Newspaper Notice ≠ Commercially Reasonable Notice

jonathanfriedmanNewspaper promotion of distressed asset sales was state-of-the-art when Ragged Dick, Tom the Bootblack, and Phil the Fiddler walked the streets of Horatio Alger’s New York City.  Times, however, have changed, as have the habits of potential purchasers and the means by which they look for their next deal.

A secured lender exercising its rights under UCC §9-610 to sell collateral after foreclosure has a duty to market the sale in a commercially reasonable manner.  How does one do that today?

A common knee-jerk is to run a newspaper ad.  This will constitute commercially reasonable notice and is likely to help achieve robust bidding, right?

No, it isn’t and it won’t.  And more and more lenders are getting sued for these misconceptions.

Looking Back

Let’s step back though time.  The total daily circulation of newspapers in the United States was about 54 million in 1950.  By 2000, the total daily circulation in 2000 declined to about 48 million, despite the U.S. population having about doubled since 1950.  And it is reasonable, to say the least, to assume that the number has dropped precipitously since, given that:

  • Wikipeda did not launch until 2001
  • LinkedIn didn’t come online until 2003
  • Facebook didn’t launch until 2004
  • Reddit was a 2005 thing
  • No one was tweeting until 2006

Changes Are Afoot

The law does not always keep pace with changing technologies.  Law makers, however, are taking note.  As early as 2012, for example, the Texas Municipal League wrote this in a legislative update:

Notice to the public is an essential part of open government, but antiquated print ads published in papers with ever-declining subscription don’t appear to be the best way to promote open government. Nevertheless, newspaper organizations are ramping up their opposition to Internet publication of notices. Why? Legal notices provide revenue in an era of declining print subscriptions.

Case Law is Evolving Too

The key standard under the UCC is the commercial reasonableness of the sale.  Courts have long held, and the commercial finance community has long relied, on the notion that the product of a commercially reasonable sale is the fair market value.” The consequences of failing to act in a commercially reasonable manner can be severe.

The UCC does not, however, define what is “commercially reasonable.”  Instead, UCC §9 -627(b)(3) states that a “disposition is made in a commercially reasonable manner if the disposition is made . . . in conformity with reasonable commercial practices among dealers in the type of property that was the subject of the disposition.” This is a standard that all but invites litigation because of its factually intensive nature.  One thing is sure: there is already case law that instructs that newspaper notice alone does not always meet this standard.1

Author:

Jonathan P. Friedland is a partner with the law firm of Sugar Felsenthal Grais & Hammer LLP, with offices in Chicago and New York. He can be contacted at jfriedland@sfgh.com or 312.704.2770.  His full profile can be viewed here.  He does not represent lenders but a significant part of his practice is focused on representing distressed businesses and their buyers.  This article is based on a longer article available here.  He founded DailyDAC, LLC in 2005 to assist lenders in providing actual commercially reasonable notice of asset sales

[1] E.g. DiGiacomo v. Green (In re Inofin Incorporated), 512 B.R. 19, 89 (Bankr. D. Mass. 2014); Ford & Vlahos v. ITT Comm’l Fin. Corp., 8 Cal.4th 1220, 1229 (Cal. 1994); Comm’ Credit Grp, Inc. v. Barber, 682 S.E.2d 760, 767 (N.C. App.  2009).

Cybersecurity: Critical For Businesses Large And Small

VinceMancusoPhoto

A cyber-attack can damage a company’s operations more rapidly and more expensively than virtually any other crisis. Lost revenue due to downtime is one thing but compromised confidential information is much worse. The good news is that there are a handful of proven tactics entrepreneurs and small business owners can use to guard against most attacks. For firms with more sophisticated systems, several reputable cyber security firms offer competitive services and software.

An astounding 71% of all security breaches will target small business, according to a 2014-2018 forecast by the IDC research group highlighted by Small Business Computing. And Forbes recently reported that cyber-crime is projected to grow to $600 billion this year, larger than any other form of crime. “Cyber criminals find small businesses easier targets because their defenses are often not as advanced as those of larger businesses,” explained Gary S. Miliefsky, founder of SnoopWall Inc., a counter-intelligence technology company.

One growing form of cyber-attack, according to Forbes, is known as ransomware. “Hackers maliciously install a file that not only encrypts your laptop or desktop but also looks for file servers and does the same, automatically,” Miliefsky warns. “Suddenly, you no longer have access to your own files – or even worse, your customer records – until you pay the ransom.” Things are so bad, Forbes notes, that the FBI now recommends paying the extortion fees! That’s why prevention matters.

New security concerns grow amid ongoing high-profile breeches. In 2013, more than 40 million credit and debit-card records, plus 70 million customer records (including addresses and phone numbers) were stolen from Target in a security breech that cost the retailer a total of $252 million. And just this month, hackers breached hundreds of computer systems at software giant Oracle Corp, including portals for its MICROS point of sale payment systems deployed at some 200,000+ food and beverage outlets, 100,000+ retail sites, and more than 30,000 hotels.

If hackers can wreak havoc on corporations that large, imagine what they can do to a small business. A recent report found that 50% of small businesses have been breached in the past 12 months. For that reason, the following cyber security tips are recommended from Forbes:

  • If staff use their own devices to access company systems, standardize security protocols.
  • Train employees in key areas – acceptable use, password policies, and defense phishing attacks.
  • Encrypt all records and confidential data to be secure from a cyber-attack.
  • Perform frequent backups and keep a copy of recent backup data off premises.
  • Test backups by restoring your system to make sure the process works.
  • Carefully screen potential employees to reduce the risk of a malicious newcomer.
  • Defend your network behind your firewall – and make sure you can block rogue access. You don’t want the cleaning company plugging in a laptop at midnight!

Author: Vince Mancuso is executive vice president where he manages the company’s overall portfolio development strategy, focusing on asset growth, client retention, and bringing further efficiencies to the company.

Vince has over 22 years of commercial finance experience. Prior to joining Fundamental as a principal, he was senior vice president at Far West Capital and managing director of Bluewater Consulting.

Vince is a former Executive Committee Member of the Commercial Finance Association and remains active in the Association’s efforts to serve and preserve the commercial finance industry.

He is a fanatical music, sports and boating nut and resides in Austin, Texas with his wife and children.

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Tokenization of invoices: A blockchain technology supply chain finance use-case

Casey Lawlor, Fluent

Casey Lawlor, co-founder and director of marketing at Fluent

Today, one of the largest contributing factors to the cost of supply chain finance, especially internationally, is the risk associated with the multi-financing of invoices and the due diligence required to lower this risk. Blockchain has gained the spotlight of supply chain industry for a myriad of use cases, none more important than the tokenization of invoices to lower this risk of multi-financing. So how are invoices tokenized, what does tokenizing an asset do, and how is blockchain technology involved?

In a recent report, a large global bank reported $200MM in losses due to fraud from one port in China. The fraudsters simply financed the same invoices for steel many times over. The cause of this expensive oversight? The lack of transparency between and within the banks and the finance providers who all believed they had THE invoice. They had no simple way to determine if the invoices they were receiving were legitimate, unique, and had not been previously financed. Their systems were disconnected, paper-based, and required tremendous coordination to derisk these invoices. They failed to catch any inconsistencies, and they paid a hefty price. In the report, they mentioned recent experimentation with blockchain technology for just this use-case.

Blockchain technology provides a solution to both issues of transparency and the provable uniqueness of invoices. On an immutable blockchain-based network, financial institutions and financing companies can immediately query a distributed database for duplicate invoices. Companies connected can verify that invoice is legitimate, and financial institutions can be sure it has not been financed before, all without sharing the private details of the invoice.

Each invoice distributed across the network is hashed, timestamped, and given a unique identifier to prevent multiple financing on that particular invoice. Data is encrypted when passed through the hashing function eliminating the ability to read any private information. This tokenized invoice is much less risky, and can be financed at a lower discount rate. Still, if the supplier tries to sell this same invoice again through the network, that invoice will have the exact hash output and the distributed database will show a previous instance of financing to all parties.

By connecting traditionally siloed parties on a distributed database (or ledger), information about these invoices can be shared securely and verified amongst all participants – drastically reducing the opportunities for fraud. Duplicate invoices can be detected much faster and the parties responsible can be easily identified and reported to the network as malicious and untrustworthy.

This process could massively reduce fraud in supply chains and eventually lead to much lower rates of working capital down a global supply chain. While we are just beginning to understand the potential of this technology, it will be implemented in supply chains sooner than you think. There is work to be done, but blockchain will undoubtedly underpin the next leap forward in the future of trade.

Author:

Casey Lawlor is a recent graduate of Washington University in St. Louis and Co-founder of Fluent. After contributing to various technology and blockchain startups, Casey and his three co-founders started Fluent to apply a new technological solution to age-old problems in trade finance. 

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To build your career, build your own brand.

ReedHowardIt used to be that people worked for the same company their entire careers, stuck with their employer through thick and thin, then retired with a nice gold watch. That’s not the case anymore. Today, more than ever, it’s important to develop and protect your own personal brand.

Market Watch says U.S. workers had an average job tenure of 4.6 years in 2012, the last year for which figures are available. And the trend holds up within almost every industry, age, and gender category.

While I still believe in being loyal to your employer and always giving more than 100% effort, the fact is that companies can no longer afford to overlook non-performance. Why? Margins are thinner, there’s not as much profit being made overall, and companies are not making so much money they can afford to carry a workforce that’s not producing. Plus, the old 80/20 principle doesn’t apply as often anymore and you rarely see those “home-run hitters” producing 80% of a company’s results.

So how does this apply to you in 2016? It may sound selfish, but each of us should look to build our own brand, our own following, and our own network of like-minded peers. I was fortunate to learn early in my career that it’s not as important which company you work for as much as your individual reputation and how smart you work. If you develop a group of people who trust you and like to conduct business with you, success will follow. People like to do business with someone they like and can trust. 

3 keys to building your brand and your value.

  1. Continually expand your network and your database. Think “bigger is better,” engage more on social media, including LinkedIn. Make it a priority to travel outside your local city and make new contacts. As a BDO, it used to be you could make a living wooing just a handful of local referral sources but those days are long gone; you need to make it your goal to meet hundreds if not thousands of new people and target those with common interests. I know too many people who have fallen by the wayside and left the industry because their old way of doing things doesn’t work anymore.
  1. Only pursue deals you know your company will do. Know your company’s credit box and stick to it. Educate your referral sources so you’re not wasting anyone’s time. It may seem counterintuitive, but often a quick no is better than a long, drawn-out yes.
  1. Follow the Golden Rule. Sounds simple, but it doesn’t happen enough anymore. Treat others as you would want them to treat you, call people back on a timely basis, and do everything (including signing up new clients) with integrity. Make sure you do what you say you’re going to do, when you say you’re going to do it, even if it’s just sending someone a new contact’s name and number. At the end of the day, all you have in our industry is your name and if you’ve created a viable brand for yourself, there are no limits to what you can accomplish.

Author: Reed Howard, Lender Recruiting

Before founding Lender Recruiting in 2010, Reed Howard served as Chief Financial Officer for ResortVentures, LLC, an Atlanta-based real estate development company.  In this role, he was responsible for financial oversight and asset management for the ownership group of a recently opened five-star resort in Cabo San Lucas named Capella Pedregal (www.capellacabo.com).

Reed has 28 years of equipment leasing, asset-based lending and factoring experience having served in various senior level positions in sales, marketing and credit.  Prior experience includes Division President and Senior Vice President of Sales and Marketing for several business units within Textron Financial Corporation, Division President for Omni National Bank’s Factoring Division, Vice President of Business Development for Presidential Financial Corporation, Vice President of Business Development for Wells Fargo Business Credit, and Vendor Finance Group Manager for CIT.

When he is not busy serving his clients at Lender Recruiting, Reed is active in several finance associations including the Commercial Finance Association (CFA) and served as Treasurer then as President for the Atlanta Chapter of the National Funding Association (NFA) in years 2006 through 2008.

As a native of metro Atlanta, Reed is active in the local community spending as much time as possible enjoying outdoor sports with family and friends.  Reed is a graduate of Kennesaw State University, where he earned a Bachelor of Science degree in business administration.  He contributes much of his professional success to his core values of integrity and character.  Reed believes that what talent can build over a lifetime, bad character can destroy in a moment.

Which is Better: Invoice Factoring or the MCA Lenders?

Stephen Perl, PMFBankcorp.com.Headshot by www.95dollarHeadshots.com Professional On-site Executive Headshots in Los Angeles and Orange CountyInvoice factoring has been around for a long time and has proven itself to be a valuable tool to increasing cash flow for businesses, but is it limited when compared to the flexibility of the Merchant Cash Advance (MCA) lenders?

With Wells Fargo funding one of the largest players in the MCA space, Can Capital, and others popping up daily with similar services, what is one to think?

The lending space always gets creative when there is too much money on the side lines created by a generous Federal Reserve over the years and little place to employ it safely.  Foreign markets are tough and mortgages are way over done…so how do banks compete with factors when they know our product is not scalable? Simple, the banks and other lenders have created a new hybrid business loan product that blends a business credit card with hints of structure borrowed from invoice factoring companies for financing the millions of businesses they cannot reach.

So do we fear it or becoming a fan of the MCA product?

If we break down the MCA product, it cannot go very high on the dollar amount if it is to remain scalable.  We have to remember that this is a credit card with lipstick and driven by numbers and smart systems…not by lenders that manage portfolios like factoring companies or commercial lenders.

The MCA product can also sort of be annoying to businesses because the borrowers’ business accounts will be debited daily in most cases for a payoff in 6-12 months.  Therefore, principal pay back is stiff and fast.

The interest rate that Can Capital and others use is also typically around 36% when annualized, so pricing is worse than a mainstream invoice factoring company’s financing.

On the other hand, factoring is quite the opposite of an MCA loan in many respects. Its lending lines are not restricted to $200,000 typically, but rather can be in the millions.  I never thought I would say this, but, the factoring repayment is patient compared to the MCA lender. Our repayment comes when the client’s customer repays our invoice, not every day whether the invoices have been paid or not.

I think factoring companies could be a fan of MCA lenders as they are filling a working capital niche that in most cases is symbiotic to the invoice factoring company.

I would love to know what you think…comments welcomed.

 

Author: Stephen Perl, CEO

1st PMF Bancorp – invoice factoring 

Author: Secrets of Doing Business with China: Dancing with the Dragon (2012) (Amazon)

Stephen M. Perl, MS, MBA is the CEO of 1st PMF Bancorp, a leading US commercial bank lender, and the founder and CEO of ChinaMart® Los Angeles, a platform that assists Chinese companies in their investment in the USA.

CHINA ALERT: What Factoring Companies and Banks Need know About Financing in Asia

Stephen Perl, PMFBankcorp.com.Headshot by www.95dollarHeadshots.com Professional On-site Executive Headshots in Los Angeles and Orange CountyInvoice factoring companies and banks that are financing clients with ties to China should read this article.  For years, China’s economy was humming along at record GDP growth rates even when compared to similar developing countries like India.  For years, China’s GDP rates were in the 8-9% growth rate range and India’s GDP was in the 5-6% range, but over the last couple of years, the Chinese economy has precipitously fallen.

The problems in China are wide spread but the greatest problem is a government that thinks their economic decisions are better than the efficiencies found in a free market system making the decisions.  With that said, the most obvious problems facing the Chinese economy are structured over capacity, inflation, and now, negative capital outflows.

Many of these major economic issues manifest and begin at the factory level which most US banks and invoice factoring companies have exposure to.  Factoring companies that finance importers and/or exporters are exposed by the virtue of the product that is made by their Chinese supplier(s). It is difficult to find a lenders’ portfolio these days that does not have exposure to China.   Factoring companies and banks must realize that financing suppliers in China presents more risk than ever before.  If the risk is not apparent, then ask yourself if Walmart, or any other major retailer that your client has open invoice with, if these retailers will take deductions from the current a/r if their supply chain or supply of product is interrupted.  It’s a dangerous game if you do not have eyes and ears on the ground in China monitoring critical supplies for your client.  Most of the suppliers in China are going out of business because there is over capacity which has been engineered into the system by the Chinese government in order to create jobs for the last several decades.  Productivity is now becoming important in China as labor rises due to inflation.  Therefore, inflation and job loss in China are now everywhere…and potentially out of control for even the Chinese government to manage.

The Chinese factory owners are also taking measures to send capital out of the country which has been pushing down the Chinese Yuan (also known in China as the RMB).  Normally, the capital flows move to Hong Kong for safety as the Hong Kong Dollar (HKD) is pegged to the US dollar (USD); however, the capital flows are now moving quickly out of Hong Kong and Hong Kong is having a hard time maintaining its peg to the USD.  Most do not realize but Hong Kong as an equal amount of USD for every HKD.  For the first time in years, Hong Kong will now probably move its peg significantly by end of year.

For US lenders in Asia with RMB denominated loans, the deterioration of the currency may be greater than even the profit earned this year.  Unfortunately, the outflows of currency are a self-fulfilling prophecy in regards to currency depreciation, and the depreciation’s acceleration is increased by a negative feedback loop as the devaluation worsens in both China and Hong Kong.

Having an extra level of credit to review suppliers’ strength is more necessary than ever due to the many factories shutting down.  Factories are closing at record levels not seen before.  How does an invoice factoring company’s trade finance department prevent losses?  The following are suggested way to prevent losses:

  1. Visit your clients’ largest suppliers;
  2. Have mini audits of all of your clients’ major suppliers at least once a year (if not more);
  3. Use third party audit firms to check product production quality;
  4. Confirm in writing all orders and dates that the Chinese factory will be required to finish (make sure paperwork is chopped by factory to authenticate approval);
  5. Hedge RMB denominated loans if possible;
  6. Invest in an International Credit Insurance Plan while lending in Asia;
  7. Make sure to have experienced underwriters and account managers in Asia to manage daily activity (or outsource it!).

Taking a few extra precautions will make invoice factoring and related financing a lot easier.

Author:

Stephen Perl, CEO

1st PMF Bancorp – invoice factoring 

Author: Secrets of Doing Business with China: Dancing with the Dragon (2012) (Amazon)

Stephen M. Perl, MS, MBA is the CEO of 1st PMF Bancorp, a leading US commercial bank lender, and the founder and CEO of ChinaMart® Los Angeles, a platform that assists Chinese companies in their investment in the USA.

Jim Hudak, president of CIT Corporate Finance discusses how the emergence of non-bank lenders offers plenty of opportunities for traditional players.

im Hudak, president, CIT Corporate Finance

Jim Hudak, President, CIT Corporate Finance

Today, the array of lenders available to growing middle-market companies is rapidly expanding. Business development companies (BDCs) have been very active in this space of late. Such entities—which are allowed to borrow as much as they raise from shareholders—have been around since the 1940s, but the number of BDCs has grown to more than 50 in recent years. Another development has been the use of collateralized loan obligations (CLOs) by special-purpose entities to provide financing and then securitize a pool of loan assets. And, of course, hedge funds have entered the fray in search of better returns for their investors.

Let there be no mistake, in some cases, it can be difficult for a regulated entity to compete with an unregulated or lightly regulated rival for the same piece of new business. But customers don’t reward financial companies for denying the changes in the market; they reward them for seeing their way through competitive obstacles and making the adjustments needed to thrive in an evolving market environment.

At CIT, we have enlisted these new lenders as allies. It wasn’t so long ago that our company was a less-regulated lender itself. In recent years, we have adopted a more traditional banking model to gather deposits and lower our cost of capital while continuing to offer competitive financing solutions. What we have found is that working with non-bank lenders offers us a way to meet our borrowers’ needs while complying with the stricter leverage limits and additional regulations that apply to bank holding companies.

For example, the regulatory guidelines tell us that, as a bank, we generally shouldn’t extend ourselves beyond “4 x 6” leverage for senior and total debt respectively. A BDC, however, doesn’t have the same restrictions. Rather than decline to pursue such a deal, we have, in many cases, partnered with various BDCs and committed to lower “first out” leverage or provided revolvers that were senior in the capital structures. The BDC has taken the “last out” leverage. We have then carved up the deal economics that make sense for both institutions relative to our respective risk appetites and return requirements. This is essentially seamless to the customer because the company is securing a total financial package and solution.

Similarly, there are times when we rely on CLOs or other debt funds for syndication after we have underwritten a deal. These funds bring needed liquidity to the market and help to lower cost of capital to companies. Borrowers value our role in the transaction because they know we are committed to a long-term relationship and have the expertise to work with them if their financial performance deteriorates. Partnering with the CLO market and other non-bank funds is a way to manage the risk on our own balance sheet, while enabling us to support our customers’ expansion opportunities.

The value of relationship-based banking is one of the big reasons why we’re confident that the influx of non-traditional lenders will complement and not replace the traditional players in middle-market finance. In the final analysis, company leaders want to work with a lender who knows their business and has dedicated industry experts on hand. They want to know that their financial partner has worked with companies like theirs through good times as well as bad. And they want to work with lenders who have stable funding sources that won’t dry up when a downturn hits.

But, most importantly, the middle market needs financial providers who are constantly thinking creatively on customers’ behalf and are willing to go the extra step to help them grow. For us, these days, that can mean collaborating with those others might see as competitors. True to our 100-plus year heritage, we at CIT have once again found that you can get an awful lot done for your customers when you look at the market from their vantage point.

Author:

Jim Hudak is President of CIT Corporate Finance. Hudak has more than 25 years of experience in corporate and leverage banking, specifically targeting middle-market companies. To learn more about CIT, visit cit.com.

 

The Rise of 2nd Lien Lending to Fill the Void in the Credit Markets

 

CharliePerer

Second lien debt is a unique product that seeks to fill the void in the credit market created by limitations of formula-based senior lenders and parameters and term of traditional mezzanine lenders.  Companies across America have a symbiotic relationship with their bank while at the same time still need additional credit.  There exists few options (outside of shareholder loans and vendor financing) for subordinated borrowing except traditional 3-to-5 year mezzanine financing that is only available to select few companies that typically have a minimum EBITDA of $8 mm. This solution provides a long-term solution, but does not address short-to-medium term needs.

 

Traditional mezzanine and equity are the two institutional forms and both serve as long-term permanent sources of capital. Healthy and stable companies are able to access both forms at competitive market rates through efficient processes, but many companies have alternative needs and generate less than $8 mm of EBITDA.  They also have interim, immediate or seasonal needs that, if solved, will help position them for the right long-term capital solution.  2nd lien debt is alternative to traditional mezzanine and equity capital as it is secured and fully amortizing.

The 2nd lien debt, which is fully amortizing, is meant to offer a short-to-medium term subordinated capital solution for companies experiencing rapid growth, a turnaround, seasonality or general availability. It also serves as a great stretch piece for acquisition financing. The loan is secured with a 2nd lien behind the senior lender and covenant free or lite depending on credit with no equity or warrant requirement.

The ideal 2nd lien borrower is an institutional company with sub-institutional capital needs ranging from $500k to $5 million.  Companies have a range of easy options to solve for a several hundred thousand dollar capital need as well as a $5+ million capital need, but very few alternatives to solve for a few million dollar capital need that is subordinated to an existing lender.

SuperGArt_Bold

2nd lien financing is short-to-medium term in length and meant to position companies who want to obtain permanent mezzanine capital, sale to private equity or short-term working capital solution.  Typical terms range from 12-to-36 months and enable companies to position themselves for the right long-term capital event or solve short-term needs due to rapid closing times.

Broad Uses of Capital

Capital needs vary across industries, but there remains a strong need for flexible capital that is accretive and covenant free.  Most companies, especially owner-operated ones, have needs that constantly surpass what their bank is able to provide.  Common uses for 2nd lien capital include availability, seasonality and acquisitions where the owner seeks flexibility and does not want to give up equity.  This type of financing enables companies to achieve their desired growth and de-lever or enhance profitability to make them an attractive target for private equity.

Timing Related Senior Debt Deals

A by-product of 2nd lien financing is bank kick-outs and timing related senior debt deals.  Companies often times are not able to obtain consent to take on subordinated capital and find themselves in a cash crunch.  Loan purchase assignments provide a unique alternatives to quickly and safely exit a bank in order to obtain a larger financing for one trade cycle and obtain a new bank once working capital normalizes.  This type of transaction is becoming more accepted, but needs to be done by experienced parties.

Author:

Charlie Perer is a Director at Super G Funding and a member of the Firm’s cash flow lending credit committee. Founded in 2008 and based in Southern California, Super G Funding, which specializes in lower middle market senior and subordinated cash flow and residual loans, recently closed a $100 mm committed debt fund with the goal of filling the credit void in the lower middle market (revenues under $100 mm).  Super G is a market leader in providing 2nd lien loans to companies who have additional capital needs beyond what their existing senior lender is willing to provide.  This unique product is tailored to companies who have an existing senior lender, can demonstrate sufficient cash flows and are looking for an accretive capital solution. 

Charlie can be contacted at (310) 562-2020 or charlie@supergfunding.com.

Jay McKinney of ProfitStars, a Jack Henry & Associates Company, explains why investing in automation equals an investment in human capital.

JayMcKinney_ProfitStarsIt may seem counterintuitive to suggest that you can invest in human capital by investing in automation. Automation is a word that strikes fear in the hearts of many workers, immediately conjuring images of less work, or worse, unemployment.

On the surface, this reaction makes sense. After all, a major goal of automation is to reduce the amount of human labor required to execute tasks. And it does, dramatically, which is wonderful for the bottom-line. But labor savings does not present a complete picture of its effects.

The true value of automation is in how it elevates the quality of work—both in terms of product and in the actual functions people get to perform.  It is quality that increases employee engagement and satisfaction.

Consider the type of work that automation typically replaces: work that is repetitive, such as keying data into a computer program from a stack of invoices day in and day out, or manually sending notices to obligors over and over.  There are, in fact, hundreds of examples in commercial finance, all entirely necessary, yet basically simple. The work must be done, but it requires little thought.

For those charged with repetitive, “non-thinking” tasks, automation cuts drudgery out of the workday. The data from that stack of invoices is quickly scanned and imported with OCR software (or uploaded from a file), allowing staff to focus their attention on irregularities and problem-solving. Those notices are sent and recorded automatically with every transaction, leaving no doubt that the job was done and freeing staff to work on real issues.

While some people take pleasure in the rituals of process, many prefer more cerebral work that engages and challenges. For those who embrace automation, work becomes much more interesting and productive.

Automation can improve the efficiency of high-level processes, too. Complicated work, such as analyzing a portfolio, also has its share of tedious steps that can be done faster and more reliably. Consider the analyst hunched over hundreds of printed pages of a client’s A/R, reviewing it line by line with a ruler, calculator, and handful of colored pens.  This slow manual search for signs of danger is work that is prime for improvement through automation.

Using collateral management automation, that A/R data is input directly into a database, with the ineligibles automatically calculated in accordance with intelligent rule sets, causing the borrowing base to be immediately updated. The analyst can now focus on interpreting results. The automated process is so much faster, in fact, that the analyst can review the A/R on a much more frequent basis, further reducing risk. Automation gives analysts the tools and time to be more effective at what they do, which makes them happier and your business safer.

Making judgment calls on whether and when to extend credit based on the facts, engaging one-on-one with clients to solve their problems and win their business—this is the kind of work that gives real satisfaction to staff because it’s thoughtful, meaty, and meaningful. It’s also the kind of work that allows your employees to grow as professionals, turns your clients into fans, and unleashes your business to thrive. While some may choose to shortcut labor savings directly to the bottom line, true visionaries invariably choose to capitalize on the opportunity and redirect excess capacity into efficient growth.

Meaningful work takes time—quality time. And your staff is never going to get enough quality time to do the meaningful stuff if they’re constantly wading through low-level distractions. Automation frees employees from the tedium of repetitive manual tasks.

Investing in automation is the ultimate investment in human capital.

Author:

Jay McKinney is the Director, CADENCE Operations for the Lending Solutions division of ProfitStars, a Jack Henry & Associates company.  Jay has over 20 years of progressive experience in systems, support, and operations in various financial lending industries, including Insurance, Banking, and Finance. He can be reached at 205-972-8900 or jmckinney@profitstars.com.

Today’s Lending Landscape: The Disruption of Digitally Enhanced Financing: My Thoughts from the CFA Independent Finance & Factoring Roundtable

TDahm2Every time I get together with my fellow peers, the conversation always turns to our hyper-competitive market.  This was the main topic again at the recent CFA Independent Finance and Factoring Roundtable.

It seems that in all but a couple of years (during the credit crisis), there has been much angst about competition from banks and other funding sources. Banks are leveraging SBA programs to aggressively re-enter the commercial and industrial lending arena. What is different this time is the entrance of new competitors that are looking for ways to generate decent yields in this low-interest-rate environment. This is seen in the amount of private equity money flowing into traditional commercial finance firms as well as the flood of new “digitally enhanced” lenders.

This flood of competition has resulted in pressure on loan pricing, structure, and credit standards. Banks are very attractive to borrowers because of the low pricing they offer and the ability to deliver non-credit services. The enthusiasm of the private equity market for commercial finance business has created a new dynamic. These funds are under continuous pressure to generate favorable returns. This translates into pressure to grow, which is the primary means of generating value.

The biggest buzz at this conference and many others recently, is the rapid appearance of a new group of lenders. This segment is so new, and so dynamic, that it has burned through a number of names during the past two years. What was once referred to as “merchant cash advance” broadened to “ACH advance,” and then adopted the non-descriptive moniker of “alternative finance.” Apparently, they were not enthusiastic about that description either and are now promoting their craft as “digitally enhanced lending.”

Whatever we call them, they represent a tidal wave of funds that are rapidly flowing into our space. Their lending strategy is completely based on software and algorithms that evaluate their borrower’s deposit account activity and the ability to debit the account to underwrite the loan. This model is extremely high on the risk reward scale. It was mentioned that the rate of default runs near 25%, and the level of loan losses is near 10%. The enticement is extremely high returns. The level of returns was not shared; however, they are obviously high enough to attract institutional money despite the extremely high loss levels I just mentioned.

Why would anyone borrow money at such a high interest rate and also allow someone to continually debit their operating account to ensure repayment? In a word, SPEED. In this age of instant gratification, these digitally enhanced lenders offer an immediate solution. They promise to fund in just 24 to 48 hours. Borrowers that are fearful of missing a critical payment or a window of opportunity will jump at the chance to grab cash quickly. Whether or not they are aware of the cost and operating risk they are assuming has not deterred them from taking the bait.

Why is this tidal wave occurring? A recent conference of digitally enhanced practitioners drew 2,500 professionals, including former U.S. Secretary of the Treasury Larry Summers, who stated that he would “not be surprised if within ten years” digitally enhanced lenders “generate 75 percent of non-subsidized small business loans.”

Ironically, despite the increasingly competitive landscape, there are many investors eager for acquisitions in the commercial finance space. Banks and private equity investors are very aggressive, and valuations remain strong. It was noted that banks will pay a higher premium; however, they will thoroughly disrupt the business. Private equity investors will pay less and are more inclined to allow the business to operate as it previously had. The strategy for the seller, therefore, is dependent on whether they are interested in maintaining the business in a similar form, or whether to optimize their payout.

These factors create a very dynamic environment. This new wave of competition is not going away.  Future success will be dependent upon these factors and others (1) efficiency (2) speed and (3) risk management. Risk management is not risk avoidance. The forecast calls for greater risk taking in the future. The key is to have a game plan for acceptable risk and effectively managing the risks we are willing to take.

For those who do not have the energy or stomach to compete, this is a good time to consider selling. I anticipate a consolidation in our industry.

Author:

Toby Dahm serves as Senior Vice President and ABL Portfolio Manager for Hitachi Business Finance. In this role, he assists in business development and is responsible for underwriting and managing of all asset-based loans.

Toby has more than 25 years of experience in commercial lending. His career began with Michigan National Bank in 1986. While there, he held positions in credit management and portfolio administration, including traditional lending, troubled loan workouts, and asset-based lending. In 1995, Toby joined Crestmark Bank and was responsible for underwriting, portfolio management, marketing, and product development.

In addition to his commercial lending career, Toby is an experienced entrepreneur. He was a founding member of Steeplechase Software, an Ann Arbor, Michigan-based start-up company that developed and sold software for industrial automation. Steeplechase was sold to Schneider Automation in 2000.

Toby received a bachelor’s degree in finance from Michigan State University in 1985 and a MBA from the University of Michigan in 1993. He was a member of the winning team in the 1993 University of Michigan Pryor Award contest for best business plan. He is active in the Association for Commercial Growth, the Commercial Finance Association, and serves as an Advisory Board Member for The Salvation Army.