Revenue-based financing continues to evolve at a rapid pace. At the heart of this growth is a blend of innovation, technology, and new regulatory challenges.
In our latest article, we see the world of revenue-based financing through the eyes of Patrick Siegfried, General Counsel and COO at Nexi.
With a professional journey that began amidst the challenges of the Great Recession, Patrick’s path has led him through various facets of small business financing. His time in the industry is marked by a keen focus on innovative solutions and regulatory guidance.
One pivotal area where Patrick has made significant strides is in navigating the complexities of state-level commercial financing disclosure laws.
His work at Nexi isn’t just about offering innovative financial solutions; it’s also about ensuring transparency and compliance in an industry where the regulatory landscape is constantly shifting. This balance of innovation and legal acumen underlines the unique challenges and opportunities in revenue-based financing that Patrick and Nexi are adeptly addressing.
Join us as we explore his insights on the evolving landscape of alternative financing and the trends that are shaping the present and future of small business funding.
Background and Work at Nexi
Q: Let’s start with your professional journey. How did you get into revenue-based financing?
I graduated from law school in 2010. At the time, we were in the middle of the Great Recession, and there were not a lot of opportunities for new attorneys. I interned during law school with the former General Counsel at the DC Department of Small & Local Business Development (DSLBD), and I maintained an interest in working in the world of small business financing, but it was difficult to get my foot in the door.
I spent some time in small business sales, focusing on OSHA safety products. Although it wasn’t my first choice, the experience helped me intimately understand how to work with small businesses. Around 2012, I took a position with Rapid Finance, a financing company that specializes in working capital for small businesses.
I knew how to speak to small business owners and understood their needs and concerns. With Joseph Looney [Rapid Finance’s General Counsel and COO] showing me the ropes, I eventually began handling some legal work for the firm. I passed the Maryland Bar Exam and started going to court, arguing motions, and working on regulatory issues.
I did this for 12 years, and, as an attorney, I grew up in the industry as it was maturing. I saw some of the legal issues we are confronting today, like disclosures, begin to develop and crystallize.
After more than a decade at Rapid Finance, the last five of which I spent as Deputy General Counsel, I was ready for a new challenge, and this brought me to Nexi.
Q: What was it that attracted you to Nexi?
First and foremost, the product.
It was important to me to work with a funder with strong economics and a sustainable business model—a funder with the ability to survive and thrive in this industry. Next, and perhaps just as important as the economics, the product also has to serve the needs of merchants.
When done correctly, the way Nexi does it, revenue-based financing, especially reverse consolidation, is a fair and reasonable funding option for small businesses. It’s the closest thing small businesses have to debt consolidation. Many “debt consolidators” and settlement companies in the industry are actually working against the interests of merchants.
Nexi’s business model is not only strong economically but actually helps small business owners improve their cash position.
I want to serve our customers’ best interests.
This has always been my philosophy, even when working in collections. I think serving the best interests of merchants serves the best interests of this industry.
Q: What does a typical day at Nexi look like?
I tend to focus my work on strategic priorities, both for Nexi and for the industry.
As COO, a big focus of mine is technology, especially the integration and use of artificial intelligence and automated processes to streamline our application intake, underwriting, and funding capabilities.
This is new technology and something that most industry stakeholders have taken an interest in over the last few years. Before that, it was simply too expensive and something that only the really big players had access to. But now, greater efficiency in the funding process is a reality that is available to the entire market thanks to OCR technology and AI.
Improved time to funding is not only important for running a successful funding business, but it is huge for merchants that need capital in the here and now.
As General Counsel, I’m focused on industry regulation, specifically the recent rise of state-level commercial financing disclosure laws.
Revenue-Based Financing Regulation
Q: Can you provide a brief overview of what is happening with the state-level disclosure laws?
The disclosure regulations are in large part a reaction to the illegal and egregious behaviors of a handful of bad actors who abused the system. These bad actors were telling merchants what they were going to get and what they had to pay back, and in many cases, the numbers were pure fabrications. A total bait and switch.
At first, the regulatory reaction was akin to “this needs to be shut down.”
We saw many state governments, including Maryland where I live and work, attempt outright bans on revenue-based financing products. These initial ban efforts didn’t go anywhere, as legislatures realized that, in many cases, the only funding options available to millions of small business owners were these types of products.
We are talking about businesses that, due to several reasons and factors, don’t qualify for traditional business financing. Lawmakers quickly understood that it was necessary to work with the industry and not against it.
Legislators pivoted and are now introducing regulations that require commercial lenders to make disclosures typically required for consumer lending products. While the goal was to create standardization in the funding process, the reality is anything but standardized, and the regulations have created more questions than answers. For example, which law applies across states? The state of origin or the state of business activities?
Even before these state regulations began popping up, it was a standard industry practice to provide merchants with financial disclosures. For example, how much capital is the merchant going to receive? How much do they need to repay? Etc., Etc.
You can argue that some revenue-based financing products are too highly priced.
But it’s not my place to decide price points, nor is it the government’s place. That responsibility rests on the market. Revenue-based financing has come a long way in 25 years. It is still a young industry, but it is maturing. Before revenue-based financing, very few lenders were willing to take on the risk of the markets we serve today.
While I understand the initial reaction of lawmakers, I think it is best to let the market work out its inefficiencies. We have laws against fraud and misrepresentation, and I think those are the laws that should be applied in the cases of bad actors, not arbitrary and disjointed statutes.
Q: What exactly is the APR debate?
This question is timely, as California recently won its lawsuit against the Small Business Finance Association (SBFA). This case was focused heavily on the use of APR in revenue-based financing, a disclosure that is required under the state’s commercial financing regulations.
The position of the SBFA is that the disclosures required by the California Department of Financial Protection and Innovation (DFPI) regulations treat revenue-based financing transactions as if they operate like traditional loans, which they do not. As such, the California regulations result in misstated costs, especially concerning APR.
In addition, the SBFA claims that the California regulations are preempted by the Truth in Lending Act (TILA) because they require the calculation and disclosure of APR, but define and calculate the term in a radically different way, calling into question the consistency and reliability of the TILA.
Most industry stakeholders would agree that APR is not an effective way of calculating the cost of a revenue-based financing agreement given the structure of a traditional loan compared to a revenue-based financing product.
And while the appeals process still needs to work itself out, from Nexi’s perspective, and I think for most operators in the industry, what the California decision means is that, at least for the foreseeable future, APR is here to stay in some states. We are going to see the issue continue to arise in other states. And I can tell you from direct knowledge that Maryland will probably be one of those states.
The general argument is that revenue-based financing products have high APRs when compared to traditional loans.
Sure, but they have to be high given the risk that funders are taking. I don’t think lower APRs are going to come from new disclosure requirements. I think it’s going to come from regular market economics. Just like any other financial product, the funders who figure out how to lower the cost of capital are those who are going to find success in a competitive market.
Again, most revenue-based financing contracts, those put together by funders doing business the right way, disclose the necessary points that the industry believes are appropriate. I’ve spoken to a lot of small business owners throughout my career. If they have an issue or complaint it isn’t about APR. They don’t say “You didn’t tell me that this was 150% APR.”
This is the last thing on their mind.
Going into an agreement, they know exactly how much is owed, they know how much they have to pay back, and they know how quickly it is all going to occur.
Many times the issue is that the business simply didn’t work out, even with the influx of capital.
This is quickly becoming a “state’s rights” issue.
We have blue states in favor of APR disclosures, and red states against APR disclosures. The real problem is that the regulations are disjointed from state to state. Unless we get some alignment across states, what we are eventually going to see is the federal government stepping in. Regulation from Washington is not going to solve the issue.
We need to present a truly worthwhile alternative, and I think we can in the form of the Uniform Law Commission.
Q: What is the Uniform Law Commission and what is it proposing to do?
The Uniform Law Commission was founded in the 19th century as the first state’s rights organization.
We have a federal government, and we have state governments. The ULC is focused on making sure both systems function correctly and, when states are capable of governing their way, the federal government leaves them be and vice versa. Their work focuses on empowering states to work together so that the laws they enact are left in place and not superseded or preempted by federal legislation.
The best example is the Uniform Commercial Code, the comprehensive set of laws governing all commercial transactions in the United States. The UCC was an effort spearheaded by the ULC (together with the American Law Institute) to ensure uniformity in the interstate transaction of business. Because of the UCC, businesses can enter into contracts with confidence, knowing that they will be enforced the same way across states.
Today, the ULC has a commercial financing disclosure study committee that is looking at the feasibility of a uniform act providing for the standardization of disclosure requirements for commercial financing. The ultimate goal is to create and implement a model act across all 50 states that will increase efficiency and reduce uncertainty regarding the governing law for revenue-based financing transactions.
In other words, although New York, California, and other states are all enacting commercial financing disclosure laws, there are slight differences, particularly with respect to language, that can have a big impact.
The goal is to remove these inefficiencies. This is what I and other members of the Alternative Finance Bar Association, like Lindsey Rohan and Kate Fisher, are working towards.
Q: How have funders adapted in light of the new disclosure laws?
Funders in the space are now incurring additional compliance costs.
As such, they are bringing on more legal professionals to better understand the new laws and ensure that they are compliant.
There are very few funders managing thousands of merchant accounts every month. So, for the time being, most funders (including Nexi) are effectively managing compliance by bringing on the necessary legal experts.
The biggest funders are leveraging disclosure platforms to better deal with the new rules and regulations, but not every funder can afford to do so.
Again, I empathize with the fact that disclosures are necessary and important. And yet, we need to come up with a more aligned approach to help funders better manage inefficiencies and compliance costs. This last point resonates with the legislators that I have talked to, and I think that’s why, although we have seen disclosure laws appear in a number of states, we haven’t seen a “wave” of legislation.
Wrapping Up
Q: What emerging trends do you see in revenue-based financing?
I’ve already touched on both of them, but I would say AI technology and the disclosure laws. I will leave the latter as we have spent a lot of time on it.
Concerning AI and other novel technologies, there is a lot of potential to change the way we work, for the better. Rather than dozens of employees manually entering applicant data into a legacy system, AI and tech-infused platforms will help streamline this process and reduce friction, especially concerning risk management.
There is the potential for the industry to save millions or billions of hours while also improving time to funding. Everything will be faster and more efficient, and this will be a big win for everyone.
Q: What does it take to be successful in this industry?
Whether on the legal or operational side of things, you need to be motivated to learn and constantly improve.
The industry has matured a lot, especially over the last 15 years.
If you are in this industry, you need to pay attention to what’s going on and keep your eyes and ears open. Keep up with the trends and challenges, like the legal landscape or the impact of new technologies. Take things step-by-step, slow and steady.
The future of the industry looks promising.
To learn more about how Nexi provides working capital to small businesses, reach out today.
