How is level of deal flow activity today versus what it was a year ago? If activity is higher, is it the result of more deal flow from existing sources or an increase in the number of origination sources, or both?
Bonanno: North Mill had record originations in 2019, up 350% year over year. Through the first two months of 2020, originations are up 175% year over year. As an indirect lender, North Mill’s origination volume is dependent on how many applications we receive from our third-party referral partners (TPRs). We attribute our 2020 originations growth to a mix of our record onboarding of 145 new TPRs in 2019, as well as our focused effort to continue to build out a more diversified product offering, specifically in medical equipment and franchise finance.
Buttkus: Deal flow continues to be strong (same as last year). Our current referral sources continue to provide us with the vast majority of prospects in need of financing, but some new sources are appearing on the scene. These new sources are seeing the economy ahead and are building their consulting business around it, which requires companies to bring in more nontraditional funding sources. That is where PMC Financial Services comes in, but lender/lessor beware, the deals may be plentiful, but as the economy adjusts, the credits we are seeing are dicier than years past. Deep diligence is key. Uncover every rock and don’t allow push back from any borrower/lessee as this is your risk at stake, and defaults are on the rise. The should have, could have, would haves are more important now than ever.
Elwood: Deal flow is higher today than it was a year ago, and it comes as a result of both increases from existing sources and the addition of new origination partners as well. We have actively sought to not only maximize opportunities with existing sources but to expand our third-party originator population at the same time. The strong economy is driving capital investment, and there are many in the broker marketplace (and us in turn) who have been beneficiaries of this increased demand.
Hebig: Channel Partners Capital’s transaction activity continues to remain very strong. January was a great start to 2020 with approved application volume up over 50% and funded units up over 55% year over year. Our partner activity and relationships continue to expand as a result of our Voyager program and new products and technologies designed to span a broader breadth of opportunities for our partners and their customer base.
What are the key drivers behind your 2020 outlook?
Bonanno: We expect the growth rate to slow over the course of the year as the comps get tougher, but we still expect 2020 to be another record year for originations. The reason we remain optimistic is that the backbone of our economy, the U.S. consumer, remains strong, and demand for financing in our two fastest growing market segments, construction and medical equipment, remains high.
Buttkus: We expect the strong deal flow to continue from banks, finance companies and referral sources focused on their borrowers’/lessors’ requirement of nontraditional non-equity dilution solutions.
Conversely, when banks and lending institutions get the so called “lender fatigue” and need to move these more challenged credits, PMC is a unique and creative solution that thinks outside the box of traditional financings.
Elwood: We fully expect that (in the absence of a significant market disruptor such as effects from coronavirus), increased application flow from existing sources and new partners will continue. From our perspective, previous concerns revolving around trade disputes and political uncertainty have eased.
Hebig: We expect activity to remain strong through 2020 given our organizational life cycle and our unwavering commitment to our partners. Adding Equipment Finance to our products in Q2 of 2020 will undoubtedly help our partners and drive continued growth. Our modeling and continued sharpening of economic data inputs seem to point to “optimism.” We have detected minor softness in a few industries and geographies, however, nothing to suggest any major issues or warrant changes. Our products are designed to work through evolving economic cycles. As a result, we remain optimistic in 2020 that our partners can meet or exceed their small business customers’ needs regardless of changes in the economy.
What factors have you faced when it comes to marketplace competition?
Bonanno: Changing the market perception of who we are as a lender is a challenge we continue to face when we go to market. Historically, North Mill was primarily focused on financing sub and near prime long-haul transportation equipment. Prior to 2018, 73% of our originations were tied to long-haul transportation, and only 25% of our originations had FICO scores of 700+. In 2020, long-haul transportation represents just 28% of our originations and 44% have FICO scores of 700+.
Buttkus: Borrowers electing to raise additional equity versus debt despite the significantly lower cost of debt — this seems to be the competitive landscape we encounter.
Elwood: Service levels and efficiencies are the key drivers we compete on relative to the general broker funding marketplace, with rate being an increasingly significant consideration. There is an increasing number of competitors in the equipment finance space, and increasingly aggressive underwriting is becoming more commonplace as more months in this prosperous economic period go by.
Hebig: The continued strength of the economy has created a plethora of funding sources and product solutions. Rates continue to remain low and credit boxes have remained relatively wide requiring finance companies to find ways to differentiate themselves while maintaining reasonable margins with good portfolio performance. Developing product variation and real ways for our partners to penetrate their new and existing customer base is a primary focus for Channel Partners. We are in this journey together.
What does it take to get a deal done with brokers in today’s environment?
Bonanno: We decided to no longer auto score applications in 2017. Intuitively, one would assume this change would decrease the odds of us getting a deal done with a broker, as others in the industry focused on auto decisioned credit algorithms to improve decision speed, and it did initially. However, over time, our third-party referral sources have come to appreciate our willingness to dig in and really understand the applicant’s story, including his or her credit history, and our willingness to structure solutions that allow them to close a transaction. Additionally, our referral sources appreciate the fact that we continue to refine our internal processes with the goal of making North Mill easier to do business with and helping our TPRs grow their business.
Elwood: For our broker partners, fast response times and offering a competitive rate are must-haves if a credit is of at least a fair quality. Availability of services like electronic documentation is almost a necessity today given the nature of the modern purchaser and the types of technology available to them and vendors looking for custom programs. The options available to borrowers include SBA financing, bank financing, credit cards, MCA, other brokers’ and direct funders’ solicitations and more. As a result, knowing how to sell the benefits of their product to the end user is critical.
Hebig: It really comes down to two things that are not new to the current conditions: first, we talk about “KYD” or Know Your Deal and second, “KYFS” or Know Your Funding Source. KYD creates credibility and opportunity by not making product assumptions that may not ultimately fit the customer. KYFS ensures you can be effective and efficient with your customers by working hand in hand with the funding source. Brokers that present the funding source with the appropriate information and offer their customers needs-based finance solutions, employ a long-term strategy that works in today’s or tomorrow’s environment.
How are current geopolitical events, such as the coronavirus and the presidential election affecting your business?
Elwood: It is too early to tell what extent the coronavirus epidemic (pandemic?) will have on the market long-term, but to this point the impact has been minimal. The upcoming presidential election has appeared to have just as little effect to-date.
Hebig: At this point, there has not been a real noticeable impact to our growth or our portfolio performance. However, we continue to monitor various industries that might be affected by various international or domestic events. As we progress through Q1/20, we will remain diligent on portfolio performance and any specific adjustments need to ensure our partners have the tools they need to be successful. The election, more than likely, will not have impact until Q3 or Q4, if at all. Fatigue from political rhetoric seems to have shifted partners and small businesses into the “I have a business to run” mantra rather than anticipatory worry.
Are you anticipating any other challenges or opportunities beyond what we’ve talked about?
Bonanno: The competitive landscape is constantly evolving. Well capitalized banks continue to purchase independents and competitors continue to make strategic decisions to enter or exit certain business segments that we compete in. We believe that our disciplined approach with respect to risk and to the pace of our growth will continue to be rewarded in volatile times and allow us to opportunistically take advantage of changes in the market and the competitive landscape.
Elwood: We view continued enhancements to our technological capabilities to be a tremendous necessity and opportunity moving forward. Areas such as API connectivity, vaulting and portal functionality will be key to maximizing potential for both one-off transactional business and vendor program-type opportunities alike. An increase in the number of competitors and continued pressure to meet production expectations in the marketplace could potentially result in buying habits that will make retaining and increasing market share even more of a challenge.
Hebig: Data analytics continues to remain a hot topic across many industries, including the equipment finance and small business financing space. Sifting through the sheer volume of data to determine what attributes will best predict portfolio performance is a challenge. Leveraging technology to implement and help gather the right data to support the correct analytics is potentially going to define winners and losers both in the short and long term.
