This is a guest post from Rob Snow, the Co-Founder and Managing Member at Carillon Capital, an investment banking and advisory firm specializing in financial services primarily specialty finance, asset management, and technology, including major initiatives in crowdfunding. Over the past 19 years, Rob has purchased and sold over $10 billion in whole loans and led the issuance of more than $4 billion in asset-backed securities. In this post he compares consumer loans with small business loans and what investors need to consider when lending to small businesses.
As the world of individual investors buying consumer loans has grown and started to mature the acquisition of small business loans is still in its relative infancy. As a banker who has spent most of my career originating and managing both consumer and small business loans, I think it is important to point out some of the unique risk differences in these two asset classes.
In the small business lending market the type of credit can have impact on the expected loss rate. I will not discuss all of the types of loans available in the market: working capital, equipment finance, merchant cash advance receivable lines; I will, however, focus on the two most common loan types in the market: working capital loans and equipment finance.
Working Capital Loans
Working capital loans are those that are most closely associated with the current consumer unsecured loan market. These loans are based on a business’s identified need for capital but may not have a specific collateral to file a lien against. For example, a small business owner may want some money to spruce up their existing location or need the money for marketing programs. In the business lending world, the purpose matters.
Healthy businesses are those that are looking for capital to grow. Those that need the funds to covers existing expenses represent much higher risk. One notable exception to this can be seasonable business with a long track record of performance.