FTC Forum on Small Business Financing & Merchant Cash Advances
May 7, 2019At the FTC Forum on Small Business Financing & Merchant Cash Advances this morning, FTC regulators asked questions of a panel of industry representatives about controversial topics, including the use of COJs. Below are some closely paraphrased responses.
On Confessions of Judgment (COJs)
Scott Crocket, Founder & CEO, Everest Business Funding
The role of COJs is a conversation worth having. What’s the right balance?
We choose only to use them for deals of $100,000 or more. And COJs apply for only 3% of our business. So if there was a ban on COJs, it wouldn’t really affect us. It might just limit the amount we would fund.
The Bloomberg stories are not representative of what we do. We don’t file a COJ when a business is slowing down, but only when we suspect fraud.
Jared Weitz, CEO, United Capital Source
90% to 95% of our deals do not include COJs. And for those where we do use COJs, we give merchants a document that has a description of what it is so that they’re comfortable with it. We tell them that they have to be comfortable with it before they take it.
Jesse Carlson, Senior Vice President & General Counsel, Kapitus
After we saw the extent of the use of confessions of judgement by certain individuals/companies, as a trade association, we at the Small Business Finance Association (SBFA) decided to include in our code of conduct a ban on the use of confessions of judgement if you’re a member of the SBFA.
Part of the reason why we do include COJs is because we’re very careful with our underwriting.
On True-ups
Jesse Carlson
We have 5 to 10 employees who speak with merchants when they are having unforeseen financial challenges and we’ll adjust their ACH repayment. Some companies treat the percentage of the company’s sales as an absolute. We’ll offer them modifications.
Scott Crocket
We remind merchants that the true-up is available.
Ami Kassar, Founder & CEO, Multifunding LLC
Many funders are not as forgiving as these funders say they are.
Kate Fisher, Partner, Hudson Cook
Some MCA funders reached out to merchants affected by the hurricane in Texas and the forest fires in California to adjust their payments.
Jared Weitz
Other funders stopped requesting payments altogether from merchants who were affected by these natural disasters.
Brokers / Aggressive Marketing
Jared Weitz
A broker of an MCA deal has to give the commission back if the merchant fails within 90 days.
Jesse Carlson
We work with about 100 brokers/ISOs at a given time and we do background checks on them.
Scott Crocket
We do background checks on brokers and we monitor their behavior. We don’t hesitate to cut off a relationship with an ISO. We do spot checks, but we don’t monitor every ISO every day.
The Federal Trade Commission hosted a forum on small business financing including loans and merchant cash advances to examine trends and consumer protection issues in this marketplace.
The forum began at 8:30am and concluded at 1pm. Among some familiar names that spoke are:
- Jared Weitz, CEO, United Capital Source
- Scott Crockett, Founder & CEO, Everest Business Funding
- Christian Spradley, Head of Policy & Senior General Associate Counsel, OnDeck
- Kate Fisher, Partner, Hudson Cook
- Ami Kassar, Founder & CEO, Multifunding LLC
- Jesse Carlson, Senior Vice President & General Counsel, Kapitus
- Sam Taussig, Head of Global Policy, Kabbage
- Lewis Goodwin, Banking Lead, Square Capital
Small Community Banks Power Fintech Revolution
February 15, 2019
“A few years back there was a lot of disruption talk about how the fintechs were going to destroy the banks,” said Jo Ann Barefoot, co-founder of Hummingbird Regtech and a former deputy U.S. Comptroller of the Currency, which regulates national banks. “There’s much more talk in the last few years about the need for banks to partner [with fintechs].”
This quote was cited in a CNBC story published today and judging from the recent bank partnerships with some of the largest fintech companies – including Square, Stripe and Robinhood – this could not be more evident. The CNBC story points out that most of these fintech/bank partnerships are not with household name banks, but rather with small community banks that welcome the business. These banks, including Sutton Bank, headquartered in Attica, OH, Cross River Bank, headquartered in Fort Lee, NJ, and Celtic Bank, headquartered in Salt Lake City, UT, are handling the banking activities for these growing fintechs – activities like holding customer deposits and underwriting consumer and business loans. And significantly, making sure that everything is up to snuff with government regulations.
A number of fintechs, including Square and SoFi, have tried to take the banking component of their businesses into their own hands by applying to become an ILC bank. But they have been met with tough resistance, much of it coming from, interestingly, community banks.
“No one envisioned when they wrote the ILC charter that we would have fintech companies that finance mortgages and student loans from private equity capital and not deposits,” President and CEO of the Consumer Bankers Association told AltFinanceDaily last year. “It’s a new world. Like with all rules and regulations, federal regulators should periodically review longstanding policy.”
So far, the opposition has been relatively successful but time will tell if it keeps up. Square and SoFi withdrew their ILC loan their applications, but Square eventually reapplied. At the 2018 Money 2020 conference in Las Vegas, SoFi CEO Anthony Noto said he would entertain seeking ILC bank status.
SBFA Announces Support for The Small Business Fairness Act
December 7, 2018The Small Business Finance Association (SBFA) today announced support for S.3717, The Small Business Fairness Act introduced by Senator Sherrod Brown (D-OH) and Senator Marco Rubio (R-FL). The bill would provide the Federal Trade Commission more clarity to protect small business owners from being forced to sign a “confession of judgment” before obtaining financing. A “confession of judgment” requires a small business owner to waive certain rights in court before obtaining financing and, in some cases, allows the lender to seize the owner’s assets if there is a default.
“This is a bad practice that must be eliminated,” said Jeremy Brown, chairman of RapidAdvance and SBFA. “Unfortunately, certain small business financing providers are misusing “confessions of judgment.” We firmly support any legislation that will provide small businesses protection from the misuse of this practice. If a small business we fund runs into trouble, we believe they should be treated fairly and deserve our commitment to help resolve the issue in a manner that is professional and respectful.”
SBFA is a non-profit advocacy organization dedicated to ensuring Main Street small businesses have access to the capital they need to grow and strengthen the economy. SBFA’s mission is to educate policymakers and regulators about the technology-driven platforms emerging in the small business lending market and how our member companies bridge the small business capital gap using innovative financing solutions. The organization is supported by companies committed to promoting small business owners’ access to fair and responsible capital.
“Our core values are centered on providing fair and responsible financing for small businesses,” said Steve Denis, executive director of SBFA. “Small business owners are the backbone of the American economy and we should empower them with as many tools as possible to grow and create jobs. We look forward to working with Senator Brown and Rubio to eliminate the abuse of the “confession of judgment” and expand the role of responsible lenders nationally.”
In 2016, SBFA released best practices for the alternative finance industry to help better protect small businesses as they seek funding online. SBFA’s best practices are centered on four principles—transparency, responsibility, fairness, and security. As the industry’s leading trade association, the best practices have been agreed to by every member company and exist to give small business owners confidence in their financing decisions. These principles provide them a better understanding of what to expect from responsible alternative finance companies, which includes fully disclosing all terms and costs and ensuring the products SBFA companies offer are in the best interest of the small business customer.
The Small Business Finance Association (SBFA) is a not-for-profit 501(c)6 trade association representing organizations that provide alternative financing solutions to small businesses.
ELFA Reacts to New Jersey Small Business Loan Bill
October 31, 2018
The Equipment Leasing Financing Association (ELFA) had its 57th Annual Convention in Phoenix in the middle of October. During the convention, ELFA’s Vice President of State Government Relations Scott Riehl left abruptly to get to Trenton, New Jersey. Why the rush? He had been alerted that there was a hearing on a small business lending bill that could have significant ramifications for his members.
“My whole goal was to find the sponsor, introduce ourselves to the sponsor and educate the sponsor as to equipment leasing in New Jersey, how long it’s been going on, and how important it is to the economy of New Jersey,” Riehl said.
The bill’s sponsor is Senator Troy Singleton who represents New Jersey’s 7th legislative district.
Speaking to the urgency of such matters, Riehl said, “You’ve got to get on the ground immediately. And that’s what we did.”
Riehl’s last minute trip across the country proved to be a fruitful one. He was able to meet Singleton that day in the hallway of the building where the hearing was being held.
While several industries have descended on Trenton to educate policymakers on the advantages and pitfalls of the proposed language, equipment leasing companies managed to carve themselves out of the bill entirely.
Reihl said that being able to point to the equipment leasing exemption in a similar California bill (SB 1235) was helpful. He and ELFA were also involved early on in making their argument against elements in the original California bill.
Having a history communicating with policymakers is also critical, Riehl said.
“The ELFA, for the better part of 25 years, has had a very vibrant state government relations division,” Riehl said. “And that makes a difference.”
New Jersey Moves to Regulate Small Business Loan Disclosures and Brokers
October 15, 2018A committee within the New Jersey State Senate convened today at 1:30pm to discuss S2262, a new small business loan disclosure bill. Similar to SB1235 in California, this bill would require all of the following on small business loan contracts less than $100,000:
The APR(This was removed during the committee hearing)- The annualized interest rate
- The finance charge
- The maximum credit limit available
- The payment schedule
- A list of all broker fees and a description of the broker’s relationship with the lender and any conflicts of interest the broker may have
- These terms must be presented before a business accepts a loan
In addition, any change to the terms that would significantly affect the responsibilities or obligations of the small business concern under the loan must be noticed 45 days in advance.
During the hearing, the bill was amended to define merchant cash advances as small business loans. Kate Fisher of Hudson Cook, LLP who represented the Commercial Finance Coalition (CFC) during the hearing, strongly opposed that amendment. The CFC is a trade association representing small business lending and MCA companies.
Also testifying against it was PJ Hoffman of the Electronic Transactions Association. Other Trade groups are gearing up to oppose the bill as well, AltFinanceDaily has learned.
The bill was voted through the committee and will continue to move forward.
Kate Fisher’s testimony has been transcribed below:
Senator Pou and committee members: Thank you for the opportunity to present testimony today regarding business loan disclosures.
My name is Kate Fisher and I am here today on behalf of the Commercial Finance Coalition, a group of responsible finance companies that provide capital to small and medium-sized businesses through innovative methods. I also am an attorney who helps providers of commercial financing comply with state and federal law.
The Commercial Finance Coalition supports efforts to make business financing more transparent.
The problem is the proposed amendment would define a merchant cash advance as a loan. A merchant cash advance is not a loan.
We all know how a loan works – the lender advances money and the borrower promises to pay it back.
A merchant cash advance is a factoring transaction, in which a business sells a percentage of its future receivables at a discount.
Take for example, a pizza shop. The pizza oven breaks and the owner needs cash to replace it.
In a loan, the pizza shop borrows the money and promises to pay the money back to the lender with interest.
In a merchant cash advance, the pizza shop sells its future receivables to a merchant cash advance company. In exchange for the money to buy that pizza oven, the merchant cash advance company will take 10% of each dollar the pizza shop makes.
If the pizza shop’s sales go down, it will pay less. If the pizza shop’s sales go up, it will pay more. And if the pizza shop is damaged by a hurricane and has to close for repairs, it will pay nothing until it can reopen its doors.
This uncertainty of repayment is why a merchant cash advance is not a loan – the pizza shop in our example, only pays if it sells pizza. Courts have overwhelmingly agreed that a merchant cash advance is not a loan. To quote a recent court decision:
“Receivables purchasing is an accepted form of business transaction, and is not a loan.”
Because a merchant cash advance is not a loan, and there is no fixed payment term, requiring an APR or annual interest rate disclosure would be misleading. For a small business looking for financing, these types of disclosures would only add confusion.
I’m very optimistic that New Jersey can lead the way in providing businesses with disclosures that are helpful – and not misleading.
Thank you.
The California Business Loan & MCA Disclosure Bill Has Passed
August 30, 2018The bill has passed. With the governor’s signature, all business loan contracts and merchant cash advance contracts in California will soon require a uniform set of formal disclosures including an annualized rate of the total cost. The precise formula for that rate will be determined by the state’s regulatory agency, the Department of Business Oversight.
Update: The bill’s death in committee was challenged by the bill’s author, Senator Steve Glazer, and ultimately allowed to come up for a vote after he complained to the senate majority leader that a committee’s decision is merely a recommendation, not a deciding factor on the bill itself. At 2:10 AM EST, it passed.
Update: The bill has died in the Senate Banking Committee. Daniel Weintraub, who serves as chief of staff to the bill’s author, tweeted after midnight eastern time that the bill was not moving forward.
Thanks to all who supported small business and #SB1235. Unfortunately the Senate Banking Committee killed the bill tonight. We fell one vote short of the four we needed to send the bill to the Senate floor. https://t.co/30ztdW2LbD
— Daniel Weintraub (@DMWeintraub) September 1, 2018
Update: The bill passed the Assembly unopposed and is slated for a late night vote by the Senate Banking Committee.
Update 8/31/18: Today is the last day for the legislature to pass this bill. We will keep you updated
California’s bill to mandate certain disclosures on business loan and merchant cash advance contracts is looking a little bit worse. The Annualized Cost of Capital method (Explained here) that some folks in the industry were accepting of, has been scrapped in favor of whatever formula a state regulator decides to pick. That means if the Commissioner of Business Oversight decides on an APR disclosure, which many industry trade groups believed they had already successfully lobbied against, all loans and non-loans alike would have to report an APR, a mathematical impossibility for a product like merchant cash advance. At present, however, all that is known is that the Commissioner’s choice must be an annualized metric.
According to Bloomberg, the amended version of the bill needs to get approval in both the Assembly and the Senate by Friday before the legislative session ends.
Trade associations that have weighed in on this bill include the Electronic Transactions Association, Commercial Finance Coalition, Small Business Finance Association, and the Innovative Lending Platform Association.
You can view all of our previous coverage about the bill here.
Breakout Capital Finance Acquires HomeZen, Inc. Technology
July 3, 2018McLean, Va. (July 3, 2018) – Breakout Capital Finance (“Breakout Capital”), a leading technology innovator and small business lending company, announced today that it has acquired HomeZen’s technology. HomeZen is a real estate technology company providing powerful software tools for home sellers using technology to more efficiently and effectively sell their homes.
HomeZen’s innovative core technology enables users to source and evaluate offers in order to achieve the best possible outcome. This technology, which includes calculators and other user tools, will be used by Breakout Capital to empower small businesses searching for working capital solutions. The company plans to unveil a new website incorporating these features later this year.
“Since its inception, Breakout Capital has prioritized being a customer-focused disruptor, seeking out ways to better serve our customers,” said Carl Fairbank, Founder and Chief Executive Officer of Breakout Capital. “HomeZen’s technology is incredibly innovative, and it will not only help us improve the way small businesses search and evaluate their options to access working capital, but will also help to empower entrepreneurs to do more with their already limited time.”
“At HomeZen we use technology to empower home sellers with the information and tools they need to easily and cheaply sell their homes,” added Kevin Bennett, Co-Founder and Chief Executive Officer of HomeZen. “I’m excited that Breakout Capital will be able to use our technology to simplify what can be a stressful, complicated process for small business owners.”
This is another milestone in the fast growth of Breakout Capital. Throughout 2018, Breakout Capital has rapidly grown loan originations, repeatedly breaking records for new funding volume. In parallel, it has continued to innovate its technology platforms, with notable advances in machine learning, artificial intelligence, and the use of blockchain to support lending operations.
Breakout Capital also recently closed on a substantial new credit facility with Medalist Partners and expanded its headquarters in McLean, Virginia.
About Breakout Capital Finance
Breakout Capital Finance is a leading financial technology company that uses best-in-class technology to provide a wide range of credit solutions to small businesses across the country. Built on the three pillars of transparency, education and advocacy for small business, the company is one of the fastest-growing direct lenders in the space and leads a world-class technology innovation effort. Breakout Capital Finance is a Principal Member of the Innovative Lending Platform Association and is an original advocate for the SmartBoxTM standard for transparency and cost disclosure.
To learn more about Breakout Capital Finance, please visit www.breakoutfinance.com.
Online Small Business Lending Provides Benefits to Small Business Owners, Finds New Survey
October 23, 2017
Washington, D.C., October, 23, 2017 – Four leading trade associations – Electronic Transactions Association, Innovative Lending Platform Association, the Marketplace Lending Association, and the Small Business Finance Association – commissioned a comprehensive survey of U.S. small business owners from Edelman Intelligence. The survey conducted by Edelman Intelligence found that a large majority (70%) of small business owners believe there are more credit options today when compared to five years ago, and 97% of those feel that the growing number of financing options is a good thing.
Small businesses owners need quick and streamlined access to credit to grow their businesses and the American economy. Online small business lenders are financial firms that provide credit to small business owners through automated, technology-enabled platforms. They regularly work with traditional lenders to deliver loans. By leveraging the ubiquity, speed and convenience of the Internet, online small business lenders use sophisticated software platforms to provide American small business owners with fast, easy and affordable credit.
Key findings of the study include:
- An overwhelming majority of small business owners reported more lending options available now than five years ago. 70 percent of small- and medium-sized business owners say there are more lending options now, and 97 percent of those believe that the increase in options is a positive thing for their businesses.
- Most small business owners reported using online small business lenders to help them expand their locations, make necessary hiring and equipment purchases, and help manage cash flow.
- Of the small business owners considering taking out a loan in the next 12 months, close to 40 percent say they will consider borrowing from an online lender.
- Online small business lenders have high levels of satisfaction and scored high marks for ease of use and business growth enablement. According to the study, 98 percent of small business owners who have used online lenders say they are likely to take out another loan with an online lender.
- For many small business owners, online small business lending platforms are a popular alternative to asking friends and family for a loan.
Media inquiries should be directed to:
ETA PRESS CONTACT:
Laura Hubbard, lhubbard@electran.org
ILPA PRESS CONTACT:
Jim Larkin, jlarkin@ondeck.com
203-526-7457
MLA PRESS CONTACT:
Nat Hoopes, nat.hoopes@marketplacelendingassociation.org
SBFA PRESS CONTACT:
Steve Denis, sdenis@sbfassociation.org
