UpFund Review: Updated December 2016
UpFund is a service that provides crowdfunded capital to Amazon sellers. If you were to read about how they describe themselves on their website, you’d likely think the capital is in the form of a loan. However, that’s not the case…providing loans would mean they are a peer-to-peer lending network (like Prosper), which comes with onerous and costly regulatory requirements. So, instead, they’ve tried to structure the business as offering consignment services.
UpFund Review: How it Works
Let’s assume a Seller wants to raise $10,000 to purchase inventory and there are 50 Backers willing to invest $200 each:
- The 50 Backers would commit to the Campaign; however, nothing is binding until the full amount ($10,000) is raised.
- UpFund collects the funds and forwards it to the Amazon Seller (Consignee) to purchase inventory from their supplier.
- Seller assigns inventory so that it is now contractually owned by the Backer (Consignor).
- Seller maintains physical control of the inventory and sends it in to Amazon’s FBA warehouses, where it is sold through the Seller’s account.
- Once inventory is sold, Seller purchases it from the Backer.
Now you might be thinking “this doesn’t sound like consignment at all”, and you’re right. I suppose there’s no easy way to describe this type of structure, so they went with something people would easily recognize.
UpFund Review: The Issues
Even though it’s not really consignment, it sounds simple enough, right? Well, not really…
I had a lot of questions about how this works, so I picked up the phone and spoke with them. Here are just a couple of things that concerned me:
- How is tax reporting handled? Is it the Seller’s responsibility to issue a 1099 to the Backer? (they couldn’t answer this question)
- If the Backer owns the inventory, then it should be on their balance sheet at year-end. How does UpFund help facilitate this recordkeeping? (again, they couldn’t really answer this question)
- What happens if the Seller can’t/doesn’t pay? If the inventory is sold and the Seller doesn’t pay, then they have defaulted on their contract. There are legal remedies for this…having to chase down your money isn’t ideal, but it’s an option, so fair enough.
- But, what happens if the inventory just doesn’t sell as expected? It’s at UpFund’s discretion to determine how to handle it. Even though the Backer owns the inventory, they don’t control the liquidation decision. The Terms originally included a provision that provided Backers with voting rights, but I’ve been (verbally) informed that those have been removed.
- Whose insurance covers the inventory should something happen while in transit? (They couldn’t answer this question either, but my once.
- I didn’t ask what happens if there’s a quality issue with the inventory, but I’m not optimistic they would have had an answer anyway…guess is that it’s the Backer’s loss) Granted, this is a low probability event, but things like this do happen – I personally had inventory that was destroyed in a China warehouse fire.
These might sound like non-issues to some people, but I consider them to be extremely important. I’ve actually got several pages of questions, many of which I didn’t even get to because I was already getting uncomfortable with the service.
UpFund Review: Digging a Little Deeper
I’d actually like to provide a disclaimer. My description of the process is just my understanding, so I might not be 100% correct. I wish I could be more confident, but it’s a confusing structure that’s been implemented simply to circumvent being regulated, and I don’t think they’ve quite figured out how it should work either (RED FLAG!). In fact, I went through their Seller Terms and Backer Terms in pretty thorough detail and followed up with the phone call I mentioned. If you read through my description of how the service works and the Terms I’ve linked to above, you’ll notice that there are a lot of inconsistencies.
Again, I’ve outlined their service in the way it was described to me on the phone because they suggested the terms are changing frequently. To be honest, that really bothers me because my guess is that most people take action on the site based on what they read rather than picking up the phone to ask questions. Transactions may actually be happening on terms completely different terms than what the parties expect, which seems outrageous to me.
With that in mind, I earlier linked to a PDF of their terms earlier rather than linking to them directly on purpose so you can see what they were like at the time this post was written. I’ll warn you – their Terms are very poorly written, to the point that I urged them to fire their attorney. Granted, I’m not a lawyer, but I have enough experience reading through legal documents to know when something is drafted properly, and their written terms are awful. Like, really bad.
As an example, there fee of 5% of Profit charged to Backers. If you read through this carefully, you’ll notice that this “Profit” fee is due to the company even if the Seller doesn’t pay you a penny of what’s owed (it’s based on what’s “promised”, not “earned”. My hunch is that this is not what UpFund intended and it’s just an example of a bad attorney doing sloppy legal work, but I wanted to point that out. I mean, would they really charge “Profit” fee even if investors lost all their money?
Similarly, notice the final paragraph in Section 2.17 – “Backer hereby grants UpFund the right to make adjustments to Backer’s account balance, in order to accurately reflect available funds, payments of Principal and Profits, fund withdrawals, clams against funds and refunds. Backer agrees that, under certain circumstances, these activities may result in a negative account balance.” Negative account balance? So, a Backer might actually OWE MORE money? What!?
When I asked about this, the person I spoke with was genuinely surprised to hear about it and suggested that it was probably just the attorney being diligent…but that’s a very odd thing to include without any more information. Why would something like that even be there? It’s either sloppy (again) or really egregious. Consider my comment above…the one about owing the 5% of Profit fee even if you lose all your money. I still don’t think they intend to charge a Profit fee even if an investor loses their money, but that’s the only way I can think of a negative account balance happening (since there are no account maintenance fees), so I’m assuming it’s just poor legal work. Either way, it’s a big red flag!
These are just a couple of examples…it would take me way too long to point out everything that I thought should be improved, but feel free to review the terms yourself if you’d like.
UpFund Review: The Conclusion
This post is already way too long, so I’m not even going to go into their business model further even though there are some interesting elements. To be honest, I think the model would be great if they were a pure peer-to-peer lending network, and if the management team were stronger, but I’ve seen enough that makes it impossible for me to recommend them right now.
For your reference, you can find their current terms here:
Hopefully these have been improved by the time you read this review.
I hope you use my comments to educate yourself, but please do your own research. I provided them with a lot of feedback, so things may have changed since I put together this review. I personally don’t think I’ll ever get to the point where I have faith in their team, but others may have a different opinion. The returns they offer are pretty attractive, so I see the draw.
Before I start getting emails, I should point out that I’m aware they are a startup trying to deal with growth. But they’ve been live for 7 months since the date of this review, and having incorrect or poorly written terms is inexcusable for a financial services business. If I were buying an app, I could look past poorly written terms as long as everything is working. However, when you’re dealing with investments, legal documents are the actual product. They shouldn’t be an afterthought! If something goes wrong, the only thing the Seller and Backer can do is look to the documents to figure out who’s responsible and/or what action steps should be taken.
It shouldn’t take a random guy like me to identify all these problems in a couple of hours when they have an entire team dedicated to this business.
Even if they get all this worked out (maybe this post will help in that regard), I’d still be very hesitant to do business with this company as there may be other issues that aren’t as easy to identify. It’s not just about the things I mentioned…I see it all as an example of a poor management team that isn’t able to effectively execute on its strategy, and that’s what concerns me the most about this company.
Remember that the company is basically acting as a financial institution. Would you trust your money with a bank that was so disorganized? I asked about things like data redundancy and what happens if UpFund goes out of business, but I don’t think I had the right person on the phone to answer those questions. These are probably things you might want to look into further though.
I debated whether or not to even write a review of the company even though it’s not something I can recommend now…but since I put a lot of effort into my research, I thought I owed it to anyone who might seriously the service. I urge you to do your own research and thoroughly consider all the risks. I know it’s a small company, and people are relying on the business to succeed for their livelihood, so it’s not my intention to hurt them with this review…but I feel it’s my duty to voice my opinion when I feel strongly about something.
Here’s a link to their official website if you want to explore it further: UpFund.io
Amazon Seller Funding Options
In the event that you are looking for some other form of financing for your business, I’d recommend exploring a few of these services:
- Lending Club
I’ve had good experiences with Lending Club and Prosper in the past, but don’t know much about the other services, so please do your own research. I’m simply providing this list as a starting point.