How a Growth Push Derailed CAN Capital, a Big Lender to Small Businesses
An ill-fated growth push has tripped up one of the oldest, most-successful online lenders to small businesses.
CAN Capital Inc. was forced to stop making new loans late last year after it discovered problems in how the company reported borrower delinquencies, according to people familiar with the matter. The errors were significant enough, the people said, to cause the company to breach covenants with its big-bank creditors such as Wells Fargo & Co. and push out three top executives.
To help turn the business around, the firm recently hired restructuring firm Realization Services Inc. for assistance in negotiating with creditors and brought on investment bank Jefferies Group LLC for advice on strategic alternatives, The Wall Street Journal reported Friday.
Acting Chief Executive Parris Sanz, a lawyer who took over the top spot at the company in November, said in an interview earlier this month that the problem affected a tiny amount of the company’s loans.
“We hit a bump in the road and blew out a tire,” said Mr. Sanz. “We just need to change out the tire, and we’ll be back on the road.”
CAN Capital’s struggles are the latest setback for the fast-growing financial-technology sector, particularly online lending, in which lenders use algorithms to automate credit decisions and fund loans with investor money rather than customer deposits.
Resurgent competition from banks and cooling investor demand for many online loans have hurt companies such as LendingClub Corp., Prosper Marketplace Inc. and On Deck Capital Inc. LendingClub, the largest online consumer lender by historical loan-origination volume, replaced its CEO after loan-disclosure problems last May.
Ultimately, CAN Capital’s problems can be traced in large part to a decision made around five years ago to expand rapidly into new markets without putting in place proper internal controls. “It became clear that our business has grown and evolved faster than some of our internal processes,” a spokeswoman said at the time of the executive changes.
What makes CAN Capital’s’s situation particularly painful is its long track record. Over its nearly two-decade history, it has issued about $6.5 billion in loans and merchant cash advances, in which the company agrees to fund a small business in exchange for a percentage for its future sales, the company has said.
Some advocacy groups criticized the cash advances as having high fees, but CAN Capital grew, signing up big banks as partners. Wells Fargo has referred customers who were declined for a loan from its merchant-services division to CAN Capital for the past six years.
Around five years ago, CAN Capital started to shift its approach to resemble its startup competitors. The company named a new CEO, Daniel DeMeo, and moved its headquarters in the New York suburb of Scarsdale, N.Y., to Manhattan’s trendy Meatpacking District. Venture-capital firms including Accel Partners and Meritech Capital Partners invested $63 million into the lender, which one investor called the “best-kept secret in the emerging financial innovation boom.”
The early signs from the changes were encouraging. In 2015, CAN announced it had attracted $650 million in debt backing from Wells Fargo, J.P. Morgan Chase & Co., Morgan Stanley and other large banks The same year, the company had around $29 million in earnings before interest, taxes, depreciation and amortization, up from about $19 million in 2014, according to people familiar with the matter.
But as the firm shifted to compete with online lenders, CAN’s loan systems allowed some employees to grant borrowers a few extra days to get payments made beyond what was stated in loan agreements, people familiar with the situation said. Such “grace days” were more common in cash advances, and typically don’t happen in the loan business unless there is a formal modification. Otherwise, the loans need to be declared delinquent.
Last summer, top CAN executives learned the issue was widespread enough to cause the firm to misstate delinquencies to investors and creditors. In November, the board of directors put Mr. DeMeo, along with the company’s chief financial officer and chief risk officer, on leave. They aren’t expected to return, the people say.
Around that time, banks involved in CAN Capital’s credit facility, led by Wells Fargo, said CAN’s issues put it in violation of covenants governing how much it was permitted to borrow, according to people familiar with the matter. As part of a December letter notifying CAN’s less-senior creditors about the breach, the banks said certain debt payments starting in March could be at risk, these people said.
Mr. Sanz says CAN officials are in talks with Wells Fargo and other banks to fix the issues and that only 3% of the loans funded with the credit facility were considered ineligible. CAN is looking to sell more than $100 million in loans and assets to strengthen its financial position and has laid off about 250 staffers in Georgia and Costa Rica, or 55% of its overall workforce, according to people familiar with the matter. Mr. Sanz said the asset sale and other steps are part of plans to raise additional liquidity for lenders and “position us for success in 2017.”
Peter Rudegeair, “How a Growth Push Derailed CAN Capital, a Big Lender to Small Businesses: Online lender’s struggles are the latest for the fast-growing financial-technology sector” Wall Street Journal, January 16, 2017. Accesed via: http://www.wsj.com/articles/how-a-growth-push-derailed-can-capital-a-big-lender-to-small-businesses-1484587393