Our friends at Revitalization Partners help companies make better decisions about business operations. This blog from their newsletter focuses on the burgeoning possibility that subprime debt-buying operations are leading us into another economic crises. At Juniper Capital, we are committed to sharing business advice that helps you maintain business success. We’re not focused on “the sky is falling!” As alternative lenders in Seattle, we specialize in real estate investments with private money loans in Washington, Oregon, and Idaho. Share your thoughts on this blog, so we can continue to provide you with quality information for operating your business in the Pacific Northwest:
Revitalization Partners has written several articles related to the movement of payday loan financing to the business market. We’ve discovered that some of our potential clients, prior to talking with us, have financed and refinanced loans in the consumer payday loan segment, increasing the loan amounts each time until even subprime lenders are ready to stop lending and foreclose on the loans. Because these loans have been so easy to get, it isn’t until the very end that borrowers ask for help… and then it’s too late.
For those who watch John Oliver’s show on HBO, there is a growing problem in the consumer industry. Used car dealers have developed a subprime business that has become “buy here, pay here.” These dealers, with no real credit approval criteria, basically arrange for anyone to get a car loan, but when all the fees and interest rates are finally calculated, the real interest rates approach 15 to 41%.
Oliver’s show recently explored how these short-lived solutions are the makings of a real sequel to The Big Short. These dealer/lender hybrids get people into cars at about the same rate they repossess those same cars. At the rate these subprime lenders reclaim cars for nonpayment, they’re essentially renting these cars, not selling them. The sky-high rates and fees, along with the inflated payments, are impossible for most borrows to keep up with.
Many people are defaulting on these loans, which is exciting for those in the subprime debt buying business, but it raises the real specter of another subprime mortgage crisis, like the one that led to the latest recession, billion-dollar bank bailouts, etc. But even if the bubble does burst, the subprime auto loan bubble isn’t likely to have the same effect as the housing industry did on the economy.
The real issue is subprime lending. As the Consumer Protection Committee clamped down on payday loans, subprime lenders simply moved their markets, so their new borrowers range from business owners to subprime auto borrowers.
A small company in Missouri borrows hundreds of millions of dollars from one of the biggest names in Wall Street finance. The debt is rated subprime and the loans carry few, if any, of the standard protections seen in ordinary debt, making them particularly risky. Yet, investors clamor to buy pieces of the loans which pay annual interest of at least 8.75% to the investors. Demand is so strong that some buyers have to settle for less than they wanted. Companies like this are the belles of the ball this year. Wall Street and private equity firms, hedge funds, and other less transparent sources of capital are frustrated by low returns on other forms of debt and are turning to riskier forms with higher returns from smaller companies. The result, weaker credit is traveling down to smaller companies that would not ordinarily have this kind of leverage.
This subprime lending boom underscores a major change in financing practices since 2008. Banks have become increasing regulated and so private equity and investment funds slice up the loans and pool them for sale to other investors. These shadow lenders make up as much as 60% of new small company loans. These loans are not at all relationship based. Any potential default or delay in making payments is likely to have an impact on the loan. It is important to understand both the impact of acquiring the loan and the impact of issues with serving the loan. Yes, the interest rate is high, but before signing you name on the loan document, consider losing your business, and all of your personal assets as well.
If the loan won’t wait a day or two for reasonable vetting from your advisor, it is probably a loan that the lender expects to go bad… or maybe you just get the thrill of starting over.
Revitalization Partners is a Pacific Northwest business advisory and restructuring management firm with a track record of achieving the best possible outcomes for clients. They specialize in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations. Whether you require interim management, a business assessment, re-engineering, or receivership/bankruptcy support, contact Revitalization Partners for efficient, effective resolutions with the highest possible returns.
Revitalization Partners… when a company is worth saving.
