While in college in Boulder, Colorado, I started a business selling posters out of the trunk of my car. With a little creativity, a cheap printer and some salesmanship, I grew the business large enough to cover my college expenses. Around the same time in Sherman Oaks, California, three siblings started a similar business out of their parents’ garage. Like me, they sold printed posters and eventually framed art.
My poster business grew fast and provided me with a great source of income during college, but never became a scalable company. The three siblings? They eventually moved out of the garage into rented space, added other home décor offerings and steadily built their company, Z Gallerie, a national retail business with 57 locations.
What was the difference between my poster business and Z Gallerie? Probably many things, but, perhaps, one critical element was access to capital. Access to capital is the driving force behind the success of many small and mid-sized businesses. Many entrepreneurs often generate capital by taking on equity partners. However, short-term financing is sometimes more desirable as it provides a viable option for creating liquidity without sacrificing control.
While there is tremendous potential in lending to this segment of the market, it requires a very unique skill set and underwriting perspective, one that is built on past entrepreneurial experience and knowledge. This type of commercial specialty finance takes, in many ways, entrepreneurs lending to entrepreneurs.
Businesses, which may have a very positive revenue outlook, often have limited credit history or are seeking short-term financing that does not fit traditional commercial lending programs and requirements. They may be a young start-up, or small company that has a contracted sale, but lacks the capital to complete the transaction. While unbankable in a traditional sense, they often simply need a bridge to an upcoming liquidity event. This market segment provides a tremendous opportunity for commercial specialty financing, both in the number of potential borrowers and in the premium per transaction.
Specialty finance, however, requires a unique, hands-on approach to underwriting and servicing. This means going beyond a formula, ratio-driven underwriting process. To be successful, the lender must understand the potential risks and rewards of providing capital to an entrepreneur. This requires not only understanding a company’s credit profile, but also the execution risk involved in an individual transaction or liquidity event. An effective specialty finance lender must take added steps such as performing a site visit at the company to assess the strength of its operations, reviewing past similar transactions, conducting diligence on the supply chain and analyzing the market conditions for the underlying asset class. Having an entrepreneurial background allows the specialty finance lender to lift the hood on their borrowers’ business and really understand the company and what drives its success.
Many traditional lenders do not directly participate in this segment of the market because it does not conform to their existing programs or risk tolerance. However, commercial specialty financing plays an important role in the lending market and provides a critical service for companies that need short-term options. That much needed liquidity is often the spark that enables the small poster business to blossom into a national retailer and a valuable future customer for more traditional lenders.
Does every business that starts out in a garage or the trunk of a car grow to $100 million in annual sales? Of course not. There is, however, tremendous opportunity in helping small to mid-sized companies bridge liquidity events on their path to success. Serving this market segment, however, takes a specialized underwriting and servicing approach as well as a unique lending perspective. In many cases, it requires the knowledge and experience of being an entrepreneur to lend to entrepreneurs.
Johnny Camarena is a member of the Credit Committee for Abington Emerson Capital, a full service specialty finance company. Abington Emerson offers short-term bridge loans to small and mid-sized businesses, including purchase order and contract financing. The company’s unique approach to lending allows it to work with companies that are experiencing disruption to their cash flow, cannot obtain financing due to unbankable credit or have only been in business for a limited time. www.abingtonemersoncapital.com