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Why the New Black Isn’t Orange

June 03, 2015, 07:00 AM

Tom Goodwin, senior vice president of Strategy and Innovation at Havas Media wrote recently that “Uber, the world’s largest taxi company, owns no vehicles. Facebook, the world’s most popular media owner, creates no content. Alibaba, the most valuable retailer, has no inventory. And Airbnb, the world’s largest accommodation provider, owns no real estate. Something interesting is happening.”

What has been superseded? Blockbuster and the VCR, buying books made of paper, going to a bookstore, using a travel agent, going to a bank to get cash or even getting a loan. How did all this happen and why?

The time honored systems of manufacturing and distribution have seen significant changes. In the U.S., from the flight to the South to break up the unions to manufacturing offshore, where for many years it was cheap and efficient, brought about the situation where the working population of the U.S. is now service-industry oriented. Have we become a nation of computer programmers, hairdressers and fast food servicers?

I will not dwell on the quality of education that does not provide good opportunities. I will dwell on the fact that we have moved to a position where intellectual capital is our savior in terms of strength and power, but with a real unemployment rate of close to 10%. The development of the Internet and more recently, the astounding impact of the mobile phone, have transformed so many processes. In doing so, these developments have demonstrated that there are more efficient, faster, more accurate and less expensive ways to innovate, produce and sell goods and services than have ever been seen.

The new systems are scalable … not capital restricted. It's not like the good old days where you were limited in production or distribution or selling by tangible expensive production, storage and distribution systems. Today UPS, FEDEX and even the US Postal Service are busy delivering goods from automated warehouses many miles from the customer base. And the customer base does not get in a car or on a bus, but shops on the Internet.

How do these changes affect commercial finance? One word: DISRUPTION.

In the same way as the examples shown above, our industry is being totally changed. To give an example, Lendit recently held its third annual conference in New York City at which 2,500 people were registered and attended. I was there, I saw only two people from our industry. Now, it was a large event ... but where were all of you? This isn’t going away!!!

The conference is described as “alternative finance” and also “digitally enhanced lending.” The reason for the terminology changes is that this is not the old, tried way of making loans or buying receivables.

It is dependent on the use of very sophisticated techniques for:

  1. Sourcing Prospects
  2. High Speed Evaluation of Prospects
  3. Risk-based Pricing
  4. Automated Collection Processes

And all of this takes place not in three months, or three weeks, but in hours. Compare that with a recent study that showed the average time to get a small business loan is six weeks. The target audience is not the $5 million to $50 million revenue company. It is the $100,000 to $3 million revenue company. And they make up 80% of the engine room that is the U.S. economy. One speaker commented that small business loans as a percent of all business loans made by banks declined from 35% in 2008 to 24% in 2013.

This is not a target market that banks can approach. They do not have speed and flexibility built into their DNA. But the realization of the size of the market and the need to be “in it,” caused Citibank to arranged a joint venture with Lending Club with the objective of sourcing small deals.

The inefficiencies in the SME business loan market both for process and marketing has been seized upon as a business opportunity and this opportunity is enhanced by:

  1. Risk aversion by banks (due in part to regulatory pressure)
  2. Absence of traditional collateral (see above for the changing face of products and services)
  3. Bank capital requirements
  4. Risk-based pricing where defaults are built into the system and the law of large numbers is applicable
  5. The shift away from personal interaction in all aspects of business and personal loan products

If you are a commercial finance, non-regulated company most of the above rules apply -- particularly if your senior line is from a bank. Food for thought? The old ad line for the NY State Lottery warns, “You gotta be in it to win it.” This certainly is not going away.

John Fox
President & CEO | Forest Capital USA
John Fox founded Forest Capital after selling Rockland Credit Finance’s portfolio in 2009. Previously, he founded Reservoir Capital Corporation. His prior associations in the factoring business go back to 1987. He has been actively involved in commercial finance since 1976.

His early experience was in the development of several high-tech companies, which he took public or merged into publicly traded companies. Fox was President of the Commercial Finance Association for the 2010-2011 term and served as past chairperson of several CFA committees.

He holds a Ph.D. in mathematics from the University of Cambridge and an M.B.A. from Brunel University.
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