Understanding the Asset Classes
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While evaluating the STNP market and creating your own framework for allocating capital across originators, it is paramount to identify the underlying assets involved in each offering. The originators on our platform offer exposure to various asset classes, which we define and break down below.
Consumer lending assets available on the Cadence platform include consumer point-of-sale installment loans, vehicle loans, cryptoasset-collateralized loans, and short-term unsecured loans. Measures of credit quality unique to consumer loans are consumer credit scores like FICO and Vantage scores in the United States. Collateralization also matters, loans that are collateralized by possessions important to everyday life, such as motor vehicles, may see better repayment rates than unsecured assets. In emerging markets, fintech consumer lenders have often focused on underbanked populations, often without credit scores or having only a limited searchable credit history of any kind. In developed markets, such lenders often focus on market niches ignored by larger bank lenders. In each case, smaller fintech originators may leverage technology and alternative data in their underwriting.
Trade receivables available on the Cadence platform include factored invoices. Invoice factoring is the purchasing of invoices from businesses at a discount. Unlike other lending, the underlying transaction here is not a loan but a sale of an asset, in this case, a business’s accounts receivables. Some industries are larger users of invoice factoring than others, trucking and logistics being a prime example. Originators in this space usually focus on the credit quality of the debtor on the invoice, rather than the client they are buying the invoice from. However, factoring firms usually maintain recourse to both the debtor and the client. Typically, a factoring firm only advances 80-90% of the value of the invoices sold, keeping the remainder as a reserve and a further protection against losses.
Perhaps among the most straightforward asset classes on the Cadence platform are small and mid-sized business (SMB) loans. SMB loans are usually short-to-medium term loans and may be secured or unsecured. They are usually underwritten to the credit quality of the borrowing firm rather than the credit score or credit quality of the business owner. In the case of secured loans or loans backed by a personal guarantee provided by the business-owner, there may be higher willingness to pay and higher recovery rates in the event of a loan default. Some SMB lenders focus on particular niches and as such use alternative data in their underwriting. For example, an originator lending to e-commerce merchants might pull data from prospective borrowers’ Amazon Seller Central accounts to make approval decisions.
SMB Cash Advances
SMB cash advances, also known as merchant cash advances (MCAs), are typically advances made to small and mid-sized businesses through the purchase oftheir future receipts. The transaction underpinning a cash advance is thus a sale of an asset rather than a loan. In this way, SMB cash advances share some characteristics of SMB loans and some attributes of invoice factoring. However, unlike invoice factoring which relies on invoices for goods or services already delivered to provide for repayment of the advance, SMB cash advances rely on future receipts. Therefore, they are subject to the ability of the underlying borrower to continue to generate revenues in order to repay the advance. Should a business be unable to repay the advance according to the original payment schedule, the owner of the cash advance usually splits the repayment over a longer period to match any slowdown in business revenues.
SMB leases have also been introduced on the Cadence platform. Leases differ from other forms of financing in that, though usually backed by tangible assets, the assets are already in the ownership of the lessor (or lender) rather than being in the ownership of the borrower but subject to a lien by the lender. This may make repossession easier, subject to less legal delay or challenges from other creditors of the lessee. Leases may be secured by property, equipment, structures, or other assets. Leases are usually underwritten both according to the lessee’s ability to make scheduled lease payments and according to the value of the lease in comparison to the value of the asset being leased. If the value of future lease payments were greater than the value of the asset being leased, then not only might the lessee be less inclined to make payments under the lease, but the ability to liquidate repossessed collateral for an amount sufficient to make up those missed payments make be hampered. Continuing along these lines, the depreciation and resale value of leased assets is important in analyzing leases.