This past weekend was the Super Bowl, aka the biggest day of the year for armchair quarterbacks. What we yell at the TV is based on our best understanding of stats going into the game and conditions on the field. Quarterbacks and coaches who read these things correctly get the rings. As professionals, we’re expected to make gut calls all year long based on similar info: forecasting, our read of current conditions, and experience. The more we can learn from the predictions and the post-game analysis, the more likely we are to craft winning strategies going forward.
So in this blog, we look to The Commercial Factor, the trade publication of the International Factoring Association, to see how 2016 forecasting from their current November/December issue has panned out and what’s still important to keep in mind. Dean Lyulkin, Managing Director at Bank of Cardiff, has a piece called, 2016 Outlook: The Global Economy, FinTech and the Presidential Election Will Try to Kill You, But Won’t Succeed Just Yet.
Lyulkin argues that financial manufacturers including banks, factors, and all manner of secured and unsecured lenders must prepare for accelerating uncertainty in 2016. Global economic turbulence, a rapidly shifting lending landscape full of FinTech start-ups, and the looming presidential election could all stand in the way of more champagne and caviar. But in the big picture, he notes that lenders who kept their foot on the accelerator over the past five years are enjoying record originations and rising valuations. And the party is likely far from over, he says.
ECONOMIC UNCERTAINTY ABOUNDS
The global economy is flagging by all reasonable measures. Demand for raw materials cratered over the past 18 months, leading to an implosion in emerging markets currencies and demand for products from industrial conglomerates. Oil prices recently plunged more than 50%, aided by the US fracking boom’s disruption of global supply. Terror and political upheaval are also now common in Egypt, Israel, Iraq, and Syria. All of which points to a serious demand problem. Add China into that mix and it’s no surprise why 2016 is off to such a bumpy start. Lyulkin aptly noted that the way these conditions affect China’s scary blend of central planning and free markets could likely mean unhappy surprises all through 2016.
To gauge small business performance, Lyulkin looks to the Equipment Leasing and Finance Association’s (ELFA) MLFI-25, an index tracking lending activity across 25 popular lenders to credit-worthy small businesses. The MLFI-25 new volume index grew 8% in 2014 while 2015 was trending at 3-4% over the first three quarters. In a sign of caution, new business now seems to be stalling. But the contraction in capital spending, he concludes, is truthfully related to the plight of the US energy sector. Remove oil firms from the equation and CAPEX is growing nicely.
DANGER: LOOSER UNDERWRITING AHEAD
Here, Lyulkin cautions against letting overheated competition push lenders into dangerous territory. Unsecured business loans are rapidly moving to 24-36 month terms for businesses with relatively healthy bank statements. Some lenders offer loan sizes equal to 15-20% of annual sales. It’s hard to imagine things won’t push further in 2016 towards lower rates, longer terms and easier credit for borrowers that don’t deserve it. That will surely make any future downturn more painful.
STAY CONSERVATIVE IN 2016 OR GET THAT WAY FAST
2016 is a pivotal year: the presidential election, Fed policy and the rapidly shifting landscape for small business lending products will dictate how it affects everyone’s bottom line. Encouragingly, he points to the near $2 trillion worth of US mergers and acquisitions in 2015, over 40% higher than the previous 2007 record. And US deal volume accounts for half of global M&A, the highest share since 1999. Not surprisingly, technology M&A is over 50% higher than its previous 2000 record. Lyulkin also notes a marked cool down of IPOs and an arguably overdue departure from what have been some ludicrous private valuations of tech firms.
Lyulkin concludes that ownership and investors looking for exits will find 2016 the right time to buy a sailboat and make like Eddie Murphy and Dan Aykroyd in the finale of Trading Places. But Lenders sticking around, he says, should maintain their course of growth, albeit a conservative one with reasonable leverage.
At Fundamental, we bring hands-on attention to every lending relationship. Direct collaboration with our principles is invaluable for entrepreneurs navigating today’s uncertain economic territory. By putting our depth of financial experience to work, our clients can focus on making the right calls in their field of expertise. Because even the best playmakers only win big when they’re teamed up with the right people.