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Just the Tip of the Iceberg

Date: Jan 04, 2016 @ 07:00 AM
Filed Under: Current Environment

Collateral comes in two primary forms, fixed collateral (like real estate, equipment and intellectual property) and working capital collateral (A/R and inventory). The working capital collateral changes every day. Today, it takes considerable time to review the changes in the working capital assets from one period to the next. Here again, Fintechs will be accessing the borrower’s systems directly to balance the assets to the penny in real time. This data can be tested to examine profit margins, obsolescence, dilution, etc. and so forth, right down to each customer and SKU on a daily basis. The shipping data can also help validate weights and timing. All this happens without taking up a single minute of a person’s time. As for the fixed assets, the biggest issue with these is the change in values over time. Data scientists will monitor the most popular sites where fixed asset sales occur to get up-to-the-minute values right down to the model number and year made. So they will be able to understand their LTV as it evolves rather than waiting for the next appraisal, which is usually at least a year away.

The borrower’s credit is reflected in its ability to meet its obligations in a timely manner. Today, this is a backward looking science as a delinquency usually doesn’t get noticed until long after it occurs. With daily data feeds, Fintechs can see delinquency the day it occurs. Even better, there is a direct link between production and cost-of-goods sold. So with proper financial modeling, they can even pick up fraud should the borrower try hiding obligations by not entering them into the system. Add to that daily feeds of the borrower’s bank activity, and held checks can be discovered. So rather than waiting for a credit reporting bureau or a lien to discover deterioration, the Fintechs will know before anyone else.

As pointed out earlier, “true” character can be tough to quantify. But personal credit reports, combined with personal financial statements and tax returns, can be a pretty good proxy. The problem here is, most lenders obtain these during the underwriting process and then annually thereafter … and a lot can happen in the interim. Fintechs can not only view them at a point in time, but they can compare the three to validate income figures and debt service, something that is a painstaking practice today (for the very few lenders that even try to do this). Then they can, like the credit card companies, monitor the guarantor’s changes in their personal credit on a daily basis. Throw in real-time payroll and capital account data, and the Fintechs can detect when a guarantor is leaning on the business to support personal issues almost the second it starts to occur.

Finally, there’s capacity. While tough to quantify, it can be easy to monitor if you have the data. Currently, lenders can validate management’s ability to perform budgeting and then execute according to plan only as monthly budget-to-actual financials are prepared (and this is for the few lenders that require projections ongoing and the even fewer that take the time to review them monthly). Fintechs can not only do this automatically, but they can uncover root causes as they happen, such as dropping margins, lower sales of key products, increases in expenses by ledger account number, etc. And all of this discover can happen without involving a single person’s time.


I haven’t even scratched the surface of what the Fintech’s can do and are doing with data.  I’ve only focused on the five C’s. However, they are also extracting data to compare how their borrowers are performing relative to key industry standards and competitors. They are monitoring business licenses to see if the borrower’s competition is growing in their geographic area, suggesting future problems. They can monitor trucking licenses and insurance to know the day an issue arises. And by getting daily uploads of both general ledger data and banking data, the ability to detect fraud goes way up. And all this without paying for a portfolio manager, account executive or field examiner. If you aren’t already planning on joining the Fintech revolution, no worries. This iceberg will displace you soon enough anyway.

Thomas G. Siska
Senior Vice President | North Mill Capital, LLC.
Thomas G. Siska is a senior vice president at North Mill Capital, LLC. Siska began his career in 1984, building the Midwestern Branch from the ground up for a West Coast-based non-recourse factor. Later, he established the firm’s first international subsidiary. Siska then supervised over 25 sales offices throughout North America. He left in 1994 to turnaround an asset-based lender and as part of that strategy, he established a de novo factoring division. Two years later, the company sold to a bank for 15 times book equity. Siska later joined GE Capital as senior vice president in its small ABL and factoring division. Prior to joining North Mill Capital, Siska founded an ABL and factoring subsidiary for another bank. He holds degrees in finance and marketing from DePaul University (1983) and earned his MBA from the University of Chicago (1990).
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