State of the Private Lending Industry

It is hard to believe that we're only two months into 2023 and it feels as if we're all living in a bomb shelter with so many explosive headlines popping up every day. I can't remember a time when there was so much uncertainty across the board in almost every aspect of our personal and business lives. Just this week as I was preparing to write this post about the current state of our private lending industry there have already been major events including a huge environmental disaster in Ohio and now the US Military is "possibly" shooting down UFO's - you can't make this s**t up, you really can't.

In an effort to stay focused, I want to write about some changes that have happened recently in the private lending industry. Some of the changes are directly related to the Federal Reserve's aggressive rate hiking but not all of them. The statement "Don't fight the Fed" comes from the realization (although not always clearly articulated) that the Fed is the big gun in the market so don't mess with them; they have a super-duper printing press that makes "money" from nothing. If you try to trade against them you'll very likely get buried.

So, here are some things I've been seeing lately as I field many requests from business owners for short term working capital:

Rates -

Private lending rates haven't really changed much at least for unsecured commercial working capital. The average cost of unsecured funding ranges between 2.5-3% per month which, interestingly, is the same as it was 4 years ago. All lending products including cash advance (MCA) and LOC are in that range and terms go out to 24 months.

It is surprising that despite conventional rates exploding higher over 100% and credit card rates moving up private capital rates are unchanged since 2018, how many things can you say THAT about?? What has changed however are approvals and guidelines. For example, approvals are coming in at the low end of guideline range leaving many merchants short of needed capital requiring them to either seek multiple fundings or cut back activity.

Restrictions -

Some industries have been restricted because of the risk. Trucking has suffered through the last three years through no fault of their own but lenders are not approving transportation companies under $1 Million annual revenue. Other industries like construction are being scrutinized more heavily. Some new restrictions have also come in the form of Sate lending laws; 7 out of 10 lenders now no longer make offers to companies in California due to new laws restricting their activity - Owners in CA have been put into a major competitive disadvantage relative to owners in other states because of this.

The result of these changes is that lenders have a lot of their capital piling up and not being lent to businesses. Lenders need to lend, if their capital piles up and they can't lend due to risk factors, they close. That leaves fewer lenders and that's exactly what's happening - many smaller, but efficient lenders are being forced out while larger players consolidate more market share.

Small business owners need the smaller, boutique style lenders because they're the only ones willing to take risks none of the big lender will. As the private lending industry suffers internal attrition leaving only larger operations in charge there will be fewer choices and lending options available to the vast majority of small business owners.

Credit Quality -

Private lenders cater to a wider range of credit profiles and that has led to the incorrect assumption that private lending is only for low credit quality borrowers. I underwrite hundreds of files and can say with authority that is not true, although I lend to owners with scores below 580 my average is 710. Recently, I've observed that higher quality credit borrowers are making requests and many of them are telling me that their banks have either cut them back or completely eliminated their commercial lines.

This is going to start happening more as the effects of the multiple Fed rate hikes starts to hit bone. Banks aren't doing well at all and the bigger they are, the worse off they are in terms of solvency. I highly recommend to all my owner freinds NOT to use big banks for their commercial accounts. Chase, WF, CITI, TD, PNC, and especially BOA are all serial felons who have abused their fiduciary trust beyond recognition. Owners who use smaller, local and even family owned banks and Credit Unions do much better in terms of personal service and get better commercial finacing options. Does anyone remember when Chase and Citi left thousands of their smaller companies twisting in the wind on the PPP and EIDL loan programs? I do.

This is the middle of the week so I don't have as much time to post other ideas and information - please call me when you have questions and I'll address your specific concerns if I haven't covered them here - I always return calls.

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