“Creating Financial Partnerships” presentation
Flexent’s Kevin Wood and Robbie Faucett spoke at the recent Risk Management Association’s 2022 Spring Conference in Roanoke, Virginia. Kevin and Robbie gave the audience some scenarios how alternative financing could help their business or bank. Presented here is the video from their presentation — and below is an edited transcript of what they said.
My name is Kevin Wood. I’m the managing director of Flexent. We’re a subsidiary of Chesapeake Bank, and Robbie Faucett is our Director of Sales. He has been with us; maybe, Robbie and I worked together for 25-ish years. It's been around a long time. But we have found that a lot of banks look at FinTech. So they’re like, I need to be able to process loans faster, I need to be able to do this quicker, I need to do this faster, and I need to help my client this way. But there are things that banks don’t do, can’t do, won’t do.
For example, many community banks are strict, you know, commercial real estate. And they, when their clients come to them, they’re like, do you need real estate? And they’re like, no, I need a line of credit. That’s $2 million. And it’s like, well, your annual sales are only $2 million. Why would I ever do that? I mean, it’s these kinds of questions that come up. So we have put together a concise presentation to introduce you to developing a good bench of alternative lending partners to make your customers and your bank more profitable. And I’ll walk through a couple of scenarios that we see I’ve seen recently that caused us to come up with the idea.
The first one is you have a customer who lands a huge contract. So I have a company, and I’m talking to one of our bank partners in New York. The company does 25 million a year in sales. It’s mostly a service-based industry, the bank has the building, somewhat leveraged in terms of the loan structure, and there’s nothing else to the deal. The bank’s customer came and said, Hey, the State of New York will give me a contract for $20 million. So I’m going to go to 45 million in sales; I need a $6 million line of credit. Banks, like you, don’t have the assets for that; we can’t help you with that. What are we going to do?
Thankfully, this bank has been working with us. They said we partner with Flexent; they’re a bank-owned subsidiary of Chesapeake Bank; they’ll take care of the (Accounts Receivable Financing) AR piece, and we’ll do everything else. And oh, by the way, we want some more of your business. So they’re going to hopefully expand their customer relationship with that customer, help the customer and help are at their bank get more deposits and more things like that. So that’s just one scenario. Another one is that Robbie has a great example of this.
A customer, you’re one of your long-term, vital customers that want to retire, and they don’t have any kids or any family members to take it over. And they’re just going to sell it to the guy who’s been running the business for ten years. He has no assets. What are you going to do? Personally… these are opportunities where you might lose the business, or you can partner with a creative alternative lender, partner up and keep the business and keep going.
We have run into situations with startups. You’ve got two or two to three 25-year-olds who are super smart, and they create this business; they’re going to start started up. They get a couple of contracts in place. These contracts are with companies like Walmart, DuPont, or Honeywell; they’re not getting paid for three, four, or five months because that’s just the terms they get. And they come to the bank and say, hey, we’d like to borrow a million dollars, and you’re like you’re all 25 year old, you’re you have zero assets, and you’re out of rented space, can’t help you.
Why send a company like that away if you don’t have to? If you can keep the relationship partner with someone creative on the alternative side and grow them into your bank, that’s a great fit. So basically, these situations come up every day. And a lot of times, you know, the responses to these are, well, can we get a cosigner? Or can we leverage every asset you own? And to give you a small facility that will not help you, but it’ll make us feel better about ourselves? Or can you go online, and we’ll search together and find some solution that might be an excellent fit for you. Or some guy with a factoring company stopped by my office a year ago and left a card? Why don’t you give him a call?
I can go through the list of a leasing guy, a purchase order finance guy, and an inventory guy, but you don’t know them. You just met them once, and you don’t have a relationship with them.
You can’t be sure if they’re still in business or not. Because right now, in the alternative finance world, COVID crushed a lot of folks in the alternative financing industry. So if you look at the (Mergers and Acquisitions) M&A activity and alternative financing, they are selling at the most rapid rate we’ve seen in a long time, it’s a pretty transactional industry anyways, but it’s sped up dramatically.
We’ve been just sitting in our spot since 1995. We’re not going anywhere; we do what we do, and we do it well. But we don’t do what we don’t do. But we know a lot of folks. So the part of this is, even if you partner with someone who only does one or two things, can they be an asset for you to get you to other reputable partners? So the solution that we’d like to propose is that you develop partnerships with these alternative lenders that don’t fit what you may offer with your bank. But you can have a complete suite of solutions, a quiver full of arrows to allow you to ... you’re a startup, I can get you up and running, and I’ll take the deposits. Then once you get enough collateral, you pay off that person, and you become a full loan partner for us. And then you grow them through to retirement, put them in your wealth management group, and have a complete lifecycle suite of products.
But your board will never allow you to do AR financing, or your board will never let you do whatever. You just got to plug the holes. And it’s better to fill the gaps with trusted, vetted partners rather than just good luck. A couple of the product sets that are out there. And we don’t offer these, but these are just things that we see bankers run into that they could benefit from accounts receivable financing. If someone is in a high growth mode or getting paid by really slow-paying customers, they don’t fit traditional bank models. They don’t fit AR, you know, lines of credit. So you’ve got to have some other tool that might be able to help you.
ABL (Asset-Based Lending), lots of banks do ABL. And what they do is they have this spreadsheet in their top drawer, and they kind of wing it, or, you know, on the bigger deals, the big banks do them. But there are very few small ticket ABL lenders out there. You would like to have an excellent ABL partner.
Purchase order financing. What you’re finding now is back two years ago, your companies used to be able to buy half a container product from China, and they could sell it. Well, now they’re having to buy a full container. And their inventory costs are exploding, and you can’t lend on something on a boat for two months or sitting in a port somewhere for a long time. So they get it inside. Supply Chain Finance, one of your big customers, wants to offer financing to their customers. No bank board is going to allow you guys to do that. But it’s nice to have a partner who can do it.
Inventory lending, as we just talked about, the just-in-time model is going away for various reasons. To have a vetted inventory lender, and you know what they do because inventory lenders are expensive, and they’re not always the best to work with. But if you’ve got one or two in your pocket, they’ve been around a long time. They know what they’re doing. They do it fairly. Those are partnerships you would like to have.
Leasing. You probably have a leasing partner, or you may have a leasing division in your bank already. But those are things that can be used creatively as an alternative tool for folks.
Credit Card Processing, I can go down the list. There are tons of alternative options, alternative things that your suite of products that you do a great job with and your client base you do well with. But there’s just these things. And rather than just winging it when your customer comes to you, if you have vetted out five or six partners in those different areas, one or two in each, then I think you’re going to be more effective in terms of helping your customers be more profitable, allowing your bank be more profitable, and just being a resource because I find most bankers.
I’ve worked for a bank for 20 plus years. We like to help people first. And then if we can get them as a customer. That’s just the bonus for us. So this is helping your customers by having these tools in your box. Not just I can’t remember who it was I talked to two years ago, call him up every six months, call him up once a year and say hey, let’s have lunch and refresh me on what you’re doing. I don’t want to hear a sales pitch. I want to listen to what you’re doing.
And if you got good relationships and good partners, that’s what you’ll get. But you have to vet these folks because what happens is some of these alternative lenders; their funding sources dry up. They go out of business quickly, sell quickly, or change their rules because they took a loss. Their bank won’t allow them to do this and the other anymore — their funding source.
So you, and if you’re like our bank, vendor management gets cranky if you start partnering with people that don’t qualify. So you want to do a little homework on the front end, you don’t want to spend hours of your time but ask those questions, you know, are you vetted? Are you able to fit my vendor management criteria? Are you able to? Is your funding source solid? Are you going to be out of business a year from now if something terrible happens? Those are questions that you want to ask. And I think they’re very valuable in allowing you to have your little portfolio, for lack of a better word, of lenders. All the lenders in the bank should be sharing this information.
So, you know, Joe over here has a really good inventory guy, and Fred down there has a good, whatever alternative lending person. So those are some things that we think benefit banks and benefit customers in the future.
And what happens from that? Well, first of all, you get a happy, satisfied customer. So they’re like, you helped me … I have clients, we helped with receivables financing 20 years ago. And they are so thankful to us, they stay with us way past what they probably need to, and we try and skinny the pricing down to make it as fair as possible.
Because receivables financing, what we do is is kind of expensive, but if you can cost-justify it, it works. And then if they’ve been with me 20-25 years, which I have a few, and they’re super profitable, but they like it, and they build our pricing into their pricing to their customers, we just skinny it down. And so it’s a great relationship. So you’ll have these long-term customer relationships that you guys like, but every bank likes, and you’ve helped him through the whole lifecycle of the business.
Also, you’re offloading some risk in areas that you’re aren’t very good at that ABL thing is, is, you know, a lot of bankers, I know, they had this Excel spreadsheet, and they kind of wing it and look at the financials, and you know, put it away for another quarter or another year and hope, hope for the best and they hope it doesn’t get picked in the next Federal Reserve exam or the state exam. Because it doesn’t fit the criteria and ABL deal, but they’re doing it takes them at risk away. You can hit the vendor management goals if you have a good partner. If it’s a bank-owned partner, you can participate back into the deal and use their expertise, but you’ll take part in the loan, which is … we offer that to our bank partners. Or you can get fee income, non-interest, fee income just by referring to the deal. Most non-alternative lenders have ongoing fee income opportunities.
So all those things come together to allow you to get a company, so you cast a wider net for your prospects. You’ve had a broader range of solutions for your customers. And you increase your safety and soundness because you’re offloading the stuff you’re not great at doing the things you’re good at and then pulling the whole relationship in when it’s super strong.
A few years ago, we had a bank partner present us with an opportunity to help them where they see a commercial and industrial (C&I) company they’ve been working with.
And we have a company that was brought to us by a nearby one of our client banks with a request of about a $5.1 million package to be able to fund the organization. In addition to a $1.8 million working capital facility. So we’re able to do there and researching and reviewing the customer. We learned that the company was founded back in the 1930s. In the 1980s, a CPA came in and bought the company through some mismanagement, which was involved in the organization.
In addition to that, he had a 20-plus-year employee who knew the business. The CPA ended up promoting him to General Manager. So over a period of years, the general manager’s style contributed to the business's overall success.
The CPA decides to retire 25-30 years later. So with our client bank looking at this, we’re scratching our heads. Do we underwrite this balance sheet as a new company or as an employee buyout company, or what’s the post-closing balance sheet going to look like in their situation and this particular company?
However, it’s been in business for quite some time and had a lot of good trading assets that were excellent quality for us to find when it comes to receivables and inventories. So we were very comfortable with that. And also, in looking to retire the CPA, part of the loan proceeds that we did was helping with the buyout. So the bank recognized that the total package was going to come close to their risk tolerance, and they didn’t want to take the big bite or financing the $5.1, in addition to the $1.8 working capital facility, so they got us involved, and we were able to put together a product for them. And our client bank maintains the relationship. They maintained all the deposits in the relationship.
Over some time, when we talked about this particular company, we found that the makeup of the loan was about a $4 million stock purchase. And that was a $600,000 occupied real estate piece and a $500,000 our equipment piece. So as we came in and funded the organization that it was healthy and did terrific, continue to grow the business, the real estate paid out the equipment paid out, and then the lender of the company, then the $4 million stock purchase that amortize down.
So recognizing that, the lender says, Well, I’ve got smooth eligibility here, and then I can return and fund the working capital piece. So of the $1.8 million that we initially did, the company grew from $15 million in 2014 to about $24 million in 2019. And they just had some phenomenal growth. And as they continue to service their primary debt, the lender has some availability, and he ended up coming back and taking out our $3.4 million facility that we have structured.
So in this example, we have a company that has some history. We had a buyout that was happening. So although it wasn’t a startup, you know, it was a company with a disciplined manager who knew the business. We had some good assets in the industry. And we’re able to help the client make it comfortable and then keep that relationship because ultimately, this buyer and this owner wanted a relationship with a local presence. So they want a local bank and the community bank that we worked with there. They didn’t have the appetite for a large facility as far as their comfort level was concerned. And so that’s what we’re able to do. Our client bank kept all the relationships and ended up paying us out on that deal. And so they were able to ‘hibernate’ a customer with us for some time until they were able to mature the relationship and constantly coming in and taking over the game before working correctly. So that’s what we’re able to do there and any questions?