Double Dipped: What’s Next For New York’s Small Business ‘Truth in Lending’ Act
January 11, 2021
Last year, when the Small Business ‘Truth in the Lending’ bill came through the New York State Senate Banking Committee, Senator George M. Borrello said he and other members went to work. Their job: to write a version everyone would like, which fell apart when the bill passed in July and it was signed into law just before Christmas.
“I’m a small business owner myself, but I also come from local government, and in local government, the committee is where the work gets done,” Borrello said. “We had the opportunity to fix this in committee. By the time it got to the floor, the governor basically reversed all the things I presented that were flaws, and he signed it.”
That’s the story of how S5470B came to be in Albany. Instead of ironing out the kinks in committee, Borrello said he watched as the bill with all its problems passed over the summer. There was a process to clean it up afterwards to make it suitable for Governor Andrew Cuomo’s signature, since it’s said that even he himself had expressed reservations about the language. But then he signed the original version and all the edits were discarded.
Politics are suspected to have played a role in that.
“When the governor finds something is flawed, he usually vetoes and sends it back,” Borrello said. “It concerns me that there is an underlying political angle that has nothing to do with the Truth in Lending.”
Steve Denis, the executive director of the Small Business Finance Association, said that he doesn’t think that the signed bill that is up on the state senate website will be the final version.
“It is so poorly drafted that even companies that support the bill have liability and will be the first to get sued,” Denis said. “The SBFA will be a lot more aggressive; the legislature has a lot to work on in the next session. It has been a wake-up call, unifying the industry. We will be more aggressive to create a more favorable version.”
Denis has attested to the harm the bill will do to the SMB finance industry in New York, costing billions of dollars in fines and litigation. He pointed out that major companies like PayPal have fought against the bill, and the proponents “recognized it was not a good bill, but passed it to fix it.”
Borrello said that it is common in Albany to encounter legislation written by lawmakers who don’t understand small business owners who deal with regulation every day. Borrello and his wife worked in the hospitality business for years before going into public service. Borello said he feels business owners’ pain during the pandemic, especially in the restaurant and hotel industry.
He said the end result of this new bill when it comes into effect this July: funding and lending companies will stop providing services in New York State, directly harming the small businesses the bill claims to help.
“One of my frustrations, being on the banking committee, is that we do things that ultimately make it more difficult for people to access credit and financing in New York State,” Borrello said. “You’re talking about small businesses that are already hurting, having financial difficulties accessing lines of credit. This disclosure law passing during this pandemic is one more nail in the coffin for small business.”
The Legislature, the Governor, and the Department of Financial Services (DFS) all reportedly had issues with the bill: yet it passed. Borrello said a problem with “nonsense lawmaking” comes from competition with other states. New York compares itself with California to “prove we’re the most progressive.” Borrello also pointed out that California passed its version of a lending disclosure bill more than two years ago, and their version of the DFS still cannot find a way to calculate an APR metric for factoring or MCA.
As the bill was argued on the legislative floor, Borrello brought up the controversial “double-dipping” term that had been inserted in the language. Borrello came to the same conclusion as Denis, that there is no double-dipping term: It was just conjured up for the bill to sound scary, negative, and damaging.
“Other than talking about potato chips, I’m not sure what you’re talking about,” Borrello said. “When you haven’t defined it, in the legislature, it comes down to a political talking point and dog whistle. You enshrine a rather vague piece of jargon in the legislation, and it shows how deeply flawed it is.”
Borrello now plans to work with the Governor, DFS, and legislature to amend and change the bill. He is also fighting for a Republican banking overhaul to provide further credit access to small businesses.
“The next step now is to go back and see what needs to be fixed,” Borrello said. “Hopefully, my role now as the ranking member of the banking committee, we can have a common-sense conversation about how to actually fix it.”
2021: The Year of Uncertainty
January 7, 2021
For alternative lenders and funders, 2021 is starting out with a question mark and will lead (hopefully) to a resounding exclamation point of recovery.
Many industry participants waved goodbye to 2020 with relief, and are welcoming a bounce-back in 2021, despite some trepidation about potential bumps along the way and how long a full recovery will take. While things started to improve somewhat toward the latter half of 2020 after grinding to a halt earlier in the year, the pandemic is still raging, with economic growth highly dependent on the immunization trajectory. Then there’s the incoming Democratic administration and the possibility of new rule- making, along with January’s runoff elections in Georgia that could change the balance of power in the Senate, and thus impact the new president’s law- making abilities.
Beyond these macro-issues, the funding industry is also dealing with its own uncertainties. Small business lenders and funders have been hit particularly hard, with underwriting decidedly more difficult in this environment. Some industry players have been forced to find alternative revenue streams in order to ride things out. Not only that, but there are scores of small businesses still reeling from pandemic-induced shutdowns and lighter foot traffic, with some gloomy estimates about their ability to bounce back. Many alternative players are weighing diminished returns against a widely-held bullish outlook for the industry long-term. Many are simply hoping they can hunker down and stick it out long enough and to avoid additional carnage and consolidation that’s widely expected over the short-term.
Ultimately things will get better, but it’s unclear precisely when, says Scott Stewart, chief executive of the Innovative Lending Platform Association. “It’s going to be a bumpy ride for the next year to figure out who is going to be able to survive,” he says.
Here’s a deeper dive into how industry participants see 2021 shaping up in terms of the challenges, competition, M&A, regulation, changing business model, expansion opportunities and more.
SPECIFIC CHALLENGES FOR SMALL BUSINESS FINANCERS
Companies that focus on consumer financing haven’t struggled quite as much amid the pandemic as their small business brethren, and they could continue to see demand grow in 2021. Even amid high unemployment rates, many consumers still need loans for home repairs or as a stop-gap to pay necessary expenses, helping to mitigate the impact on firms that focus on personal loans.
Small business financers, however, got pummeled in 2020 and the situation remains precarious, especially given the prognosis for small companies broadly. Consider that 163,735 Yelp-listed businesses closed from the beginning of the pandemic through Aug. 31—at least 97,966 of them permanently. Further underscoring how dire the situation is for small businesses, 48 percent of owners feared not earning enough revenue in December to keep their businesses afloat, according to a recent poll by Alignable, an online referral network for small businesses. What’s more, 50 percent of retail establishments and 47 percent of B2B firms could close permanently, according to the poll of 9,204 small business owners.
A SHRINKING COMPETITIVE LANDSCAPE
For many lenders and funders, the latter part of 2020 proved more successful for originations, though business is still a far cry from before the pandemic. A number of players who suspended or reduced business operations for a period of time during the first wave of the pandemic have dipped their toes back in and are in the process of trying to adapt to the new normal. For some, though, the challenges may prove too great, industry observers say. Given that many brokers and funders that were on the fringe have been hurt by the pandemic, more shake- out can be expected, says Lou Pizzileo, a certified public accountant who advises and audits alternative finance companies for Grassi in Jericho. N.Y.
And, with fewer competitors, there will be more of a need for those who are left to pick up the slack, says Peter Renton, founder of Lend Academy. Beyond being a lifeline for many alternative financers, PPP loans helped open the eyes of many small businesses who hadn’t previously considered working with anyone but a bank. In the beginning, when it was so difficult for small businesses to get these funds, they looked beyond banks for options and some found their way to online providers. This could be a boon for the industry going forward since alternative providers are now on the radar screen of more small businesses, says Moshe Kazimirsky, vice president of strategic partnerships and business development at Become.
He predicts that larger, stronger players will gradually ease some of their lending and funding criteria early on in 2021, but no one is expecting a quick revival, with some predicting it could be well into 2022 before the industry is on truly stable footing. “I think it’s going to be a very slow recovery,” Kazimirsky says.
M&A
In 2020, the industry saw bellwethers like Kabbage and OnDeck get swallowed up, and with so many businesses pinched, there are likely to be more bargains ahead from M&A standpoint, Pizzileo says. “The damage from Covid is palpable; we just haven’t seen the real impact of it yet,” he says.
No matter what product you are providing, if you’re a smaller player who can’t find your way, you’re going to have a hard time staying in business,” says Stewart of the Innovative Lending Platform Association. “There will be some collateral damage going into next year,” he predicts.
In terms of likely buyers, Renton says he expects other fintechs to step in, and possibly even mid-size community banks snap up some alternative providers. If you can buy something for “a song” it’s compelling, he says. “I expect to see a few more offers that are too good to refuse,” he says.
CHANGING BUSINESS MODELS
Pizzileo, the CPA, predicts there will be ongoing opportunities in the year ahead for well-positioned, strong businesses with available capital. In some cases, however, this may require tinkering with their existing ways of doing business.
Before the crisis, some lenders applied the same or very similar lending model across industries. “That is going the way of the dinosaur. That’s not going to be a successful model going forward,” Renton says. Lenders will focus more on having a differentiated model for the businesses they serve. “I think the crisis created this necessity to treat each industry on its own merits and create a model that has some level of independence, he says.
The year ahead is also likely to be one in which e-commerce lending continues to thrive. According to the third quarter 2020 report from the U.S. Census Bureau, U.S. retail e-commerce stood at $209.5 billion, up 36.7% year over-year. E-commerce accounted for 14.3% of total retail sales in Q3. Because it’s such a high-growth area, and many businesses that didn’t have this vertical before are moving in this direction and more lenders are focusing on it and growing that part of their business, says Kazimirsky of Become.
It will also be interesting to watch how lenders and funders continue to reshape themselves. Sofi, for instance, is continuing to pursue its goal of receiving a national bank charter. Other lenders and funders may also seek to reinvent themselves as they attempt to stay afloat and compete more effectively.
“Monoline lenders that rely on a single product will have more difficulty supporting customers in the wake of Covid,” says Gina Taylor Cotter, senior vice president and general manager of global business financing at American Express, which purchased Kabbage in 2020. “Small businesses need multi-product solutions to not only access working capital, but also real-time insights to help them be more prudent with their cash flow and accept contactless payments safely to encourage more business,” she says.
CHANGES IN RISK MODELING
Another pandemic-driven change is that lenders have had to tweak their risk modeling. Everyone understands the economy is not in the greatest spot, but their challenge in 2021 will be developing a way to assess future losses in the absence of a baseline, says Rutger van Faassen, head of product and market strategy for the benchmarking and omnichannel research group at Informa Financial Intelligence.
Consumer behaviors have changed, for instance. So even though the pandemic will end, it’s too soon to say what the structural impacts on an industry will be and how that affects the desirability of lending to especially hard-hit businesses, such as restaurants, cruise lines and fitness centers. “Clearly the behavior that everyone is showing right now is because of the pandemic. The question is: how will people behave once the pandemic ends,” he says.
“In the meantime, a lot of lenders will have to do more in-the-moment decision-making, until we get to a point when we’re truly in a new normal, when they can start recalibrating models for the longer-term,” he says.
OPPORTUNITIES TO HELP SMALL BUSINESSES
One certainty in the year ahead is the need to help existing small businesses with their recovery, says Cotter of American Express. “Small businesses represent 99 percent of all jobs, two-thirds of new jobs and half of the non-farm GDP in America. Our country’s success depends on small businesses, and financial institutions have a great opportunity to meet their needs to recover and return to positions of growth in 2021,” she says.
How to make this happen is something many alternative financers will grapple with in 2021. Another opportunity may exist in providing funding solutions to new businesses or those that have pivoted as a result of the pandemic. Cotter points to the inaugural American Express Entrepreneurial Spirit Trendex, which found 76% of businesses have already pivoted their business this year and 73% expect to do it again next year. “New-business applications have reached record heights as entrepreneurs pivot and adapt, indicating a surge of new ventures that will require financial solutions to build their business,” Cotter says.
REGULATORY WATCH
Several regulatory issues hang in the balance in 2021, including state-based disclosure laws, expected rules on third-party data aggregation and demographic data collection, and the status of a special purpose charter for fintechs, says Ryan Metcalf, head of U.S. public policy, regulatory affairs and social impact at Funding Circle. With a new administration coming in, the regulatory environment could become more favorable for measures that stalled during Trump’s tenure.
Armen Meyer, vice president of LendingClub and an active member of the Marketplace Lending Association, says he’s hoping to see a bill pass in 2021 that requires more transparency for small business lending. He would also like to see more states follow the lead of California and Virginia and make the 36% interest rate standard of Congress’s Military Lending Act, which covers active- duty service members (including those on active Guard or active Reserve duty) and covered dependents, the law of the land. “We’re calling for this to be expanded to everybody,” he says.
CANADA
Meanwhile, our neighbors to the North have their own challenges and opportunities for the year ahead. The alternative financing industry in Canada originated out of the 2008 recession when banks restricted their credit box and wouldn’t lend to certain groups. While conditions are very different now, “this period of economic uncertainty is going to be an incredible fertile period of time for fintechs to come up with new and interesting and creative credit products just like they did entering the last financial crisis,” says Tal Schwartz, head of policy at the Canadian Lenders Association.
Open banking continues to be on the Canadian docket for 2021 and how the framework shapes up is of utmost interest to fintech lenders in Canada. Schwartz says he’s also hopeful that alternative players in Canada will have a role to play in subsequent government- initiated lending programs. He’s also expecting to see more growth in the e-commerce area, particularly when it comes to extending credit to e-commerce companies and in financing solutions at checkout for online shopping.
AltFinanceDaily’s Top Five Stories of 2020
December 28, 2020DeBanked’s Top 10 most read stories of 2020 all involved the Payment Protection Program (PPP). It was by far the hottest topic in small business financial services for the year. As a result, we consolidated our most read stories into FIVE categories and this is what our readers consumed most in 2020!
1. PPP
The Payroll Protection Program saga boiled down to one major question early on in the pandemic: Who, if anybody, would be able to lend the money out on the government’s behalf? PPP Lender Requirements was the most read story on AltFinanceDaily in 2020, followed by the world being curious to find out who was the biggest PPP lender. On April 22, AltFinanceDaily was the first to spread the story that Ready Capital (Knight Capital‘s parent company) was the largest PPP lender in the US for Round 1.
2. NY’s Disclosure Bill
The biggest non-PPP story of the year was a bill passed in New York that was signed by the governor at Midnight on Christmas Eve. SB 5470, which some have dubbed “The Small Business Truth in Lending Act,” is slated to completely overhaul the non-bank small business lending market in the state. The bill was passed by the legislature in July.
3. OnDeck
It’s difficult to overstate how much of a rollercoaster it was for the stalwart fintech lender in 2020. OnDeck started the year with optimism, announcing a NASCAR sponsorship in March just as the company’s stock suddenly plummeted by 30%. By the time summer rolled around, the company was no longer engaged in non-PPP lending activities and was battling in a fight for its life with its creditors. In July, OnDeck was acquired by Enova, which led to shareholder lawsuits over the terms and disclosures tied to the deal. Somehow, by year-end, OnDeck managed to pull itself back together, thanks to its new parent company. It successfully originated $148M worth of loans in Q3.
Wow, just wow.
4. Covid-19
The impact of Covid was a close 4th on AltFinanceDaily’s top read list. In March, AltFinanceDaily published a writeup of How Small Business Funders [Were] Reacting, an interesting glimpse into the pandemic as it was just unfolding. At that time, attitudes ranged from confidence in being prepared to being convinced it was time to shut everything down. One notable takeaway from the commentary is that nobody surmised that the situation would persist for the entire rest of the year.
Capify CEO David Goldin made an early bold prediction, however. “I would not be surprised if we learn in the next few weeks that the President of the United States has it,” he said in an interview with AltFinanceDaily in mid-March. President Trump was diagnosed with Covid-19 less than six months later on October 6th.
5. Scandal
Three scandals were a near-tie for views in 2020 so we’re revisiting them all here.
Brendan Ross & Direct Lending Investments – Brendan Ross, the former CEO of a very popular fintech lending hedge fund, was indicted on August 11th. Federal officials including the SEC, say that Ross defrauded investors while managing more than $1 billion in assets. Ross’s “unwinding” began in 2019 when he suddenly resigned from the firm and wrongdoing was alleged.
Jonathan Braun – Jon Braun, made infamous by a Bloomberg Businessweek profile, checked into FCI Otisville earlier this year after having been sentenced the previous May for drug related offenses. Braun resurfaced in the news this summer when the FTC announced civil charges against him for alleged acts related to a company named Richmond Capital Group, LLC. The New York State Attorney General filed its own charges against Braun and affiliates at the same time.
Par Funding – A financial services firm based in Philadelphia generated major headlines this year after the SEC filed a lawsuit against the company that ultimately resulted in it being placed in receivership. A series of stunts and accidents got the SEC’s case off to a rocky start, but the likelihood of Par ever restarting its business has diminished to almost nothing.
Ho Ho… Hold Up. NY Governor Signs Industry-Altering Small Business Lending Law
December 24, 2020
Merrrrry Christmas. New York Governor Andrew Cuomo reportedly signed SB 5470 into law late last night, a bill that forever changes and complicates nearly all forms of small business financing in the state.
The law gives regulatory enforcement authority to New York’s Department of Financial Services, requires APR disclosures on contracts where one can’t be mathematically calculated, and mandates that customers be told if there is any “double dipping” going on. And that’s just the beginning of what it contains.
A coalition of small business capital providers fiercely opposed the language of the bill. Steve Denis, executive director of the Small Business Finance Association, wrote in an op-ed that “the lack of cogency and lazy approach to this legislation is a disservice to the hard-working entrepreneurs who continue to open their businesses while facing daily economic uncertainty.”
The bill was also opposed by fintech lenders like PayPal.
Proponents of the bill celebrated the news on social media in the early morning hours of Christmas Eve.
Ryan Metcalf at Funding Circle, a company not even based in New York that moved all of its tech jobs out of the US to the UK this summer, wrote on LinkedIn that the bill will “save New York #smallbiz between $369 million and $1.75 billion annually.” Funding Circle, as a member of the Responsible Business Lending Coalition (RBLC), was heavily engaged in the advocacy process.
Several of RBLC’s members have already ceased small business lending in the US, some permanently.
Unique circumstances also exist at an ally of the RBLC, the Innovative Lending Platform Association (ILPA), which Funding Circle is also a member of. Two out of the 11 members were acquired before the bill could even be signed, Kabbage and OnDeck.
NY State Assemblyman Ken Zebrowski and State Senator Kevin Thomas, who sponsored the bill, cheered the signing of it.
“Thanks to Governor Cuomo for signing our Small Business Truth in Lending Act,” Zebrowski tweeted. “Extremely proud to have worked with many to establish the most comprehensive small business disclosure law in the nation. With the pandemic surging on, small biz owners need these critical protections now.”
“The signing of the New York State Small Business Truth in Lending Act is a victory for New York’s small business owners,” Thomas wrote on twitter. “Thank you for signing New York’s first-ever small business lending transparency bill into law.”
“I think that the companies and organizations that support this legislation don’t fully understand what’s actually in the bill,” SBFA’s Steve Denis said to AltFinanceDaily in August. “[…] They have no problem pounding the table and taking credit for its passage, but I guess they don’t realize it will subject them and the rest of the alternative finance industry to massive liability, massive fines—upwards of billions of dollars worth of fines.”
And yet Senator Thomas tweeted, “This will help a lot of small businesses trying to get back on their feet during this pandemic.”
It is unclear, of course, who they expect to provide such capital now to do this.
Failing Main Street NY
December 21, 2020
During the election, we heard candidates on both sides to toss around the phrase “small businesses are the backbone of the American economy.” A staple of exhausted political rhetoric, made trite despite its truth because for many politicians it’s a talking point, not a platform. We must move from rhetoric to action. To do so, America’s political leaders need a real understanding of what small businesses need—and what they don’t.
The struggle between understanding and posturing is on display right now in Albany. While small business owners struggle to open their doors, the legislature passed a so-called “truth in lending for small business” bill that claims to provide more disclosure to business owners seeking financing. Led by Senator Kevin Thomas and Assemblyman Ken Zebrowski the bill is currently pending before Governor Cuomo. The legislators recently authored an op-ed that further demonstrates their failure to recognize that the innocuously named bill is rife with faults and lacks a competent grasp of small business issues. The critical blind spots in the bill’s design threatens billions of dollars in capital leaving New York—a failing small businesses owners can scarcely afford at such a difficult time.
Yet, rather than incentivizing finance providers to stay in New York, the legislature is focused on complex disclosures that lack real meaning or understanding to small business owners. Senator Thomas opined on the Senate floor “… the reason I introduced this bill is because people don’t use standard terminology.” Interestingly, this bill creates several new terms and metrics that would be required to be disclosed that have never been used before in finance. Terms like “double-dipping” and new confusing metrics that even the CFPB under President Obama labeled as “confusing and misleading” to consumers. This bill’s fatal flaw is that it has confused information volume with transparency, somethings a recent study proved would harm small business owners.
Even Senator Thomas acknowledged the legislation’s myriad of problems while still encouraging its passage. In his colloquy with Senator George Borrello on the Senate floor, right before he called New York small business owners “unsophisticated,” he mentioned how his bill had “many issues” that he “hoped” would be worked out before implementation. Hope is not a strategy and it won’t help small business owners obtain the financing they need to stay in businesses. Advancing legislation that would limit options for entrepreneurs working to stay in businesses during a pandemic that has crippled the New York economy represents a reprehensible failure of leadership.
Minority-owned businesses have faced a disproportionate economic impact from the pandemic. According to the Fed, Black-owned businesses have declined by 41% since February, compared to only 17% of white owned businesses. Further, the Paycheck Protection Program (PPP), the federal government’s signature relief program for small businesses, has left significant coverage gaps: these loans reached only 20% of eligible firms in states with the highest densities of minority-owned firms, and in counties with the densest minority-owned business activity, coverage rates were typically lower than 20%. Specific to New York, only 7% of firms in the Bronx and 11% in Queens received PPP loans. Moreover, less than 10% of minority-owned businesses have a traditional banking relationship—something that was initially required to have access to the PPP.
The lack of cogency and lazy approach to this legislation is a disservice to the hard-working entrepreneurs who continue to open their businesses while facing daily economic uncertainty. Governor Cuomo has worked tirelessly to continue to provide economic relief to both businesses and consumers—removing billions in financing for small businesses will only hinder this effort. New York can do better.
Steve Denis
Executive Director
Small Business Finance Association
SBA Dumps Detailed Data on Every Single PPP Borrower
December 2, 2020
The SBA has dumped all of it.
A court order recently forced the SBA to reveal precise details of every single PPP and EIDL borrower regardless of loan size and regardless of privacy concerns.
The SBA dumped all the data late on Tuesday night through a series of downloadable .csv files.
However, small-business-forum.net has made a web-friendly search tool for the PPP loans (not the EIDL), which contains 5 million records. The loan amounts are precise. This latest cache of data is different from the previous reveal in that the loan amounts are exact. There is no approximating here.
The mass disclosure was viewed as controversial because PPP loan amounts were directly correlated with monthly payroll figures so one could potentially deduce the salary of a self-employed business owner with no employees by knowing just their PPP loan amount.
In any case, all of the data has been made public. The easiest way to search the database is at https://www.small-business-forum.net/pppchecker.php
The OnDeck Roller Coaster of 2020
October 30, 2020
“2019 was an important year for OnDeck and we finished strong,” said OnDeck CEO Noah Breslow in the year-end earnings call that took place on February 11, 2020. “Financially, we had our second full year of profitability. And strategically, we are making significant progress positioning the company for improved performance and even greater long-term success.”
OnDeck reported net income of $28 million for 2019 and its share price closed at $4.07 the day earnings were announced, giving it a market cap of roughly $240 million. This was down significantly from its IPO value of $1.3 billion, but up from the lows it had hit in 2017 and 2019.
Over the next 30 days, however, the price fell by 50% on fears that the looming novel coronavirus could cause catastrophic disruption. The company also announced the departure of its Chief Accounting Officer.
As the industry looked on with wonder, news coming out of the company seemed strangely at odds with reality. For example, OnDeck announced a “first-ever” NASCAR sponsorship on March 10th.
“OnDeck is proud to sponsor the JR Motorsports team and driver Daniel Hemric for races during the 2020 NASCAR Xfinity Series season,” said a senior vice president of marketing at OnDeck. “So many of our small business customers are avid motorsports fans and we look forward to joining them to cheer on Daniel and the No. 8 car decked out in OnDeck colors at the Atlanta 250 and the Chicago 300.”
On March 23, OnDeck closed at 70 cents. The market, it seemed, valued OnDeck at a paltry $41 million.
Publicly, OnDeck kept up the optimism. The company applied to be a PPP lender as the program was just beginning to roll out. “We are excited to be one of the fintechs delivering PPP loans as a direct lender,” Breslow said. “Our team has been working around the clock getting us ready and now we wait and hope we are approved soon!”
Simultaneously, the company suspended the funding of its “Core” loans and lines of credit to new and existing customers. The company then went on to report a Q1 net loss of $59M due to covid-related damage, wiping out all of its 2019 profits and more. It also furloughed many employees while reducing the pay for those that stayed on.
That same month, OnDeck’s management “commenced a review of potential financing options to secure additional liquidity and potentially replace [its] corporate line facility and began contacting potential sources of alternative financing, including mezzanine debt.”
The response it got was grim.
“The interest rates offered by those alternative financing sources ranged from 1-month LIBOR plus 900 basis points to 1,700 basis points (in addition to an upfront fee) and all but one required a significantly dilutive equity component,” the company later disclosed. “The one proposal that did not include an equity component was at an interest rate of 1-month LIBOR plus 1,400 basis points to 1,700 basis points.”
OnDeck engaged in negotiations with four potential sources of alternative financing, but two dropped out as the economic effects of the pandemic worsened. At the same time, it was speaking with Enova about something else entirely, a potential merger.
On the frontend, OnDeck was keeping the public abreast of its negotiations with creditors. The pandemic had put them in a technical breach of its terms with several of them but the company was experiencing some success with securing workouts and reprieves.
Regardless, the stock continued to trade below $1 as the world looked on to see what would become of their Q2.
On July 28th, bombshell news broke. Enova, an international lending conglomerate, announced it was acquiring OnDeck for the price of approximately $90 million.
“Following an extensive review of our strategic options, we believe this is the right path forward for our customers, employees, and shareholders,” Noah Breslow said on a call with Enova executives the following day.
Some shareholders had a different opinion and thought that the deal and the terms looked a little fishy, all considered. Nine different shareholder lawsuits were filed over the next two months with the intent to delay or block the acquisition.
How could this possibly be the best deal or the right path?!
That was the underlying question being posed between the lines of the various claims asserted. OnDeck ultimately settled with all the parties by releasing supplemental information to the public about its financial situation and thought process that led up to the Enova merger. All the objections appeared to fade as shareholders approved the deal by an overwhelming majority.
On October 13th, Enova announced that it had completed the acquisition of OnDeck.
But by that time, was OnDeck merely a hollowed out shell of its former self? Not quite, according to disclosures made two weeks later. Enova announced that OnDeck’s portfolio performance was already exceeding their expectations.
“On the small business side, the makeup of the demand is surprisingly similar to a year ago,” said David Fisher, CEO of Enova. “You would expect so many differences given what the economy has been through but there’s actually very very few. It’s pretty broad based. Credit quality look really really strong. If anything it’s stronger- I think it’s the stronger businesses that are trying to borrow at this point that are trying to lean into covid, not the ones that are just trying to survive so if anything on the demand there is a slight improvement on credit quality in small business.”
Fisher was also bullish going forward. “We believe now is a great time to be increasing our presence in
small business lending. The pandemic has devastated many small businesses across the country. Their
revenues are down and small business owners are digging into their savings to survive until the pandemic subsides and the economy reopens.”
Enova reported monster quarterly earnings of $94 million, a company record.
“Together Enova and OnDeck will be well positioned to further support small businesses and consumers in the wake of the pandemic,” Fisher said.
Steve Denis Talks About SBFA Study: APR is a Bad Metric For SMB Loan Transparency
October 19, 2020
In response to regulatory bills in California and New York that will enforce APR disclosures on small business capital providers, the Small Business Finance Association (SBFA) funded a study by Kingsley-Kleimann to find out if APR is a good metric to use for business loans.
Steve Denis, the Executive director of the SBFA, said his group supported the study because the states should test concepts with actual small business owners before passing regulation. In the NY disclosure bill awaiting signature, Denis said there was no concept testing. Some of the companies that support the bill might not have even read what it stipulates.
“You have a group of companies that are pushing these types of disclosures, for no reason other than their own self-interest,” Denis said. “We’re fine with disclosure, we are all for transparency, but it needs to be done in a way that we believe is meaningful to small business owners.”
In qualitative testing of 24 small business owners and executives who have experience taking commercial loans, the study concluded participants did not understand what APR was. The study found that the total cost of financing model was a better way to understand and compare options for their use.
“As one participant, when asked to define APR, answered: ‘I feel like you are asking a kid, why is the sky blue?’ (Participant 3, NY).” The study concluded, “In other words, [APR] is ever-present yet also inscrutable.”
Kingsley-Kleimann is a research-based organization that studies communication and disclosure for government agencies like the FTC and private or public business. Participants were selected from Califonia and NY.
Denis said that the findings show what SMB lending companies have already known- Anual Percentage Rate is not a useful metric for short term loans. Many do not know that APR represents the annualized cost of funds for the loan term, with the fees and additional costs included.
“People don’t know what APR is; it confuses them,” Denis said. “They know it’s a metric they should use, but they don’t know why. The APR is such a marketing tool now, it’s not a valuable tool.”
The study showed most respondents thought APR was the same as an interest rate. It’s not.
Denis said using an annualized rate for shorter-term loans or SMB loans that have no ending date worsens the problems. In those cases, firms estimate an APR, and it is inaccurate.
“When you have a merchant cash advance, there’s no term,” Denis said. “So you have to estimate a term, and I mean that is just a recipe for fraud.”
Denis said that the firms supporting California SB1235 and the New York S 5470/A 10118-A disclosure bill and taking credit for writing the laws are the same companies that will suffer under the strict tolerance of an APR rule.
“The companies pushing this, the trade associations pushing it, they like to take credit for writing the bill in California and writing the bill in New York: I don’t even think they’ve read it,” Denis said. “It’s going to subject their own members to potentially millions if not hundreds of millions of dollars in potential liability [fines.]”
The SBFA is not against disclosure by any means, Denis said, but supported other avenues. The trade group believes knowing the total cost of a loan and the cost and timeline of payments will help protect and inform borrowers better than APR. Firms that support the disclosure bill are banking off the positive press, hoping to be seen as pro-consumer protections but forcing APR will make it harder to compare the actual value of loans, Denis said.
Denis is still optimistic that regulators will work with businesses affected by the incoming legislation. He said the NY legislature and governor’s office, as well as the California Department of Business Oversight, understand the problems of using APR.
“They’re receptive to these arguments, and they know what they’re doing,” Denis said. “The last thing they want to do is pass a bill that’s going to further confuse businesses, especially during a pandemic when businesses are relying on this capital to stay afloat.”
