I have the unique privilege of being a third generation banker. My grandfather started and managed a small savings and loan (“S&L”) bank in the western suburbs of Chicago. My dad followed him into the S&L business and there were days when I would join him at work, handing out toasters and other goodies to those who opened new accounts. Occasionally we would go into homes with a rolling tape measure to measure and appraise the land and house against which the S&L had provided a mortgage. Companies at the time also received most of their funding from banks.
I have worked with many financial institutions in my career (at three major banks) and have learned a great deal over my decades helping companies refine their strategy, raise capital and think about the best how to deal with their opportunities and challenges. A dominant theme that I have observed, and which has accelerated over the past decade and particularly over the past 24 months, has been the “democratization of finance”, or DEFI.
Trade finance providers continue to expand
Today, corporate finance is provided by an increasingly wide range of entities. Banks are still active and important, but businesses today can obtain trade finance options from any of the following non-bank financial institutions (NBFIs):
- BDC (Business Development Corporation)
- Independent financial company
- Captive finance company
- Asset manager
- insurance company
- Fintech lender
- CLO Manager
- Hedge funds
Some of these lenders are “blended platforms” to better align their clients’ needs with capital availability, investor interests and services. The “democratization of finance” often happens under the radar – many of these lenders and financiers have their own balance sheets, but they also partner with other investors to meet the unique needs of their clients. Many lenders are increasingly offering solutions ranging from senior debt to equity, as well as asset ‘flow’ arrangements. Several asset managers now own insurance companies, which often offer the ability to invest in whole loans, securities and even equity stakes in companies.
Improvements in technology, rising global cash levels, continued low interest rates and the current regulatory environment are providing benefits to commercial finance providers, contributing to overall growth in many industries, as seen here in leveraged loans:
Share of NBFI in leveraged loan issuance
(% commitments)
Tighter regulations around leveraged lending have made the industry more difficult for banks, allowing NBFIs to be more competitive
Source: SNC, Leveraged Lending Guidelines
With the economy still uncertain and businesses facing many hurdles, including supply chain issues, hiring challenges and the continued impact of the pandemic, recent data from various sectors shows many reasons for economic optimism.
Reason for optimism in default and delinquency rates
Businesses faced many stresses, but overall they handled the COVID-19 pandemic well, except for some notable pockets. This is something my management team has discussed at length, and our industry research team has observed that most lenders have sailed well over the past 18 months, supported by flexibility, good liquidity management and government support that helped small borrowers in particular.
Small business loan performance continues to improve, with PayNet’s Small Business Loan Delinquency Index falling to 1.75% from 2.29% at the end of 2020. Delinquencies and Defaults small businesses grew at the start of the pandemic, but have begun to recover with federal government support and continue to show promise as the economy reopens.
Cause for Optimism in Small Business Financing
Many small businesses have seen significant pandemic-induced stress in 2020 and 2021, but new business creation is approaching multi-decade highs as many take advantage of the current market to start new ventures. And many existing businesses have turned to fintech lenders for Paycheck Protection Program loans to keep their businesses afloat.
Within our commercial finance group, we closely monitor the performance of these companies and lenders, especially as many lenders have developed new tools to source, underwrite and administer loans. In the future, these tech lenders could be more formidable and important financiers for business needs.
The NFIB’s Small Business Optimism Index recently fell slightly month-on-month, but reads slightly up from last quarter to 99.7 from 95.0. Notable quarterly moves include the rise of plans to increase employment and the growing belief that now is the time to expand. More recent data shows that optimism warrants caution, however, with some consumer companies seeing reduced traffic with concerns over the Delta variant.
Cause for Optimism in Equipment Financing
The Equipment Leasing and Finance Association’s Monthly Leasing and Finance Index indicates that new business volume is up 17% from 2020 levels year-to-date. ELFA reported potential headwinds in the second half, including low vaccination rates, rising inflation and supply chain/labour issues. These headwinds are offset by rising investment, growing confidence and reopening in many sectors of the economy.
Source of GDP: United States Bureau of Economic Analysis
Monthly Leasing and Finance Index Source: Equipment Leasing and Finance Association
Overall, since March 2020, there has been a general acceleration in the trends that are transforming trade finance. Although banks both directly and indirectly support many commercial financial markets, we see continued growth and evolution of commercial financial organizations that meet the needs of their customers, often in improved ways. We believe these trends will continue and technology and focus will be key differentiators over time. It is exciting to see how the “democratization of finance” continues to transform the way commercial financial service providers provide capital and other services to their clients, and we see this evolution as part of one of most exciting times in commercial finance.
