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Nasir and Matt talk about the Seattle startup SwanLuv, which quickly shifted its business model of giving couples free loans for weddings.

Full Podcast Transcript

NASIR: Welcome to our podcast where we cover business in the news and add our legal twist.
My name is Nasir Pasha.

MATT: And I’m Matt Staub.

NASIR: Matthew Staub, we are continuing our week of talking about startups that have had some growing pains.

MATT: Yeah, this one seems to be all pain, actually.

NASIR: Yeah, from the beginning, right?

MATT: Well, I was trying to figure out when exactly they started all this. From what I can tell, there was a ton of stories in December – you know, a couple of months ago. I’m guessing it’s been about two months since they ramped up and started. But let me just explain what this company is. I had not actually even heard of this, surprisingly. This is the type of story that my wife would have come across and said, “Hey, have you heard about this? You should have this on the podcast.”
It’s called Swanluv. I’ll tell you the original premise and what they are now. The original idea was they would give a loan up to $10,000 to a couple for their wedding expenses with no obligation to pay it back. All right, sounds too good to be true, right?

NASIR: Great idea!

MATT: But, yeah, terrible business model of just giving away up to $10,000 in request. But the catch was, if the couple didn’t stay together – i.e. if they got divorced – I assume it’s just divorce and not any sort of death or anything like that, I think it has to be divorce – if the couple end up getting divorced, they would have to pay the loan back, the principal back with interest. That’s the general idea of what they were doing. There’s a lot of problems with this, one of which was apparently they had this algorithm or formula or something like a questionnaire and the couples would enter this information and they would calculate the risk based on how they answered certain questions.

NASIR: You know that’s all made up, too.

MATT: Oh, yeah.

NASIR: As if they can actually predict that. What’s crazy too is that they planned on funding the loans from people breaking up.

MATT: Yeah.

NASIR: That means that, in theory, they’d have to front a lot of money until these things actually started coming in. Forget about the whole collection issues and the issues that people would try to get out of this by not divorcing but just separating and how are they going to keep track that people are staying married? I mean, I can go on and on but, I mean, can we at least agree that it’s not a good idea as far as a startup business? Like, if someone came to you, like, “Hey, here’s my 60-second pitch, this is what I like to do. Could you not laugh at the idea?” That’s the question.

MATT: Was the idea to just constantly search for recently filed divorces? How are they going to keep track of it? Even if they found out that a couple got divorced, how are they going to collect on it?

NASIR: And we’re talking about years later, right?

MATT: Yeah.

NASIR: I suppose people are going to remember that, if they get divorced, they’re going to have to pay $10,000. But, when people divorce, from a financial perspective, it’s a mess, right? Most of the time, both parties lose money – or at least one party. I should say, a collective community property, there’s a lot of money lost. There’s money lost on attorneys, a lot of credit cards get left unpaid, credit goes down. In other words, there’ll be other debts. Let alone, of course, people that are borrowing this money – so-called borrowing – may not have been in a very good financial condition anyway. Also, a lot of divorces are caused by financial stress.

MATT: Ah, that’s the point I had.

NASIR: Oh, okay, you did? Okay.

MATT: You brought up a good point before that and, obviously, the people that were going to do this needed the money so they might not be in the best financial position. But the thing I was going to say was I thought that – this is not substantiated but from what I’ve heard – the number one reason for divorces is money problems.

NASIR: Yeah.

MATT: It’s definitely one of the top couple – or top few, at least. I mean, just from a practical standpoint, this whole business model just doesn’t make sense. Like you said, it even said on the site before they took it down or whatever, “Does Swanluv profit from divorces?” “No, 100 percent of the money collected from the members who are later divorced is used to provide funds for future couples’ dream weddings.” So, yeah, they’re funding these future couples from failed previous marriages. I guess, technically, you could get remarried and that funding could be from your previous marriage end in divorce.

NASIR: This is just ridiculous. Okay. Let’s get to the point here.
They start advertising for marketing this concept but they don’t actually launch, right? They have a launch date or something to that effect and I think they’re launching on what, February 14th? And then, they make an announcement. What was the announcement that they made?

MATT: Basically, the response was overwhelming. I don’t know how people found out about this. Like I said, there were the articles I got posted, but I hadn’t heard of this or seen anyone post about it but, apparently, there was just an overwhelming response because, essentially, they were requested to what was the total number?

NASIR: Sorry to interrupt you. I’m just reading, it’s a screenshot of some of their FAQs and one of the questions – and you’ve already talked about this – “How do we determine which applicants receive funds?” and the answer is, “We leverage online data and algorithm software technology to quickly assess applicants’ risk to determine funding others.” It seems like they basically fund the couples that they think are going to divorce, right? Which is funny. If you end up getting funded then it’s almost an insult because they think that you’re going to divorce more than another couple that’s applying.

MATT: I’m glad you brought that up and I finally got my internet to load. Yeah, it says, “Due to overwhelming demand, nearly $2 billion at $10,000 per couple, the unanticipated legal regulations restrictions in the lending space, we went this different route.” But, yeah, going back to what you just said, everyone that requested it, you didn’t have to give money to that couple. It’s still an option. It’s not like this couple makes a request and they automatically get $10,000. Even if the demand was high, they didn’t have to give money to everyone. I don’t know how they would decide who to give the money to.

NASIR: They should have just used their fancy online data and algorithm software technology.

MATT: I don’t even know how even go about it. I mean, I’m trying to think of what information. I guess maybe a shorter period of time they’ve been together? If it was a very short period? I guess there’s probably certain things you can think about and say, “Oh, they’re more likely.” I mean, statistically, I’m sure there’s things that are more likely for a couple to get divorced or not.
But, anyway, the demand was high. $2 billion apparently overall, all said and done. So, they said, “Well, we obviously can’t do this anymore. We’re going to completely shift our whole process and now we’re just going to become a funding platform to a wedding crowdfunding model,” essentially, putting up a crowdfunding campaign asking friends and family to give money to this couple’s wedding. Same kind of rules apply. You know, as long as they stay married, they keep the wedding. But, if they don’t, they have to pay the money back to those friends and family which to me is even more ridiculous than the original idea.

NASIR: It is, I agree. It’s like they took a bad idea and, instead of making it a good idea, they just add some salt and pepper to it. This statement, unanticipated lending issues and all this stuff, as if that could not have been planned ahead of it. I’m sorry, I have to interrupt my chain of thought here. I’m also looking at another question that says, “How do we help couples stay together?” and the answer is, “Free marriage counselling is available.” Not only are they going to give you free money and wait years to get it back – and they may not even get it back at all if the couple stays together – they’re going to offer you free marriage counselling in order to prevent you from divorcing so that they can not get their money back. I mean, this is just a phenomenal business idea.

MATT: I mean, we’re not even into the legal side of it yet. I mean, we’ve pinpointed ten different issues that are terrible just from a business model perspective. I mean, it was doomed to fail from the beginning. If I would have used this myself, I would have said they’re more likely to go out of business than I am to get a divorce.

NASIR: That’s right!

MATT: You know, it won’t be until when it happens if anything.
I guess we’re get to the legal aspect of this.

NASIR: Yeah, let’s get to that.

MATT: How do you think these loans were set up? I would have to think, the way they’ve structured everything, it just wasn’t really done properly.

NASIR: Yeah. I mean, they mention kind of lending.

MATT: They didn’t give any money yet, I guess. Maybe it was just ideas at this point.

NASIR: I think that’s right. I don’t think they actually did any transactions from what I understand. I think they would have been in a lot worse situation than they are now if they had. But they reference lending – what do they say? – unanticipated lending legal regulations, restrictions in the lending spaces, as if there’s new laws all of a sudden in the lending space which there really aren’t. I think one of the problems that they probably ran into is, think about it this way, I mean, giving $10,000 and I have a certain percentage chance that I’m going to get that paid back. And so, if I’m making many loans for $10,000, in order for me to get that money that I’m getting, I have to get a pretty high interest rate for the ones that do divorce because it has to make up for those other ones.

MATT: Exactly.

NASIR: And so, in fact, I would even imagine that the interest rate is such that they may even be obligated to pay back even more than double what the original principal was or something to that effect. I mean, it has to be some kind of pretty high interest rate or penalty and so forth. I mean, I can’t imagine if it’s a 6 percent interest rate where the couple divorces after a year and the company’s only going to make $600, right? It’s probably something pretty high which, of course, you know, you’re going to run into lending issues.

MATT: Yeah. I think they’re based out of Seattle, I believe. I think the maximum interest rate you can charge is 12 percent – not tremendously high. But, yeah, I mean, just pure math, it just didn’t seem like it was going to be feasible from a financial perspective – unless everyone is getting divorced and they were collecting on it.
The other thing too I’m very curious about is where were they planning on getting this money from?

NASIR: The original money, right?

MATT: Yeah, the principal that was getting loaned on. Like, you have to have that money.

NASIR: You have to be like a bank, right? You’d have to have a pretty… I mean, it depends obviously how many but that’s the whole premise, right? In order to make money, you have to run the numbers. In the sense that, if you only did ten of these, then you could easily get unlucky. Let’s say 80 percent of the ones that they select get divorced within five years – and that’s an acceptable business plan for them which I’m sure that’s not how it is – but in order to get that 80 percent, it’s a law of averages. You have to do a high volume. Again, how are they going to get that money? It doesn’t make sense.

MATT: Yeah, they should have just done – and this probably already exist – wedding loans and you just pay it back over however many years, no matter what.

NASIR: That’s a great idea!

MATT: It’s also just called a loan. It doesn’t even need to be specified as a wedding loan.

NASIR: Yeah. Here’s a legal issue that I think I personally am also kind of annoyed by in the sense that, okay, a lot of couples are upset and they’re not wrong because, really, it’s like they didn’t launch yet. They didn’t sign an agreement and, you know, there was a lot of tweets afterwards when they made the announcement – like, “Hey, you gave our hopes up. We thought we were going to have this dream wedding and now we don’t have any money,” and so forth. But, in reality, this is like I’m going to give them the benefit of the doubt that they didn’t promise this, they didn’t sign any contract because that’s what I’m reading. But let’s assume that no couple could make that argument. But here’s one thing that I think we, as consumers, should have an issue with – they drum up all this exposure – whether it’s today that we’re covering them today or prior to that – that they’re giving away all this free money and then they’re like, “You know what? No, we’re not going to give free money away. We’re going to do this and we’re going to launch a different business and, by the way, since I know all you guys are getting married, I’m going to send you an email saying, ‘Hey, instead of us giving you free money, why don’t you ask your friends and family to raise money for you and then we’re going to profit from that.’” To me, that has some problems and I saw one article mention that because the couples didn’t pay any money then the FTC or FCC wouldn’t get involved but I think there’s some real issue here. I mean they basically lied to us or took back a representation that they made that they were going to do this in exchange for exposure. There has to be something wrong with that.

MATT: Yeah. Like you said, it’s hard to tell. I would assume kind of based on everything we’ve seen and the response and the potential couples’ responses that nothing was agreed to, nothing was signed, no money was certainly given out. Also, their site is currently off as we’re recording this so we can’t even see what is written there now.

NASIR: Yeah, I think they said that their servers couldn’t handle the crowdfunding structure or something.

MATT: But, I mean, even if they get back up and running, they’re still going to run into issues. I’m just confused how they’re going to be. Let’s say they get up with their new plan and they’re just going to kind of be they said they’re a platform but they’re taking in the money and they’re holding it and they’re giving it out once whatever time period is up.

NASIR: It’s not the worst concept because, prior to this, they were lending money to make money off people’s divorces basically. But, now, they’re saying, “Okay, friends and family, lend them money.” The reality perspective is that I give my friend $10,000 for their wedding but I’m like, “Hey, if you guys get divorced, I want that money back. I gave it to you guys to get married, not to get divorced.” And I didn’t give them the money to make money off of them. I gave them the money so that I can help out my friend or family member, right? It’s not the worst idea but, these guys, I feel like these guys are the wrong people to do it.

MATT: I’d even mention what I thought was the most atrocious part of this.

NASIR: What’s that?

MATT: Let’s see. I’ve got to find the quote. I guess at one point he was interviewed – I think this is back in December – it said they haven’t attracted any investors yet, blah blah blah, but here’s what he said.

NASIR: That’s pretty atrocious, too. Like, as if they were expecting investors to fund this thing.

MATT: Apparently, the contract that I guess is not going to exist anymore includes a clause that only one partner has to pay back the money if the marriage ends in abuse. Good luck getting involved in that.

NASIR: Oh, my gosh.

MATT: I don’t know how you could even say that. It’s just terrible.

NASIR: I don’t think they had any idea. You know what? I still don’t think they have any idea. Like, for example, I give $500 towards their crowdfunding campaign for someone’s marriage and they get divorced. Who’s going to collect it? Do I have to collect it? Is this company going to go and send a collection letter? And what if they don’t collect it? Can I sue this company for not having proper collection efforts? Can I sue the couple at the least if they don’t do anything? I mean, it’s just ridiculous

MATT: Yeah, I think you would sue the company. I mean, even if they try this new route they’re going on, they’re still going to have tons of problems. If I knew somebody that got divorced, the immediate first thing I would think of is, “How much money did I put towards their wedding?” I mean, I guess that’s what buying gifts are. You don’t see people asking for their gift back.

NASIR: You know, I was thinking, like, we’re pretty much going through the whole legal analysis of this business and I’m just thinking, if this was my client, what would be my advice to them? It’d probably just be like, “Stop doing what you’re doing and don’t do this business.” I mean, what would your advice be?

MATT: They’re not in as bad a position as we’re making it out to be just because they haven’t… I mean, all they’ve done is talk so far. They haven’t done anything.

NASIR: You know what? You’re right. We could be criticizing them and this could all be a scam. We’ve gone on for like twenty minutes or so on how ridiculous this is. I feel like you’re right, though; they just baited us into this kind of criticism.

MATT: Maybe we can break the story. I haven’t seen anyone write about that yet.

NASIR: If it is true, another good idea is to just basically, if you do have a good wedding or marriage kind of related business idea, just buy the company name and then launch that idea because they have the publicity. That’s what I would do.

MATT: There you go. That’s the takeaway for this week.

NASIR: Very specific advice but it’s still applicable, nonetheless.

MATT: This is one of our longer episodes and one of our shortest legal talk episodes.

NASIR: That’s true. It was just us bashing an idea for twenty minutes.

MATT: Yeah, I don’t regret it.

NASIR: I agree. I regret nothing.
All right, thanks for joining us.

MATT: Yeah, keep it sound and keep it smart.

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Legally Sound | Smart Business covers the top business stories with a legal twist. Hosted by attorneys Nasir N. Pasha and Matt Staub of Pasha Law, Legally Sound | Smart Business is a podcast geared towards small business owners.

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