Got a Ferrari or Fine Art? If So, You May Have More Leverage Than You Think
December 23, 2015If you own a Ferrari, fine art or expensive wine, getting access to capital may be easier than you think.
Although it’s still a niche market, luxury asset-backed lending has been gaining traction lately, particularly with small and mid-size business owners. These executives are enticed by the ability to use certain high-priced valuables as a means of getting large amounts of cash quickly and often at a lower cost than other funding sources.
“People are increasingly learning that this is another option. It’s not for everybody, but it’s another option,” says Tom McDermott, chief commercial officer at Borro, a New York-based asset-backed lender that deals exclusively with luxury asset-based loans.
It’s notable that luxury asset-based lending by alternative funders is gaining ground at a time when unsecured money is so easy to come by. There are several reasons business owners are attracted to the idea of leveraging their valuables to attain cash. First off, they don’t need stellar credit or a proven track record in business to qualify. Secondly, they can typically get larger sums of money and at better rates than they might through other financing channels. A third reason is that many of them have already tapped out other funding options and leveraging their assets allows them to obtain additional funds quickly.
“A lot of small business owners have assets, so it’s something else for them to utilize in getting access to attractive small business financing,” says Steven Mandis, chairman of Kalamata Capital LLC, an alternative finance company in Bethesda, Maryland.
Here’s how the process typically works at most luxury asset-based lenders. Say a business owner wants to borrow against a high-priced item such as a top-of-the-line car, fine art or wine, jewelry or a luxury watch. First the luxury-based lender hires a third-party to appraise the item. Generally, depending on the asset and its marketability, lenders will lend 50 percent to 70 percent of the asset’s value. If the owner moves forward, the item or items are held and insured in a lender’s secure storage area until the loan is paid back. Default rates on these types of loans are relatively low, lenders say.
“People don’t want to put their house at risk when they need capital,” says McDermott of Borro. “They’d rather lose the Maserati or a lovely piece of art than the house,” he says. And even then, it doesn’t happen very often, he says. Borro clients only default on their loans about 8 percent of the time, McDermott says.
Barriers to Entry
To be certain, luxury-based lending is not a business that every funder wants to be in. For starters, there are a lot of regulatory hoops a funder has to jump through in order to do it. You need a pawnbroker’s license and a second-hand dealer license. You also need a secure facility or facilities to house the collateral, have secure ways of transporting the valuables, and you need to carry large amounts of insurance for the transfer of the items as well as during the holding period.
Indeed, keeping the items secure is critical. PledgeCap, a Lynbrook, New York-based funder, says on its website that it uses “cutting edge technology, top of the line bank vaults and armed guards” to keep a customer’s items safe. What’s more, all items are insured during transit and storage. All items are shipped through secured and insured FedEx shipping vendors for pickups and drop-offs.
“There aren’t a lot of players in the market because there are a lot of operational and legal requirements to adhere to. There are a lot of barriers to entry,” says Gene Ayzenberg, the company’s chief operating officer.
Putting Things in Perspective
Luxury asset-based lending is only a small subset of the overall asset-based lending market, which as a whole has been gaining ground in the past few years. After getting badly burned in the most recent recession, many lenders have come to appreciate the security blanket that collateral offers. According to the Commercial Finance Association’s quarterly Asset Based Lending Index, U.S. ABL loan commitments rose 7.2 percent in the second quarter, compared with the year-earlier period. In addition, new ABL credit commitments were 6.3% higher than the same period a year ago.
“Asset-based lending at one time used to be the lending of last resort. Now it’s the type of lending that it is accepted globally,” says Donald Clarke, president of Asset Based Lending Consultants Inc., a Hollywood, Florida-based company that provides due diligence services for lenders. “Today, everybody wants an asset.”
There’s not a lot of public data to gauge the size of the luxury market within the broader asset-based lending market. But a 2014 report that focuses on art lending gives more perspective to at least one facet of luxury asset-based lending.
Thirty six percent of the private banks polled said they offer art lending and art financing services using art and collectibles as collateral. That’s up from 27 percent in 2012 and 22 percent in 2011, according to the report by consulting firm Deloitte and ArtBanc, a company that provides art sales alternatives, valuations and collections management services.
Meanwhile, 40 percent of private banks said this would be a strategic focus in the coming 12 months, up considerably from the 13 percent who named this as a priority in 2012.
These market changes are likely driven by client demand. The Deloitte/ArtBanc survey found that 48 percent of establishes art collectors polled said they would be interested in using their art collection as collateral for a loan, up from 41 percent in 2012.
Many big banks won’t touch asset-based lending deals unless they are worth north of $5 million. Some community banks will do smaller deals, but many don’t have the necessary infrastructure or skill sets, explains Clarke, of Asset Based Lending Consultants. This, of course, leaves an opening for alternative funders to capture market share.
Luxury asset-based lending expected to experience growth
Some lenders say they expect demand for luxury asset-based loans to continue to increase over time as more people accumulate big-ticket items and they become more aware that they can satisfy their capital needs by leveraging those assets. “A lot of times they don’t even know they have this option available to them,” says Ayzenberg of PledgeCap.
He says most of his company’s customers are small and mid-size business owners. Often they have temporary cash flow issues, but bank loans aren’t necessarily an option for them for any number of reasons. For instance, some may have bad credit. Others may have excellent credit but not enough of a business track record to qualify for a bank loan. Others may not have the cash flow to secure the amount of money they need, or they may need the money very quickly. Asset-based lenders can generally make the money available within a day, whereas bank loans require a lot of paperwork and can take months to obtain.
Mandis, of Kalamata Capital, says his company has seen an increased willingness by business owners to put up their luxury assets as collateral in order to get larger amounts of money at more favorable terms. Many times business owners have a high-priced asset that they don’t want to sell and pay a tax or can’t easily unload within a short-time frame. By borrowing against the luxury asset, they will get the capital to take advantage of a short-term opportunity and make an attractive return quickly without having to worry about finding a buyer or paying taxes on the sale of the asset, he explains.
Certainly luxury asset-based lending is not for every customer. Not only do you have to have a valuable asset to be used as collateral, but you also have to be willing to part with the item while the loan is outstanding. The risk of default and not getting the item back may also be a barrier for some people.
“I would be very hesitant to put up my wife’s diamond ring for my business. I don’t think it’s typically someone’s first choice,” says Ami Kassar, chief executive and founder of Multifunding LLC, a company in Ambler, Pennsylvania that helps small businesses find the best loan for their business. He remembers considering this option for a client only once in the past several years and the client ultimately chose another funding source.
But companies that focus on luxury asset-based lending say there is a viable market for their services that will continue to grow as more people hear about it and use it successfully to fulfill their funding needs. People have been taking their small items to pawn shops for many years. Working with a licensed lender to leverage their larger and often more expensive items gives them an option they may not have had previously. “You can’t just drive a tractor into a local pawnshop and say, ‘Here just put this in your safe,’” says Ayzenberg of PledgeCap.
Also, unlike pawn shops, luxury asset-based lenders say they aren’t looking to sell the items to make a quick buck and will only sell the item as a last resort if a customer defaults and they can’t reach agreeable terms. “We want them to keep their items,” says Ayzenberg whose company has been in business since 2013. For every 100 loans, there are only a small percentage of customers that default and lose the items, he says.
Every lender runs their business slightly different. At Borro, for example, loans typically range between $20,000 and $10 million and span in time frame from three months to three years. Rates start in the mid-teens and are based on the size of the loan, the time frame and how easy the asset would be to sell. In order to work with Borro, the asset typically has to be worth more than around $40,000, McDermott says.
Borro, which has been in business since 2009, deals with customers directly. But it also gets a good number of referrals from other lenders. Let’s say a customer needs $500,000 and a particular lender can only offer a maximum of $350,000. That lender might refer the client to Borro, which kicks in $150,000 based on the value of a leveraged asset. The referring company gets a commission based on the loan value and doesn’t lose the whole deal. “It’s a way to keep your customers tied in with you,” McDermott says, adding that Borro has no intention of getting into other types of lending. “We complement each other. We don’t compete.”
PledgeCap also focuses exclusively on asset-based lending. The company typically funds loans between $1,000 and $5 million. The length of each loan is four months. Customers don’t have to pay every month, though most do. For every month the loan is outstanding customers pay a rate of 3 percent on average. Other fees, payable at the end of the loan, are assessed based on costs PledgeCap incurs and depend on factors such as the cost of insurance, the appraisal fee and the cost of transporting the item to the secure facility.
By contrast, Kalamata Capital, which has been in business since 2013, offers asset-backed loans in connection with several other small business financing options—such as working capital loans, SBA loans, lines of credit, merchant cash advance and invoice factoring—to give customers more flexibility in terms of rates.
In Kalamata’s case, it will evaluate the cash flow and other assets of a small business for financing options. Kalamata then combines both the amount it would lend against an asset and the amount it would lend to the small business, possibly giving the business a lower rate—and more options—in the process.
While it’s not a type of funding that works for everyone, Mandis, the chairman of Kalamata, expects to see continued growth in this area. “I don’t think the loan market for luxury assets is as large as many of the traditional small business finance areas, but it is something that can be helpful to small business owners,” he says.
Stacking: Is it Tortious Interference?
April 16, 2015
STACKING – the practice of entering into a cash advance transaction or loan knowing that the merchant already has one or more open cash advances or loans with a competitor – is causing a rift among merchant cash advance companies and small business lenders.
On one side are companies that only originate first-position deals. These companies generally include a clause in their contracts prohibiting the merchant from obtaining another merchant cash advance or loan until the company receives all of the future receivables it has purchased or is fully repaid. First-position companies view stacking as a threat to recovery of money advanced or loaned to merchants. On the other side are companies that routinely offer second or third-position deals. These companies argue that merchants with adequate cash flow to support additional advances should be free to obtain them.
In the last several months, at least two first-position companies have sued their stacking competitors, claiming that stacking constitutes tortious interference with contractual relations. These cases may ultimately result in a decision as to whether a stacker is liable for damages to a prior-position company when a merchant defaults. Although it varies by state, a claim of tortious interference with contractual relations claim generally includes all of the following elements:
1. The existence of its valid contract with
a third party;
2. The defendant’s knowledge of that contract;
3. The defendant’s intentional and improper procuring of a breach; and
4. Damages.
See White Plains Coat & Apron Co. v. Cintas Corp., 8 N.Y.3d 422, 425 (2007).
So when is advancing money to a willing merchant “improper” under the law?
No reported court decisions have tackled stacking, let alone discuss whether interfering with a prior merchant cash advance or loan contract is improper. In fact, few cases discuss this issue at all. According to Section 767 of the Restatement Second of Torts, the tort of tortious interference does not have hard-set rules. The issue in each case is whether the interference is improper under the circumstances and whether, upon a consideration of the relative significance of the factors involved, the court should permit the conduct without liability, despite its effect of harm to another. In other words, it is a fact-intensive analysis.
The New York Court of Appeals put it this way: “At bottom, as a matter of policy, courts are called upon to strike a balance between two valued interests: protection of enforceable contracts, which lends stability and predictability to parties’ dealings, and promotion of free and robust competition in the marketplace.” White Plains Coat & Apron Co. v. Cintas Corp., 8 N.Y.3d 422, 425, 867 N.E.2d 381, 383 (2007).
Because there are no reported court cases addressing stacking, we can only look to cases between other types of businesses to see what courts have said about “improper” interference. Maryland’s highest appellate court has held that inducing a breach of contract, even for competitive purposes, is improper. Macklin v. Robert Logan Associates, 334 Md. 287, 303 (1994). In contrast, New York courts have concluded that improper interference is conduct that goes beyond a minimum level of ethical behavior in the marketplace.
In the White Plains Coat & Apron case, a New York-based linen rental business sued a competitor in federal court for tortious interference with existing customer contracts. White Plains claimed that it had five-year exclusive service contracts with customers and that, knowing of these arrangements, Cintas induced dozens of White Plains’ customers to breach their contracts and enter into rental agreements with Cintas. White Plains alleged that Cintas trained its sales reps to convince its customers to abandon their contracts with White Plains even after the customers told Cintas that they had contracts with White Plains.
White Plains sent Cintas a letter demanding that Cintas stop soliciting and servicing White Plains’ contract customers, enclosing a list of customers allegedly solicited improperly. When Cintas refused to stop pursuing its customers, White Plains sued.
The court granted summary judgment for Cintas and dismissed the complaint. The court held that because Cintas and White Plains were business competitors, Cintas’ legitimate interest to make a profit was a defense to White Plains’ lawsuit. According to the trial court “the only answer … is to go out and do it also to the other guy.”
White Plains appealed to the Second Circuit Court of Appeals. Because there was an important open state law question regarding whether economic self-interest was a defense to a tortious interference claim, the Second Circuit certified the following question to the New York Court of Appeals, New York’s highest appellate court: “Does a generalized economic interest in soliciting business for profit constitute a defense to a claim of tortious interference with an existing contract for an alleged tortfeasor with no previous economic relationship with the breaching party?”
The New York Court of Appeals said no, holding that economic self-interest is not a defense. However, the court explained that business competition in and of itself is not a tort, stating that:
“[W]e note that protecting existing contractual relationships does not negate a competitor’s right to solicit business, where liability is limited to improper inducement of a third party to breach its contract. Sending regular advertising and soliciting business in the normal course does not constitute inducement of breach of contract. A competitor’s ultimate liability will depend on a showing that the inducement exceeded ‘a minimum level of ethical behavior in the marketplace.’”
In a Florida case, Azar v. Lehigh Corporation, 364 So.2d 860 (Fla. Dist. Ct. App. 1978), a Florida appellate court upheld a restraining order against a former salesman of a developer after he allegedly tortiously interfered with the developer’s contracts. Lehigh Corporation developed and sold real property in a large development project in Lee County, Florida. Part of Lehigh’s promotional campaign brought prospective purchasers to see the development and stay at the only local motel at Lehigh’s expense. Lehigh’s former salesman, Leroy Azar, would follow prospective customers to the motel and persuade them to rescind their contracts for the purchase of property and to purchase property from him at a lower price. Azar spotted customers by following people down the street and observing whether they were carrying big envelopes full of Lehigh sales literature. He then would then seek out the customers in their motel rooms and offer to handle the rescission of his contract if the customer would move out of the motel and buy a lot from him. Azar also equipped his car with a large sign advertising the sale of his lots and followed Lehigh’s tour bus full of prospective customers.
The trial court granted the restraining order against Azar. Azar appealed, arguing that customers had a legal right under federal law to rescind their contracts within three days and that he was merely providing them with an opportunity to be relieved of their contract and to obtain comparable property for lower prices.
In upholding the trial court’s restraining order against Azar, the appellate court explained that there is a narrow line between what constitutes vigorous competition in a free enterprise society and malicious interference with a favorable business relationship. The court also quoted the following passage from a well-known treatise:
Though trade warfare may be waged to the bitter end, there are certain rules of combat which must be observed. . . . W. Prosser, Law of Torts (4th ed. 1971) at 956.
The appellate court explained that the issue is whether the subject conduct is considered to be “unfair” according to contemporary business standards.
How courts will treat stacking among competing merchant cash advance companies and lenders remains to be seen. The analysis of what is “improper” interference versus vigorous, but acceptable, competition will be based on the specific facts of each case. In the meantime, merchant cash advance companies and lenders that engage in stacking should consider applicable state law, including case law, and whether their conduct could be considered improper under the circumstances.
Robert Cook, Cathy Brennan and Kate Fisher are partners in the Maryland office of Hudson Cook, LLP. Robert can be reached at 410-865-5401 or by email at rcook@hudco.com. Cathy can be reached at 410-865-5405 or by email at cbrennan@hudco.com. Kate can be reached at 410-782-2356 or by email at kfisher@hudco.com.
Strategic Funding Secures $12 Million Equity Round and $15 Million Senior Credit Facility
June 27, 2012For Release on MPR / New York (June 26, 2012) – New York City based Strategic Funding (www.sfscapital.com) has announced it has completed a $12 million equity round with an investor group led by Three Layer Capital of Los Angeles, California and simultaneously closed on a new $15 million revolving Senior Credit Facility with Capital One Bank. The new equity and credit facility will be used for ongoing capital needs and to fund the future growth of company.
Strategic Funding is recognized as one of the most innovative companies in the alternative finance industry, providing unique working capital solutions such as merchant cash advance, revenue based factoring (ACH programs) and commercial loans for small businesses. The company’s business model combines sophisticated underwriting incorporating qualitative and quantitative risk analysis with the most advanced enterprise technology available.
“Strategic Funding finances the small to mid-sized businesses of Main Street America” said Andrew Reiser, Chairman and CEO of Strategic Funding. “Since 2006, we have provided thousands of small businesses with the working capital they need to grow and sustain themselves through challenging times. Today’s entrepreneurs have very limited access to bank financing, a void filled by our company and the alternative finance industry – so one might say that we are stimulating the economy, one small business at a time.”
In seeking high yield investment opportunities, Thomas Scoville, a partner at Three Layer Capital stated that, “We were looking for best-of-breed players in the alternative finance space. A lot of companies are currently operating in this arena but few have the disciplines and technology of Strategic. A number of these companies are also beginning to venture into big-data risk analytics, but Strategic has been quietly doing this for years – they’ve got a big head start.” Dan Scholefield, partner in Three Layer Capital added, “Their business model demonstrates remarkably high yields and low default rates while providing financing to traditionally under-banked entrepreneurs. Strategic is very responsive to the needs of the market and economic conditions and provided an outstanding investment opportunity.”
Reiser continued, “We pride ourselves on integrity and responsiveness to the ever changing market and are pleased to welcome our new investors at Three Layer Capital and the team at Capital One Bank.
The Capital One Bank Senior Credit facility replaces the facility provided by Paul Frontier Holdings, which has been a shareholder in Strategic since 2007. Rahul Vaid a managing director of Frontier Capital Advisors, which manages the Paul Frontier Holdings portfolio. He will remain a member of the Board of Directors and his firm will continue their support as a major shareholder of Strategic.
About Strategic Funding
Strategic Funding ( www.sfscapital.com ) is a leading provider of specialty financing to small businesses throughout the United States. Strategic is recognized as the technology leader in servicing the factoring and loan transactions of thousands of merchant accounts for themselves and over one hundred funding partners. The Strategic enterprise technology is at the backbone of the “Strategic Partner” program which promotes syndication among numerous cash advance companies and private investors. Established in 2006, Strategic has its headquarters in New York City and maintains regional offices in Williamsburg, Virginia; Chicago, Illinois and Seattle, Washington, serving thousands of active small business clients in all 50 states.
About Capital One
Capital One Financial Corporation ( www.capitalone.com ) is a financial holding company whose subsidiaries, which include Capital One, N.A., Capital One Bank (USA), N. A., and ING Bank, fsb, had $216.5 billion in deposits and $294.5 billion in total assets outstanding as of March 31, 2012. Headquartered in McLean, Virginia, Capital One and ING Direct offer a broad spectrum of financial products and services to consumers, small businesses and commercial clients through a variety of channels. Capital One, N.A. has approximately 1,000 branch locations primarily in New York, New Jersey, Texas, Louisiana, Maryland, Virginia and the District of Columbia. A Fortune 500 company, Capital One trades on the New York Stock Exchange under the symbol “COF” and is included in the S&P 100 index.
About Three Layer Capital
Three Layer Capital ( www.threelayercapital.com ) is a privately held multidisciplinary fund with focused interests in biotechnology, energy and alternative finance, located in Los Angeles, California.
Contact:
David C. Sederholt, Chief Operating Officer
Strategic Funding
Phone: 212-354-1400
DSederholt@sfscapital.com
