The alternative capital, and “innovative” working capital “bubble”?

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When my girls were small, I was their dealer. Candy. Mom was a little conservative on the “whole foods” mindset, so we did a few deals under the table. I learned that was a cheap way to win a quick smile because hey, kids will always jump for candy. If unregulated, they’ll take it to real unhealthy places though and while fortunate that wasn’t my girls…the whole thing probably wasn’t very smart on my end.

Are the “new Fintech working capital guys” dealing candy to small business owners?

No matter what you think of these “new working capital lenders”, you can’t help but recognize the growth of the segment. We have a few on our client roster and we love ‘em. But for every one we take on, we turn down 10. Unprecedented. Alarming, because turning down money is just not in my nature. Some have the goal of helping in a difficult time and fill a SHORT TERM capital need, helping the client get to a better place. Those are our clients. Others are tying nooses around necks for a living. And they get turned away here. But supply, demand and good ‘ole profit make this market. Rather than killing some of these lenders for the very questionable long term impacts to their small business customers (and man would I love to write that article), let’s ask the real question…why is there a market?

Like it or not, there is a pronounced gap in what traditional lenders offer vs. what the market needs are for capital. Always been that way a bit, but a little alarming right now. While I may be writing on the “new working capital” guys to this point, the entire reality is the growth of alternative capital in the market is meteoric. Record fundraising in private equity, alternative lending funds, and even junior capital funds. These, of course, are all very legitimate sectors of commercial finance, but their growth also indicates an increasing gap in the capital structure of business.

As more money flows into all these alternative areas, the number of players are booming. With booming competition, you get crazy deal structures and risk models. All in an entire multi-trillion dollar “alternative capital” industry that is…wait for it…downright loosely regulated compared to banks. Shaking off nightmares visions of Lehman and Bear, I must ask… Are we creating value in the void of capital needs or building a time bomb?

And the poor banks. Yes, I said it…the poor banks. Banking has downright sucked over the last few years. Monetary and interest rate policy virtually erased their ability to grow. An Orwellian-like regulation system prevented them from loosening the reigns on risk…even a little… to close the capital divide. All because we cannot let what happened in 08/09 EVER happen again. Until, of course, it does because the government will never be able to be proactive in regulation of innovation in financial markets. They’re too big, slow and frankly, dumb. The Berlin Wall bricks of the mortgage thing were hitting them in the head before they knew they had a problem.  And while the road we’re on with the alternative capital guys is probably nowhere near the mortgage thing…it’s still a thing.

When a need is not met in a free market system, someone WILL step up to meet that need. And when that is successful, teams of others will follow. If that need is met with companies taking undo risk in good economic times, the free market system will work perfectly as the cycle swings downward. It will correct. Even painfully so. Not just to the business owners leveraging themselves, but to the lenders propagating the long term myth of lending built for profit and speed over really helping people.

If you ever wanna chat about how to message your commercial finance company in this interesting time, give us a holler.

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