It’s easy to take advantage of today’s doom and gloom, but you need a stiff will and plenty of freed up capital. Here is the first of three ideas.
1: Baby Business Bank
It’s hard enough these days to get finance for a house – but it has always been hard to get bank finance for small businesses. I’m referring here to small yet established or high potential businesses that have a steady cashflow and growth potential. It drives me nuts when you have a strong P&L, solid enough balance sheet and will clearly benefit from capital, and yet the traditional banks will have nothing to do with you.
Those traditional banks want some sort of security over tangible assets – such as buildings, machines or the owner’s house. This is fine for traditional high capital businesses, but these days we are driven to be much more capital light, and so there is not a lot of security to get liens over.
A decent business oriented bank should be able to look hard at the business fundamentals and provide finance based on the operation and accounts receivables, not the assets. There are plenty of businesses that have a demonstrated market, clear ability to ramp up production and yet are financially constrained and must grow slowly or not at all. A decent business bank could back these companies with a combination of debt and convertible equity. Convertible Equity is debt that can convert into an equity stake in the company.
I’m talking about small businesses here – the ones that traditional banks ignore, and that are too small for investment banks to care about, and too small or low potential for the small private equity sector to care about. They are less than $5m in revenue, and down to a few hundred thousand.
The aim is to have business bankers that are smart enough to evaluate a business and its people, and make very quick decisions on investments. They monitor the health of the company each month (perhaps as a Director) and provide considered advice as required. They are not overly active managers, as each banker will have a wide portfolio. The most important point of difference from other banks is the lack of dependence on a computer system, and much more use of discretion, relationships and plain old common sense.
As the bank grows they can move into the territory of the incumbents – personal loans and loans to more established, bigger businesses. Sooner or later – you have a real bank.
To lend money, you first need to have money.
In this climate the starter money will need to come from established wealth, as it’s unlikely that banks will be looking for opportunities to invest in yet another finance coany.
As the business grows, the baby business bank can bundle the debt and sell it, much like the (collapsed) finance companies did with real estate debt. However this debt can contained the upside from the value of the convertible options – if any of the company’s perform well the the returns could be very high.
This may sound like a private equity or Venture Capital firm – but I am thinking of an order or two of magnitude difference, with hundreds to thousands of loans, and loans of $100,000 to $500,000. Think of each loan as about the same size as a housing mortgage, and it doesn’t seem so large.
There are plenty of barriers to starting this and making it successful, but the market gap is there for the taking, and I’d love to do it just to see the impact on local businesses.
That’s the idea.
I talked about this with a friend, and he mentioned the latest news is that Pyne Gould Corporation is moving to do something like this, with subsidiaries Marac and Perpetual Trust proposed to be restructured into a Bank:
“This restructuring into a specialist bank will enable these businesses to better meet the needs of their customers by offering financial services to both small- and medium-sized businesses throughout New Zealand and also specialist personal banking for individuals”
Marac already lends to businesses, including invoice financing and other commercial lending, however the largest chunk of their financing appears to be for vehicles and property.
A not bad but ultimately unrevealing 2008 annual report for PGC doesn’t really help shed light on the range and risk of their assets – $374m is “property”, $357m is “consumer and personal” (probably vehicles), and $235m is “wholesale and retail trade”. That last category is interesting, but there is no indication of the sort of lending – it could be vehicles or business financing. The other big categories of over $100m are “transport & storage” and “constructon”. That last one is a bit dodgy these days, along with the large property loan portfolio.
Marac’s business lending is constrained to finance based on existing assets, such as machines or invoices. The market gap is finance for growth – finance that is not backed by tangible assets, but by the knowledge that the company will almost inevitably expand. I imagine there is also an opportunity to be aggressive in this new era of ultra-conservative lending.