I have the unique privilege of being a third generation banker. My grandfather started and managed a small savings and credit union (âS&Lâ) in the western suburbs of Chicago. My father followed him into the S&L business and there were days when I joined him at work, handing out toasters and other freebies to those opening new accounts. Every now and then we would go into houses with a rolling tape measure to measure and assess the land and house that S&L had mortgage against. The companies of the time also obtained most of their financing from banks.
I have worked with many financial institutions during my career (in three big banks) and have learned a lot in my decades helping companies refine their strategy, raise capital and think about the best way of managing their opportunities and challenges. A dominant theme that I have observed, and which has accelerated over the past decade and particularly over the past 24 months, has been the âdemocratization of financeâ, or DEFI.
Trade finance providers continue to expand
Today, business financing is provided by an increasingly wide range of entities. Banks are still active and important, but businesses today can obtain trade finance options from any of the following Non-Bank Financial Institutions (NBFIs):
- BDC (Business Development Corporation)
- Independent Financial Company
- Captive finance company
- Asset manager
- Insurance company
- FinTech lender
- CLO Manager
- Hedge funds
Some of these lenders are âmixing platformsâ to better align the needs of their clients with the availability of capital, investor interests and services. The âdemocratization of financeâ often happens under the radar – many of these lenders and financiers have their own balance sheets, but they also partner with other investors to meet the unique needs of their clients. Many lenders are increasingly offering solutions ranging from senior debt to equity, as well as asset âflowâ arrangements. Several asset managers now own insurance companies, which often offer the option of investing in whole loans, securities and even equity interests in companies.
Technological improvements, increasing global liquidity levels, persistently low interest rates and the current regulatory environment provide benefits to providers of trade finance, contributing to overall growth in many sectors, as seen here in leveraged loans:
NBFI’s share in leveraged loan arrangements
Improved regulation of leveraged loans has made the industry more difficult for banks, allowing NBFIs to be more competitive
Source: SNC, Leveraged Loan Guidance
While the economy is still uncertain and businesses face many hurdles, including supply chain issues, hiring challenges and the continuing impact of the pandemic, recent data from various industries shows significant growth. many reasons to be optimistic economically.
Cause of optimism in default and delinquency rates
Businesses have faced a lot of stresses, but overall they’ve gotten through the COVID-19 pandemic well, with the exception of some notable pockets. This is something my management team has discussed at length, and our industry research team observed that most lenders have done well over the past 18 months, supported by flexibility, good cash management and support. from the government which has helped small borrowers in particular.
Small business loan performance continues to improve, with PayNet’s Small Business Loan Default Index falling to 1.75%, from 2.29% at the end of 2020. Defaults and defaults small businesses grew at the start of the pandemic, but began to recover with the federal government. support and continues to show promise as the economy reopens.
Cause of optimism in the financing of small businesses
Many small businesses have experienced significant pandemic-induced stress in 2020 and 2021, but new business creation is approaching decades-long highs as many are taking advantage of the current market to start new businesses. And many existing businesses have turned to fintech lenders for paycheck protection program loans to keep their businesses afloat.
Within our commercial finance group, we closely monitor the performance of these companies and lenders, especially as many lenders have developed new tools for finding, underwriting and administering loans. In the future, these tech lenders could be more formidable and important financiers for business needs.
The NFIB Small Business Optimism Index recently declined slightly on a month-over-month basis, but is up slightly from last quarter to 99.7 from 95.0. Notable quarterly moves include growing plans to increase employment and a growing belief that now is the time to grow. More recent data shows optimism warrants caution, however, with some consumer companies seeing reduced traffic with concerns about the Delta variant.
Reason for optimism in the financing of equipment
The Equipment Leasing and Finance Association’s monthly lease and finance index shows new business volume is up 17% from 2020 levels since the start of the year. ELFA reported potential headwinds in the second half of the year, including low vaccination rates, rising inflation and supply chain / labor issues. These headwinds are being offset by increased investment, growing confidence and the reopening of many sectors of the economy.
GDP Source: US Bureau of Economic Analysis
Monthly leasing and financing index Source: Equipment Leasing and Finance Association
Overall, since March 2020, we have seen a general acceleration in the trends that are transforming commercial finance. As banks both directly and indirectly support many trade finance markets, we see continued growth and evolution of trade finance organizations that serve the needs of their customers, often in improved ways. We believe these trends will continue and that technology and focus will be key differentiators over time. It is exciting to see how the ‘democratization of finance’ continues to transform the way commercial finance providers deliver capital and other services to their clients, and we see this development as part of one of the periods. the most exciting of commercial finance.