From Broker to Balance Sheet
“When I first started booking my own portfolio, I did it because I saw transactions that were creditworthy transactions which I couldn’t sell. I knew they had the ability to pay and they were a reasonable risk; however, for some reason or another, they were no longer bankable [and] didn’t fit any funder’s footprint, I brought them in-house. From there, it evolved to the point where I was just buying transactions that fit my credit parameters, transaction size and desired yield,” Kabot says.
“The timing was right because I had learned so much as a third-party originator that
I knew what I needed to be looking for to make solid credit decisions and have the time and the resources financially to make it all work,” Kabot says. “I started on my own with no financial backing. It’s been a figure-it-out-as-you-go type of situation for me.”
Pete Sawyer, president of Sun South Equipment Leasing, took a hybrid approach to holding deals on his own balance sheet because he once worked for a company where that was a standard procedure. Working with local bankers and community members initially, Sun South started bringing transactions in-house for clients known by those bankers.
Sawyer became what he calls a virtual loan officer, presenting credit packages to banks and letting them take it from there, with banks wanting varying degrees of both information and recourse. Two years after its launch, Sun South regularly bills and collects transactions in-house, utilizing TURBO-Lease, which has become second nature for Sawyer’s team.
Funding the Business
When it comes to accessing capital, Kabot says she’s not leveraged and she takes nothing out of the company, viewing the portfolio as a complete investment strategy. Kabot pays herself and overhead for both companies through the TPO part of the business. When Kabot first started her billing and collecting process, it only took an hour or two. Now, that process takes all day and her CPA has set up additional bookkeeping services to help her keep up, but she still does billing and collecting on her own.
Sawyer puts some skin in the game on certain deals, whether they are recourse or non-recourse.
“That has built up a cash flow over the years, which in slow times certainly makes things easier, but it also enables us to purchase without debt transactions out there,” Sawyer says. “That works really well. We do a combination of finance leases and, shall we say, tax leases to a certain degree. So that’s always a nice balance sheet item as far as a depreciation’s concerned.”
Advice for the Uninitiated
Brokers considering making the switch must be able to accept the reality that some transactions won’t work out and they will have to take a loss every now and then, according to Kabot. When she started out, Kabot was able to make it for three or four years before taking a hit with a lost transaction. Now, she says she’s taken several more over the course of her career and she doesn’t let it slow her down.
“The very first time I [took a hit], my friend and industry mentor, Paul Menzel, said, ‘You took your first loss. Now you’re finally in business.’ I think that’s one of the No. 1 things [to remember]. You just have to realize things can and will go wrong,” Kabot says.
Sawyer says making lasting relationships with community banks and other organizations is key to mitigating the risk of operating your own balance sheet. Whether that means being part of the chamber of commerce or attending meetings a bank hosts, it’s all about being present and building a good credit package. It’s also important, Sawyer says, to understand the owners of smaller companies may not have the time or bandwidth to understand everything they need to know about a loan, which is why building both good rapport and a package they can wrap their heads around is key to getting them onto your balance sheet.
Kabot and Sawyer both recommend connecting with professionals who have experienced success when switching from being a TPO to maintaining a balance sheet through organizations like the American Association of Commercial Finance Brokers and the National Equipment Finance Association as well as by attending conventions when possible. These events are great places to find a mentor too.
“My best connections, as far as access to capital, have come to through industry association involvement as opposed to community banks,” Kabot explains. “You’re going to have a harder time finding a Bank of America or Wells Fargo or Chase willing to jump into the type of business plan that we have as small independents, or at least that’s been my experience. However, when I have tried to talk with community banks, I found it challenging, as they don’t understand the business plan and the credit characteristics make them nervous. The best contacts I’ve made, from everything to inspection services, collection companies, GPS services, have all been through associations.”
Kabot goes further and stresses the importance of due diligence, stating she vets every transaction with a fine-tooth comb, pouring over financial records, bank statements, credit history and potential methods of structure to understand her clients.
“On doing your due diligence to vet transactions that are going onto your own balance sheet, I conduct myself in the same way I sell transactions to my funding sources because I never sell anything that I don’t believe in,” Kabot says. “I look at bank statements. I look at credit history. Depending on the transaction size, I might even look at tax returns and financials. But I use almost the same underwriting criteria that a lot of my funding sources use with the exception that for me, it must be a client who I know or with whom I already have experience. What makes it a little different is that I’m OK with doing maybe a little bit lower credit score because I know we’re not a scoring company. I know why that score is low. I look for attributes of the transaction that offset the risk or what looks like a risk.”
On the portfolio side of things, Sawyer warns to be aware of sales tax and licensure issues that may arise in the state(s) in which you are doing business. Citing the rigorous monthly sales tax reporting process in Florida, Sawyer says you must do as much preemptive research as you can so you aren’t ambushed by taxes and fees when you go to collect.
Ian Koplin is an editor of Monitor.