Thoughts on Inflation, a Recession, and Regulation From Someone Who’s Seen ‘This Movie’ Before

“I can tell you that in the US that originators are starting to adjust their underwriting policies,” said David Goldin, CEO of Capify and Head of Originations at Lender Capital Partners, “I don’t know about pricing. I haven’t heard that yet.”

Goldin, who has been a small business finance chief executive for 20 years, believes that the economy, inflation, and interest rates are front-and-center issues that the industry should be thinking about right now. In the UK, one region that Capify operates in, Goldin said that several small business finance executives there are already talking about raising margin and doing shorter term deals to prepare for the increased risk.

“Some originators are smart enough to be proactive and others are saying, ‘oh we’ll just watch it.’ So it’s either going to take trickling down through the economy globally or defaults to go up for these adjustment to happen,” he said.

During the Great Recession of ’08/’09, Goldin was right in the thick of it as the CEO of AmeriMerchant, one of the first MCA companies in the US. He explained that there’s a notable difference between now versus then.

“One of the things that didn’t exist back then, someone doing a second [position] was like unheard of in 2008,” he said. “Now, what is it now? first, 2nd, 3rd, 4th, 5th? 6, 7, 8, 9. It’s like a horse race. Ten horses in the race in some cases. […] You have to be careful, right? You have to make sure you’re covering your margin by charging enough and going shorter.”

But in a competitive environment where nobody wants to reveal their cards or risk losing business, not every funder is keen to start making changes right now. Goldin said that many funding companies will wait to see if their competitors start tightening up first especially if they’re driven by their ISOs and brokers. The downside of becoming more conservative is that brokers might just decide to take all of their business elsewhere.

But a looming recession isn’t all bad. “There are some positives,” he said. “The positives are the banks do tighten up. It’s just a question of when not if. So, you may get applicants that come to alternative financing that may have never taken or considered these types of products because they got bank financing.”

Complicating the landscape now, however, is that funding companies are wrangling with new state regulations. Goldin is aware of several originators that have temporarily paused business in Virginia, for example, where a disclosure requirement went into effect just last week. The soon-to-be implemented New York and California laws are also causing rumblings about funding suspensions respectively. In each of those states it was “sales-based financing” products that were specifically targeted, a trend that looks sure to continue as states like Maryland, Connecticut, and others are determined to reintroduce disclosure legislation next year.

“I think more and more originators will eventually get away from the MCA model,” Goldin said, “and go more towards the business loan model by partnering with a bank. I think you’re going to see more companies trying to implement bank programs to become full business loans and not deal with all the nuances of a state by state and MCA program.”

Goldin’s point of view, wisdom, and predictions are aggressively sobering. Only three months ago, industry sources were telling deBanked that their outlook for 2022 was optimistic and that the end of covid-era government stimulus suggested that there would be growth for non-bank finance companies. Suddenly the tone has shifted, the stock market has plummeted, and interest rates are rising.

“I think if you resurveyed originators now, I think you’d get a different response than you did eight weeks ago or even four weeks ago,” Goldin said. “I can tell you right now that capital providers are asking their originators about how they’re making adjusments in this environment…”

Indeed, deBanked did speak with several players just last week and did notice that the general sentiment had shifted to one of concern and caution.

“I think funders should be thinking about redundancy,” Goldin said. “More than ever the best time to raise capital is when you don’t need it. And I don’t know if [funding sources] will pull lines, yes if defaults go up, but they may not be as inclined to enter into new relationships in this environment.” Because of that, now might be the last best opportunity to secure additional credit sources even they’re not necessarily needed, he suggested.

With that, he said that funders should be thinking about tightening up the bottom of their credit profile, increasing their margins, doing shorter term deals, looking for more mature businesses, and working with businesses with higher credit scores.

“I think that those that don’t make credit adjustments, raise margin, and go shorter are going to have their you-know-what handed to them,” he said. “I’ve seen this movie too many times. It doesn’t have to be called a recession. […] It’s all about affordability to repay, and the more debt [the customers] have, and the more their margins are squeezed, or the more their sales go down. That’s when problems begin. You’re less likely to have a problem if you’re only out six months instead of eighteen months. I’ve used this saying a million times: ‘When the ships are too far out to sea and it’s a tidal wave, you can’t get them back.'”

Sean Murray is the President and Chief Editor of deBanked and the founder of the Broker Fair Conference. Connect with me on LinkedIn or follow me on twitter. You can view all future deBanked events here.