State of Private lending industry - Part 2

Last week I touched on how the recent headline issues like inflation & Federal Reserve rate hikes and have affected private lenders and the small business owners we serve. Some of the changes were to be expected but others weren't like, for example, an uptick in demand for credit card debt while rates skyrocket. Although that and other recent data might seem counter-intuitive, if we look at the larger picture there is mountain of evidence that easily explains where we are now and where we're most likely headed. Spoiler alert: It's not good.

Some of you might recall my earlier posts where I spoke about the excesses we've all been part of (for at least) since 2008 when the financial system melted down and the government under the new (Obama) administration authorized the Fed to issue 26 Trillion new dollars between 2009 and 2011 just to plug the gaping hole left in our economy by the bankers' melt down. Not one single perp-walk BTW.

Since then, we've been on life support with the Fed injecting Trillions into the economy like it's a dialysis patient while most of us just living though it as if it was just: "Normal business activity" like MSNBC said. Then, in September 2019, the REPO market, which is the minuscule rate huge banks charge each other for massive over-night loans, blew up. It went to 10% which is like a nuke to the bond market.

Everyone knows what happened next: covid happened. And the spigot for printing new money went postal - 6 Trillion new dollars were pumped into the economy in less than 2 years. -

"In season 9 episode 23 of The Office, Andy Bernard graced us with one of television's most memorable quotes: “I wish there was a way to know you're in the good old days before you've actually left them.”

In retrospect, all of the 0-rate interest years where you could get working capital cheap and lever up beyond believe to grow aggressively was all because the Fed was stoking the printing press like a BBQ pit in order to keep liquidity flowing through the patient, er, economy.

"We experienced a decade of quantitative easing and declining interest rates that culminated with an unprecedented multi-trillion-dollar infusion of capital in 2020. But three years later, the party had to end.
The Fed is raising rates, money isn't free anymore, and companies have to once again rediscover the lost art of "turning a profit." Outrageous stuff, isn't it?"

What's happening now to all business owners and the world at large is a massive re-adjustment. There will be a lot of dislocation as the transition from a free-money, loose Fed policy world reverts to the way things were before 2008 - (more likely before 1971 but that's for whole other post by itself). Transitions from loose to tight aren't easy and they require a huge adjustment to survive them. Most owners already have enough on their plate so I expect a lot of consolidation as the weak sisters fall away and the efficient/powerful gain more marketshare.

In Private lending we're going through this adjustment now and it's manifest in fewer choices for business owners and less options to fund their companies. Some states have included new legislation making it prohibitively expensive to do business as private lender there - they are the usual suspects of course: CA & NY. California already has implemented new rules resulting in 70% of private lenders dropping out of the state, nice going! NY, not to be outdone just finished it's comment period so we expect that state to have new restrictions in about 6 months. Business owners in those states can thank their legislators for denying them capital resources available to their competitors in all other 48 states - nice.

"That’s all folks. New York State’s Department of Financial Services has finalized its rules on commercial financing disclosures. The Fifty-three page rulebook dictates what covered parties will be required to do."

Already the community of lenders is shrinking due to inability to place their capital. As risk increases so do lending guidelines making it harder for lenders to find compatible borrowers. If their capital piles up they have to shut down leaving only the larger players. That puts affordable working capital out of reach for the vast majority of owners. Less lenders, fewer options to secure affordable working capital.

"Upstart, the embattled online lender that recently announced a 20% reduction in headcount, revealed on Tuesday that it had also suspended its small business lending operations. The sudden about-face is notable given that the company just entered that market in mid-2022."

For now things are still pretty much as they were for fico scores above 600 - that is, affordable terms are being approved. Rates are stable but requests are being scrutinized heavily and tighter guidelines limit the amounts we can offer. The best advice I can offer to those seeking capital is to expect costs to be in the 2.5-3% per month range for unsecured money - Hard money loans with CRE collateral range lower 8-12% APR.

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