In banking, some things change while others remain the same.
It doesn’t seem that long ago that people went exclusively to a bricks and mortar bank location to conduct their business and personal banking. I recall my own grandfather getting dressed up in his finest togs to visit TD bank at the end of his street in Winnipeg. This was a daily ritual for him. The personal service, conversation and rapport with the tellers and branch manager is what drew him, and many others, to the bank (not to mention the free coffee and cookies).
Banking has come a long way since then.
Twenty years ago, online banking was in its infancy with the advent of the internet. Today, people have done away with their manual deposit books (some may remember those) in favour of conducting a large portion of their day-to-day banking online. One recent report published by Comscore noted over 67% of Canadians use online banking as their primary method of banking (vs. 44% in the U.S.), the highest adoption rates amongst the 38 global markets surveyed. Interestingly, people between the age of 45 and 54 were the highest users, as measured by site visits per month, amongst all Canadians between the age of 18 and 65+.
Widespread adoption of online banking has thus spurred new competitors to enter the market. A banking sector oft described as oligopolistic, served by a few large Canadian banks, has become a veritable cornucopia of choice for Canadian consumers. In July 2018, KMPG issued its annual Pulse of FinTech report which noted that FinTech (“financial technology”) companies are becoming increasingly popular amongst Canadian consumers and investors, attracting US$263mil in investment capital in the first half of 2018. Year-to-date, the aggregate number of FinTech deals has already surpassed the total seen in 2017.
Focusing on consumers and small business, many FinTech companies, who partner with Canada’s traditional Schedule 1 banks, promise faster adjudication of personal credit products (some in as little as 5 minutes) while others pair traditional loans products with enhanced mobile apps that feature credit scores, personal budgeting tools and fraud detection (E.g. Mogo, Koho and Borrowell). Earlier this year, robo-advisor Wealthsimple completed another successful round of financing to grow its platform, now operating in three countries with assets under management of nearly $2bln in just over two years.
Similarly, business owners also have a myriad financing options available to them. Merchant Advance Capital offers small business loans up to $500k across four primary sectors. Products include your traditional term loan facilities, leasing lines and loans granted to businesses demonstrating a commitment to improving the environment and their community. National Bank recently announced a strategic partnership with Thinking Capital, which provides loans of $5k to $300k to small businesses in Canada, promising loan adjudication within seven minutes and funds advanced in as little as 24 hours. Lendified also offers small business loans up to $150k, to purchase equipment, finance working capital, provide bridge loans, each provided via quick loan approvals and short funding windows.
In today’s banking world, it is clear that financing options for small businesses and consumers alike are endless. What is interesting to note however is that FinTech has not yet ventured into the mid-market financing space in this country (mid-market companies characterized as those with revenues between $50mil and $500mil). Why is this? As for consumer loan products, the underlying algorithm for the above-noted FinTech companies is often driven by the borrower’s personal credit score. Small business loans are similarly determined on this basis, but also consider time in business, current debt load and company assets (often known as a behavioural scoring model). While the application process and timeline may be slightly different from one FinTech lender to the next, the inputs into the loan application are often quite similar.
In contrast, mid-market transactions are often much more complex and thus using an automatic loan approval process not possible. Mid-market M&A transactions for example involve significant upfront legal, financial, managerial and personnel due diligence that must be conducted before a term sheet is presented to the client. With some variation, the above diligence also commonly applies to requests for term loans, ABL facilities, debt recapitalizations and margined working capital revolvers.
While many debt capital financings begin with collecting similar information, each deal has its own complexities and challenges that need to be uncovered and their risk assessed. Depending on depth and breadth of this assessment, a transaction closing can range anywhere from two to six months. With respect to all financing types, but predominantly M&A transactions, it is an iterative process that often makes many starts and stops before a successful closing occurs. This lengthy process is often what stymies a transaction as deal fatigue sets in and all parties lose focus.
Kaeros was founded to help eliminate these situations and to facilitate a more orderly and efficient closing.
Having originated, structured and closed several hundred debt capital transactions over the years, we understand what is involved and where roadblocks arise. We ask all the relevant questions up front to minimize the back and forth information gathering, allowing our advisor’s to quickly identify the correct financier for a particular debt capital need, for a specific client.
At Kaeros, we believe that obtaining debt capital financing should not be an onerous process. Management’s priority should be on running the business versus spending precious time on arranging financing.
If you agree and you have a debt capital need now or on the horizon, we’d appreciate the opportunity to talk to you. Give us a call on 250.713.8505 or send us a note at trevor.palmquist@kaeroscapital.com.
Cheers, Trevor
Founder and Managing Director