Posted on October 15th, 2020 by Brett Boehm, CEO TBF Financial
Recently, Susan Carol, a reporter and communicator in the equipment finance industry, interviewed me about developments in the alternative lending marketplace.
Our conversation touched on changes fintech lenders are grappling with in 2020 as a result of the pandemic, more to come, their plans for selling off commercial debt, TBF Financial’s role in the industry, and how alternative lenders are showing interest in the equipment finance space. Below are excerpts from our discussion.
Debt Sales Ahead
Susan Carol: I thought we'd start by just talking a little bit about your company's role in the alternative finance marketplace.
Brett Boehm: TBF Financial is a commercial debt buyer. We work with commercial online lenders, merchant cash advance companies, equipment leasing companies and banks lending against real estate and lines of credit in the commercial segment. This makes us a unique, niche type of debt buyer because we are a commercial debt buyer and not a consumer debt buyer. The consumer marketplace is very large, and the commercial is dwarfed by the consumer when comparing the size of the two entities and what's available for purchase.
As a service provider to commercial financial institutions, TBF is an asset that creates immediate liquidity on accounts that have been written down to zero, so there's a huge benefit to companies in need of guaranteed cash that they can get quickly.
For fintechs and alternative lenders, the question right now is when to sell. Originally there was talk that there would be a lot of commercial debt selling going on toward the end of the year. As I talk to more companies in the industry, most now tell me they are planning to take their losses this year, hope to start 2021 strong and anticipate selling a lot of that type of paper in the first two quarters of 2021 to get some cash rolling. And also, they are revamping their credit side going forward.
Changing Landscape
Susan Carol: One would expect that alternative lenders would thrive at a time like this, given their tech-driven platforms. Certainly, we have seen some major market announcements, such as the acquisition of Kabbage by American Express. Do you expect to see other such acquisitions? How might this affect our equipment finance market?
Brett Boehm: I don't necessarily expect to see many more acquisitions, maybe mergers or liquidations, but I don't expect anyone to be purchasing a large entity like that, primarily because two of the largest that were independent were Kabbage and OnDeck. By being among the largest commercial online lenders in the country and a publicly traded company, OnDeck’s struggles and recent sale was big news. Then American Express, one of the world's most powerful finance companies, contracted to purchase Kabbage. The combination of Amex and Kabbage make it very difficult for any other similar financier to compete against it in that market space.
Tons of money goes into marketing and they have that capital in spades to put out there, to drive their financing options, so the Amex-Kabbage team will now dominate this space. And as others continue to utilize Kabbage’s platforms and customer lists, I expect that they will take a lot of this data and grow into other areas of financing like equipment financing. I wouldn't be surprised if they have an online platform to support the equipment leasing industry very soon.
There really aren't any other entities that are that big and could be acquired. I see the potential for smaller entities that ran into trouble merging with someone else, or liquidating everything and selling off their companies, but not a big asset acquisition like Amex did with Kabbage.
Susan Carol: Well, how does this affect your business in this marketplace?
Brett Boehm: It'll be interesting. We've done business with lots of large entities and the question becomes, when you're dealing with someone that is as big as an American Express, will they consider outside collections or do they just want to support it in house? These super large companies generally like to maintain everything within and not outsource much. We'll see if that continues to be the case.
We do expect there to be a lot of selling and liquidation among alternative lenders that really haven't done many loans since March. Many of them literally stopped originations in March as everything was kind of hitting the fan with the pandemic, and instead they moved over to making government loans on behalf the SBA, where they can loan someone else’s money and still get commissions. Kabbage was one of the big players that provided SBA lending. So, alternative lenders found a safe way to drive revenue towards the front end of the company. However, now their books have kind of dried up and they have to revamp their algorithms and platform so they will function as well in the current pandemic and future post-pandemic environment as they did in the pre-pandemic environment.
Equipment Finance Interest
Susan Carol: You are on the membership committee of the ELFA (Equipment Leasing and Finance Association). Do you think that some of these fintech lenders might be interested in joining the ELFA or partnering with ELFA members?
Brett Boehm: Yes, most definitely, they have been joining. The F in ELFA stands for finance. The association used to just focus on equipment leasing, as the ELA. Once they added finance, they tried to expand the association to apply to banks and other entities such as alternative lenders. As they've been working at growing the segment, there have been alternative lenders that have joined, and other financial technology companies that have joined, as well, along with banks large and small. And TBF has benefited from networking with companies in the alternative lending space at ELFA events and purchasing their portfolios.
Susan Carol: Right, and you think that trend will continue?
Brett Boehm: Definitely. Even though in these types of environments you tend to figure out how to do more with less, I don't think that online conferences and Zoom meetings are really going to be the way of the future. People are still going to want to be face-to-face and attend these conferences and network in person, meeting prospects and learning what their competitors are doing, so I really still expect there to be a benefit in the association conferences.
Susan Carol: I began to wonder after our initial conversation about this if we might see more ELFA members become sort of fintech-like companies just by using the same kinds of business models. Like Innovation Finance, for example, with its mobile platform. Do you think we might be looking at a lot more companies like this? Or maybe everyone really becoming a “fintech,” to the point where that's not even necessarily a term anymore?
Brett Boehm: Yes, I feel like we're already partially there. If you have a business model where prospective customers go online and their information gets plugged in and the data then gets pulled and it gets thrown through this algorithm of math and data, you can instantaneously offer a loan to the person without an individual in your company touching the deal. Well, you can just imagine the number of deals that they're able to do at the same time, 24 hours a day, seven days a week.
When you need individuals to underwrite and review all this information, it takes longer. You could lose the deal, and you can't get as many deals done. If you can somehow find an algorithm that can do all that for you, even if you have to have some hands on deck, you're going to be able to put a lot more loans together and financing agreements together to get deals done and grow your business.
So, it definitely behooves companies to look at ways that they can utilize financial technology to speed up their processes and make them more efficient, as it will just grow their company exponentially.
Balancing Risks
Susan Carol: Just wondering if being that fast and instantaneous, if that somehow is riskier and maybe leads to more credit issues, and maybe to having to charge off accounts.
Brett Boehm: One would think that yes, it's riskier, because there are anomalies to every situation you might have, and that's where getting the algorithm tweaked to a point where it's as good as it can be is important. And constantly reviewing it, too, so you would always have a team that is looking at whether this algorithm is in line with where it needs to be. That is kind of an example of what happened when the pandemic hit, and companies were shutting down. Many alternative lenders stopped lending because they knew that their algorithms did not reflect the current marketplace and they couldn't tweak them fast enough. Because it was such a drastic change, they had to walk away from the entire thing and just shut it down to see where things were going.
But in a more stabilized economic environment, it's easy to tweak the algorithm on the fly. And if you do have more charge offs, as long as they're within the range that you need to still be profitable, if the algorithm is increasing your business so that you're putting so much more on at the front end that it goes up a couple of percentages, then all those new deals that you're doing should more than cover the increase in charge offs. You just have to make sure that charge offs don’t increase too much beyond a certain threshold.
Susan Carol: Right. Is there anything else we should discuss about the risk in the credit environment? Any other thoughts?
Brett Boehm: It seems that the equipment financing entities are still lending. They have security in their equipment, and they know what the marketplace is ultimately for their equipment. For online lenders, their security is in a customer’s business and in any individual guarantors. Most businesses today don’t have physical assets like there used to be. Some do, depending on the type of business you're running, but a lot of them are mom-and-pop, online, drop ship, web-based type businesses where there aren't many assets. So, if the business stops running, your UCC doesn't really attach to much. In the underwriting you're anticipating the risk that the entity is going to be able to perform, and hopefully they do sufficiently to cover the loan or lease.
And with all the different types and levels of financing available, even the high risk deals can be offset with the rate of interest, so if the customer doesn’t pay in full, hopefully they got to a point where they covered the principal and were at least into the interest so it is a profitable deal. Even though it would be a loss overall as to how it's booked because they didn't pay the entire amount back, underneath it still became profitable.
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Brett Boehm is CEO for TBF Financial. He can be reached at bboehm@tbfgroup.com, phone 847-267-0660 or via LinkedIn. |
