Are You an Underwriter Thinking About Going into Sales?
September 26, 2023
My days of working on deals are long gone but once upon a time I was the head of one of the most well-known MCA underwriting departments (Merchant Cash and Capital). The problem was that I was a restless 24 year-old with a front row seat to watching ISOs my age and younger make up to 4x as much as my salary all while spending their days giving me a hard time. I don’t have to recall what it was like because I wrote it down when it was happening.
“ISOs debate constantly about declines and make excuses for required paperwork that merchants can’t produce,” I wrote.
I had little appreciation for how hard sales was and I relished being a hardliner on guidelines. While this approach ultimately paid off majorly for the company (it was in the run-up to 2008!), it did not prepare me for what I did next. I quit my position and became a sales rep for an affiliated ISO, you know because I thought I would automatically become rich off commissions.
After learning that sales meant I would get only 3 leads per day, it dawned on me that 95% of my time would be spent cold calling UCCs. And so that’s what I did, blasting away UCCs on a manual hand dial basis because there was no auto-dialer. Getting any app in at all was a huge achievement and I begged and pleaded with underwriters to pre-approve incomplete files that in a former life I would have enjoyed striking down.
It was a very humbling experience, which was made all the more humble when about a month later almost every MCA company in the industry stopped funding as credit lines got pulled and the financial system came to a standstill to kick off the Great Recession. I really could not believe my luck. My position had no base pay in those days so I had really shot myself in the foot. Just as before, I documented my experience.
“My streak was extended to 25 declined deals and a merchant I had been pitching for literally 4 months was finally giving me a shot. The sweat, the stress, and the dwindling commission paychecks led to the addition of a 2% closing cost on the deal. The merchant ok’d it and signed my form.”
I wasn’t the closing fee type but after the terrible streak and virtually no pay for a whole month, it happened. Unfortunately, the funder I did it with was not happy about it at all.
“The funder got wind of the closing cost and called our office,” I wrote. “Something was said about greed and overburdening their merchant. A warning was issued and they were going to watch my submissions more closely. 25 straight submissions with auto-decline notices, 4 months of sweat in closing a deal, and only a quarter of that 2% closing cost actually going into my pocket. That’s pre-tax by the way. Now I’m on their watch list.”
Somehow, somewhere at a funding company there was an underwriter out there talking about me being an annoying ISO. Fortunately, I appreciated the irony at the time and it was no hard feelings. I felt thankful for having had the experience on the other side of the table.
If you’re wondering if I went back to underwriting or gave up sales, I didn’t. I continued on as a sales rep and manually dialed hundreds of people a day for another three years. I really enjoyed the challenge and the motivation it sparked inside me. I ended up getting a lot of deals funded, though probably not enough to say that I was ever great at it. I launched AltFinanceDaily while doing this believe it or not. Smile and dial during the day, type on the site at night. Oh those were the days.
The moral of my experience is that the grass is always greener on the other side and sometimes it takes walking a mile in another person’s shoes to really appreciate what they do. If you’re ever annoyed by someone you have to deal with or envious of whatever they’re getting, just know there’s probably more to the story. I hope this helps.
As IRS Announces Pause of ERC Payouts, Businesses May Resume Pursuit of Upfront Alternatives
September 14, 2023
Across the web on internet forums such as Reddit, business owners accustomed to telling ERC filing war stories are starting to worry that their checks might not be coming any time soon.
“I spoke with an agent today. She said they received an organization-wide email to stop processing ERC for the time being,” one user reported at the end of August. Some users replied to say that it wasn’t true. But it is.
On July 26, IRS Commissioner Danny Werfel said that the IRS had cleared its backlog of valid ERC claims and is now “intensifying compliance work and putting in place additional procedures to deal with fraud in the program.”
“The further we get from the pandemic, we believe the percentage of legitimate claims coming in is declining,” Werfel said.
The IRS later confirmed to the Wall Street Journal that it had in fact slowed its processing of claims. There’s some truth in the assertion that the IRS had cleared out a major backlog before doing this.
In late June, for example, those same internet forums were abuzz with happy check recipients and a rush of optimism that the era of long processing wait times was coming to a close. The shift in sentiment had implications. For Finance ERC, a company that provides business owners with cash upfront in return for buying their future ERC receivables, the impact was immediate.
“[Early in] the summer we saw tremendous demand in our origination levels, April, May, and June, of companies coming to us with the mindset that the IRS was taking too long so they wanted to sell their ERC credit rather than wait,” said David Goldin, a Managing Member of Finance ERC. “And then we saw in our portfolio, which is large checks flowing in from the IRS all at once over the summer, and then we saw our demand for new customers fall off a cliff.”
The IRS cranking out checks had made people reconsider not wanting to wait.
“Psychologically, customers then would say, ‘why would I finance it, I’m going to be getting my check any day, my friend got his check, this one got his check…'”
But since then IRS checks slowed to a crawl, intentionally. And for all the talk about clearing the backlog, there were still 637,000 unprocessed 941-X forms (adjusted quarterly tax forms necessary for the credit) as of September 6th, not to mention that under current law, 2020 tax returns can be amended until April 2024, and 2021 returns can be amended until April 2025.
On September 14th, the IRS upped the ante of a delay to a total pause for new claims. “New claims for the employee retention credit, or ERC, won’t be processed until at least 2024,” the WSJ reported. The headline leaves little room for misinterpretation: IRS Shuts Door on New Pandemic Tax Credit Claims Until at Least 2024.
All of which means that business owners are now back to the waiting game and potentially back to considering upfront solutions. For Finance ERC, the company saw interest suddenly pick up and then accelerate since the first WSJ story came out.
“So I’m not saying the day that article came out, but we’ve definitely seen a spike in demand,” Goldin said. “My thing would be that for anyone that was selling [ERC financing], to think about that again, or those that weren’t selling it and they’re feeling that the MCA market is struggling, it’s too competitive, this is a new opportunity.”
Goldin shared this prior to the news breaking that the delay of ERC payouts had completely paused. Presumably, it would only make businesses more interested in getting the financing.
As he previously told AltFinanceDaily, Finance ERC’s product requires no payments, can be eligible for up to 4-6x of what they would otherwise qualify for with an MCA, and can get it at a fraction of the cost of an MCA. But offering it can’t be done as an afterthought, he explained, even if you’re a big company with a big merchant portfolio.
“…you send out one or two emails you might as well not even send them out at all,” Goldin said.” Unless you’re actually embracing the product in your ecosystem, you know, drip marketing, follow up, you literally have to have a separate team selling it or it won’t work. But the guys that have done it, I know a few MCA guys that have, they’ve crushed it on both filing and funding. They’ve set up a separate group, separate sales guys, and they’re really killing it.”
And so the previous frontier of financing the ERC could now also be the next frontier yet again because of what’s taking place. On one subreddit, now that the reality is setting in, the tone has shifted.
“Has anyone tried contacting their state representative about the delay in refund?” The user began. He then adds that he’s already been waiting a whole year.
The Growth of IDIQ
September 7, 2023
IDIQ is no stranger to recognition. A leader in identity theft protection, the company has earned a spot on the Inc. 5000 list for four consecutive years. Founded in 2009, IDIQ began its journey with a handful of employees in a Southern California home before expanding to an office building in Temecula, CA. The Temecula location grew to seven buildings, opening additional offices in Illinois, Florida, and Arizona, along with hubs in Texas and New York.
“Yes, we’ve grown rapidly,” said Bryan Sullivan, Chief Operating and Financial Officer at IDIQ. “We’ve hired more than 150 employees in the last three years to facilitate our business growth. We currently have about 250 employees.”
According to Sullivan, the COVID-19 pandemic catalyzed two significant trends that contributed to IDIQ’s growth. First, there was a spike in online scams and identity theft. Second, there was an increase in consumer finance transactions, including credit card use, home purchases, and refinances.
Sullivan recalled one case in particular: “We had a member who received an alert that two companies, not accounts but companies, had been opened in a different state by an identity thief using their name and personal information and had applied for business loans,” said Sullivan. “We alerted the member to the fraud and helped them get the bogus companies eliminated.”
“Without these alerts it might have taken years for the victim to find out about the identity theft and bogus companies and loans in their name,” Sullivan explained. “And, once found out, it would take months if not years to recover their identity and credit and cost thousands of dollars in lost wages and other costs.”
An IDIQ customer can be pretty much anybody since they now have several brands. IdentityIQ, which focuses on identity theft and credit monitoring is their flagship. The others include MyScoreIQ, Resident-Link, Countrywide Pre-Paid Legal Services, and Credit & Debt.
In the small business finance industry, IDIQ is used several ways. In one example, brokers can offer merchants access to their credit reports and in turn use that data to help them figure out the best path to pursue for funding.
“Our strategy has been to continually expand our product offerings,” he said. “Adding features and benefits that protect and educate consumers as well as improve their financial wellness and help them meet their financial goals.”
Experts: How GFE Went Big
September 6, 2023The Brewster Building is an icon in Long Island City, a bustling district of Queens that’s right across the water from Manhattan. Most people know the building as the official headquarters of JetBlue because their giant logo on the roof can be seen from miles away. Others identify it as a major corporate hub for The Estée Lauder Companies since they sublease a substantial amount of office space inside. But up on the eighth floor, men and women traversing the hallways in suits work for another employer that’s making a splash in a different industry altogether. The sign on their door says GFE, which is short for Global Funding Experts. It’s a company that provides working capital to small businesses nationwide and they just recently secured a senior debt facility of up to $100 million.
Boris Musheyev, GFE’s CEO, founded the company almost a decade ago with partner Viacheslav “Steve” Eliyayev. Musheyev was working mainly in real estate when he learned about an innovative way to support small businesses by purchasing their future receivables. A cautious investor, he didn’t just jump right in. Instead, he bided his time with research on how it worked. He crunched numbers and analyzed the risks before he was confident it was something he wanted to do.
“From the outset, I’ve only channeled funds into ventures I wholeheartedly believed would both succeed and offer genuine value,” Musheyev told AltFinanceDaily. “This commitment was evident in 2013 when we began by investing our capital.”
Alas, Global Funding Experts was born. The company’s model is referral partner driven, meaning they rely on ISOs for submissions and there’s no internal sales force. Today, GFE has an estimated 1,500 ISOs signed up and they receive about 700 applications on an average day. It’s a level of scale that wouldn’t be possible if they didn’t have an efficient CRM, something Musheyev predicted the necessity and utility of long before. GFE began building its own proprietary CRM in 2017 and the company used that to accelerate growth beyond its early startup days.
With its momentum, GFE brought on Boris Shakhmurov to serve as COO in 2019, a traditional banking executive with 20 years experience. Shakhmurov was previously an Executive Director at JPMorgan Chase and had overseen mainly cybersecurity, technology controls, and compliance before making his move to GFE. The two Boris’s knew each other previously, having been friends for over 30 years already. At GFE, Shakhmurov’s pitch that “banks don’t lend to small businesses” lands differently given his background.
“As an expert in Governance, Risk, and Compliance, when I joined the organization in 2019, our goal was to establish a best-in-class MCA Operational Resilience framework to address current and future challenges facing our industry,” Shakhmurov said. “With a focus on building strong and resilient operational controls, we used a multidisciplinary approach to assess the risk across all of our information assets and business processes. The Zero Trust and Defense-in-Depth approach enabled us to focus on early detection, rapid response, enhanced protection, and reducing single points of failure throughout the entire MCA lifecycle.”
For all the technical talk, Shakhmurov said what really stands out is the firm’s family-like atmosphere, which one can see for themselves in their spacious office. That environment has been achieved all while tightly controlling and compartmentalizing access to data, the company says. Security is paramount.
With the infrastructure in place, GFE hired Jonathan Mayer to be their CFO, a veteran accountant who previously spent more than 10 years at Grant Thornton LLP. Mayer first met Musheyev and Shakhmurov in 2021 and he echoed a similar sentiment about how he ended up at GFE. “The work ethic and trust and family environment really stood out to me,” Mayer said.
Between Musheyev, Eliyayev, Shakhmurov, and Mayer, the firm was then off to the races, ultimately leading up to the securing of a debt facility last month of up to $100 million. A lot went into making that happen, including the enlistment of a well known industry law firm to perform the due diligence, they say.
“Through consistent communication with our merchants and operational adaptability, we’ve not only met but surpassed our profitability benchmarks, all the while ensuring minimal defaults in our portfolio,” Musheyev said.
The company also credits having a qualified CFO and robust CRM technology as being necessary ingredients to getting a serious deal done. GFE’s signature products include purchases of future receivables, reverse consolidations, and more recently something called “Incremental Funding.” There’s also no commission clawbacks, they tout. Overall, GFE has funded over $400 million in capital to small businesses since inception.
The executive team heaped praise on the staff for being integral to their success.
“What we have is trust,” Shakhmurov said, who comes back again and again to the importance of building a business that will endure. “If you look at the banking industry, you need operational resilience,” he said.
Protecting Your Syndicated MCA Investments
August 24, 2023David Roitblat is the founder and CEO of Better Accounting Solutions, an accounting firm based in New York City, and a leading authority in specialized accounting for merchant cash advance companies.
To connect with David or schedule a call about working with Better Accounting Solutions, email david@betteraccountingsolutions.com.
An increasingly popular way for merchant cash advances businesses to raise capital is by offering syndicated deals. In theory, this structure is simple to understand and fulfill the terms of: in these scenarios, investors put a percentage of the funded deal and get a percentage of the returns. But, as we all know, our industry is dynamic and has inherent risks, and safeguarding one’s hard-earned investments takes on paramount importance.
We saw the pitfalls in the cases of MJ Capital Funding, LLC and 1 Global Capital, along with more recent cases earlier this year, where investors were fleeced of hundreds of millions of dollars that they invested into what they thought were legitimate MCA funding companies.
What happened there is unfortunately investors did not see or understand the importance of having a third party reporting back to the investors and syndicators about how their investment was going, and were misled until it was too late.
So how can investors protect their investments in syndicated MCA deals?
Know Where Your Money Is Going
Let’s start with the first thing you can do.
The landscape of MCAs is marred by tales of deceitful entities posing as legitimate funding companies, leaving investors and syndicators in dire financial straits when they are left to hold the bag.
From the outset, it is essential to ensure that the funds committed find their way into the intended bank account- one that is owned by the same entity as the MCA actually funding the merchants. The need for this is underscored by the unfortunate prevalence of fraudulent actors diverting funds to different accounts under deceptive entities. This manipulation obscures the money trail, making it harder to track and detect financial malfeasance, and leave investor funds vulnerable to exploitation.
Vigilance through Allocation Monitoring
To protect your investment against malicious machinations, it is crucial to exercise stringent vigilance and monitor your funds.
If one’s investment is tied to a specific percentage of MCA deals, a diligent verification process is necessary to confirm that the funds contributed align precisely with these deals. Ensuring the MCA business has a quality and comprehensive reporting and CRM system will provide a transparent window into the balance and distribution of funds across each deal. This transparency not only empowers investors but also safeguards their interests against any misallocation.
Additionally, investors should ask about and pay attention to when their portion of the syndication was added to a deal, to make sure you haven’t been added to a bad deal only once they have already started bouncing payments.
Finally, suppose the CRM system shows an available balance on your syndication for a certain amount. In that case, you can talk to the MCA funder about ensuring they always have that amount or more available in their bank account. If the available balance in the MCA’s bank account is less than your available liquid balance then essentially the funder is borrowing (and risking) your funds to fund deals without you benefitting.
Navigating Default Deception
Another way scammers try to fleece syndicators is by telling them deals that they have invested in have defaulted. Through shrewd tactics such as rerouting default payments to alternative accounts or manipulating reporting mechanisms, deceptive entities can evade investor scrutiny and keep their money.
To counteract these tactics, a collaborative partnership with a transparent and independent accounting firm is indispensable. This partnership acts as a source of clarity for both parties: unraveling intricate payment webs and ensuring that defaults are tracked while investors receive accurate insights into their investments’ actual performance that cannot be manipulated by the unscrupulous funder.
A Solution…
The scale of risks are glaringly evident. So what can you do about it?
The message is clear: vigilance is paramount. Minor inconsistencies can snowball into severe financial pitfalls, making it imperative to maintain an unwavering, watchful eye.
But it’s difficult for syndicators to do that, both because they have limited insights as syndicators and because they have their own jobs to worry about without the added stress.
That’s why Better Accounting Solutions encourages all our clients in the merchant cash advance industry to employ this protective framework:
When we come onboard to do accounting for business or investors, we encourage both parties to obtain explicit consent from MCA entities to share all information with the syndicator. Without formal authorization, firms like Better Accounting Solutions are legally bound from sharing crucial information. Trust and transparency rests upon this explicit approval, serving as the conduit for open dialogues and proactive measures. With this permission granted, the accountants can regularly produce independent and up-to-date reports ensuring both parties are on the same page and share a mutual trust. That’s the benefit of third party oversight: nothing is happening in the dark, without anyone’s knowledge.
Encouraging and working towards an honest merchant cash advance industry is a virtue that safeguards investments, draws more investors, and bolsters the credibility of our entire industry.
Loan Volumes Strong, Approvals Cautious in Small Business Finance Space
August 22, 2023
In this current environment, small business finance companies are proceeding cautiously.
“In 2022, the company’s turndown rate stood at 8%, but it has surged to 12% this year,” said David Miles, VP and Director of Credit for Eastern Funding. Eastern Funding primarily serves coin laundromats, grocery stores, and car washes but also operates two subsidiaries that focus on assets like commercial vehicles & tow trucks and fitness & wellness equipment. While Miles said that loan volume has remained strong, the percentage of transactions being turned down has increased.
“…I think that’s fairly indicative of the market or the environment that we’re currently in, which is high interest rates,” said Miles. “You have consumers that are carrying a lot of debt and it’s somewhat of a precursor to a potential downturn or recession.”
The circumstances are being felt all across the lending spectrum. According to a recent consumer lending study from the Federal Reserve, the overall rejection rate for credit applicants was 21.8% in June, the highest level in five years. That study looked primarily at mortgages, credit cards, and auto loans.
But in the commercial universe where Eastern Funding operates, the sentiment seems to be matching the shift in the numbers. On a recent quarterly earnings call, for example, Lightspeed CFO Asha Bakshani said of their MCA program, “There’s tons of demand. We’re just taking our time intentionally given the macro.” On unsecured business loans, Enova CEO David Fisher recently said that “we’re just not convinced the risk/reward is there right now, again, given the uncertainty in the economy, an extra few percentages of origination growth for us this year is pretty inconsequential.” Both Lightspeed and Enova are also still experiencing strong volume despite the conservative approach.
“We’ve definitely seen credit quality go down compared to prior years but that’s the main challenge,” said Miles of Eastern Funding. “And we want to make sure that especially in this environment, that we continue to make good loans, we make loans that don’t go to collections, that don’t go to work-out, and we don’t experience any losses across any of the three divisions.”
One challenge of being cautious, however, is communicating the situation to potential customers who may still be stuck in the mindset of 1-2 years ago.
“Our focus is on making sure that the people that do have credit authority, that they’re well aware of the environment that we’re currently in, and that there is enhanced risk just to do with the macroeconomic environment that we’re operating in,” Miles said.
After Comeback WBL Hits The “Express” Lane
August 10, 2023
When World Business Lenders (WBL) resumed funding in April, they made it a point to announce that it wasn’t just going to be some regular old reboot with fresh capital. The company was going digital. At the helm of the changes taking place is a new face, John Milligan, who has more than 25 years of experience in maximizing profitability and long-term growth for lending companies. He’s now not only the company’s Managing Director and the Chief Operating Officer but he’s also spearheading loan production. And one of the first initiatives he touted was a more streamlined process for ISO partners.
The company’s ambitions first had to contend with any fallout of having paused lending in the first place, which started on December 9, 2022. At the time, WBL CEO Doug Naidus Cited “unplanned growth given market conditions” as the cause and loan applications in the pipeline that were caught off guard by the unexpected news entered a sort of suspended animation. WBL later secured financing in April that not only enabled the company to resume originating and funding loans “but afforded access to more lending capacity than ever before.”
The resumption spurred a race to revisit those pending deals from five months earlier to see what, if anything, might still be willing and eligible to move forward.
“The merchants in our active pipeline were our first priority,” Milligan said, “and we are pleased that many of them were able to complete their loan once we relaunched.”
That they waited the whole time was a big sign of confidence for WBL. The company’s unique product offering might have played a role in why the borrowers and their ISOs were so patient, however. WBL offers real-estate backed commercial loans in a field of competitors that are mostly pre-occupied with unsecured working capital financing, for example. Although it stands apart, the pace of funding and potential unfamiliarity with the process could be a drawback for ISOs not used to it. That was part of the inspiration for WBL’s “ISO Express.”
“First, ISO Express was conceived based upon feedback from ISOs that a faster, more streamlined program would be beneficial,” Milligan said. “Second, there are many ISOs which are unfamiliar with our real estate collateralized commercial loan products and ISO Express is a perfect introduction for them.”
The ISO Express program consists of 1-2 hour pre-qualifications after submission and 10-day closing guarantees for loans collateralized by residential properties. They accept pledges of second homes, investment properties and primary residences (in most states) as collateral; and say that being in a junior lien position is acceptable. Loans that are to be collateralized by commercial properties can also be submitted through ISO Express but Milligan says those are better suited for their Account Executive channel where ISOs can still engage with a traditional rep.
WBL also simplified their product to a standard interest rate and term, which they feel will make the total loan process faster and easier to understand. Overall, their return to the industry and these changes have led to an outcome that they’re happy with so far.
“In fact, since we relaunched, we have seen an increase in the total of number ISOs registered with WBL,” said Milligan, “driven by a combination of our new ISO Express program, an increased demand by small businesses for capital, and general tightening of credit guidelines throughout the market.”
Shopify Capital Continues to Gain Momentum
August 2, 2023Shopify Capital continues to gain momentum, according to the company’s most recent quarterly earnings call. Historically, the company has broadcast its precise business loan and merchant cash advance origination figures for each quarter but this time it held off from doing that. Instead, it emphasized that it had “$719 million in loans receivables and merchant cash advances outstanding on June 30, 2023.” As that figure came straight off the balance sheet, that could be compared to the $629M outstanding in the quarter before. So, receivables went up but originations was not disclosed.
Nevertheless, Shopify explained that Capital was among several business segments that were leading to some of highest cross-sell volumes they have ever achieved.
“The team is working tirelessly,” said Shopify President Harley Finkelstein. “They’re executing it really effectively.”
