Since the Great Recession of 2008, asset-based lending and factoring have been turned upside down. First, it was defaults and bankruptcies of clients as their sales volumes plummeted. Then it was bankruptcies of our clients’ once stronger customers, leading to more failed clients. Next it was the spike in risk with no corresponding rise in return as the remaining active commercial finance participants all clamored to compete for the few decent prospects still out looking for money (or still in business for that matter). Finally, as the overall economy has improved (albeit slowly and painfully), we now see even lower returns as banks, hedge funds, SBICs, PE firms, and the like pour back into the highly leveraged market to deploy whatever capital they have left at their disposal. Most of these new entrants are seeking “higher than average risk adjusted returns.” The problem is, while they understand the higher return side of the equation, they clearly don’t adequately adjust for the risk they are taking. The banks on the other hand, are simply in need of making C&I loans, again without enough appreciation of the true extra risk. And the reward for us ABL and factoring survivors: lower risk-adjusted returns… again. Perfect.

While someone unfamiliar with our business might think I’m whining, the sad reality is we’ve seen this picture before in 2006 and 2007. And remember what followed (Hello? Great Recession? I remember you. We met just a few years back. Wasn’t expecting to hear from you again so soon!). Markets gyrate all the time, so ups and downs are part of life. No sector is immune. Yet when certain industries feel pain, such as the printing trade for example, the consequences pretty much stay within the industry itself. If a printer screws up a job, the client will have to wait for a new shipment (probably from a different printer). Sure, certain printing jobs are going to be more important than others resulting in varying degrees of pain to the client. But in the end, everyone lives. Not so with banking and finance. We bear responsibilities to others beyond ourselves because our decisions directly affect those most precious to us, our clients. If an asset-based lender or factor makes a bad decision, it can many times lead to the demise of the client, which in turn, can bankrupt the owner/guarantor. Everyone loses. Therefore, the words “customer service” take on a completely different tone when used in the commercial finance industry. In the eyes of a client, good customer service would be to give them more money than prudent lending/factoring would suggest, and do it for an all-in cost of the prime rate minus 3.25%. In truth, doing so would be a total disservice to the client and the owner/guarantor (not to mention ourselves, our employees, our lenders and our investors). Like parents raising their children, we are supposed to say “no” when the consequences of being wrong can be fatal.

We all have a duty to do our jobs properly based on the sound principles developed over decades of successful, responsible secured financing. Factors have a double duty. Not only do they have to structure based on what they believe they can recoup from a liquidation of the client, but they also need to set prudent limits on the amount of unsecured credit they allow their clients to give to their customers/debtors. Unfortunately, in today’s post-recession ultra-competitive marketplace, some ABLs and factors are flat out shirking their responsibilities in the interest of booking volume. Under the guise of “good customer service”, advance rates in ABL are growing unabated and customer credit limits in factoring aren’t even being set or checked in many cases. Airballs are back in ABL structures, only they’re now called “stretch pieces” or “formula over-advances”. Factors are producing their own airballs with inventory advances and term loans secured by collateral that has not been appraised and will surely cost more to liquidate than the proceeds from the sale.

There is no question that we all have to do things differently to effectively differentiate ourselves in this overly crowded marketplace. I see some ABLs offering term loans on equipment and even real estate for the first time in their history. With proper appraisals and prudent advance rates, this makes good sense. I see some factoring companies starting to offer PO Financing. Again, with the appropriate controls and advance rates, this can set them apart from the rest of the pack. Clients are better served by working with one provider for maximum cash availability. Applause goes out to these firms for the willingness to change in an ever more complicated environment. Now that’s customer service!

Then there are the other guys. They’ve got growth targets and they’re going to achieve those goals regardless of the ultimate outcome.  We all know that many clients don’t comprehend responsible lending. They’ll take all the money anyone is willing to give them, collateral or no collateral. They’ll also take the lowest coupon rate even if the costs of default or termination are exceedingly excessive. So let’s not pretend that all clients should know what they’re getting into. They sign our agreements because they’ve run out of other options and we’re not going to negotiate (much) anyway. They hope and pray that we know what we’re doing and won’t take advantage of them if things go awry. In the past, they could count on us with few exceptions. Today, with reckless structures more commonplace (aka piggish behavior), the odds of things going wrong have increased exponentially. Fewer clients are surviving what in the past would have been considered a normal bump in the road. All under the premise of providing good customer service (aka the lipstick)? Try telling that to the guarantor’s family and the families of the employees out of work when the client fails. If you don’t like this burden of responsibility, find another line of work. No applause for your disservice to all concerned.