5 Key Differences Between Online Business Lenders

As a small business, it is important to understand your loan options.

Online lending for small-business owners has quickly become a big (and largely unregulated) business, with Morgan Stanley estimating that these lenders will lend out $7.9 billion this year. And with the increased activity, regulators in Washington are starting to open their eyes and ask questions.

As in any Washington D.C. showdown, different groups are preparing for a fight. And while I can’t predict how things will end up, I think it’s fair to say that there will be two fundamentally different camps.

One group will be comprised of representatives who promote short-term on-line loans or cash advances. There are hundreds of companies either lending or brokering these products. The second group will involve lenders who offer term loan products with 2- to 5-year terms. While unfortunately these lenders don’t have a name, I like to call them investment lenders, as borrowers have time to invest their funds and pay them back over time.

In my mind, these two groups represent two fundamentally different business practices-and it’s important for the small-business community to understand the differences between shorter term and investment lenders. The difference is in the transparency and safety of the loans they make.

Here are the key differences.

1. Investment lenders provide a transparent interest rate. Shorter term lenders use “factor” pricing. While factor pricing is simple on the fae, borrowers often get it confused with an interest rate, and can often think that the money is four times cheaper than it is. A study by the Federal Reserve recently confirmed that “mom and pop” businesses are grossly confused by this short-term, less transparent pricing.

2. The short-term advances and loans often result in borrowers stuck in expensive cycles of re-borrowing, like a payday loan. Many short-term lenders juice their returns by double-charging the borrowers every time they renew, in a practice called “double dipping.” Longer-term financing can better help businesses grow.

3. Longer term lenders typically have no pre-payment penalties. Short-term lenders have no pre-payment benefits. So if the borrower can pay back in a month instead of six months, they’re still responsible for the entire amount.

4. Interest rates for longer term lenders typically range from 6 to 32 percent. Meanwhile, I have seen paper issued from short-term lenders with interest rates ranging from 40 to 200 percent.

5. There are a handful of lenders and brokers promoting short-term loans. There are far fewer advocating the longer term loans.

When you’re looking for an on-line loan, be very careful which product you choose.

(My company MultiFunding is a proud founding member of the Responsible Business Lending Coalition, which includes many of the investment lenders. I am not writing this piece on behalf of the Coalition. These opinions are my own.)

Does “Factor Pricing” Make Sense?

Or is it a convenient way to disguise 100% APR loans?

Forbes recently interviewed OnDeck CEO Noah Breslow and-the day before his third quarter earnings call-gave him an opportunity to address many of the criticisms hurled at his company and the short term on-line lending industry. As usual, Noah gave an eloquent defense.

At the crux of the debate is how loans should be presented to small-business owners. OnDeck and hundreds of other players in their industry insist that factor pricing makes loans simpler and clearer for businesses to understand. Other players insist on traditional APR pricing. Breslow responds that OnDeck prefers to give a dollars and cents cost because “Customers don’t find cents on the dollar confusing.”

I recently had some insight when a client we’re working with came to us after being offered a loan by OnDeck. The story goes: this small business earned $284k in 2014 with a net loss of $70k. This year has been better so far, with $586k in revenue and $80k in profits.

Based on their credit profile, and financial performance OnDeck was willing to offer them the following terms just a few weeks ago. The fine print includes a blanket lien on all company assets and a personal guarantee from the owner.

  • The first offer was for a loan of $55,000 with a payback of $60,500 over 3 months. This includes 63 daily payments of $960.32 and an origination fee of $1,375.00.
  • The second offer was for a loan of $105,000 with a payback of $123,900 over 6 months. This includes 126 daily payments of $983.33 and an origination fee of $2,750.00.
  • The third offer was for a loan of $150,000 with a payback of $183,000 over 9 months. This includes 189 daily payments of $968.25 and an origination fee of $3,750.00.
  • The fourth offer was for a loan of $195,000 with a payback of $247,650 over 12 months. This includes 252 daily payments of $982.74 and an origination fee of $4,875.00.

Are you curious what the APR is on these different offers?

  • Offer 1 (3-month): 100.85% APR
  • Offer 2 (6-month): 81.25% APR
  • Offer 3 (9-month): 64.13% APR
  • Offer 4 (12-month): 57.2% APR

I don’t find these figures confusing at all. To me and I would argue to any rational business person, these interest rates would make one shake in their boots.

Sometimes when I tell people the story of these loans-they look at me like I am crazy and they must be rare and uncommon. In fact, OnDeck issued $483 million of these loans in the third Quarter of this year. And they are just one of hundreds of lenders or advance companies like this.

I have no problem with short-term loans. Emergencies come up, and capital is needed to float the business. There is a specific business case for short-term lenders. But I do think that APR’s should be disclosed clearly-so that borrowers understand what they are getting themselves in for.

If you were an entrepreneur looking for money would you take any of the loan offers above? And if the offer included the APR would you think about them any differently? Do you think that loans like this are good or bad for the economy?

Do You Want to be a Unicorn?

The Dream Could Send You Down the Wrong Path

I recently returned from a business trip to San Francisco, where I met some firms that are blasting off, t-minus 10. They are well-funded, chock full of venture capital and equity investment. They are on their way to star-spangled stardom, but for now they have little-to-no interest in profits. They are living the Unicorn Dream.

The Dream says that you need investors to build great companies. It says all great ideas enroll in Y Combinator or another startup incubator. But I am going to ask a simple question. I did not ask it out there; they would have kicked me out. Why are people so impressed by equity funding?

“Silicon Street” focuses on growth because when you are selling equity in your company, and you are trying to convince someone to invest, you need to sell them a dream. So you sell them a dream to fund your business. Think about it from the investor’s side. If you’re going to invest in a business (which means you will buy equity in the business), you are hoping that the company will grow, and grow fast. Then you can sell your piece for an explosive return.

In that picture, today’s financials matter very little. The first question is: “Could this business be the next unicorn? Could it be huge?”

Unicorns are a stark contrast with the reality of most Main Street businesses. Main Street companies mostly work with lenders, not investors. And while the investor buys dreams, lenders manage risk. So, to win on Main Street, you have no choice but to earn profits and build collateral, because they help get you loans. Profits help you grow. Dreams of grandeur waste time.

When a Main Street business borrows money, the lender does not care about future growth. That is too far in the uncertain future. A lender looks for security now. While they earn interest, they want certainty that their investment will survive. They need protection if the company goes south.

There is nothing wrong with that. Just a few weeks ago, on the other side of the country, the Inc. 5000 Conference brought me into contact with hundreds of business owners who have built enterprises with their hands rather than taking on venture capital or equity. For years, they invested cautiously, traded on profitability, and built up from scratch. No one owns the fruits of their labor but them.

As a small business/startup, you might be able to choose your street, but ninety-nine out of one hundred, there is not an option. You are on Main Street, so keep on walking. Don’t try to be what you’re not, and don’t think any more or less of the guys taking another path. It is legitimate to be a Main Street Business.

5 Questions You Need To Ask Your Prospective Lender

You Need to Be Sure the Lender is a Good Match for You.

When you meet a lender to discuss your loan application, don’t let them be the only one asking questions. You also need to figure out whether they’re a good match for you and your company. As an added bonus, asking the right questions makes you look better as an applicant and helps your chances of qualifying for financing. Here are 5 questions I recommend all my clients have ready when they go to meet a lender.

1. Who will make the ultimate decision for my loan application?

The person you meet with might not be the person who will ultimately decide if you qualify for a business loan, especially when your business is just starting out and you haven’t worked with the lender before.

It’s important to figure out who is the final decision maker because this is someone you want to build a relationship with, if not now then definitely in the future. By asking this question at your initial meeting, you can get a clearer idea about who is involved in the loan application process.

2. Do you know this person and work closely with them?

If the person you’re meeting with isn’t the decision maker, you need to figure out how close they are to this decision maker. When you apply for a business loan, you’re doing more than just handing them your financial documents. It’s also your chance to discuss your business plan and explain your long-term goals for your company.

If the person you’re speaking with has no real contact with the ultimate decision maker, the information from your presentation likely won’t get through to them. In this case, it may be better to push for another meeting if not with the ultimate decision maker than at least with someone closer to them in the process.

3. How many loans like mine have you closed in the past year?

It’s important to work with a company that regularly deals with the type of financing you want. For example, if you’re taking out an asset-backed loan, your lender should regularly set up these types of loans. Otherwise, they may not give you the best loan terms or possibly deny your application because they don’t want that type of business. They also would be less helpful if you run into problems with your financing because they don’t have the right experience.

4. Does it make sense for me to take out a new loan or to refinance my current loans?

If you’ve already taken out some loans for your business, it may make sense to refinance and borrow money again through your current loans. The lender should consider this possibility because depending on how your financial situation changed and the terms on your current loans, it could work out to be a better deal to refinance. Your lender should consider all your options before setting up a new loan for you.

5. What is the time range for completing this process and what do you need from me?

You need to know how long their application process will take so you can figure out when you’ll receive financing and put together a backup plan in case you don’t qualify. Even more importantly, you need to know what supporting documents they need from you to process your application. Ask what often delays the process so the two of you can make sure your application doesn’t run into these problems.

Have I Gone Soft on Capitalism?

In a distressing tale about the cash advance industry last week Zeek Faux of Bloomberg told a sad story  of two young Americans who sold their cash advance company. Their company lent out money with APR’s in the hundreds of percent range to small-business owners, proceeded to sell the company to a Wall Street fund, and are now partying it up in their tax haven sex pad in Puerto Rico.

I posted the article on social media with the phrase “what would their mothers think” and then I forwarded the link to a friend of mine who is an avid defender of the cash advance industry. My friend proceeded to tell me that I don’t believe in capitalism, and there is nothing wrong with selling a product or service at the highest price the market will bear. When it comes to the lending business, I respectfully disagree.

When you’re in the business of lending money or facilitating lending money, you’re choosing to participate in an industry that could put our entire economy and the core of capitalism at risk. If it’s acceptable to lend money at exorbitant usurious rates to business owners or individuals who don’t understand the true price they’re paying – ultimately capitalism will come falling down.

So I disagree with my friend on a rational level. But I also have a hard time relating to his beliefs on an emotional level. Let’s face it we spend the majority of our awake hours working. And while I want to make money like everybody else does, I don’t want to do it at the expense of my customer’s and everyone around me.

If I could ask the two entrepreneurs in Puerto Rico one thing, I would ask them if they felt that they had any obligations to anyone but themselves? I know the answer, and I suspect I know the answer of the Wall Street firm that bought them as well.

My answer to my friend is that I have not gone soft on capitalism – I fight hard to defend it every day by trying to ensure that the small-business owners we work with can sustain themselves for the long run.

The banking system in our country is broken. We cannot have hundreds of banks being run out of garages in a largely ruleless process, that few in Washington understand. If the story in Puerto Rico tells us anything, the time for change is now.

What I learned from an Uber Driver

Have you ever chatted with an Uber Driver? Sometimes they are fascinating budding entrepreneurs who are driving a few hours a day to earn some extra cash while they try to get their business off the ground.

Last night, my Uber driver in Miami asked for my card when I told him that I help entrepreneurs get loans. And today, he asked if he could come see me at my hotel. Although his loan request is tiny, I liked his initiative and chutzpah, and invited him to come over and chat.

This young man is working in Jewelry sales and driving Uber, while he is trying to get a screen printing business off the ground and a clothing line. He is also a talented photographer and graphic designer. He showed me his stuff – and I was impressed.

He has been beating his head for the last few months trying to figure out how to get his hands on $10,000 so he can buy some screen printing equipment. He sees the equipment as the critical step to push him forward and is comfortable that he has customers lined up. The problem is that with his credit score, no one will lend him money.

As with many entrepreneurs, sometimes the goal is such a big obstacle, and the goal is the wrong thing. If my new Uber friend, keeps waiting for his equipment, he will never get to the next level.

His love and passion is graphic design. If he could sell those services, and outsource the screen printing to one of the hundreds of shops in Miami who could do the work, he would be off to the races.

This chat reminded me of two important lessons that are universal to any entrepreneur – irrespective of whether you are just starting out or pushing a multi-million dollar enterprise to the next level: follow your passion, and follow the money.

My Uber friend is passionate about design and he is really good at it. And he has clients who want to work with him and are ready to pay him money. And yet he is stuck because he wants to buy machinery that is not critical to start.

What is holding you back? Are you not following your passion? Or maybe you are letting the wrong goal stand in your way.

The Responsibility of Being A Business Loan Broker

Recently I have realized that lessons my Dad taught me over the years have had a deep and powerful impact on my work.

I am the founder and CEO of a national business loan brokerage, MultiFunding. Since we started six years ago, we’re trying to bring a new set of ethics and standards to an industry that has been fraught with scandals and unscrupulous behavior over decades. Every month, we work with hundreds of business owners and entrepreneurs around the country to try and help them figure out the best possible loan options for their businesses.

My Dad is a retired ophthalmologist. Growing up I watched him take care of thousands of eyes. Every patient got one on one attention. Every patient was treated carefully and thoughtfully – no matter how simple or complicated the case was. Reputation meant everything, and my Dad was loved and respected.

Sometimes my Dad tries to give me advice about how to run my loan brokerage. While we might not always agree about tactics, the truth is that I am applying the values and principles of his medical practice to a different industry.

I don’t want to suggest that taking care of loans is nearly as intricate as operating on eyeballs. But we think of ourselves as loan doctors. A bad loan can ruin a business, an entrepreneur’s dreams and all of their employee’s livelihoods. So when we’re entrusted with advising them about their loans, we have to take the situation as seriously as a doctor would.

We listen to each situation carefully, ask the appropriate questions, and try to explain alternative plans and possibilities. We lay our plans so a business can be healthy and grow. And we worry and focus on what’s best for the business, instead of thinking about what loan product we might be able to sell at the highest commission.

Sometimes the solution is pretty black and white and there is a quick diagnosis. But often times it’s just not that clear – and there are different options with pros and cons to be considered. Often there is a multi-step solution that has to be constructed and recommended. And sometimes a loan is not the right solution at all. Every business has to be treated like a patient – every single time. It’s our responsibility to think that the businesses life is on the line.

There has been a lot of activity and investment in the business lending space since I started MultiFunding. Hundreds of new alternative lenders have emerged. Sadly, in many cases the loans they offer do more damage than good. Other on-line brokers have emerged who try to use technology to replace the human judgement of our work. And sadly there are some companies who position themselves as brokers, but peddle many of their own lending products on the back end.

With all the buzz around us, and talk about technology, we will stay focused on treating business owners as patients instead of numbers on a spreadsheet. That’s what I learned to do growing up as a kid, and I think it will serve a lot of people well for generations to come.

MultiFunding Challenges Business Loan Industry for Transparency

Online Business Lending estimated to be $7.9 billion this year.

 OCTOBER 27, 2015 – AMBLER, PA – Business loan adviser MultiFunding announces its 3rd quarter report card in an initiative to improve transparency across the business loan broker industry.  This report lays out the company’s year-to-date loan data including APR range and product type.

The marketplace for small business lending is expected to hit $7.9 Billion this year, up 68% from last year, according to Morgan Stanley. These loans are predicted to grow substantially.  By 2020, small business loans could account for 16% of the lending market.  That is almost five times the market share now.

MultiFunding challenges the other industry players – including  Biz2Credit.com, Bizfi.com, FinanceStore.com, Fundera.com, and Lendio.com – to release their loan distribution data.

“Moves like the one that MultiFunding is doing today bring greater options and information to small business owners” said Dr. Jeff Cornwall, the Jack C. Massey chair in Entrepreneurship at Belmont University.  “This can translate into huge savings for entrepreneurs and ultimately can be used to further grow their businesses”.

The percentage of very low interest loans granted by MultiFunding, which includes APRs of 6% or less, is 23% through the third quarter.

 

All Online Lenders Are Not Created Equal

In a recent New York Times article, Michael Korkery superficially bundled all online lenders into one group, often referring to them as “marketplace lenders”. I think this is a mistake. There are big differences amongst online lenders, and in my opinion describing them with one swipe of the paint brush is not responsible journalism. Apples and oranges might be fruits, but there are plenty of differences as well.

Two of the main lenders discussed in the article are on OnDeck Capital and Lending Club. My experience with these lenders is a broker of business loans, and there is almost nothing similar in their products.

OnDeck markets short-term on-line loans. These loans typically amortize over 6 months, and the money is withdrawn from the borrower’s bank account in equal increments every day for the life of the loan. The loans’ are presented in a way that the customer is told they will borrow $50K and pay back $60K. While the borrower often thinks this will cost them $10K or 20 percent, the actual APR is closer to 80%.

The loans have no pre-payment benefits, so even if the borrower is ready to pay off their obligation in a month, they are still on the hook for the full $10K. Also, because of the short amortization period, the borrower is often forced into a debt trap and has to renew multiple times.

Lending Club and their competitors like Funding Circle market more traditional term loans that typically amortize over 2 – 4 years. Interest rates are typically in the mid-teens and are clearly indicated. Like a traditional loan, there is one monthly payment. Lending Club and most of their competitors have no pre-payment penalties.

OnDeck underwrites their loans based off of a review of three months of bank statements, and a review of business and personal credit reports. Lending Club looks at historical tax returns, and does a traditional cash flow analysis to make sure the borrower is not taking on more debt then they can afford to pay back.

While OnDeck and Lending Club are considered online lenders, that’s about the only thing they have in common. When reporters write about this space, I think they have an obligation to dig in and understand it.

Is Entrepreneur Class Peasant Class?

Last week, after spending several hours stuck in Atlanta airport, I boarded my Southwest flight home and got a seat in the last row. I jokingly posted a picture of the view on Facebook with the caption “entrepreneur class” A friend of mine who works for a venture backed company that recently went public quickly quipped back “Peasant class” His comment made me think about venture backed companies and how they are celebrated in our culture.

Every day, I wake up to another announcement in my news feed to a venture backed company raising another “round”. Whatever round it is, and whatever stage the company is, there is a “wow” factor associated with the announcement. I will often get comments from friends and colleagues, “how did they do that?” or “what an accomplishment”!!!

Is a financing round really something to celebrate? Is it a rite of passage or a true accomplishment? Like so many questions in life, the answer is that it depends. As is so many other parts of business and life, the answer is not as black or white as many like to make it out to be.

Putting a business on the venture capital treadmill, is one way to go. It comes with its risks and benefits. Typically, when these companies raise rounds, they’re not profitable yet. They’ve placed themselves on a high speed treadmill that often demands growth and market share before profit. The entrepreneur needs to keep up with multiple financing rounds at continuously higher valuations, so his or her investors can show paper returns to their investors.

This strategy occasionally works and there are powerful stories such as Facebook or twitter that we all marvel at. But for every one of these stories, there are hundreds that we don’t hear about – who eventually fizzle away or blow up when they can’t get that next round.

As I said, there are risks and benefits, just as there are in choosing to build your business without outside financing. For every announcement of an entrepreneur who is celebrating a round, there are hundreds of small-business owners who are choosing to slug it out and focus on slow and organic profitability. Some of these make it, and plenty don’t as well.

That being said, we don’t often read the stories about these businesses in the news. These “quiet” entrepreneurs aren’t made out to be heroes, even though they likely hire multitudes of more people than the venture backed companies. These entrepreneurs are my heroes, because they’re willing to put their houses on the line and sink all of their savings into their ideas.

On this Fourth of July weekend I am thinking about our independence as well as the American Dream. I hope we find ways to celebrate all of those who give it their best shot. I plan to keep on flying “Entrepreneur Class” – how about you ?