Rita Garwood: Hi everyone, I’m Rita Garwood, editor in chief of ABF Journal. Joining me on the podcast today is Joe Camberato. Joe is CEO of National Business Capital. Joe, thanks for being on the podcast again — I’m excited to talk with you.
Joe Camberato: Always good to talk to you, Rita. Good to be here. Thank you.
Garwood: Traditional ABL underwriting is methodical by design, and that methodology exists for good reasons. What is the problem you set out to solve, and why did speed become the answer?
Camberato: I think speed and convenience is one of the best things that we bring to the market, and it’s a big value-add of ours. Business moves fast, and we are big fans of ABL, banks, and traditional financing — I think all types of financing are important and all have a time and place.
But there are a lot of situations when you think about all the millions of businesses that exist throughout the entire US. At any given moment, a decent amount of those businesses have opportunities that came in left field, or a challenge that pops up, and they need to react quickly. Speed can make up whether they’re going to need the financing at all, but it can really make or break them being able to execute and nail an opportunity.
So it’s really important, and pretty much all the deals we do are high-growth companies — they’re growth deals or bridges. We don’t really work with companies that are in bad situations. If they need a bridge, it’s usually a cash flow bridge — they’re growing, they’re doing a number of jobs, or they’re waiting to get paid from their accounts receivable, and they want to take on more and do more, so they need to bridge the gap. Or they’re just growing fast and something comes their way that they have to execute on.
I can’t tell you how many deals we’ve done where, if we were only a day or two later in providing the financing, they would have just said no — they wouldn’t have had a need for it anymore because they would have missed out on that opportunity. So when it comes to business, days make a difference, and one to two days can make or break a deal.
Garwood: When you tell a traditional lender that you’re closing deals in days, what’s the most common objection you hear, and what’s your honest response?
Camberato: A lot of folks know us and understand us, but there’s still a good amount of people who do not. Usually they’re either surprised or think that we’re maybe over-exaggerating, and they always ask, “How are you able to do that? How can you underwrite a one-to-five-million-dollar deal in days?” We’ve funded eight-to-ten-million-dollar deals in one to two weeks — it’s fast.
But it’s a combination of a number of things. We’re built for speed — we have the infrastructure for it, and we’ve utilized technology for a long time now. Everyone talks about AI and technology now, but we’ve been building tech since I basically started the company in 2007, eighteen years ago, and we’ve always been improving the process. So from a process standpoint, a technology standpoint, and an infrastructure standpoint, we have that in place where we can review an application and a financial package very quickly. We also have a team in place that can move and react quickly, and we’re very entrepreneurial in the way we look at deals and underwrite.
If we have a full financial package, we can hop on a call the same day or next day with the client and move right into a discovery and underwriting call and really get it into motion. We’ve had clients submit us deals in the morning, and it’s ready for review hours later, or by end of day, and we can get on a call. The technology, the process, and the systems we have in place really give us the ability to do that.
Garwood: Can you walk us through the underwriting process at a conceptual level, as a practitioner? What information are you actually making credit decisions on, and how is it weighted?
Camberato: It all depends on the size — it’s weighted really more based on the size of the deal. The larger the deal, the more in-depth we’ll get in our underwriting. But we’re pretty simple — we usually look at the last one to two years of financials for the business, plus year-to-date financials, and we want to look at their cash flow over the last six to twelve months and really understand that. What we’re really focused on is what’s going on currently, right now.
Then we want to understand what their use of funds is for. So, very simply put: what are you using the money for, and what is the opportunity? Then we want to understand how our financing can make that opportunity work, and our goal is to get really clear on that. So we’re obviously looking at the typical financial package that I think most would look at.
From there, it’s really getting on the phone with the CEO, or the business owner and entrepreneur, along with their team, and really diving into the opportunity at hand — how they think this is going to work, how they can use our capital to execute on their plan, and how it’s going to benefit their business.
Garwood: With every fast-moving credit process, there’s a theory of risk embedded in it — some implicit bet about what predicts repayment. What is yours?
Camberato: Everything that we’re doing is around risk, and we’re really more managing risk than we are lending. So obviously, with speed, you really have to have your checks and balances and your processes in place. The good thing about us is that we still have this entrepreneurial way about it — on smaller transactions, it’s a little bit easier and faster and clear-cut to underwrite.
As the transactions get larger or more complex, we dig deeper. We don’t have it set in stone that we have to fund someone in a week or less, or two weeks or less, or whatever the timeframe is. As we’re going through our underwriting process, if we find things, we’ll dig for more — we’ll ask for supporting documentation.
We obviously always want to move fast, but we don’t want to move fast to the point where we’re taking on too much risk that will lead to defaults. So it’s like trust and verify — as we’re moving through a process and we uncover things, we’ll continue to dig deeper, and if we have to dig deeper, it might mean us missing out on a deal. We have to dig deeper in order to get comfortable, and we’ll hold to that rather than just overlooking things. We’re not going to overlook something that we feel like we need more clarity on.
Garwood: Traditional ABL lenders would point to things like field exams, borrowing base certificates, and collateral verification as core safeguards. When you move really fast, what’s your equivalent — or have you concluded that some of those are less essential than the industry assumes?
Camberato: We don’t focus on collateral, so we don’t have to do the typical field exam that an asset-based lender will do. But on certain deal sizes — once we hit a certain point, usually around three to four million dollars — we will do an in-person site visit, and we’ll fly someone out from the team. The good thing is that we can make that happen very quickly. If we like a deal and we’re moving fast, we can have someone out there in a matter of days, or even the next day in some cases. We’ve always been able to react to that very fast.
Some of the other typical, traditional things don’t really line up with the way that we review things. We’ll also look at financials — we don’t necessarily need audited or reviewed financials. We do love them, and we love to get those, but we’ll utilize other tools and verification processes to validate that information. That helps us be really flexible and move quickly, without necessarily needing audited financials, while still being able to verify that revenue in a different way.
So there are definitely unique things in the way we have our process structured, where we still want to validate that information. We want to validate the tax returns that are being provided, and we use different tech, platforms, and other tools in order to do that rather quickly.
Garwood: It sounds like my next question is about human judgment versus automation, and it sounds like you do have people flying out for those larger deals. Across your business, where does human judgment still live in your process, and where have you tried to automate, then pulled back and realized humans were still necessary?
Camberato: I think for what we do, humans are a big part of the process. We don’t see ourselves as being this AI platform, an AI marketplace where no one ever has to speak to a human. We view technology and AI as something that can empower the team, remove redundant tasks, and streamline and speed up processes — really turn our team members into superhumans, so to speak. That’s how we’re looking at AI and tech, and that’s how we’ve always looked at it.
I think, especially in this new non-bank lending world — and there are all different levels of non-bank lending in the small to lower-middle market, especially on the small-business side — initially everyone was trying to go so tech-heavy, and then they realized, hey, maybe we need some real people in the process. We’ve always believed in using tech and great people together, and that’s still our philosophy today. On the smaller transactions, sub-one-million-dollars, we’re able to move a lot faster, and we can rely more on our systems, tech, and processes. But as you start to break a million dollars, five million, ten million dollars, those transactions always have much more complexity in the mix — they’re more sophisticated businesses.
You just have to dig deeper, and that comes down to having great people on our team, great people in underwriting. We’re validating information, but we’re also validating the human on the other end of the transaction — the borrower. We want to make sure that they’re good people, that we believe in what they’re saying, and that we understand whether they really know their business.
Do they know their ROI? Are they clear on the amount of money they need to borrow? Is that actually going to be enough to execute on their plan? Are they over-borrowing — is it too much? All of those things — that’s where the human-to-human interaction really takes place.
Garwood: Speaking of borrowers, what borrower profile and deal type is your model genuinely built for, and where would you slow down or decline a borrower entirely?
Camberato: We are very industry-agnostic — we look at all industries. We don’t do startups, but “startup” is a very loosely defined word in today’s world. You have companies doing a hundred million in revenue that consider themselves startups, but our definition of a startup is someone with no revenue who wants to start a business. If you’ve been in business for one to two years, we typically like companies that have been in business two to three years or more.
We’re in all industries, all fifty states. Our core industries are construction contractors and a lot of the blue-collar trades, which usually have some of the biggest challenges with banks and ABL lenders — they don’t underwrite those, but we really like them. We also like manufacturing, wholesale distribution, healthcare, and even restaurants. So it’s a wide mix. And even if I didn’t mention a specific industry, we still look at any industry.
Really, it’s a business that’s been in business for a few years, that’s growing fast and needs growth capital. They’re doing revenue — they’re breaking even or profitable. If they’re showing a loss, there’s a real reason for it, and we can understand it. They have a true path to profitability, and what our capital is going to be used for is going to help either continue to fuel the growth or bring them to a really good place. So we’re pretty agnostic from an industry perspective.
Garwood: We’ve been talking a lot about speed. Are there situations where a borrower shouldn’t want speed, and where the structure and friction of a traditional ABL deal is actually better for their situation?
Camberato: It’s funny — borrowers always want speed and the path of least resistance, typically. I think where you maybe wouldn’t want speed is when you’re doing an acquisition — you’re buying a company as a business, and you want to make sure you’re taking the time to do due diligence on the company you’re buying. Sometimes we’re doing deals where the owners — our client — are buying it from another business owner, and they’re kind of working the transaction out without an advisor in the mix, or an M&A group.
You want to make sure that in those acquisition transactions, you’re really validating the information. The good news is, when you pull us into those transactions, we’re going to validate the information on the client side and on the business they’re purchasing — so we actually help in that situation. Those deals sometimes move a little bit slower.
I think if you’re going to borrow money to acquire something, you want to make sure that what you’re doing is really validated. You’re taking the time on that, and you want to make sure you’re working with the right advisor on your side — someone who has the experience and can help validate the information. Because the worst thing you could do is borrow millions of dollars and buy a bad company, or do a bad deal.
We’ve seen situations out there where people are selling things — equipment, for example — and they’re fraudulent transactions, and we’ve caught them because we’re doing the validation. So those are situations where speed can hurt you, and you want to make sure you’re validating your transaction.
Garwood: Let’s talk about credit performance. What does your loss data look like relative to what a traditional lender would consider acceptable, and what does that tell you about any trade-offs you’ve made?
Camberato: Our losses are very good — we’re very good from a loss perspective. Compared to traditional lenders, I’m not exactly sure how we’d line up, but when it comes to the space, I think we’re below most. I think that really just speaks volumes to our process, our systems, and our structure.
Garwood: In credit conditions today, does a high-velocity book behave differently than a traditional portfolio, and what does the cycle reveal that good times might hide?
Camberato: In good times, everyone thinks their underwriting is great. I think it’s really important, from a lending perspective, that in all economies you have to remain disciplined — and I think that’s where people get hurt. In good times, when everything performs well, people continue to take on more and more risk, and some will really go out on big limbs on deals. When there’s a pullback or a shift, that’s where you see who is a really good underwriter and who isn’t.
I think that’s one of the hardest things for any lender, not just us. As a lender, you’re in the business of managing risk — like I said before — but I think most lenders will say, “Hey, we’re in the business of originating deals and funding deals,” so their business is structured around wanting to do more and more deals. But it’s not just about how much you originate, it’s about how much you can collect back. So staying disciplined is one of the hardest things to do for any lender, and the market is just ever-changing — it’s so fluid, especially coming out of COVID, over these last six years.
It bounced right back. There was free money in the system, everyone thought they were the best underwriter in the world, and there was all this pumped-up demand — it looked like everything was going to keep going. That’s actually when I was the most nervous, and I was saying this at the time: everyone thinks they’re a great underwriter now because they’re being fueled by government money. As all that got cleaned up, dried up, and was spent, that’s when you started to see a lot of the cracks in the economy — a lot of cracks with lenders and their portfolios.
I think we’re still going through this rebalancing period, where you have a lot of good and bad businesses mixed together. So I think right now, more than ever, it’s important to remain diligent. Some lenders have done a great job of that; others haven’t, and they’ve wound up in the press because they’ve overlooked things.
We also came out of a period in private credit where a lot of folks had easy access to capital to deploy as a lender — a lot of new entrants into the space. In those environments, you get access to a bunch of capital, and then you have to deploy it. I think it’s been a very interesting market, where deal flow has been all over the place — it’s been good, it’s been bad. When you talk to a lot of people, it’s harder to find a good deal right now in this environment.
So if you had easy access to capital — through private credit or wherever — when the market was hot, and now you’re sitting on a bunch of capital, that’s when people start to overlook basic underwriting fundamentals, and mistakes start to get made, because they’re just focused on deploying capital and not focused on the collection part of it — they’re just focused on origination. I think that’s already started to happen, and we’ve already seen some of those cracks. I think we’ll probably see some more of them as we come out of this bumpy economy.
Garwood: Last question for you — if you had to identify one thing that the ABL industry gets structurally wrong about underwriting, not a technology gap but a conceptual one, what would it be?
Camberato: I think there are a lot of good ABL lenders out there. I think the biggest thing, from a structural and conceptual standpoint, is that — though there are a few good ones now realizing this — many have been behind the times with their infrastructure, technology, and process. I think if they put focus on their process, systems, and technology, and on the way they package and underwrite deals, they could move a lot faster while still diving deep in their underwriting, without having to sacrifice on risk.
Garwood: Well Joe, thank you so much for being on the podcast today and having this conversation. I really appreciate you taking the time.
Camberato: Thank you, Rita. Thanks for having me.