The flexibility of the business model has become a lifeline for companies of all kinds amid the pandemic. Whether they are manufacturers reorganizing their product lines to create more PPE or restaurants operating only under social distancing requirements, adapting quickly to the new and sudden pressures of the market has been a key feature of the companies that could withstand the volatility.
However, this market uncertainty can also create opportunities FAVO Capital Founder and CEO Vincent Napolitano. FAVO Capital recently announced the full rebranding of FAVO Realty, a few months after Napolitano decided to shift the company’s focus as a commercial real estate company (which will continue under the FAVO Realty brand to an alternative financier for small businesses (under the FAVO Capital brand) .
With both businesses now forming FAVO Capital, the initiative provided an opportunity to enter the small business finance industry through cash advances from merchants, invoice finance, and other types of short-term finance products. Speaking to PYMNTS, Napolitano discussed why the market is well positioned to add another alternate lender to the scene and why the trader cash advance can be a valuable tool for small and medium-sized businesses (SMBs) preparing for a market recovery – in spite of everything, the often negative reputation of the financing instrument.
A gap in the market
Much like the financial crisis of 2008 and the subsequent withdrawal of traditional lenders from the field of finance for small businesses, today’s economy signals a familiar skepticism among banks when it comes to supporting their SME customers, according to Napolitano.
“Banks just don’t lend like they used to,” he said. “They are not going to make loans, or if they do do loans, it takes a long time for these merchants and small businesses across the country to get their money.”
Today, there is a convergence of factors that offer new entrants a promising opportunity, including the potential reluctance of banks to fund small businesses as well as the growing numbers of companies looking for capital to survive.
The Paycheck Protection Program (PPP) has similarly emerged in an environment where small businesses are desperately looking for working capital. In a way, the PPP initiative has highlighted the value of alternative lenders and FinTechs, digitally-minded companies that have been able to simplify PPP applications and fund issuance, often with greater agility than the big banks.
At the same time, the veil will be lifted on the appetite of SMEs for working capital today. According to Napolitano, PPP loans are not enough.
“It doesn’t meet all of the capital requirements,” he said. “It gives them a short-term ‘shot in the arm’ or a thrust.”
PPP is not a silver bullet for small businesses, stressed Napolitano, who warned that even if a small business can access such help, entrepreneurs still need to be smart about how they run their business in order to remain financially viable.
This also applies to access to any type of financing, especially the dealer cash advance – the financing product that FAVO Capital focuses on and that has received a hidden connotation in recent years due to issues such as sky-high interest rates and often negative connotations Fees. The tool is now at the center of many regulatory discussions aimed at protecting borrowers, leading to a lawsuit filed last year by New York Attorney General Letitia James.
“Unfortunately,” said Napolitano, “you will find a lot of bad actors and bad seeds.”
He said he will use his background as a Wall Street executive to keep compliance first as FAVO Capital gains a foothold as an alternative lender. It is important for small businesses to offer a variety of financial products in addition to the MCA so that entrepreneurs can access short-term financing that can change as they grow. It’s about building relationships with companies to equip them with tools for long-term success, rather than just doing business with small business customers, Napolitano said.
With the rebranding now complete, FAVO Capital is currently looking into working with FinTechs to streamline a variety of workflows, including underwriting and credit monitoring, to bolster the small business customer experience. SMEs need capital today, but Napolitano predicts that demand will only continue to rise in the coming months.
“We have seen a lot of smaller donors go under, bigger donors have left the room or have pulled the reins and haven’t borrowed that much,” he said. “We thought more than ever that there might be a great opportunity to break into this area as the economy tries to get back on track in ’21 and ’22.”