creighton, President & CEO of the Consumer Data Industry Association, a trade group that represents the three major credit bureaus as well as about a hundred other companies – mostly smaller credit bureaus around the country, resellers of credit bureau information and background screening companies.
The credit bureaus decided to curtail reporting of judgments and liens as part of the National Consumer Assistance Plan, or NCAP, Creighton says. NCAP is an agreement reached in March 2015 among the three major credit bureaus and the attorneys general of 31 states, who were pressing for fairness in credit reports. Many observers call NCAP a “settlement” but the agreement did not result from a lawsuit, he notes.
Under NCAP, the bureaus will continue to include bankruptcies in their reports because the records meet the standard of providing a name, address, Social Security number and date of birth and because visits to the courthouse to update records occur at least every 90 days. About half of liens don’t meet those standards and will be removed from credit reports, and nearly all judgments fail to adhere to the standard and will no longer appear on the reports.
Although Creighton declines to say how many consumers were victims of credit reporting errors, he emphasizes the severity of the problem for each victim. “If you were one of the people who had a name similar to somebody else or a similar Social Security number, it would impact you a lot,” he maintains. “I don’t know how widespread it was, but it was disruptive enough for individual people that it’s better just not to have it.”
A Federal Trade Commission study released in 2013 reported that a sample of 1,000 credit reports indicated that 25 percent had at least one error that could reduce scores, according to published reports. Such findings prompted state attorneys general to seek remedies that resulted in NCAP.
The bureaus planned to implement another major portion of NCAP in September when they were to begin waiting 180 days before reporting medical debts, Creighton notes. At the same time, debts for medical expenses covered by insurance policies were to be omitted from credit reports, he says.
Changes brought by NCAP represent part of ongoing efforts to improve the system, according to Creighton. “We want accurate information in the reports,” he says. “That’s good for everybody.”
The Voice of Main Street – Small Businesses Share Their Experience With Non-bank Finance
October 18, 2017
If she hadn’t scored the $250,000 loan through Breakout Capital in 2015, Jackie Luo says, the commercial-software firm she heads in Baltimore could not have made the “strategic hires” and purchased the new server to support additional customers and maintain the company’s 30% growth rate.
“Without that infusion of capital” from the McLean (Va.)-based lender, says Luo, chief executive at E-ISG Asset Intelligence, the software solutions provider would have been hard-pressed to deploy the “bandwidth and capacity” necessary to meet burgeoning demand.
And demand there is. Luo says billing for her company’s services helping more than 100 businesses and government agencies improve operational efficiency by keeping tabs on multiple assets — human, financial and equipment — topped $1.5 million last year, up from $1 million in 2015. This year, moreover, E-ISG is on track to collect nearly $2 million.
Meantime, she says, the $250,000, 10-year note at 6% interest she obtained with the help of Breakout was both a good deal and convenient: she reports securing the financing in three weeks, compared with the six months that a commercial bank would likely have taken. In addition, she’s been able to forge a better relationship with Breakout than with a faceless financial institution.
“We are a small business,” she says, “and we’d be just one in a million at a big bank like Wells Fargo. They wouldn’t give us much attention.” With Breakout, Luo adds: “I have the freedom to make decisions about infrastructure investments without worrying about the short-term. And I don’t have to deal with people second-guessing me.”
Had she not gotten the financing, moreover, “I would not be able to pay myself,” she says. “I’d have to use my salary as working capital.”
Luo is not alone. Her company’s story of finding much-needed capital from a nonbank financial company is increasingly common. It has always been challenging for small businesses to obtain credit from a big bank — roughly a financial institution larger than $10 billion in assets. But the small and community banks that have been the lifeblood for small businesses have also been winding down their small-business lending as well, according to a March, 2016, working paper published by the Federal Reserve Bank of Philadelphia.
“As recently as 1997, small banks, with less than $10 billion in assets, accounted for 77% of the small business lending market share issued by commercial banks,” co-authors Julapa Jagtiani and Catharine Lemieux write in “Small Business Lending: Challenges and Opportunities for Community Banks.” However, the market share dropped to 43% in 2015 for small business loans with origination amounts less than $1 million held by depository institutions.
“The decline is even more severe for small business loans of less than $100,000,” they add, “where the market share for small banks under $10 billion declined from 82% in 1997 to only 29% in 2015.”
The Philadelphia Fed study notes that alternative nonbank lenders are filling a widening gap. “By using technology and unconventional underwriting techniques, many alternative lenders are competing for borrowers with offers of faster processing times, automatic applications, minimal demands for financial documents, and funding as soon as the same day.” And the Fed study finds that it’s likely that nonbank lenders, which are growing rapidly, are having a positive effect by “increasing the availability of credit, particularly to newer businesses that do not have the credit history required by traditional lenders.”
Meantime, the Small Business Administration reports that small businesses remain essential to the health of the U.S. economy. Businesses with fewer than 500 employees account for 55% of overall employment in the U.S., according to the agency, and are responsible for creating two out of every three net new jobs. Which means that alternative funding sources — which do not, it is worth noting, depend on depositors’ money, as banks do — are playing an increasingly important and largely unrecognized role in the country’s economic fortunes, notes Cornelius Hurley, a law professor at Boston University and executive director of the Online Lending Policy Institute. “They’re still a small percentage of the overall lending picture,” he says of nonbank financial companies, “but they’re an emerging force and a lot of small businesspeople certainly depend on them. If they disappeared tomorrow,” he adds, “a lot of businesses would be wiped out too.”
To find out what is happening in the real world, AltFinanceDaily interviewed small business owners around the country: among others, a Houston sports medicine provider, a Connecticut restaurateur, a Midwestern truck hauler, and a Maryland hardware-store owner. Some recounted being shunned by banks because of poor credit while others registered unhappiness with traditional financial institutions as inconvenient and impersonal. While some who turned to alternative lenders admitted they would have preferred not to be paying dearly for borrowing or for cash advances, most said the tradeoff was worth it.
The existence of alternative lenders has made it possible for these businesspeople to meet payrolls, pay contractors and suppliers even when business was slow or billings stalled. Customers with alternative funders – in addition to Breakout’s customers, AltFinanceDaily spoke to clients of Pearl Capital Business Funding and Merchants Advance Network– also reported that they were able to purchase or replace equipment and maintain inventory, hire additional employees and accept new customers, pay for upkeep and upgrades of their business’s physical plant, and make other expenditures necessary to keep operations up-and-running.
Jason, for example, who heads a family business in Louisiana manufacturing and selling pesticides (and who asked to be identified only by his first name), reports that his suppliers began demanding that he pay in advance for chemical feedstock after he took a “financial hit following a nasty divorce.”
The roughly $1 million (annual sales) business — which was started by his parents back in 1960 — furnishes chemicals mainly to cotton farmers and homeowners in Louisiana and Texas, most of whom purchase the company’s products through feed and hardware stores. Jason says he spends a substantial amount of time on the road handling sales and distribution.
His suppliers not only require him to pay for the chemicals upfront but, following his divorce, they now insist upon larger purchases as well. Following the departure of a previous lender, he says, Breakout stepped in with an $80,000, 12-month loan in March, 2016, which he was able to repay within six months. This was followed by a $60,000 borrowing in March, 2017, which he again paid down early – in 90 days, Jason says – and the account manager at Breakout “went to bat for me and gave me an additional discount for early payment.”
Had Breakout not provided external funding, Jason says, he would have been “wiped out.” He adds with feeling: “It would have meant the end of me.” And sinking the fortunes of the company would also have spelled job losses for five employees, including both his son, who works part-time, and his sister, the business’s co-manager. “Now I’m out of the hole,” he says.
In Houston, Anna, co-owner of a physical therapy and sports medicine concern, was interviewed in August just before Hurricane Harvey loomed on the horizon. “We’d been around for four years and growing rapidly,” she says, asking to be identified only by her first name, and “we couldn’t keep up with the growth.”
Anna recalls that a few years ago (she is vague about the exact dates) the company needed $50,000 to $60,000 to add equipment and staff to meet the growing demand. Because of some “ups and downs” in her business and credit history, however, a bank loan was out of the question. “My credit wasn’t the best,” Anna says, “and we had not been in business the five-to-seven years that most banks want.” She began casting about for financing and quickly saw that factoring would not be a suitable choice for a business like hers, which depends heavily on third-party payments from health insurance providers. “Companies using factoring are taking money based on credit card payments,” she says, “and we’re not a restaurant or a bar. So we can’t pay a percentage of every transaction.” Typically, she notes, getting paid by an insurance company involves a “90-day turnaround.”
Anna went online, did some research, and talked to three or four nonbank lenders searching for the “right kind of company.” That led her to Breakout. “What I really liked about them is that they did a lot of due diligence on our field,” she says. “They did their homework, asking us: ‘What are your collections and payroll? How much outstanding debt do you have?’ They also asked to see our actual bank statements.”
Despite the high level of due diligence that Breakout performed, Anna says, it only took “maybe three or four days” for the loan to be approved and for the money to land in her bank account. Before long, she was off to the races. With the added capital, she hired three more employees – bringing the employee headcount to 18 — purchased more gym equipment, made payroll, and paid off miscellaneous expenses.
The added capacity and fortified staff, meanwhile, enabled the company to “almost triple its volume,” the entrepreneur says. And not only did the financing “put me in a good financial place,” Anna adds, but after repayment, Breakout made it possible for her to effect a merger with a competitor by approving a second loan for about $30,000. “The best thing about Breakout,” she says, “has been the communication. One time I did need to make a payment two or three days late. But I just called (the account manager). I was very surprised because these kinds of companies are seen as a last resort. But it was like they were investing in us.”
John Speelman, who owns Poolesville Hardware in Poolesville, Md., can boast a raft of five-star Yelp reviews online. “Extremely helpful and friendly service, surprisingly good selection (and) the complete opposite of a big box hardware chain,” raves one customer. “It is so rare to find a well-stocked store that has helpful personnel—makes this store a real gem!” says another fan.
For his part, Speelman attributes much of his hardware store’s popularity to the financing arrangement that he’s been able to work out over the past eight years with Merchants Advance Network, a Fort Lauderdale (Fla.)-based alternative funder. “It takes money to make money,” is one of his pet aphorisms.
Located roughly 35 miles west of the White House, the hardware store boasts a clientele who tend to arrive in BMW’s rather than the pickup trucks that predominated a decade or so ago in this exurban community of some 5,000 denizens. Whatever their class background, though, they’re looking for items that are not a good match for an online purchase. “People don’t buy a toilet plunger, a can of paint or picture-hanging stuff online,” Speelman says. “Because they want to do that today,” he says, “they won’t order with Amazon.”
“One industry that has not been impacted” by online merchandisers, he adds, “is the garden center. They’ll buy a garden hose, weed killer and seeding,” he explains of his regular customers. “And light bulbs” while they’re there, he adds. “We’re like the 7-Eleven — a convenience store.”
To guarantee that convenience, Speelman pays cash-in-advance for most of his inventory, and banks have not been helpful. He contrasts the relationship he has with Michael Scalise, the chief executive at Merchants Advance, with loan officers at commercial banks. “It’s hard to get a loan for anything in retail,” he says. Never mind that he maintains “a high credit rating and I never bounce a check,” he went on. “There are no more local banks. At M&T Bank, all the managers I knew are gone and there’s always a new teller. The banking industry is a revolving door.” So he opts for capital from Merchants Advance “when I need 30-40-50 grand in a day, I use Mike’s money” even though the cost can be as steep as 25%, he says. If he doesn’t have something in stock – specialty items like ammo boxes, a Sugarplum tent, as many as 32 packs of size D batteries, metric measuring tapes – he can put in a special order with suppliers. But he prides himself on the full panoply of wares on his shelves. “You can’t sell from an empty cart,” is another of his favorite sayings.
Lori Hitchcock, who also draws capital from Merchants Advance, is manifestly displeased with the banking industry. She’s an owner with her husband of Hitchcock Trucking, the couple’s 60-year-old family business, which is located on a ten-acre tract in Webberville, Mich., situated between Detroit and Lansing, the state capital.
Of her experience with banks, Hitchcock says: “At the time we went with (Merchants Advance), banks weren’t lending. And they’re still not lending. We’re considered high-maintenance and high-risk. Banks don’t want a bunch of trucks” should they foreclose on a loan, she observes. “If you’re a farmer, they can take all your land. Great! In this crazy world you live in, it’s hard to get the banks interested.”
The Hitchcock family’s fleet of ten Peterbilt semis hitch up to more than 20 trailers and truck bodies – flatbeds, dump trucks, vans, and refrigerated trucks or “reefers” – and haul grain, sweet corn, onions, celery, fertilizer, and soft drinks across the Midwest. Most recently, she says, the family business took out $80,000 from Merchants Advance to expand its fleet and buy another reefer trailer and a backhoe. “Out here in the country, you always need a backhoe,” she says.
To satisfy her lender, the company makes daily ACH payments. “I’m not going to lie and say that things aren’t tight,” she says. “It is a burden. You just have to have constant cash-flow – which we do have. And it’s important to have good relationships…I can usually tell three weeks in advance if (making payments) is going to be challenging. So it all comes down to being loyal to people.”
Whatever the struggle to keep up with debt payments, it beats using her own money. “My husband and I are raising a family,” Hitchcock says, “and it’s nice having the cash so you’re not putting your personal earnings into the company.”
In Manchester, Conn., a stone’s throw east of Hartford, Corey Wry says that he wouldn’t be able to operate his two, highly rated restaurants just off Interstate 84 – Corey’s Catsup & Mustard and Pastrami on Wry – if he didn’t have funding from Pearl Capital, a New York (N.Y.)-based alternative funding company. A graduate of Johnson & Wales University in Providence, a restaurant-and hotel school, Wry describes himself as “a culinary guy” whose first love is serving food that’s both innovatively prepared and delicious. He candidly admits that his credit hit “rock bottom” after a confluence of untoward events.
Last year, a third restaurant in town, Chops & Catch, that he and some partners had “bootstrapped” had to shut down after six years of operation. Despite generally favorable reviews for such creative fare as the “lobsterburger,” the surf-and-turf themed restaurant was a money-loser. He was also struggling to pay off credit cards. And he’d been late more than once on car payments.
At the same time, Wry was in the process of moving Pastrami & Wry — a deli whose moniker is wordplay on his last name – to a new location. Both the general contractor and electrician were “over-budget” on that project, he says. Meanwhile, Catsup and Mustard, a hamburger spot, needed to be spruced up. Says he: “It was getting busier and the original seats were worn. I had a hole in a booth big enough to swallow someone.”
He approached a few banks for a loan and “it did not seem like it was going to happen,” he says. “Then I got a cold call from one of these financiers. Some of them had super-high rates. When you have bad credit but need to make capital improvements you do what you have to do.”
He’s accessed more than $100,000 from several alternative funding sources, including Pearl – from which he reports getting merchant cash advances for $30,000. But hard as it is to meet the obligations, which typically require a daily ACH payment, the financing has made renovating the burger place possible. Moreover, he’d still be on the hook with plumbers and other contractors – all of whom are local tradesmen and would likely be paying him personal visits until they were repaid — for the relocation of Pastrami & Wry.
“Business is good,” says Wry, who at 40 is single, often works 15-hour days, and says that he doesn’t have time for a girlfriend, much less a wife and family. “I’ve still got $3,200 on the books with the electrician,” he adds, “which means that I won’t be able to purchase a deli slicer. I have to plan these things out…”
James McGehee, a partner at the boutique accounting and tax-preparation firm McGehee, Davis & Associates, which is located in the Denver suburb of White Ridge, reports that the firm took a merchant cash advance from Pearl Capital, among other financiers, to bridge the gap between tax season and the rest of the year when billings invariably diminish. “Our overhead is pretty high,” he explains. “We’ve added two employees. We’ve been expanding on what we were doing, adding tax and accounting clients.”
A very conservative, sober-sounding man, McGehee explained that his credit was nonetheless “trashed” after he suffered from health problems five years ago. “Major stuff,” he says, “it was open-heart surgery.” The medical ordeal meant that he could not work for a time and had trouble paying his bills. “Some family members helped me through the mortgage and utilities payments and I ended up in arrears and in credit card debt,” he says.
All of which made an alternative source of financing his firm’s only option. “I’m not sure how we heard about Pearl,” he says. “I think they just happened to call. We took out [$11,000]. It was not a huge amount. We also borrowed $9,000 from another entity. We paid it all back during tax season. The terms were pretty steep,” McGehee adds.
“But when you need the money for cash-flow,” he explains, “you just absorb it. You grin and bear it. When you need the money, you need the money.”
Lead Generators Facing Rougher Road
October 13, 2017
Lead generators for alternative funders are facing stronger headwinds these days. The business has gotten tougher for a whole host of reasons. A pullback in alternative lending necessitates fewer leads. On top of that, funders, ISOs and brokers have gotten pickier about the types of leads they’ll accept. What’s more, stricter application of the Telephone Consumer Protection Act (TCPA) is hampering lead generators’ ability to solicit business owners. As a result, some lead generators have faded away, while others have been developing additional business lines or are broadening their reach to other areas within financial services to buoy earnings.
“I don’t see any growth in the space for the next six months, or maybe a year,” says Michael O’Hare, chief executive of Blindbid, a lead generation company in Colorado Springs, Colorado. “It’s really unclear right now what’s going to happen, but we’ll see.”
The alternative funding industry has been in somewhat of a funk since spring 2016 when Lending Club grabbed headlines with a scandal that spooked the industry and also took out several senior managers, including the company’s then-CEO.
It was the first time in the industry’s relatively short history that people realized “it wasn’t all puppy dogs and ice cream,” says Justin Benton, a partner at Lenders Marketing in Santa Monica, Calif., a lead generator in the alternative funding space.
Since that time, there’s been a lot of movement in the market, including companies that are consolidating or exiting the business, pumping the brakes or making shifts in product lines, Benton says. These developments have all had a big impact on the sheer number of clients that are looking for leads, he says.
Late last year, for instance, CAN Capital Inc. stopped funding for several months, though it’s back in business as of early July. This summer, Bizfi, one of the stalwarts of the alternative financing space, began giving pink slips to staff and in August the company sold the servicing rights to its $250 million loan portfolio to rival Credibly.
There aren’t as many start-up ISOs or companies entering the alternative funding space—meaning more leads for existing funders—which, of course, is a boon for them.
“There are still roughly 75,000 business owners every week who meet the criteria for an [MCA]. Now instead of there being 5,000 options in the space, there are 2,000, so those 2,000 are gobbling it all up,” Benton says.
At the same time, however, TCPA regulations have gotten more stringent, making it dangerous to solicit businesses, says O’Hare of Blindbid. “Any phone call you make, you can get sued,” he says.
Large funding companies generally take TCPA very seriously—especially if they’ve gotten hit with violations, O’Hare says. Smaller funders and brokers, however, aren’t always as familiar with the restrictions; they think it’s only an issue if you’re calling consumers, as opposed to calling businesses, but that’s not the case. “A lot of businesses today are using their cell phone as a main business line and also for personal use. If you call a cell phone that’s on the DNC [Do Not Call Registry], you can potentially get sued.”
Last year, he had a situation where a plaintiff pretended to be an interested business. When he passed along the referral, the plaintiff’s attorney claimed TCPA violations and ultimately sued the funder. The funder balked, and it created numerous issues for his company.
His company now tries to educate funders about how to protect themselves from TCPA litigation. He sends out emails to funders with information about TCPA and provides contact information of attorneys who are well-versed in TCPA rules. He also provides funders with risk mitigation tactics and shares his list of known TCPA litigators so funders won’t accidentally call them. He also provides direction to clients that receive a demand letter or complaint on how to respond and offers a list of TCPA defense attorneys, if they need.
“We’ve become almost extreme in how we try to avoid problems related to TCPA,” O’Hare says.
To be sure, some of the changes lead generators are experiencing are indicative of a maturing industry.
A few years ago, lead generators could be less selective who they approached initially because the concept of alternative funding was so new to merchants, says Bob Squiers, chief executive of Meridian Leads, a lead generator in Deerfield Beach, Fla. Now, however, the cat is out of the bag, and, with business owners getting multiple calls a day, it’s harder to get their attention, he says.
“They know, they’ve heard, they’ve been pitched. There’s not too many unturned business owners. It’s about getting them at the right time.”
As a result, lead generation today requires more data to discern the good leads from the bad. Instead of going after half a million restaurants, lead generators are targeting the 20 percent that data suggests are the most viable funding candidates. “It’s more of a sniper approach than a shotgun approach,” Squiers says.
Rob Buchanan, senior sales executive at Infogroup in Papillion, Nebraska, who focuses on lead-generation for the fintech space, notes that within the past 18 months or so, clients have been going after “low-hanging fruit” when it comes to leads. They are looking for leads where business owners are actively looking for financing as opposed to relying primarily on UCC data. They are still using UCC data, but to a lesser extent than they were in the past, he says.
Not only do clients want very targeted and specific types of companies—but they are changing their minds more frequently about the types of businesses they’re looking for, says Matthew Martin, managing director and principal at Silver Bullet Marketing, a lead-generating and marketing company in Danbury, Conn. They might ask for businesses of a particular size or credit quality—they are even seeking to exclude businesses within certain zip codes. They are also more amenable to leads from industries they deemed too risky a few years ago.
“I have clients that are constantly changing the parameters of what they want,” Martin says.
The problem is that once you start narrowing the leads of possible merchants that can be funded, lead costs go up and many funders don’t want to pay for that, says O’Hare of Blindbid. “The glory days when everything was wide open and you could generate leads really cheaply are pretty much gone.”
Meanwhile, as some lead generators have faded into the sunset, others are forging ahead in search of new opportunities.
Benton of Lenders Marketing, for instance, says his company has started to focus its efforts in other areas of lending, including SBA, new business, mortgage, commercial, residential, auto and student loans.
Digital marketing is another area experiencing increased demand. Business owners that need money tend to use Google to find funding companies. Infogroup’s digital marketing leads these businesses directly to funders, ISOs and brokers, Buchanan says.
“More and more funders, brokers and ISOs are leaning toward doing digital marketing,” he says.
Bizfi Alum Jared Weitz Reflects on Demise of Former Employer and Rise of UCS
October 9, 2017
Jared Weitz has come a long way since his earlier days as one of the original Bizfi employees. Today he’s at the helm of online funding marketplace United Capital Source (UCS), which has been on a tear since AltFinanceDaily last spoke with Weitz a couple of years ago. The UCS founder and chief executive took some time to revisit with us about having to painfully watch the demise of his former employer, which is where he cut his teeth in this business, and the rise of his own company UCS as a funding marketplace.
In some ways, the more things change the more they stay the same. Since the last time Weitz spoke with us, the company’s location remains in the heart of Times Square in New York, and UCS has grown its staff by only four people including two sales reps. What has changed, however, is the amount of funding that the company has done and the size of the average transaction, all of which have blossomed.
“When we first spoke a few years ago we were doing $8 million to $10 million a month in funding volume. Now we are doing between $14 million and $16 million per month,” said Weitz.
He added that where the company differentiates itself is that while a few years ago the products they were selling were predominately in the sub-prime space now they sell other products, which allows merchants to “swim upstream” when they qualify for that.
The result has been bolstered partnerships and product offerings and an average loan size that has jumped from $30,000 to $40,000 per deal to a range of $500,000 to $2 million.
“We opened up the funnel to the kind of relationships we’re able to broker and the kinds of financings we’re able to offer. We’re playing in the field of SBAs, account receivables financing, lines of credit and asset backed loans. By offering these products our volume has jumped significantly and allowed us to talk to different referral partners.”
UCS does all of its own marketing and generates leads for their in-house sales reps. Those sales reps take a file from open to close and they analyze the small business owner’s needs on a consultative call.
“We understand their business and their pain points. The first question we ask isn’t how much do you need but what’s paining you in your business today that we can help you with?”
One such business owner recounted his experience with UCS to AltFinanceDaily, saying that traditional banks were “an absolute pain” to secure funding. He spoke of the “very stressful” and time-consuming process of applying for a loan, saying he doesn’t have time to “jump through a million hoops to get a loan.”
“When I was initially looking to curb my temporary cash flow problem, I searched online for the best alternatives to traditional bank loans. I read all the reviews on companies and decided to call UCS,” the business owner told AltFinanceDaily, adding that he’s been a UCS repeat customer for a number of years and is especially fond of the ease at which the process is completed.
“I could literally call Jared today and have six figures in my account tomorrow. The best part is the pay back process. They only take funds when I run credit card transactions. So, in my slow months, I don’t have to stress and worry about repaying the loan. UCS is a perfect fit for me,” the business owner said.
Eye Opener
As the seventh or eighth employee of Bizfi, Weitz really has been part of the evolution of online funding. He says the rise and fall of Bizfi has been an “eye opener” for him.
“It caused a bunch of funding companies to be a little gun shy when it comes to funding. I told my guys this too shall pass. People are shaken and wondering if it’s a larger global issue. Thankfully it’s not a global issue. There are plenty of funding companies that are well backed that are still funding. My group is well able to pick it back up. We have signed up with more funding companies to increase our offerings and make sure we have no concentration issues,” said Weitz.
And although he left the company to eventually launch UCS, which has proven to be a prudent move, he has nothing but respect for his former employer.
“My history there is very deep and I’ve got a genuine love for the founders of the company. It’s where I cut my teeth. I was really sad the day I heard they’re not funding anymore.”
In fact, Bizfi was one of the funders that UCS counted among its partners.
“We had a good book there. We started to see problems and began to shift where our new business was going. Thankfully it didn’t affect me. But it showed me that you should sign up with more funding companies. If you think the mix should be X go 50% more and be super cautious. This approach has worked out for us,” he said.
Weitz has advice for other funders that might be looking to grow at lightning speed.
“Someone that’s growing so fast while they’re also innovating and looking to close larger transactions that bring them to a bigger place – that’s hard to do all at once. Driving at 200 MPH either works out well and takes you to the finish line or it doesn’t work out really well. It’s really unfortunate that it didn’t work out for them.”
Deal Competition
For its part, UCS competes with the likes of LendingTree and other online marketplaces, but that seems only to add an ounce of perspective to Weitz and the UCS team, driving them to adjust and remain nimble so that they can get the next deal.
“Healthy competition is good for us. We welcome anything like that. Some of my best learning experiences have been when we were beat out on a deal. I call the merchant personally and say hey, who gave you the deal? Honestly, I want to sign up with them and offer those rates to my clients. We form a friendship with both the funder and the small businesses,” he said.
UCS also counts some high-profile funders among its partners.
“We’ve worked with some funders forever and it’s been great. But we really had to also find folks that offer certain products but at a cheaper rate,” said Weitz, pointing to the scenario of a merchant having a few of those loans under their belt and improved credit as a result. “They are being solicited by depository banks and can qualify for that rate. We don’t want to lose the relationship. My thought process is sign up with similar folks with that product and when the time comes we can swim the merchant upstream.”
For instance, not all funders offer SBA loans but UCS has been doing so for the past two years. “It’s really kind of taken off for us over the last year. The same thing with accounts receivable and future order financing.”
UCS acts as both a broker and investor in their own deals, so they have a vested interest in the underwriting standards. “Investing with some of our funding partners on the syndication side allows us to have buying power and to take an actual interest in the merchant we’re dealing with,” said Weitz, adding that UCS takes a hybrid approach offering both a fully automated underwriting process for those merchants who want it but also having the capability to talk to the business owners, which is what the large majority of business owners prefer.
