Auto fintech Finova files for bankruptcy

Despite having raised $155 million in venture funding and being touted as a fintech innovator for its auto equity line of credit product, Finova Financial has filed for bankruptcy protection six years after its founding.

Finova Financial, the operating name of National Financial Holdings Inc., is a Palm Beach, Fla.-based fintech that got its start in 2015. It was jointly founded by Gregory Keough and Derek Acree, a pair of executives with long track records in the financial services sector.

Global venture capital firm 500 Startups and a handful of other investors ponied up seed funding for Finova, which initially operated solely in Florida. The fintech catered primarily to unbanked and underbanked consumers; its core product was its Car Equity Line of Credit, dubbed “C-LOC.”

At a Finovate conference in 2016, Keough touted the differences between Finova’s C-LOC and a typical auto title loan. While both products are based on the amount of equity a customer has in their car, C-LOC allowed customers 12 months to repay the loan, as opposed to the 30 days typically afforded by an auto title loan. Also, with C-LOC, at least some amount of every payment would be applied to pay down principal. Plus, customers who consistently made on-time payments were rewarded with lower rates.

Finova Financial got off to a quick start, raising $52.5 million just seven months after its debut. Investors included Metamorphic Ventures and MHS Capital. Fintech entrepreneurs Jake Gibson, co-founder of NerdWallet, and Sam Hodges, co-founder of Funding Circle, joined the round, while CoVenture provided the credit facility to support Finova’s growth.

A year later, the startup had expanded into six more states and launched the Finova Automobile-Secured Prepaid Card, which allowed consumers to use cash or equity from their car to fund the card. At the time, Keough said, “Other prepaid cards require consumers to deposit cash, which is the No. 1 issue impacting growth of the secured prepaid card market segment. Allowing people to use their car equity removes another barrier for financially underserved Americans.”

Around that time, Finova secured another $102.5 million in equity and credit facility funding. The financing was led by CoVenture, with participation from existing investors. In announcing the new funding round, Finova said that the capital would be used to expand the company’s digital financial services products to “transform the future of banking.”

But last month, Finova’s auto lending business appeared to be headed for trouble. On July 17, parent company National Financial Holdings filed for Chapter 11 bankruptcy protection in the Southern District of Florida. Though light on details, the filing indicates that after administrative expenses are paid, no funds would be available to repay unsecured creditors. Further, it specified that the company has as many as 49 creditors and that, while its estimated assets might total $50,000, its estimated liabilities range somewhere between $1 million and $10 million.

The bankruptcy filing listed the creditors with the 20 largest unsecured claims. At the top on the list with a $21,029.25 claim was Consolidated Asset Recovery Systems, a provider of recovery management, skiptracing and remarketing services acquired by Primeritus Financial Services in 2019. In addition, Silicon Valley Bank, payments platform KyckGlobal and a Florida consultancy are each owed $10,000, according to the filing.

Meanwhile, Finova co-founders Keough and Acree — who co-founded another company called Blockchain Credit Partners in 2019 — landed in hot water with the SEC last week for failing to register sales of more than $30 million of digital tokens, and for allegedly misleading investors. Though Keough and Acree neither admitted to nor denied the , they agreed to pay penalties of $125,000 each. Also, Blockchain Credit agreed to give up $12.8 million as part of the SEC cease-and-desist order.

For now, Finova’s appears to be operating as before, and its website makes no mention of the bankruptcy filing. But, perhaps, the fintech will face the same fate as the companies it was trying to replace. In a slideshow Keough created for a 500 Startups event in 2018, he listed the reasons people with bank accounts don’t like banks. Consumers cited the hefty fees and high interest rates that banks charge, and one customer fretted that “banks can go bankrupt.” Apparently, so can Finova.

Auto Finance Summit, the premier industry event, returns October 27-29 in Las Vegas. The Summit continues to bring together the best and brightest in the industry year after year for unparalleled networking and professional education. To learn more about the 2021 event and register, visit www.AutoFinanceSummit.com.