market. The real target market for online lenders should be companies generating less than $1 million that need $30,000 in capital.
Technology, data analytics and algorithms enable industry leaders,
such as Rapid and OnDeck, to make funding decisions within
minutes. For those fintech lenders, daily repayment requirements
ensure acceptable loss rates. This easily obtained capital has become
the lifeblood for many small businesses.
Online Lending Moving Upmarket
The problem is, online lending has already started to move up market
to larger companies. As a result, the tension between traditional senior
lenders trying to stay within formula and borrowers demanding access
to quick cash is increasing. Small ABLs serving the $5 million and
under market have become more vigilant and have been forced to take
on more risk by providing temporary over-advances to control the
situation. Or they may increase advance limits. Going out of formula
creates more risk and internal pressure for secured asset-based
lenders. This sub-$500,000 capital needs market is a very hard niche
to finance when factoring in cost of capital, bad debt and overhead,
among other things.
Currently, the senior lender can choose to go out of formula or risk
the borrower taking a daily debit loan. Neither alternative is ideal. The
former requires a senior lender to dip into the reserve or go way past
it, and the latter requires letting borrowers take capital that was never
meant to solve a cash cycle. Daily debit loans are not easy or practical
to turn off, and most borrowers would never think to sign an inter-creditor agreement, let alone ask for any type of consent.
Most fintech firms lack a skilled professional on the front lines who
can analyze a situation and make a business decision. The name of the
game for these lenders is massive originations, algorithms and automation, all of which work to support the SBL industry’s sub-$50,000 senior
loans to non-bankable companies, but are less effective venturing up
market to companies with non-linear capital needs.
The fintech revolution has produced more than 400 daily debit lenders, which makes it seem like money does grow on trees.
To avoid having clients obtain quick fixes of up
to $500,000 online within minutes, asset-based and
commercial lenders are going to have to implement new
structures and strategies to provide more cash availability and to better protect and monitor collateral. For
most secured lenders the problem is not losing deals to
fintech companies, but, rather, having clients breach
loan agreements by incurring additional debt without
consent and not understanding the cash flow effect of
In response, second lien lenders are developing
creative solutions to help ABLs and commercial lenders
provide up to 100% availability and preclude clients
from taking short-term daily debit products to solve
short-term capital needs.
Daily debit loans, whether structured as purchases
of receivables (MCA) or small business loans (SBL),
have exploded from a niche product designed for the
restaurant industry to a multi-billion dollar global
industry, which now has access to the securitization
New Lending Structures Combat the
Rise of Daily Debit Loans:
The ABL industry strikes back
BY CHARLIE PERER
Online lenders have made it quick and easy for business borrowers to access cash in a crunch. But these
fintech lenders rely on algorithms and business plans, not bothering to check to see if the borrower has
existing loans in place. If the client runs into difficulties, this can create headaches for the senior lender.
Charlie Perer suggests that second lien lenders provide new products to enable borrowers to get a quick
influx of cash controlled by the senior lender.
For most secured lenders the problem is not losing deals to
fintech companies, but, rather, having clients breach loan
agreements by incurring additional debt without consent and
not understanding the cash flow effect of daily amortization.
Head of Originations,
Super G Capital