Small business loans Canada: Introduction
Today I am going to be telling you a story about a US corporate bankruptcy, and then a case study of our own. The purpose is to illustrate how you need to understand all the risk factors as a private small investor in making small business loans Canada.
Small business loans Canada: 1st Global Capital bankruptcy
A $283 million corporate US bankruptcy has derailed many retirement plans. It has left many investors in a financial crisis. In one case, a small inheritance was invested. In another, a cash award granted by a Court was invested. These are just two of the investor stories coming out of the US bankruptcy case of 1st Global Capital of Hallandale Beach, Florida.
1st Global Capital describes itself this way:
“1st Global Capital is an industry-leading direct funder with the professionalism, flexibility and fast turnaround you need to maximize your success. We use our years of industry experience, our funding power and our technological expertise to empower Independent Sales Organizations (ISOs) and Partner’s like you to maximize your business opportunities. Behind every 1GC deal is the expert vetting and oversight from our team of funding professionals with over 50 years of combined underwriting experience.”
Small business loans Canada: The “memorandums of indebtedness”
1st Global Capital was created 5 years ago to fund small companies. It funded loans to small businesses throughout many states in the USA. Examples of the types of businesses it funded are dining establishments, retail stores, construction businesses, healthcare, and e-commerce companies.
They raised money by issuing “memorandums of indebtedness” to people who invested with 1st Global Capital. Many used retirement savings accounts to fund their investment. 1st Global Capital used commissioned agents in many states to sell the 1st Global Capital investment opportunity. These short-term deals were supposed to pay back with interest at the end of nine months.
Small business loans Canada: The risky loan products
1st Global Capital was an alternative lender. It’s loan products included:
- Merchant Cash Advances
- Specialty Funding Options
- Asset Based Lending
- Accounts Receivable Funding
By its very nature, this was risky lending to businesses that could not obtain more traditional bank financing. The investors were wooed by promises of high returns, but I am certain they did not really understand they were making unsecured loans to a company that placed the money into risky loans.
Small business loans Canada: The small investors
Bankruptcy documents indicate greater than 4,000 1st Global Capital accounts existed across the country at the date of bankruptcy. Numerous are individual retirement accounts, each owed in between $621,000 and $922,000.
Court records indicate that 1st Global Capital stated that the cause of its bankruptcy was examinations by the Securities and Exchange Commission as well as the U.S. attorney’s office in southern Florida over alleged securities violations.
As a result, the inflow of money from investors stopped when 1st Global Capital could no longer offer its memorandums. The bankruptcy files show that as a result, the company dealt with an unexpected and intense liquidity situation. The regulatory agencies state that 1st Global Capital was selling securities and the company was subject to government registration with and oversight by government regulatory agencies.
The bankruptcy records do not indicate this but I am certain that eventually, the bankruptcy trustee will report that the investment scheme was a Ponzi scheme. If the inability to take in more loans caused the company’s bankruptcy, it is obvious that they required fresh money in order to honour their existing liabilities. New investors’ money paying back older investors is a classic definition of a Ponzi scheme.
Small business loans Canada: Our very own Canadian case study
Not understanding what you are investing in is not a story unique to the United States. Let me tell you about one of our case studies from last year called Vaughan Crossings Inc (“VCI”). We were appointed by the Court as Receiver of the assets, properties and undertaking of VCI. The main asset of VCI was 5.5 acres of owned development land located at the northwest corner of Dufferin and Centre Streets in the City of Vaughan, ON. In this receivership, our main role was to sell these lands. You can find all the Court records and public information on our webpage that we set up for VCI, so I won’t go through the history of the file in this Brandon’s Blog.
The important point in this file is that the second mortgagee was a group of investors. These investors were found through the use of commissioned agents. These agents were mainly financial advisors and insurance agents. The agents made commissions to raise funds from their clients for investment in this project. Just like in the 1st Global Capital case, the investors were mainly individuals, many of whom used funds in their RRSPs to make the loan.
Small business loans Canada: The dangers of not understanding risk
During the receivership, I had the chance to speak with many investors who called in wanting to know the status of their investments. These unsophisticated people were wooed by the promise of high returns when the project was fully built out. Just like in the 1st Global Capital case, the mortgage syndicator had to cease raising funds as they were being investigated by the Financial Services Commission of Ontario. Ultimately, the mortgage syndicator went into receivership also.
The money put in by this unsophisticated investor group was secured by way of a second mortgage. The developer ran out of cash to develop the property. The mortgage syndicator was shut down. The lands were not be developed. The plan was that the mortgage syndicator was going to do another round of financing to provide construction financing, which would be in priority to the second mortgagee! The mortgage syndicator had the authority, acting as trustee of the second mortgage, to subordinate that mortgage to the construction financing. However, that never happened.
Small business loans Canada: The receivership
Without construction financing, the development project could not continue; hence our appointment as Receiver. There two mortgages against the property and numerous construction liens filed and perfected against the property. We obtained our appraisals and ran a receivership sales process. We sold the property for much more than its appraised value. The sales price repaid the construction liens and the first mortgage. However, there was very little available for the second mortgagee investors.
The promise of a high-interest rate wooed these investors. They may not have been as focussed on the safety of their capital. Unfortunately, these small investors did not understand the risks associated with this type of loan they were making. Shame on their financial advisors who sold them this investment, knowing it was not right for most of them. The financial advisors were hungry for commissions, regardless of what harm may come to their clients.
Small business loans Canada: Is your business at risk?
If your small business is having financial problems, more small business loans alone is not the answer. You must first look at all aspects of your business. First, you should look at the viability of your business.
Are there expenses that need cutting and activities that you must do that can generate more revenue? If so, perhaps we can restructure your business. You may not need a long-term small business loan. Perhaps a short-term loan to get over the immediate financial hurdle you are facing is enough.
If you are looking for ways to restructure your corporate or personal debt call Ira Smith Trustee & Receiver Inc. We understand the stress and pain your financial problems are causing you. We feel your pain and we can end it for you.
Our strategy for every single business and person is to develop a result where Starting Over, Starting Now comes true, starting the minute you walk through our door. You’re just one call away from taking the necessary actions to get your debt settlement and back on the road to leading a healthy and stress-free life. Contact the Ira Smith Team today.