Commercial Lending: Low Interest Rates Tarnish Positive Deal Flow
RMP Capital’s James DiCamillo notes that 2012 was characterized by historically low interest rates that made earning a profit somewhat challenging. Looking ahead, DiCamillo says banks have continued their retreat in the small business sector, even though many enterprises that would be candidates for financing pose only a fair level of risk. As a result, more business owners in this category appear to be discovering commercial finance as a serious option.
It appears that the commercial finance industry has enjoyed a decent level of activity in 2012 with respect to deals and transactions. However, the luster was somewhat tarnished with the severe pressures of historically low interest rates. The ability to earn a profit on a financing needed to be carefully scrutinized.
Credit for deal flow in commercial finance in some respects goes to the banks. They continue to be burdened, however, by steep, excruciating regulations by government monitors. Banks have continued their retreat in the small business sector, even though many enterprises that would be candidates for financing only pose a fair level of risk. More business owners in this category appear to be discovering commercial finance as a serious option. Some of the noteworthy sectors are:
Apparel and Footwear
Both apparel and footwear have been suffering and depressed for a variety of economic reasons. There are always emerging designers that think they can succeed and will consider commercial finance. The major brand labels have so much power in the stores that it becomes exceedingly difficult for the upstarts to compete with them. Overall, retailers are under so much financial pressure they cannot be blamed for demanding all types of stipulations and requirements to their advantage from design houses that want to get placed in their stores.
Retailers have been aggressively creating their own brands where they engage in direct buying, thus cutting out the middle supply chain business owners whether they are suppliers, importers, distributors, vendors, jobbers and the like. For the retailers, it is now a one-way proposition. Deals that are available in this space have become frustrating.
Regular high-value jewelry activity and the opportunity for financings among businesses in this space were unimpressive during 2012. In what was an uncertain economy, high net worth consumers have instinctively put off decisions and held back on buying expensive many leisure, lifestyle items. On the other hand, cheap costume jewelry enterprises with entrepreneurs and new designers are always coming forward. These areas present decent opportunities for financing.
Competitive warfare has broken out in the electronics sector where small business owners are looking for commercial finance in their manufacturing and importing of big-name brand knock offs. The retail community embraces these propositions. However, there are all sorts of strings connected, which often lead the business owner and the deal into a high-risk scenario, including retailer demands like attached markdowns and huge returns. These transactions can disintegrate into one huge consignment sale. It becomes very easy for the client — and the financing source to lose out here.
Also be careful when you are financing black market electronics (complete knock-offs without regard to patents or copyrights) or gray market electronics (buying legally from an unauthorized distributor). Brands like Microsoft, Apple or HP carry a lot of weight with retailers. It appears unlikely many in commercial finance will get the opportunity to finance those deals. Perhaps, some of us may be financing “the next Apple” or “the future Microsoft.”
The same applies as to the chances to finance cheaper versions of a computer brand. One strong growth area during 2012, which appears to be continuing into 2013, are opportunities for financing computer upgrade products, enhancements and software packages with strong licensing. There seems to be good entrepreneurship and partnering of business owners. All of this has strong potential.
I believe we are on a new generation of consumers driven by cultural appeal that will stimulate toy sales. There appears to be promising product innovation matched by a marketplace for this sector. The doors are open for financing all aspects of the toy market whether it is manufacturers, jobbers, importers, distributors, suppliers, etc. There are generally good margins to be made depending upon the promotion and popularity of the product.
I’m not seeing a lot of activity in the furniture industry. Big chains appear to be limiting their purchases, and what action is existent is being handled by specialty shops (i.e., bedding, lighting, carpeting).
Be careful on the receivables from a small store operation or an independent. What is its size and credit status? There appears to be some promise among entrepreneurs that are manufacturing customized, high-quality furniture and selling to high-end concerns. This budding class of business owners needs financing.
The publishing industry appears to be in a holding pattern, treading water, so I am not sure of its future direction based upon the sector’s technology shakeout. Publishing is finding and re-inventing itself. I would be cautious on any deal in this sector for 2013.
RMP has been involved in factoring trucking invoices since 2007. I sense some increased volume on truckers moving goods for 2013, with account debtors paying slower and even demanding more advantageous terms. So, the factor becomes more relevant.
However, more commercial finance firms have recently discovered this space, and the competition for deals has been driving down margins on yields — to the benefit of the trucker.
There are a number of new, small factors that have made their debut in commercial finance. They are actually well-capitalized entrepreneurs that are moving their investments from banks and other equities, trying to take advantage of more attractive yields in factoring.
They need backroom support and additional leverage financing as they learn the business. High net-worth people have a lot of interest in this approach and how factors can service them.
There are plenty of deals still flowing from public works construction, the contractors and subs engaged in this work, especially from small vendors and family-owned businesses, that need financing. Many of these enterprises do not have the financial capacity or cash flow if they are awarded government contracts. Therefore, this should be an excellent fit for many factors.
The success key is establishing a strong funds control program. It appears that with President Obama’s re-election, public works opportunities will be abundant for the next several years.
Whether it is telephone companies, electric companies or cable companies — many utilities are putting out contracts to local vendors and contractors. Obviously, this offers good risk receivables, probably with payment terms over several months. I would take these deals all day, every week.
Between insurance companies, government programs and hospitals, there is no shortage of good receivables where time is required for payment to the vendor, supplier or distributor. Look for opportunities especially when it comes to inventory items, materials, devices — everything from bandages, to scalpels, to operating room lighting, to oxygen canisters, to braces, to wheelchairs, beds, the list goes on.
There’s an astounding statistic that has surfaced since Hurricane Sandy in the Northeast. It affected 250,000 vehicles, which were either totaled or damaged. We have already started seeing a stampede of auto parts activity. This is over and above what had been a good year in 2012, since there has been a record set on the life of vehicles that owners are now keeping between five and ten years, all requiring parts. Let’s feast!
Staffing is another robust sector that has seen growth due to some negative economic issues. Many employers remain reluctant to hire additional, permanent workers based on perceived instability and volatility. They do not know if increases in business volume are only temporary.
They also do not want to get stuck with legal encumbrances that come with company employment and job descriptions. Temporary personnel and staffing is a popular solution and the receivables are decent.
Financing opportunities have remained steady and consistent for suppliers, vendors, importers, and distributors that sell to retailers in the office supplies space. These are products and inventory that consumers will always use. Margins, procurement and requisitions, however, all favor the retailer.
The big boxes can pretty much dictate terms and conditions if the small business owner wants to sell them. There has been widespread media coverage on how Staples has initiated shrinking its real estate while growing its Internet volume. This does not infer less sales, rather greater profitability. Look for more of this business model by others in this space.
My instincts based on more than 40 years in business, many logged in commercial finance, is that 2013 will continue to offer some economic improvements because we are at the end of the 2008 down cycle. A significant negative in our 2012 economy has been uncertainty and instability ravaged by partisanship and politics.
Whether you are a Republican or a Democrat, an Obama supporter or a Romney voter — the direction of our nation over the next several years has been somewhat settled. I am not expecting a whole lot, but there should be some modest upswing for commercial finance.
James DiCamillo is executive vice president of Islandia, NY-based RMP Capital Corporation, a ten-year-old national factor that handles approximately $120 million in annual deal flow. For more information, visit www.rmpcapital.com.