A new mortgage crisis like the one that has devastated homeowners is hitting the nation's office and retail buildings. This new round of financial pain, which some had anticipated but hoped to avoid, now seems all but certain.
The last mortgage crisis in the residential sector of housing, really effected the larger banking institution who were highly exposed. Unfortunately in this next wave of foreclosures it is likely to swamp many smaller community banks across the country. Elizabeth Warren, Chairman of the Congressional Oversight Panel, the watchdog created by Congress to monitor the financial bailout, was recently quoted in saying, "There's been an enormous bubble in commercial real estate, and it has to come down. There will be significant bankruptcies among developers and significant failures among community banks." In all of 2009 there were 89 bank closures by the FDIC, through April 30 there have been 63 in 2010!
Unlike the largest banks that got into so much trouble early on, the community banks in general fared better in the residential mortgage crisis. Not only do community banks issue a higher proportion of commercial loans, but they also hold on to them rather than sell them to other investors. Nationwide, at least $1.4 trillion in commercial real estate debt is expected to roll over during the next three years. CoStar Group, a Bethesda real estate research company, estimates that half of commercial real estate mortgages will be underwater by the beginning of 2011.
Every dollar they lose in commercial real estate is a dollar they can't use for small businesses. That means if you thought capital is constricted for small business owners now, just wait six more months! It will be virtually gone from the traditional banking system. Alternative lending sources will see a huge uptick in demand and will become more the norm for business financing. I recently spoke to the top lending officer of one of the largest banks to find out the current criteria for qualifying for a small business loan. Here's what it is:
- In business for two-plus years
- FICO score for all business owners of 720 or higher
- No declining gross sales in the previous eight quarters
What does this all mean for the Merchant Cash Advance industry? Obviously growth and demand will continue and I expect the rate of demand to increase at a rapid pace. As more credit worthy clients choose the MCA as their financing tool, default rates will continue to drop. As the default rates drop, we can expect some new pricing/product models to develop to capture this new market. Bottom line, in the MCA's short history there has never been a better time to be involved in the business!
