What Shakeout? Breakout Capital Secures $25 Million Credit Facility
February 8, 2017
Put a tally up on the board for small business lenders in 2017. McClean, VA-based Breakout Capital, which just announced a move into a larger office last week, has also secured a $25 million credit facility with Drift Capital Partners. Drift is an alternative asset management company.
Breakout is young by today’s industry standards, founded only two years ago by former investment banker Carl Fairbank, who is the company’s CEO. And don’t count them out just because they’re not in New York or San Francisco. Washington DC’s Virginia suburbs have become somewhat of a hotspot for fintech lenders. OnDeck, Fundation, StreetShares and QuarterSpot all have offices there, Fairbank points out. “And Capital One is right up the street,” he adds while explaining that the community has a strong talent pool that is familiar with creative lending. Breakout has already grown to about 20 employees and they’re still growing, he says.
Fairbank considers Breakout to be a more upmarket lender, whose repertoire includes serving the near-prime, mid-prime customer. CAN Capital and Dealstruck had focused on this area and both companies stopped funding new business in 2016. As I point this out, I ask if that suggests that segment is perhaps too difficult to make work.
“Candidly, that’s the part of the market that I feel the best about,” he says matter of factly. The company tries to product-fit deals based on the borrower, and will even make monthly-payment based loans. “I think the subprime side with the stacking and the debt settlement companies is a very very difficult place to play right now,” he says, adding that they have worked with subprime borrowers using their original bridge program but that they’ve kind of pulled back from doing those. As with all programs regardless, their goal is to graduate merchants into better or less costly products later on. We have helped merchants move on to get SBA loans, he maintains.
That all sounds very hands on, and part of it is, Fairbank confirms while asserting that technology does indeed do a lot of the legwork. “There’s absolutely a human element to underwriting these deals,” he says. He also agrees with much of what RapidAdvance chairman Jeremy Brown wrote in a AltFinanceDaily op-ed titled, The New Normal. Both Breakout and RapidAdvance refer to themselves as technology-enabled lenders, an acknowledgement that tech is a component of the company, not the entire company itself.
“I think we will see the beginning of the demise of fully automated, no manual touch funding,” Brown wrote in his article.
Brown also predicted that the legal system will ultimately impose order on some industry practices like stacking or that a state like New York could take a public policy interest in products he believes have legal flaws. As he was writing that, Governor Cuomo’s office published a budget proposal that redefined what it means to make a loan in the state. And it leaves much to be desired, some sources contend. Two attorneys at Hudson Cook, LLP, for example, published an analysis that demonstrates how its wording is ambiguous and far-reaching.
“What they really need to do is take the time to think through the implications and basically do a full study of the market to ensure that what they’re pushing forward is going to have the desired consequences,” Breakout’s Fairbank offers on the matter.
This doesn’t mean he’s anti-regulation. The company already holds itself to high standards and customer suitability and is a founding member of the Coalition for Responsible Business Finance.
“I personally do believe that there’s bad forms of lending or cash advances in the market and I’m sure that’s what Cuomo thinks as well but at the same time, it’s getting pushed very quickly and they really really ought to step back and do the research to understand the broader implications and to understand what exactly they’re trying to accomplish,” he maintains.
His pragmatism extends to the OCC’s proposed limited fintech charter, which he finds intriguing, assuming it gets buttoned up. “I believe it’s a concept worth pursuing,” he says, explaining that regulators will need to get comfortable with unsecured lending.
In the meantime, he’s optimistic about Breakout’s prospects. “In a time when institutional appetite for alternative finance companies has dried up, we believe our ability to raise a credit facility in this market speaks volumes about what we have already accomplished, our position as a leading player in the space, and our prospects for strong, but measured, growth,” Fairbank is quoted as saying in a company announcement. The company was also invited and joined the Task Force for the PLUM Initiative, a collaboration between the U.S. Small Business Administration (SBA) and the Milken Institute to more effectively provide capital to minority-owned businesses throughout the United States. The Task Force consists of a very select group of industry leaders, who are in positions to improve access to capital in underserved markets, according to the announcement.
While other companies are making adjustments or in his opinion, continuing to make questionable underwriting decisions, Fairbank thinks his formula for success works. “I think that we do look at deals differently than most folks because I intentionally built the core of my underwriting team with folks who are not from this space so they take a more traditional approach and mix it with some of the greatest aspects of alternative finance.”
The Top Small Business Lending Platform Finalists Named By LendIt
January 20, 2017The LendIt Industry Awards has named six finalists for the Top Small Business Lending Platform. They are:
- OnDeck
- Kabbage
- SmartBiz
- StreetShares
- Ascentium Capital
- iwoca
OnDeck you should know by now. They are publicly traded on the NYSE under ticker ONDK. We last sat down with them in October, shortly before they announced a $200 million credit facility with Credit Suisse.
Kabbage was one of the first online small business lenders to truly experiment with complete automation. In the last year the company has partnered with banking giants Santander and Bank of Nova Scotia.
SmartBiz ranked as the number one provider of non-Express, SBA 7(a) loans under $350,000 for fiscal year 2016. An online platform, they generated $200 million in funded SBA 7(a) loans through its bank lending partners during that period.
StreetShares has a strong focus on funding veteran small businesses. The company is also one of a very few to get approved for Reg A+ under the JOBS Act, which allows them to accept investments from unaccredited retail investors (with some limitations).
Ascentium Capital actually funded nearly $900 million to small businesses in 2016 and was acquired by PE firm Warburg Pincus just a few months ago.
iwoca is based in the UK but also operates in Germany, Spain, and Poland. They offer lines of credit to small businesses up to £100,000 with repayment terms of up to 12 months. Interest rates range from 2% to 6% per month. iwoca has raised £46 million through debt and equity.
According to LendIt, finalists for this category were awarded to the top small business lending platform based on a combination of loan performance, volume, growth, product diversity and responsiveness to stakeholders.
A similar category, the greatest Emerging Small Business Lending Platform also had six finalists. They include:
- ApplePie Capital
- Capital Float
- Credibility Capital
- Lendio
- Lendix
- Wunder Capital
More than 30 industry experts will judge and select award winners. You can view all categories, finalists and judges here.
You can also get 15% off the LendIt Conference registration with promo code: AltFinanceDaily17USA.
Marketplace Lending Association Announces 11 New Members
January 12, 2017
WASHINGTON, Jan. 12, 2017 /PRNewswire/ — The Marketplace Lending Association (MLA) today announced the addition of eleven new companies to the Association. The new members join as the MLA works to expand its presence in Washington. The MLA was formed in 2016 by founding members Funding Circle, Lending Club, and Prosper Marketplace with the goal of promoting a transparent, efficient and customer-friendly financial system.
New Members include: Affirm, Upstart, CommonBond, Avant, PeerStreet, Marlette Funding, Sharestates, Able, and StreetShares. New Associate Members of the MLA include dv01 and LendIt.
This expansion represents a new chapter for the MLA, as it extends the group beyond consumer and small business lending to include platforms focused on student loan refinancing and real estate, as well as greater diversity of funding models, including lending platforms that hold loans on balance sheet.
“On behalf of the founding members, I welcome these new members to the Association and I look forward to working with them to advance our mutual public goals both in Washington and in state capitols around the country,” said Nathaniel Hoopes, executive director of the MLA. “As MLA member companies continue to innovate and create new opportunities for borrowers and investors, the MLA will play an important role in sharing data and insights that help educate policy makers on the benefits that these companies bring to consumers, businesses, and our financial system.”
To provide policymakers with a general overview of its 2017 agenda, the Association also today sent letters to the incoming Trump Administration and to the leaders of the 115th Congress.
ABOUT MLA
MLA, a professional trade association, was formed in 2016. The goals of the Association are to promote a transparent, efficient, and customer-friendly financial system by supporting the responsible growth of marketplace lending, fostering innovation in financial technology, and encouraging sound public policy at the state and federal level. To be eligible to join the association MLA companies must abide by the highest standards of business conduct in providing credit and services to consumers and businesses.
For more information about MLA, its members and its membership standards, visit the MLA website at www.marketplacelendingassociation.org.
Media Contacts:
Nathaniel Hoopes – Executive Director
Phone: (202) 660 1825
nat.hoopes@marketplacelendingassociation.org
My Three Year Anniversary of Investing on Lending Club’s Platform
January 3, 2017
It’s been three long years since the first month that I ever bought a Lending Club note and to commemorate the event, I decided to go back and see what I did and share what I’ve learned since then.
In January 2014, I attempted to buy ten $25 notes for a total of $250, all of which were A and B-grade with 36 month maturities. Here’s what happened:
- Four of them paid off early
- Four of them are current and are just about to mature
- Two of the loans ended up not getting funded
So I actually only ended up getting $200 worth of notes and the results were great. But I didn’t stop there. I went on to buy more than $85,000 worth of Lending Club notes over the next two and a half years. The last note I ever bought was on June 8, 2016. If you’re wondering if I’ve made money, I have so far, but that still assumes a doomsday event doesn’t happen with the rest of my outstanding notes that will mature over the next few years.
Here are a few things I learned since the day I first started:
Reinvesting isn’t guaranteed
There is no guarantee that a similar new note will be available to replace one that just paid off. In the immediate post-Laplanche era, there were very few notes on the retail platform to buy and sometimes even none at all. Any number of major events could cause a situation like this to happen on a marketplace lending platform so you need to be prepared to manage idle cash should there be few or no suitable replacement notes.
Early payoffs can be very bad
This is related to reinvesting but can be bad all on its own. Lending Club charges retail investors a 1% penalty on outstanding principal whenever a borrower pays off their loan early (so long as the loan is 12 months old). Few people seem to be aware of this and it really makes no sense. Consider that as a retail investor you not only lose the interest you would make for the rest of the life of the loan on a good paying borrower, but you also get hit with a penalty on top of it even though you as the investor had nothing to do with the borrower’s decision. That sucks a lot. And potentially even worse, but plausible, what if there were no identical notes available to replace the ones lost to an early payoff? You lose three times.
Other platforms and banks are working against you
Banks like Discover and Goldman Sachs are actively working to steal Lending Club’s borrowers. And when they are successful, loans get paid off early, which hurts your investments. I’ve had nearly 1,000 of my borrowers pay off early on Lending Club for some reason or another already, so this is a major phenomenon.
Diversification isn’t just about the letter grades
Don’t put all your money in 1 note, but also don’t put all your money on 1 platform. Lending Club is still just a single company so you should only invest a small percentage of your investable assets on it. I have placed smaller experimental amounts on other platforms such as Prosper, StreetShares and Colonial Funding Network (Strategic Funding Source.) And yet, the bulk of my personal investments are actually in more traditional assets.
Holes in transparency
One of Lending Club’s biggest draws has been its transparency with investors but there’s still a lot of information that is withheld. When a borrower pays off early, investors aren’t told why or how it happened. Are borrowers really refinancing a credit card or are they taking the money and going to Vegas for the weekend? Investors don’t know and the true use of funds isn’t verified. Is the borrower broke? Lending Club focuses on a borrower’s credit profile, not on how much cash the borrower has in the bank, which could be $0 or negative. I’ve encountered plenty of investors that have argued that a borrower’s cash flow history is a non-factor or a burden on approval speed, but coming from a commercial financing background, I am still shocked that a consumer’s historical cash flow plays no role in getting a three-to-five year loan.
When a borrower stops paying, don’t expect to know why
A common theme in the collections notes of delinquent borrowers is the dreaded “Called. No answer,” line which can repeat for days, weeks, or months on end. Some borrowers will just stop paying and then never answer Lending Club’s calls again or they’ll ask that they “cease and desist” from making future calls. Was it financial hardship? You won’t always get the satisfaction of knowing, making it truly a numbers game.
This is a speculative investment
The value of your portfolio might not have volatile swings, but there are numerous risk factors that can impact performance. Only invest a small percentage of your investable assets.
It’s a nice investment option to have
Investing in notes backed by consumer loans is a great yield opportunity for retail investors in a low savings account rate environment. Despite the risks, retail investors don’t have many alternatives to earn a decent return outside of the stock market. Hopefully marketplace lending platforms don’t completely move away from retail investors.
Are Retail Investors Really The Secret to Marketplace Lending Stability?
July 18, 2016
One anecdotal lesson that marketplace lenders seem to be circulating in 2016 is that outside institutional capital alone isn’t enough to succeed long term, at least on the consumer lending side where the yield spreads are typically narrower. Retail investors are crucial, some of them say, to achieve balance. In late March for example, a group of industry captains predicted there would be a return to the industry’s peer-to-peer roots, partially because of the assumed loyalty that retail investors offered. That was before several players stumbled, reported weak loan volumes and announced layoffs. So are we now seeing a return to the retail investor?
That assumes that they were a part of the industry’s capital structure to begin with. And that’s never really been the case. For Lending Club, about 20% of their loans were funded by self-managed individual investors in 2015. 47% came from individuals through investment vehicles or managed accounts. For Prosper, individual investors only made up about 5% of loan funding. And then that’s about it. Everyone else relied on wealthy accredited investors and institutions from the start.
“Retail investors are more loyal to a specific platform,” said Fundera’s Jared Hecht during that March panel. But he probably assumed, to his credit, that the platform wouldn’t do anything to jeopardize that trust. Lending Club, of course, is a good example of what happens when that trust is violated after the CEO resigned in a scandal that included the manipulation of loan data.
And here’s how retail investors reacted, according to a Morgan Stanley report: 24% of retail investors that were aware of the scandal and DOJ investigation said they would no longer be making new investments on the platform. Another 24% said they would stop temporarily. Only 16% of those aware said they wouldn’t be changing the amount of new investments they make. But that’s for those aware. Many retail investors haven’t any idea that something happened.
“82% of investors (not primed with information about the investigation) planned to invest more or the same amount on the platform,” they reported, which may speak more to why retail investors would be a more stable capital base than anything else, the fact that they may be more likely to be blissfully unaware or detached from what’s happening to the platform they’re investing on. That’s a frightening thought but perhaps not much different than some investors who don’t pay any attention to their equity investments so long as the dividend checks keep coming.
How many people cashed out their mutual funds after Brexit, for example? I know I didn’t. It never even entered my mind despite my portfolio losing about 4% in a few days. It of course came right back up. Contrast that with Lending Club investors who haven’t lost anything as a direct result of the investigation.
And in that sense, it probably all comes down to the relationship a retail investor has with the platform. Do they feel that it’s safe enough that they can just let it roll in the background of life to generate steady returns like a mutual fund? Or do they consider it a speculative investment where they’re in today for some yield but out tomorrow at the first sign of danger? The former would indeed be the sweet spot for a platform looking for a stable capital source, but their long-term ability to tap into this group will depend on whether or not they can prove to regulators, particularly the SEC, that they will not violate the privilege bestowed on them to do this.
After all, Lending Club and Prosper for a long time were the only platforms to have obtained special SEC approval to solicit retail investors. StreetShares is another company that has recently joined them, but their ability to tap into this investor class is made possible under a different law, the JOBS Act’s Regulation A+. Under that, they can only raise a maximum of $50 Million, an amount too small for the likes of companies like SoFi or OnDeck if they were to seriously consider making retail investors part of their capital base.
Therein lies the conundrum about retail investors being a key component of long term capital sustainability, few platforms can even access them. And with regulatory skepticism starting to creep in, the window to pursue that as a realistic channel might already be closed. Which means that any platform that was totally reliant on Wall Street to begin with, might forever be stuck with them and their volatile whims.
One doesn’t need look any further than to see the consequences of that realization than the rumors that SoFi may consider becoming a bank to guarantee its long term survival, the company whose actual slogan is “Don’t Bank.” Dependent on raising evermore outside capital, the lender seems to have recently reached the ceiling of institutional investor appetite for its products, according to the WSJ. And this at a time when their loans are performing well and the economy is still expanding. The WSJ reported that SoFi CEO Mike Cagney might be seeking regulatory approval for a state banking charter in Utah and with that the ability to offer credit cards and deposit accounts. The story states that the deposits wouldn’t be used to fund the loans themselves. If true, they would still accomplish another objective by doing that, diversifying the company out of the one-dimensional rat race of having to make evermore loans even when the market can’t tolerate them anymore.
For marketplace lending, the peers in peer-to-peer may only offer stability if you can access them. For everyone else, there’s another set of retail roots that platforms could over time head towards, deposits. Banks figured that out a zillion years ago. And to that end, marketplace lending might be known by a more fitting name in the not-to-distant future, banking. That will mean tighter controls and stricter regulations but in the end ensure long term stability. And if that’s what a platform is really trying to achieve, then maybe they’re heading to an ironic end.
The industry could return to its retail roots then after all, but a retail level far more simple and basic. Stability may just mean a teller window and an ATM machine…
LendIt Recap: News Headlines You Need to Know
April 13, 2016
Al Goldstein of Avant speaking at the LendIt USA 2016 conference in San Francisco, CA, USA on April 11, 2016. (photo by Gabe Palacio)
As the industry wrapped up one of the biggest conferences of the year, here are some notable company announcements worth filing away:
Chicago-based online lender Avant named former UBS executive Raj Vora to lead the company’s capital raising efforts. Vora will lead strategy for its investment vehicles.
New York-based Student loan refinancer Lendkey crossed $1 billion in origination and deployment
Small business lender National Funding appointed first female president Torrie Inouye. Inouye headed data and analytics for the firm where she drove customer acquisition and underwriting.
Another millennial lender on the block raised Series A funding. New York-based online lender Pave Inc raised $8 million from Maxfield Capital that included existing investors C4 Ventures and Seer Capital. The four year old company lends unsecured personal loans to millennials.
Small business lender Streetshares won SEC approval to launch business bonds to the masses. The product will pay a fixed 5 percent interest (regardless of the performance of a particular underlying loan), is ensured by a provision fund, and provides liquidity as investors can access their funds at a 1 percent fee.
Prosper decided to end its loan sale agreement with Citi and might be in talks with Goldman Sachs. This move comes after a lukewarm reception on a batch of Prosper bonds after investors demanded as much as 5 percent points higher compared to last year.
Marketplace Lenders Will Return to Their Peer Roots, Insiders Say
March 30, 2016
Will marketplace lending revert back to peer-to-peer lending? Insiders said “yes,” during a panel hosted at CommonBond’s NYC office yesterday. Moderated by WSJ reporter Telis Demos, The State of Fintech Lending included two panelists that had something to say about the greatly exaggerated death of “peers” in peer-to-peer lending.
Marketplace lenders will look to tap back into individual investors, said CommonBond CEO David Klein, specifying that accredited investors were an obvious choice but that true retail investors would also play a role.
Fundera CEO Jared Hecht said marketplace lenders can achieve a “network effect” with retail investors, something not likely to occur with institutional sources. The network effect is a phenomenon whereby a good or service becomes more valuable when more people use it. “Retail investors are more loyal to a specific platform,” Hecht said.
Klein explained that the retreat from peers over time stemmed from Lending Club and Prosper’s historical issues with the Securities and Exchange Commission. Both companies faced an existential threat in 2008 over the alleged sale of unregistered securities to unsophisticated investors. They were able to overcome this by agreeing to register every single loan offered on their platforms as a security with the SEC. Today, that has led to both companies becoming part of the top five filers of securities in the US, Klein said. While this registration process is mostly automated, the road to get there was complicated and thus there was a shift towards institutional sources for most new entrants.
But there are signs it’s coming back. Two weeks ago, small business lender StreetShares announced that retail investors would soon be able to invest on their platform. But even then, StreetShares has accomplished this through a less complicated process than the ones Lending Club and Prosper adhere to. Under the JOBS Act’s Regulation A+, startups can raise up to $50 million over a 12-month period from retail investors.
The return path may be slow, however. Prosper for example, still sells 92% of its loans to institutional sources and only 45% of Lending Club loans are sold to retail investors. Even they are not entirely peer-to-peer.
The marketplace lending industry will inevitably come to respect the “peer” again, panelists concluded. “2016 will be the year that marketplace lenders will go from the mainstream to maturity,” Klein said.
