Swimming with the Sharks

Sometimes the best deal you do is the one you don't.

I have really enjoyed an uptick in business over the past few days. I am energized by the level of activity. The downside is that many of these deals are just not doable. 130% LTV's, short terms, low yields, and high credit risk; Sometimes the risk just isn't worth the reward.

The only way to remain stable in the transportation business is to stick to your guns. Define your own credit parameters based on your collections experience and loss projections and hold to it.

It is companies that do not have a strict credit policy and will fluctuate in their volume and appetite, that tend to play hopscotch in the market. You realize that there is a huge mountain of profitability and truck finance, so therefore you dive into the pool and become aggressive. You purchase deals like the one I just mentioned. You enjoy the windfall of income. All of this comes at a cost. If you are not prepared and have adequate loss reserves, you will go out of business or if you have deep pockets you realize that transportation is a painful industry. 

This is what causes companies to become aggressive and then to exit the market.

They dive in and make all kinds of money upfront and when their default cycle hits they feel the pain and pulled her hand out of the fire. If you have solid credit parameters, industry knowledge and a solid servicing process, it's like having an oven mitt. You may feel a little bit of warmth but the likelihood of you being burned is much lower. I have kept open channels of discussion with many of my friends in the finance industry and all of the successful companies create credit parameters based on their experience in the industry in conjunction with industry-specific knowledge and they hold to it.

One of the last companies that I worked with forgot this simple tenet of business. They focused on portfolio size and growth rather than profitability and risk and reward. This risk not only comes in the form of collateral and credit but also comes in terms of legal and environmental. 

When you are new to the swimming pool; you sometimes forget about the sharks.

I have seen multiple companies be eaten alive by sharks. As much as it pains me to see my colleagues go through this, it is a stark realization that I must never allow myself to fall into the volume trap. I do want to grow my company but I want to grow it intelligently. This will ensure long-term success not only for me but, for my investors.

In speaking to those in hard money lending, I have realized that I am not offering a high enough rate to entice enough investors. According the nonprofit model anything higher than a 10% that cost will put severe strain on my profitability. Yet, that's exactly what it looks like I must do. I was up most of last night figuring budgets and projections and I was able to determine that I could offer up two of 11 1/2% rate for my debt and still be able to function within the credit parameters that I have set.

So, I am now offering an 11% rate for a warehouse line used specifically for funding commercial vehicles. This warehouse line will be 100% recourse meaning, that if an end user default, I will pay off that portion of the debt. I know that transportation finance us appears risky in comparison to real estate but when done correctly, by somebody who knows the industry, it can be the most profitable leasing segment. If anybody is interested in investing, simply complete the form on my website and I will send you a copy of my prospectus.

Until then, keep it consistent and enjoy swimming among the sharks.