Some say insanity is doing the same thing over and over again and expecting different results. For 16 years, Briar Capital did just that. It was not until a year ago that we came to our senses, sought refuge from the overly competitive world of receivable and inventory finance, and forged a new path as a collateral lender with a new focus.
Looking in the Mirror
During Briar Capital’s time as a traditional asset-based lender financing receivables and inventory, we spent too much time marketing products with little differentiation from competitors. We naively thought we could succeed in a crowded sea of competition without taking more risk. It was not until we took a long and hard look inward that we identified a new way forward.
By traditional measures of success, Briar Capital’s ABL business performed admirably. We were profitable and returns were good, but we were unable to grow the portfolio to the levels we envisioned. Once we exited the receivables and inventory financing space, the reasons why became clear.
One obstacle we faced was the short-term nature of the loans we made. Usually it felt like running on a treadmill. Despite making new loans, growth was stagnant. Just as we would celebrate the closing of a new transaction, an existing loan would pay off. Additionally, there always seemed to be a never-ending supply of competitors. Senior debt for lenders in the ABL space was, and still is, readily available, allowing new entrants to join an already crowded field. While the list of ABL providers grew, the number of opportunities did not and shares shrunk.
Briar Capital made several attempts to differentiate itself but seldom gained traction. We tried competing on price, but margins can only get so thin and someone else was always willing to get cheaper to earn the business. When we attempted to compete on structure, there would be at least one lender that would advance more on an asset class, forgo personal guarantees or relax eligibility requirements to win the deal. No matter our efforts, unless we were willing to compromise on underwriting or slash rates even further, there were far too many lenders in the space for us to effectively compete.
Focus on the Ignored
After running into wall after wall attempting to grow the business, we took bold action to stop the insanity. We cut out our receivable and inventory financing business in favor of a less popular segment of the asset-based lending industry: real estate financing for ABL borrowers.
Although many are familiar with the real estate lending space, most in the ABL community are hesitant to participate. Much of that stems from the illiquidity of the real estate market. If a traditional ABL deal heads south, most receivables still turn in about 60 to 90 days while inventory might take slightly longer. With real estate, in some states, foreclosure is administered through the courts and it is not uncommon for it to take more than a year for the process to play out. That is an eternity to an ABL lender, especially if they are seeking an exit.
Most asset-based lenders have long memories and nearly all can recall the “one” time they experienced challenges financing a property. Whether it was the amount of money they lost at a foreclosure auction or the agonizing length of time it took to get out of the deal, those memories are at the forefront of many credit officers’ minds when they consider financing real estate. If those scars are not enough, most senior debt providers to the ABL community prohibit the inclusion of real estate in borrowing bases, making it a costly product to offer and providing significant incentive to keep out of the real estate space altogether.
A New Way Forward
Briar Capital’s decision to focus on a single asset class was not a new idea. In fact, it was borrowed from the equipment finance industry. Rather than finance multiple asset classes, like many in the equipment finance space, we opted to provide financing for a solitary asset. While equipment lenders focus on what they know best, we do the same with owner-occupied commercial real estate for ABL borrowers.
Since opening our doors in 2003, Briar Capital has financed hundreds of millions in real estate assets. Despite the uniqueness of pairing real estate finance with working capital lines of credit, real estate loans only accounted for roughly 35% of Briar Capital’s total portfolio most years. Although most of those loans were part of a larger working capital facility, Briar Capital did finance the occasional stand-alone property, similar to what it offers today.
At the time, abandoning the receivables and inventory financing industry was risky. Taking a hatchet to a profitable business and cutting out 65% of average loan portfolio overnight does not occur often. In the year since Briar Capital made that unconventional decision, we’ve wondered why we didn’t do it sooner.
Past and Present
Since moving full-time to owner-occupied commercial real estate finance, Briar Capital has experienced record portfolio growth. Our real estate loan outstandings have increased dramatically and since going public with our narrowed focus, we have seen a huge increase in real estate deal flow. Moreover, despite having only one product to sell, we received more referrals in the first six months of 2019 than what we did in all of 2018 when we offered multiple lines of business. Although we anticipated a shift in referral sources, we did not expect the change to be so dramatic. In years past, about 70% of our referrals came from banks. Today, banks only account for 10% of deal flow as compared with asset-based lenders that represent 65% of our referrals. The same groups we once competed with are now our biggest customers and those new customers rely on us to compete in the competitive ABL market.
We’ve been involved in numerous occasions where funds generated from our real estate loans allowed an ABL lender to close a loan with its required level of opening availability under its borrowing base. Additionally, there have been other examples where the refinance of the borrower’s real estate was used to eliminate an overadvance by the ABL lender or bring working capital advance rates back into formula. The change from ABL competitor to ABL partner has been swift and the results have been better than expected.
The traditional ABL business Briar Capital chased for years was ultimately holding us back. Prior to shedding our competing ABL product, other lenders were reluctant to send us real estate referrals because they feared exposing their referral sources and/or borrowers to a competitor. Now that Briar Capital is no longer a competitor, ABL lenders do not hesitate to send deals our way.
Faced with decisions to advance more on inventory, increase debtor concentrations or provide a temporary overadvance, asset-based lenders have more options today. With Briar Capital, they now have a partner to finance their prospects’ and borrowers’ real estate assets and generate liquidity they could seldom obtain themselves. As a true real estate asset-based lender, Briar Capital provides more favorable terms than those offering long term amortizations and covenant free structures.
Briar Capital’s 16 years in the traditional ABL space was not unproductive. During that time, we gained an understanding of what a working capital lender needs when it comes to inter-creditor agreements and mortgagees waivers. This understanding is carried over when formulating those documents today. Who better to work with on difficult negotiations than someone who understands the perspective of both lenders?
Leading the Way
Self-disruption of one’s business model is unconventional, but it was an opportunity to blaze a new trail for Briar Capital. Rather than continue to battle among the masses, we turned the masses into allies and now bring added value to financings where real estate is included in the collateral pool. While still evolving today, Briar is pleased to be leading the way as the first lender focused exclusively on providing commercial real estate finance on a nationwide basis in the ABL community.
Jeff Van Sickle is president of Briar Capital Real Estate Fund.