Competing in the Middle Market Lending Bakeoff

I recently had a conversation with Barry Kastner, EVP and Head of ABL for Bibby Financial Services. Bibby North America has three businesses – an ABL practice, a traditional factoring business, and a specialty transportation finance business.   Barry described ABL lending as an art not a science.  Bibby’s sweet spot is companies in the $15M to $75M revenue space.

I was curious how companies in this segment look to raise capital to raise the funding their businesses need. Barry said these firms generally will use either an intermediary such as an accountant, investment banker, turnaround manager, or even a consultant or attorney or if they have a sophisticated CFO, go through them.  Generally these companies first start with their bank and their ABL division. But Barry finds many of these companies are wasting their time with the bank, yes the price of money is cheaper, but with specialty lenders, the risk appetite is more open to what they need and with more flexibility.

So if the bank doesn’t meet their needs, the bake-off begins. Barry said that these companies will go through five or 10 lenders and ask for a proposal.  And price is not always THE consideration.  Barry mentioned some CFOs will go to the next guy for 25bps but its more about structure, and how much liquidity they will be able to get from the structure. Barry is a big believer that it comes down to relationship and trust, as many will ask to speak to other borrowers. They want to know the lender is a partner.

There are other issues – do you require a personal guarantee and maybe the competitor does not. Do you require more reporting, and maybe the competitor does not.

At the end of the day, what’s important – structure, advance rates, pricing, eligibility, etc. Barry says their borrowers can stay for multiple years.

While most ABL shops will not lend against foreign receivables unless they have credit insurance, Bibby is in 13 countries, and are aggressive on foreign receivable lending in those locations.

This is not to say specialty finance is not without their challenges. While they compete with banks, they are also funded by banks.  Bibby’s cost of funds is directly related to banks as they are largely financed by them, and if you haven’t looked lately, banks cost of funding is going up.  Libor costs have gone up as Banks have lost access to the commercial paper market, Basel cost increases occur annually (most recent another 50bps on 31 Dec), and of course the Fed increased rates in December. Barry notes this has been benign so far, but we all know how hard the future is to predict.

Still, there is a whole industry out there to service the capital needs of the middle market segment, and one where the early pay finance solutions have had limited success. see B2B Collateral Lenders – Meet the New B2B Information Lenders

p.s. recently Bibby had a senior management shake up, see news releases

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