Loan business hides risks, customers keep losing BNPL service provider Sezzle (SEZL.US) is suddenly attacked by short seller Hindenburg

Sezzle's stock plunged on Wednesday after short seller Hindenburg Research disclosed its short position in the "buy now, pay later" (BNPL) service provider, citing risks in its lending business and a decline in customers and merchants.

However, the company denied the allegations, calling them "misleading and taken out of context," and said it remained "confident" in its outlook provided with its third-quarter results.

The stock, which has risen more than 1,000% this year, fell as much as 28.6% during the session before closing down 23.16%.

Hindenburg said in a report that Sezzle was "lending to high-risk consumers with poor credit who are unable to use traditional credit cards at 12.65% interest rates."

Hindenburg claimed Sezzle was rapidly losing customers and merchants, according to the report. Hindenburg is the firm that helped bring down the Indian conglomerate Adani's market value by more than $100 billion and also targeted Jack Dorsey's payment company Block.

Odysseas Papadimitriou, CEO of personal finance company WalletHub, commented on the allegations: "The key is to respond quickly to these accusations. Not just with words, but with actions."

BNPL is a financing option that allows consumers to buy goods and pay for them over time, often in installments. The service became more popular after the pandemic forced more shoppers to shop online.

Because most BNPL providers do not report their loans to credit reporting agencies, data on defaults is scarce.

Papadimitriou added: "Unsecured subprime lending is a very difficult business. Long-term profitability is very hard, and requires an experienced, analytical, disciplined team."

Sezzle raised its full-year adjusted profit and revenue growth forecasts in November.

According to analysis firm Ortex, the stock's short position represented 2.72% of the float.

Short sellers typically sell borrowed securities and plan to buy them back at a lower price. With the stock down about 23%, the short position is expected to generate a $5.7 million profit on the books.