Private lending is one of the three key sources of business capital, along with internal funding from retained profits and traditional bank lending. It is particularly important as rising interest rates and assorted economic pressures limit access to capital for many small businesses. Scott Walton is an established private lender through his company Westmark Capital, which he founded in Fort Worth in 2013, and he spoke with the Fort Worth Business Press about the state of private lending and its role in funding small businesses.
FWBP: As inflation has continued to be a strong factor and we have seen the Federal Reserve’s prime interest rate more than double from 2.5% to 5.5% in the last 12 months, how would you describe the economy?
Walton: While the nation’s economy is relatively resilient in many sectors, we have noticed an increasing number of small business borrowers losing access to their traditional lenders. Please remember the “Fed Funds + 3” calculation means that rates for prime borrowers are 8.5% (5.5% prime + 3) for those with pristine credit in a solid industry.
Our nation is facing crippling national debt, personal debt, and small business debt, and each of these impacts the availability of future credit for borrowers.
Right now, we are seeing businesses unable to take advantage of opportunities because they cannot find financing at a reasonable rate through traditional lenders due to tightening constraints as the Federal Reserve attempts to slow inflation and the overall economy.
Rising interest rates often lead banks to focus on maintaining their existing loan portfolios and managing credit risks rather than aggressively expanding their lending activities.
FWBP: What role does private lending play in this economy?
Walton: Private lending occurs when a company takes out a loan from a financial resource that is exclusively in the loan business and does not accept or solicit deposits. We are a specialized non-depository lender exclusively in the loan business. By not accepting deposits, we do not fully compete with traditional banks. The banks continue to retain deposits, which helps keep them strong while removing potential risks.
Many banks refer their customers to us because the customer may have a unique need that does not match the specific criteria the bank needs for a loan. Some of our best referrals are from banks.
As a private lender, we offer financing for such services as:
- Unsecured business loans
- Factoring, also known as accounts receivable financing
- Asset-based lending
- Debt negotiation/consolidation
FWBP: What has happened to small businesses that cannot qualify for a loan from a traditional lender?
Walton: We have recently helped two clients escape predatory lenders from the East Coast that have charged 70% interest and even more. When small businesses make such desperate decisions at aggressively high interest rates, they are only delaying their inevitable failure. We were able to consolidate the loans of these two clients at interest rates significantly lower, resulting in a more palatable payment schedule while also offering terms that help the clients survive their temporary situations.
Here’s a tip for small businesses carrying debt at unfavorable terms: Reach out as soon as you can to a private lender to discuss consolidation of your loans.
Our goal is to serve our client so well that the client is in a far better financial and business position after working with our firm. That happens because of our focus on creating win-win positions.
FWBP: What factors can impact whether a business receives a loan?
Walton: Some issues are beyond the control of the borrower, such as market volatility, geopolitical tensions, and regulatory complexities in the banking system. As mentioned earlier, the Federal Reserve is attempting to cool down the economy with the higher interest rates.
That definitely impacts whether some borrowers can proceed with their projects or if they need to wait for more favorable financing terms. The Fed’s interest rates impact several areas:
- Borrowing costs
- Loan defaults for highly leveraged businesses
- Asset quality, which can be negatively affected by rising interest rates
FWBP: What are some reasons that small businesses come to a private lender?
Walton: On many occasions, a client has a new opportunity such as a major construction project and the client needs working capital to fund that project. Since we work with a lot of subcontractors, our role is to provide working capital for payroll and equipment rentals, purchases, and materials.
On other occasions, we help fund a client who is acquiring a new facility or buying out a competitor. We can offer a greater amount of flexibility because private lenders are not subject to regular visits from bank examiners that require very stringent documentation and compliance with federal guidelines. We are willing to accept higher amounts of risk than traditional banks.
Some of the benefits of private lenders are:
- Faster loan approval and processing
- Customized loan solutions
- Less stringent collateral requirements
- More lenient credit requirements
- Competitive interest rates and terms
- Specialized industry expertise
- Reduced regulatory burden
FWBP: You told us the last time we discussed this subject with you that subcontractors are a prime market for you. Has that target market changed with rising interest rates?
Walton: Have you noticed that construction is still moving ahead at a fast pace? Due to commitments made before interest rates increased, you’re still seeing cranes in the air for major construction projects as well as growth in residential developments. Three new developments in the Fort Worth area have just recently been announced.
As borrowers are dealing with variable interest rates from traditional lenders, we are seeing an increase in calls to consider new financing opportunities. Subcontractors are hiring more workers and are renting or buying equipment. They need lenders that can be flexible and recognize the value of opportunities that may arise.
FWBP: How else do you help your lending clients?
Walton:: To a great degree, we help strengthen the finances of any client that we finance. Through what we call a “Technology Stack,” we provide very sophisticated analytics about our client’s needs and their ability to repay their loan.
When prospective clients ask us to factor invoices, we research each of the major customers that the company has to make sure those companies are financially healthy enough to pay their bills on time. In many cases, we have provided information that has led clients to review and improve payment terms from their own customers so they could make their payments to us. As a result, we have saved clients from a lot of financial pain because we acted as a monitor for the client and helped strengthen their processes.
FWBP: What advice would you give to a small business owner who is seeking financing in this environment?
Walton: First, go to where you currently have a relationship, such as your local bank, and explore your options. If that conversation does not lead to financing under good terms, check out a reputable private lender and ask for references. Since the private lending industry is unregulated, different companies operate with their own sets of priorities. Most importantly, never hold back any information about your company or your loan. Neither you nor the lender will be happy with last-minute surprises.
The way to secure your loan and earn trust for the future is to be transparent so the lender can properly evaluate your position.
Scott Walton is president and CEO of Westmark Capital, a company he established in Fort Worth in 2013 as a resource for creative business lending solutions for growing companies. Westmark provides funding for projects that may not fit in the scope of traditional banking due to restrictions imposed by banking regulators. As an unregulated lender, Westmark Capital helps fund purchase orders, accounts receivable, working capital, equipment purchases and rentals, and more. The company is veteran-owned due to Scott’s service in the U.S. Navy and considers integrity and discipline as essential core principles.