Interview with Morewood Funding, LLC Founder and President Howard Abrahams
Welcome everybody to another edition of ATL Alts. This is your host and creator, Andres Sandate. I am excited today to welcome, Howard Abrahams, the president and founder of Morewood Funding. He's based in, Long Island, Port Washington, and we're gonna spend the next 45 or 50 minutes talking about, Howard's background, more wood funding, and the work that they do to help businesses, particularly those who, have not been able to or are not able to get financing and funding from traditional, sources like banks, how, Howard's firm, and how his banking solutions and banking services help them. So with that, Howard, welcome to ATLLs.
Howard Abrahams:Thanks, Andres. Nice to be here.
Andres Sandate:Yeah. Glad to have you. I always like to ask my guests to start, by just giving a little bit of their backstory. So tell us a little bit about you, Howard, and, maybe go back as far as you'd like, but how how'd you get to kinda where you're at today with Marwood Funding?
Howard Abrahams:Absolutely. And just just for context in terms of tenure, I'm 54 years old. I went to, Binghamton University Upstate New York, and then Cardozo Law School in New York City. Graduated from law school in 1994, passed the bar, worked as a lawyer during the summers. But during, the mid nineties when I graduate graduated, there's a lot of action on Wall Street.
Howard Abrahams:So I went to, Wall Street, for, what is that, 25 years or so, mostly raising capital for investment funds. And I had the privilege of working at 3 extraordinary funds. One called Man Investments, which is a large hedge fund conglomerate out of England. Sure. Another one called Perella Weinberg, a boutique investment bank in New York City that had some investment products we're working on.
Howard Abrahams:And then a specialty finance company out of Boston, Texas called Vida, now rebranded to Obra Capital.
Andres Sandate:Oh, yeah. Yeah.
Howard Abrahams:At at Vida, we were, investing in life settlements, which is, where you buy an insurance policy from a senior. So an 85 year old, you pay the premiums. And then when they pass away, you get the death benefit from the insurance company. So I was raising capital for those funds. And then in 2019, I'd, wanted to go out on my own, and I'd known a little bit about, commercial and alternative finance, both through some of the work I was doing at VIDA and also through some family members that were involved in, commercial finance.
Howard Abrahams:So I literally started in 2019 and picked up the phone and called my local accountant and said, do you have any unbankable borrowers? And, you know, 4 years later, I'm rocking and rolling. You know, he he threw me some some business that was having trouble getting money from their bank, and, I called the one lender that I knew who was a real estate lender, and they said, no. I'm a real estate lender, not a business lender. Called my friend who's a business lender.
Howard Abrahams:I called that person. They said this is too small for me. Call someone else who handles smaller deals. And, you know, today, I built a a very large database of over 250 lenders that I work with. I source borrowers.
Howard Abrahams:I match them up with lenders, and I'm in the middle. And, my incentive is to help, get a deal done.
Andres Sandate:Yeah. That's great. Well, I, as I was saying earlier before we went live, I I have a couple of podcasts now. And as I've been into this medium, one of the things that I found is there's so many subject matter experts in particular areas. You're talking about finance and and and the debt capital markets.
Andres Sandate:And so what I'm, you know, what I'm doing today is I'm I'm I'm building ATL also as a platform to help educate, inform, and inspire, founders and practitioners, investors around alternative, investments, which includes increasingly a big allocation to private credit. Right? And what is private credit? It's all these non bank lenders, all these non bank assets. Right?
Andres Sandate:And that can include a big part of your wheelhouse, I would presume, which we'll talk about. But it also another podcast I've created is called asset backed as I mentioned, and I'm gonna go ahead and put this show on that as well because I think a lot of the things we're gonna get into, are gonna be very relevant to that audience, which is really directed to founders and practitioners in private credit, in, private debt, and how they can go about accessing this quite opaque, but multi $1,000,000,000,000 nonbank asset class, right, that, you read about every day. So fantastic background. I would love to jump in and ask you, Howard. So so you had this, you know, lengthy career on Wall Street and asset management, 2 really big firms, Mann Group, Prolo Weinberg, and then you mentioned VIDA, in the life settlement space.
Andres Sandate:When you decided to to move into alternative finance and setting up, you know, your own firm, hanging your own shingle, you talked about calling on that network. When when it came time to identifying or maybe it's evolved over time, but how did you identify which types of companies you wanted to support in terms of the financing needs that they had? Like, did you focus on specific industries, specific geographies, certain size of company?
Howard Abrahams:Well, I'm just I literally started by calling that accountant who gave me, you know, a particular company to to try and get financing for. And what I realized is that, a critical part of the value chain or the delivery chain would be the lender. And if I didn't get along with the lender, or I didn't trust the lender, I couldn't rely on the lender, I wouldn't be able to, you know, help that bar or close the deal. So the way I work is I I built this Rolodex of lenders, and I have a lot of faith in each of those over 250 lenders. I've talked to all of them.
Howard Abrahams:I've vetted them, had discussions with them, and I can rely on them. I know they'll call me back. I know they move pretty quickly. And I know they're good for their word. If they offer a term sheet, they're they're likely to close.
Howard Abrahams:And so I actually work backwards.
Andres Sandate:Okay. I start with the
Howard Abrahams:lender, and if I have faith in the lender, I'll actually look for borrowers that fit that lender's bucket. Okay. I am a generalist, but I I think of it more as a solution looking for a problem than a problem looking for a solution. If you
Andres Sandate:Okay. Well then, yeah, that makes sense. Let's talk about, I was a banker at one point, and and I remember the bank set up origination and coverage teams based on, you know, industry or in some cases, you had corporate and middle market, lower middle market. But let's just pick up on what you just said. So you go to the lender, the financing provider.
Andres Sandate:You have 250 relationships. Within that, you have a lot of different mandates, call it. A lot of different objectives for where that capital is looking to be put to work. So I would imagine this die this database is pretty dynamic. Can you give us a feel and a flavor for what what does that look like?
Andres Sandate:You know? Yeah. Is it community banks all the way up to large asset managers and kind of everything in between? Or or what's it look like?
Howard Abrahams:So they're they're mostly finance companies. They're they're not large asset managers, and they're not typically banks or community banks. There are a couple of banks that have ABL departments, that tend to be a little bit more aggressive than, let's say, a Chase or a JPMorgan, you know, a Citibank ABL department. But these are primarily finance companies or, smaller funds. When I say smaller, could be as big as a 1,000,000,000 or 2, or small as, you know, 50 to a 100,000,000.
Howard Abrahams:Mhmm. And and they're they're either funded by Equity Investors Limited Partners, or more likely, they have access to a line of credit from a Wells Fargo or CIT or Synovus Bank or or some other bank that's providing them capital, and then they're relending that money out at a higher, that's effectively their cost of goods, and then they're relending at a higher rate. And, for me, my my sweet spot ranges from a a1000000 or 2 up to about 25,000,000. And then the middle of that, you know, 7 to 12,000,000 kind of being my sweet spot. Larger than that, I find that the business has typically has some boutique investment bank representation.
Howard Abrahams:And then smaller than that, they they may not have their act together or be, mature enough as a business to, to obtain, even alternative financing.
Andres Sandate:Right. So the so, yeah, they're very difficult to underwrite or they're yeah. Their loan tape isn't large enough or whatever Exactly. The case may be. So I'd love to keep going on the finance companies themselves.
Andres Sandate:So I think a lot of the listeners who are building businesses and have built, you know, small, medium sized businesses that are looking for capital. I I often find that when they think about capital, the first thing they think about is their local bank. They think, oh, I'm gonna go to my local bank maybe where I have personal savings and checking account, and they start there. But I think what you just described is a is a financing company, is a finance company that is a it doesn't have branches. It it doesn't have a retail presence.
Andres Sandate:Can you give us a feel for I mean, I've heard of CIT. I think some of our listeners would have heard of some of these finance companies if you if you threw some names out. So give us a feel for that industry. What does it look like? Is it regulated?
Andres Sandate:Who are these are these shops, large and very established? You know, what what are the characteristics of these of these finance companies?
Howard Abrahams:For sure. And and they do tend to have, product specialties, and we can get into what the products, if you will, look look like. But these are generally, range from firms like SLR or Pathway Bank's ABL department that would actually be fairly sizable. I'm guessing sort of 50 to a 100 people. They've got an origination team.
Howard Abrahams:Those are the sort of business development team looking for the loans. Typically, my first, interface with, with with that firm would be through their business development folks. Then they've got underwriters. Once the business development folks bring in a deal, they sort of, you know, do the first cut and create a a bit of an investment memo in in conjunction with the underwriter that's giving them comments saying, you know, we we would need to see the following or asking questions about the deal. The deal would typically go to an investment committee at at the firm, and then, they would issue a a a letter of of indication or otherwise known as a proposal, additional due diligence, confirmatory due diligence would be done, and then ultimately, the loan could fund in, you know, let's say anywhere from 2 or 3 weeks out to, you know, 4 to 6 weeks of of of diligence, from the from the firm.
Howard Abrahams:You know some of them on on certain types of loan products like purchase order finance, you're really looking for very early stage businesses. It might be their 1st revenue or early revenue, and it it could be a a a very small team of an originator, an owner, they they could be the same person to, you know, a team of 10 or 15 people do doing doing soup to nuts, work. Yeah. You know?
Andres Sandate:So, yeah, that makes sense. So I, you know, in looking and looking at, at at Morewood Funding and how, you know, you present your business and platform. You talk about, companies who have, had a difficult time or don't have access to conventional lenders, which I'm presuming we're talking about banks typically. And the the value proposition is more would will take them out to a much broader set of potential financing sources. What are some of the challenges that make them difficult to finance at the banks first?
Howard Abrahams:Yeah. That that's a great question. And, you know, we're in an exceptional time now. So I'll give you that sort of a general answer and then an answer that applies now, but more specifically, what is going on in the current environment. So, you know, banks are regulated by the the Fed and the OCC.
Howard Abrahams:And, you know, I spoke to someone at Flagstar Bank today, and they have just shut down lending. I mean, Flagstar is a major, major bank, and they are shut down lending. They're they're supporting their current portfolio companies, but they're not issuing new loans. So that that's, you know, specific to Flagstar, but in general, banks are, really tight right now. And, as a result of the Fed's, audits and the Fed's limitations, generally speaking, the banks are not putting out money right now.
Howard Abrahams:So that that's specific to this environment. But in general, banks need, you know, at least 3 years of a track record, 3 years of of profits. There might be explainable extraordinary circumstances why a business lost money last year. They might have reinvested in in in r and d or or, you know, capital goods, capital expenditures. So there might be explainable reasons that could knock them out or disqualify them from bank lending.
Howard Abrahams:But a private lender might charge a little bit more than a bank, but have a lot more patience and understanding as to the as to the reasons. Additional additional reasons might be a bank might do a deal, might lend, but they might not lend enough. They might not they might ask for too many restrictive covenants. There might be a structure that that's not not tenable to a borrower. I mean, if you take, for example, purchase order financing, if you get a a large order from Walmart to make t shirts, a $1,000,000 order from Walmart, and you've gotta pay your Chinese factory $700,000 to get those t shirts made.
Howard Abrahams:You know, your local bank is not gonna send money out to, China Chinese factory. But there are lenders that are equipped. They've got boots on the ground or relations to something ground in China to make sure that that factory is legitimate, to understand whether the goods have been shipped or not, and, better equipped on micro level to, finance a transaction like that that would never get financed by a bank.
Andres Sandate:Yeah. So in in how you built more wood, funding when you go back and, you know, you've done this now 4 or 5 years and you've built this, universe of of of financing sources. What have you found is you know, what are some of the the important aspects to know as you sort of originate a new financing relationship? Like, as as you sit down with a new business development officer or relationship manager at one of these firms to say, hey. This is how I can help your firm, you know, identify good quality loan opportunities.
Andres Sandate:What are they usually looking for?
Howard Abrahams:Yeah. And by the way, it's never square peg, square hole. Right? So, you know, even even though, a lender will give you, their buy box or underwriting box, if we we're looking for deals of a particular size, in a particular industry, with a particular advance rate, with a particular, interest rate or fee associated with it, You go back to that lender and for one reason or another, you know, depending on the weather, they may or may not do that deal. So you do need to hedge and perhaps show it to a couple or or 3 or 4 lenders, to ensure that you know, kind of work in parallel to ensure that that deal gets done.
Howard Abrahams:But what I'm looking for, as I said, is a very responsive lender. If they're not gonna call me back within, you know, 12 to 24 hours, that's just gonna be indicative of the way they're gonna work with with my potential borrower. So it's just it's just not gonna work. Right? And, my we won't we won't be able to get a deal done.
Howard Abrahams:So I'm looking for somebody who's helpful, who's understanding, who's willing to listen to the the business owner and understand that where the business owner will be. And really be while these lenders are not equity partners, but will be a debt partner and supportive of the business. And if the business, you know, gets into a somewhat rocky time, the lender will understand and look across across the valley and help that that borrower, you know, work its way into a a better situation.
Andres Sandate:And and if the company is looking for 1st loan or or establishing, it's a line of credit or has very specific need, like you mentioned purchase order finance, that's one thing. What about a company that is looking to refinance and is is is looking to refinance into, you know the environments are gonna shift. We haven't had a rate, move this year. I think at the beginning of the year, experts were predicting 6, 7 rate cuts. We might get 1.
Andres Sandate:We might not get any. Who knows? But but, obviously, a big part of small, medium sized businesses is access to capital. And, you know, that access to capital being cut off, you know, for these companies, it could mean lights lights out, game over. So what are the different types of sort of mandates that these companies are looking to resolve?
Andres Sandate:Rescue financing one day and then the next day you're working on a a refinance? Like, I'm I'm curious what a day in the life is.
Howard Abrahams:Yeah. I I don't know the exact breakdown, so maybe it's about 5050 of businesses that need money, you know, to keep the lights on versus businesses that need money because they're growing so fast and can't Yeah. Afford to support their growth internally. Working on well, I'll give you sort of two examples. Working with a about a $30,000,000 revenue business that has about a a $8,000,000 loan with their current bank at, let's just call it, 7%, because this loan was secured a while ago.
Howard Abrahams:And they have an expansion project. But the business had losses a year ago, and the bank doesn't wanna give them additional money for that very exciting expansion project. So I was able to get them. They currently have 8,000,000 at, let's say, 7%. I was able to get them an offer for 11,000,000 at 12% for the next 5 years.
Howard Abrahams:And he said, well, why would someone go from 8 percent to 11 purse, to 12, excuse me, to, when I say 11% for 12% for the next 5 years. Well, the reason is that that that extra 4,000,000 or 3,000,000 that they're gonna get, at at a slightly higher rate, so it's gonna cost them, you know, 3 three points on, you know, just a few $100,000 more per year is gonna going into a project that's gonna create them $3,000,000 worth of profits per year, once they build it in a year from now. You know, you put us exit multiple of, you know, 4 or 5, 6 times on that, you're you're creating, you know, 15, 20, $25,000,000 of enterprise value all because you're gonna pay another half a $1,000,000 a year or so in interest costs.
Andres Sandate:Yeah. So
Howard Abrahams:that that's like sort of a a a an expansion or a good problem to have. And then you have a business that, you know, for one reason or another, they have too much inventory. They they their money's tied up in their inventory. They can't, can't can't they've got the wrong inventory. It's not selling anymore.
Howard Abrahams:It's obsolete, and they need to, borrow money to make payroll. You know, more of a rescue situation, if you will. Right?
Andres Sandate:Yeah. I I'm curious, you know, as you have been in the space in the capital markets, you know, for for quite some time and specifically with Morwood helping businesses with solving financing challenges, and it even sounds like some strategic challenges when you talk about how to finance capital expansion and and looking at an exit in several years, right, to grow the enterprise value, get a bigger bigger multiple. That's much more than just being a quote, unquote, you know, the old school term loan broker. Right? There's much more that clearly goes into this from a, is there is there a consulting aspect to what you're doing when you get into these companies and really roll up your sleeves?
Howard Abrahams:There there isn't. There isn't. It depends on the situation. I mean, if they're sophisticated and have a CFO or, internal or external CFO, they have a really good sense of where they wanna go. I mean, they might be right.
Howard Abrahams:They might be wrong. But they're sort of tasking me to, help them get get the capital, and I'll lay out some options. Speaking to a business, yesterday that, when when it comes to receivables finance, you can either sign, let's say, a 1 or 2 year contract with a lender, and they'll finance all your receivables. Or you can have a more expensive, but yet more flexible option where we we call a spot factor. So you just periodically, on occasion, ask the lender to finance your receivables.
Howard Abrahams:Right? So one is a, like, a a contract for a year or 2, and the other one is episodic as needed. Obviously, as needed, you're gonna pay a lot more, but it'll be a lot more flexible. And so my job there is just my well, my goal in that case, it was only yesterday, is to present that business with 2 term sheets, and then we can go through and discuss which which makes more sense, for the borrower. So Yeah.
Howard Abrahams:To that extent, it is consultative, but, you know, I'm not there to tell them that they did that they shouldn't finance or that they should finance.
Andres Sandate:Sure. Sure. Makes sense. Love to ask you about the, you know, the the increased use or nonuse of debt financing for earlier stage businesses. I mean, we're coming out of a period, over the prior 4 or 5 years, probably stopped about a year and a half, 2 years ago where early stage companies were having money just thrown at them by VCs and and, growth equity.
Andres Sandate:That's changed, and it's much harder now to secure capital of any kind. And there have been firms that have stepped to in to fill the void. What what have you seen over the last 2 years, you know, in in this uncertain interest rate environment with respect to securing debt capital for earlier stage, you know, growing companies, because it's just become much harder for them in general to to get financed. And I'm curious for somebody that's on the front lines, what what your observations are.
Howard Abrahams:I I I am on the front lines of that and and see that repeatedly that, you know, a few years ago, you raised capital either from VC or from friends and family, and you you sort of build your product. And let's let's just say that you are selling your product, you're just not meeting the expectations, and you're, let's say, not profitable. So now you want to either borrow money, but you can't really pay the debt, or you can't service the debt on the those borrowings. So your only other alternative is go back to your investors, in which case you have to explain to them why you aren't making the money you said you would make, the profits you said you would make 5 years ago when you raised that capital. It's unlikely that those investors will give you give you money because you haven't hit the targets.
Howard Abrahams:Right? Unless you've got a really, really good excuse for your name's Jeff Bezos or
Andres Sandate:or
Howard Abrahams:Sergey Brin, and you've got that level of credibility. Right? But if you're not so if you're not hitting your targets and you can't rate you can't service your debt and you're not going to get your equity capital, I would say you're in big trouble. So you likely have, need to take a hard look as to whether you have a failed business model.
Andres Sandate:Yeah. And and let's talk a little bit about I don't know if you'd call them zombie companies,
Howard Abrahams:but
Andres Sandate:they've got enough to keep the lights on. And I was at an event yesterday where, you know, the the comment from some of the bigger institutional debt shops was in their conversations with enterprise CFOs. These would be kind of fortune 1,000 type companies. I have to think the similar thing happens as you move down market. The first thing that they're looking to do in in terms of, you know, again, most of them are publicly traded, so there's a short term pressure on on meeting earnings and and the street's expectations.
Andres Sandate:But the first thing you do is sort of try to, you know, cut costs. Cut costs, but maybe avoid having to reduce headcount. So you reduce hours, and you reduce shifts, and you start looking at then, okay. Our margins, are gonna get tight. And how do we protect some of our margin?
Andres Sandate:Well, now we've gotta start maybe doing some layoffs. What is the thinking that's going on in, not the zombie company, but the company that's selling. It's just selling into a tougher environment. There isn't as much buying happening on the other end. What are what are you what are the financing sources scrutinizing today, if things have slowed down?
Andres Sandate:And and what are the CFOs and you when you're talking to these financing sources? What's the narrative?
Howard Abrahams:Yeah. So the the real question from a lender is, at worst, is what's your burn rate. Right? How much do you have, and how much are you using, and how long is your runway? And Yeah.
Howard Abrahams:You know, the lender doesn't might lend you money, in a certain construct, but doesn't wanna get ahead of your runway. They don't wanna be left holding the bag. So that they'll lend you to to an amount that that's shorter than than your runway. And, of course, runway is changing depending on where sales and profitability are are are going to. But that's where the what you call the ABL or the alternative, loan market comes into place because there might be, a more flexible approach to collateral.
Howard Abrahams:So for example, receivables. Right? So if a lender is looking at receivables, they don't need to rely, as heavily on the credit of the borrower. They're looking to the credit of the receivables. So you might not have a very profitable company, but you're shipping to Walmart, and Walmart owes your business money.
Howard Abrahams:That's a highly valued asset
Andres Sandate:that
Howard Abrahams:a lender a lender will lend against where normally, a business like that wouldn't be able to obtain direct financing based on their credit history. Same thing with equipment financing. Maybe you're a biotech and you raised a lot of money a few years ago. You've burned through a lot of that money, including purchasing equipment. And now, you can't access the equity markets, but you're sitting on this equipment with no leverage, no debt on it, perhaps you should put some debt on that equipment.
Howard Abrahams:And lenders will say, okay. This is valuable equipment. If the borrower defaults and can't pay back, the loan, we could repossess the equipment. It's the same thing as your car. Right?
Howard Abrahams:The car has some some residual value. Right? Inventory. I mean, you know, you could be sitting on a a 1000000 t shirts that, Walmart only ordered 500,000, so you've got 500,000 extra t shirts. Well, some lender will say, you know, put an appraisal, appraise the value of those t shirts, and say, I'm willing to lend a certain percent against those t shirts.
Howard Abrahams:And if you can't pay me back, I'll take possession of the t shirts and I'll resell them. I know where where and how to resell them. And it's the same thing with purchase order finance. You know, if you've got a $1,000,000 we mentioned earlier, a $1,000,000 order from Walmart. We know the factory can make those t shirts, ship them to Walmart, so we're willing to lend against that purchase order.
Howard Abrahams:So that it's it's a creative approach to, collateral and and what collateral might be and what the value of that collateral might be.
Andres Sandate:Yeah. I I'd love to get your take on, having spoken to a lot of early stage founders and growing companies that are looking for financing, you know, there's always, I guess, surprise when they start looking at various term sheets. Sometimes the founder is very, very focused on rate, and they don't look at advanced rate. And they don't look at the covenant packages. How are you coaching your clients in terms of 2 or 3 term sheets and some of the some of the things that they need to sort of think about, outside of just the lowest interest rate on, you know, on the, the proposal.
Howard Abrahams:Very much. Well, if you go back to that example I gave earlier where this person was borrowing 8,000,000 at 7%, and I was able to get them 11,000,000 at 12%, I actually said in good faith and being brutally honest to that, borrower, when I opened up the email from the lender, I thought it was gonna be 16% plus warrants, and it came in at 12%. And they but they they were used to coming at at at at mid to high single digits, and so they were shocked by 12%. Right? And there, we we really try to stress them that this lender, will give them 3,000,000 more than the bank would give them, which would enable them to build their new project.
Howard Abrahams:And to the extent that they have any other new projects, this lender would be supportive. In effect, this lender would be a partner to them, but not take any equity. And no matter what the loan costs, right, whether it's, you know, 12%, 16%, or or 20%, it's still cheaper than equity if your business is growing and profitable. Right? And when you think about your business, if you're gonna double and triple and quadruple your business and try to sell it one day and you give a piece of your business away today, that's gonna be a lot more than paying a lender virtually any amount of money.
Andres Sandate:Yeah. No question. And I and I often have have said to earlier stage companies, you know, there's so much education out there about raising your venture, but there's very little around how to actually build a capital stack where you keep more of your company. You don't bring up and bring in as much outside capital. You have a smaller board, and perhaps you you think about using revenue based financing or or debt or other means, if you've got assets that can be written.
Andres Sandate:I think there's a real big education opportunity out there for for that class of founder.
Howard Abrahams:I I will say, though, there's a certain, credibility or, endorsement, testimonial by having some VC Capital. I've been talking to a business, a software company that last year did 15,000,000 and this year did 30 it's gonna do about 35,000,000. And they they're totally bootstrapped. And, you know, when when folks lenders look at that and now seeking some debt capital. When lenders look at that, they on the one hand, you say, well, it's pretty impressive.
Howard Abrahams:They've gotten to where they are on their own. On another hand, you say, well, why did VCs pass on that? What what are we missing? Or or is the top line real? Or is the bottom line real?
Howard Abrahams:Is the is the is the model real? You know, has a VC or professional investor kind of vetted this company or do they have to boost strap because no one really believed in their idea. So there is sort of a a third party endorsed endorsement by having some VC Capital. And so
Andres Sandate:Yeah. Yeah. Yeah. Of course.
Howard Abrahams:If you hit a rough patch, the VC has deeper pockets and can, you know, can can support, the business.
Andres Sandate:Right. Yeah. And they can be a pathway to growth equity, and then growth equity can be obviously a pathway to to the buyout market or the the PE market. I wanna ask you about the, the relationship aspect. You know, banks always position themselves as being by the borrower's side and providing all sorts of ancillary, products and services and solutions that banks can can offer.
Andres Sandate:You know, you know, deposit services, treasury management, etcetera, etcetera. What is the characteristics of the relationship with, these financing companies and and these, call it non bank lenders that are generally, entering into the the to the lending relationships that that you participate in. Because and here's the question, Howard. Things go wrong. Things happen.
Andres Sandate:The by nature, you know, no person that's ever made loans for any long period of time has had a perfect track record. And it comes down to how does that workout process unfold. Can you kinda give a feel for this?
Howard Abrahams:Yeah. That's a great question. I mean, look, the these lenders are private lenders at their own businesses. So they too are entrepreneurs. I mean, I'm working on a deal now where the borrower doesn't wanna sign a personal guarantee, and the lender says you should know that I've signed a personal guarantee with my source of capital, Wells Fargo.
Howard Abrahams:So I'm I'm on the hook. You should be on the hook. Right?
Andres Sandate:Yeah.
Howard Abrahams:But to that end, because these lenders are also entrepreneurs, I think they are a lot more understanding than a salaried employee at a bank who's never, you know, made payroll, never doesn't have their name on a lease, never contemplated a personal guarantee. Right? Never thought about paying back capital because they're a w two employee. So I think these lenders are a lot more understanding and respectful of entrepreneurs and understand that there there are rocky you know, it's a it's a bumpy road to to to entrepreneur to success. I should also point out that, when you had asked me why why, what I do, I told you what I do, but I didn't tell you the why of what I do it.
Howard Abrahams:And I felt that in my previous career, it did get a little bit bureaucratic. I was raising money for funds with with a fact card and a deck that that was immutable. It was all regulated, and and I knew the top ten questions that every investor would potential investor would ask me, and I knew the top ten answers, and every meeting was was exactly the same. Here, it is an unregulated space dealing with entrepreneurs. They're frequently facing existential issues, where they need they need capital to survive or to thrive.
Howard Abrahams:And, I have the utmost respect and edification, if you will, of, helping these entrepreneurs and understand what they're going through. I myself have my own business too now. So I understand what they're going through and really respect the journey that they're on and get a lot of satisfaction in, trying to, help these entrepreneurs, get get through get through it all.
Andres Sandate:Yeah. I mean, it's it sounds it it's it sounds like one of the real value propositions outside of clearly helping the founder and the and the team, I would say make a market, but identify, you know, where's the best place for them to go to finance. But it's also talking to a set of, talking to a professional who's who's really been in the trenches. I mean, you see a lot more deals than they do. Right?
Andres Sandate:The reality is you know what is market more so than the borrower because the borrower is building their business, x y z. You're sitting there all day if I am making, you know, a simplification is yours you're you're looking across the capital markets and you know what market is. Right?
Howard Abrahams:You're absolutely right. You you remind me of that quote by Warren Buffett where he says tell me where I'm gonna die and I'll avoid that spot. And it's like I'm, you know, I'm, or spent some time in Austin when the scooters came out and Right. Happened to speak to a nurse. And she said, since scooters came out, we're seeing, you know, a lot more head injuries in in the ER department.
Howard Abrahams:So it's pretty simple. If you don't wanna end up in the yard, or you wanna minimize your chance of ending up in the ER department, don't get on a scooter. So what are business is doing that, would get them into a a a place where they're desperate for capital? Now, again, half the borrowers I speak to are in a good place or have a good problem, which is they're growing so fast that they they, they they they need the capital to support their growth. I was actually talking to a lender about this specific issue, in a certain industry where where where businesses are typically going really, really fast.
Howard Abrahams:And to support that growth, they end up taking a very, very high interest rate loan. And then perhaps that growth slows down or there's a problem in one of their orders, and they're stuck with with this high interest rate debt. And I said to the, lender, well, what do you what do you would you advise these businesses? He said, I'd advise them to slow down. I wouldn't advise them to grow at any cost.
Howard Abrahams:And, you know, when you think back to sort of your VC questions that VC cultures grow at grow at any cost. And perhaps, again, if you're Jeff Bezos and you you have virtually unlimited access to capital, that's a good model. But if you're not Jeff Bezos and you don't have unlimited access to capital, you ought to be really, really careful about whether you can pay back, any any bar well, a, whether you have access to to to debt or any other financing, and b, whether you can whether you can pay it back. Right?
Andres Sandate:Yeah. For sure. I have a, next week, I'm I'm doing a, a lunch and learn with an accelerator. And, you know, we're gonna have a 100 or so CEOs and founders, primarily earlier stage companies, mostly tech, software businesses, etcetera. I'd love to ask you.
Andres Sandate:If you were my if you were in my shoes, I have some thoughts about some of the things I'd like to talk to them about, but the conversation is alternatives to equity financing. That's the whole point of the lunch and learn. You know? Some of these companies are gonna go try to raise equity. Some of them will, like you said, want that stamp of approval that comes from from getting a especially a very well respected VC.
Andres Sandate:Others are gonna explore other alternatives. You know, there's been an increase over the last, 3 to 5 years of things like revenue based financing. We saw companies like Capchase and Wayflyer and Pipe and a number of others that raised a lot of money, made a lot of loans into software. And I know, you know, specifically in the cases of several of these software businesses, they ran into trouble. They didn't grow as quickly, and the financing models ran into trouble.
Andres Sandate:When you think about the the the the recurring revenue nature businesses, of software and other recurring revenue models, what are some of the things you see on the front lines that lenders are scrutinizing today?
Howard Abrahams:Well, I you know, in in those cases, you're looking at both the top and and then potentially the or hopefully the eventual bottom line.
Andres Sandate:Yeah.
Howard Abrahams:And the the the sort of situations I've been involved with, let's say, over the last 6 to 12 months more recently, on the revenue based financings that I've worked on. And they're they're they come in a in a variety of different shapes and flavors. Right? One one deal I'm thinking of was a venture debt deal. So it was a company that's tech forward, has a VC involved, you know, has has has a good equity stack, but wanted to raise some venture debt.
Howard Abrahams:So I arranged, $3,000,000 venture debt financing for them. And, spoke to them 6 months later, and their top line isn't growing as expected. Right? And so now they're looking for a second position. Right?
Howard Abrahams:So if the if the first position venture debt was, let's say, all in at about 14%, and that and that venture debt lender won't advance them additional capital. You've gotta go get a second position lender. And and there you're talking about very high teens. Right? Because that second position lenders, a, lending to an unprofitable business, and b, in the second position.
Howard Abrahams:So I think it we're we the most important thing I think entrepreneurs could could do right now is to sober up and realize we are in a tough environment. There is capital, both debt and equity for good deals, but it's it it better be a good deal. Otherwise, you're, throwing good money after bad money. And, the lenders, just like the equity investors are, are absolutely scrutinizing deals.
Andres Sandate:Well, I was at an investor event yesterday here in Atlanta, and and the last panel of the day was was on the public markets. And 3 CIOs, got up, and all 3 predicted a recession. You know? Right. It's coming.
Andres Sandate:You know, some people will say we're already in 1. But, not to dive into the macro, but the environment is clearly uncertain, and uncertainty is not good for for markets, generally. We have an election at the end of the year. There's a lot of geopolitical events that are happening, you know, in in Europe and and the Middle East. So all this uncertainty compounds what is already, you know, a a pretty complex backdrop, if you will.
Andres Sandate:So all the more reason, if I'm hearing you, why the company and the fundamentals need to be a good story.
Howard Abrahams:Absolutely. And you know, look, the debt investors are not so much buying the story, they're buying the facts. Yeah. The the current state of financials, they're not, I'm working with a business that wants to do a roll up and, you know, he's on his his 3rd acquisition and his target is $1,000,000,000. I said, well, when you're talking to the lender, don't tell them your target's $1,000,000,000.
Howard Abrahams:They're not impressed by that and they're gonna would all they're gonna see is the the integration risk. Right? Tell them you wanna make one one acquisition at a time, digest it, then you'll make another acquisition. Whereas an equity investor might have been, a lot more excited buying into a business or investing into a business that's gonna get to a $1,000,000,000 and, you know, no no time at all. Right?
Howard Abrahams:So I think I Yeah. And and I'll I'll also add that the the lenders, you know, they do have a cushion. Right? On receivables, they're lending 80, 85%. On inventory, they're lending 80 80 percent of forced liquidation value.
Howard Abrahams:So there is a cushion, and they could withstand, hopefully, any downturn in the economy. Right?
Andres Sandate:Yeah. On the, on the point that that you made about more of a sort of a sober fact based, fundamental based review. I I, PM said to me at a big credit fund, you know, our our investment committee does the deals we hate the least. And I thought that was such a a a a sort of sanguine wise way to encapsulate the credit investor mindset relative to the equity mindset. Right?
Andres Sandate:Which is how big could this get? You know? Is this a visionary CEO? Yeah.
Howard Abrahams:It brings up a really interesting point in how to talk to your lender. Right? And first of all, I wanna say borrowers should keep their lenders on a close on a very short leash. They should charm their lenders. And I don't mean, you know, any sort of insincere and disingenuous, stupid way, but be very responsive.
Howard Abrahams:Your lender is giving you money, potentially a lot of money. They wanna know the same way I wanna work with lenders that are responsive. They wanna know that they're working with borrowers, that when there's an issue, they're gonna call up and the borrower is gonna be there. Right? The borrower is not gonna be ducking them.
Howard Abrahams:You know, don't boast to your bar to your lender that you're going on vacation or you're buying a Rolls Royce, if you will. Right? Be show the lender that you're a responsible steward of their capital. If if they ask for a deliverable, try and get it back to them as soon as possible. If you need to take a pause in the process for one reason or another, be communicated with your lender.
Howard Abrahams:Tell them, hey. I need to take a pause. Either tell them the real reason or just tell them that you need to take a pause. Don't lie to them. But you're building a relationship with your lender, and treat the lender the way you want your lender to treat you.
Howard Abrahams:Absolutely.
Andres Sandate:Makes sense. I have one final segment I'd love to ask you about in our final few minutes, Howard. This has been super enlightening. A lot of great nuggets. I wanna talk about data, and I wanna talk about AI.
Andres Sandate:And I wanna ask you from the perspective of what you're seeing out there. Again, I'm gonna use the the term the front lines. Data has become such a huge part of the underwriting, fact gathering, aspect of what we are doing, particularly when you talk about, loans to consumer businesses where there's, you know, lots and lots and lots of orders. Can you just, enlighten me a little bit about how data is playing a bigger and bigger role in the underwriting process and and the importance of data from a CFO, CEO's perspective?
Howard Abrahams:Sure. Now you mentioned in the beginning that this is a relatively opaque industry, and it depends where you are, on the scale and size and volume, how opaque and or how efficient the the the lend the lenders are. Now if you're in, you know, sort of consumer loans, autos, or even mortgages, there's gonna be just an absolute ton of data and a ton of AI, to work with. But if you're a unique business and you're making t shirts for Walmart, less so, and it's hard to really automate that process because, you know, no 2 no 2 businesses, perhaps unlike real estate, no 2 businesses look alike. Now increasingly, there are third party, providers that are saying, you know, t shirts aren't selling at Walmart, don't lend against apparel, etcetera, etcetera.
Howard Abrahams:But I would say that this industry is a couple of steps behind most other industries, or this this, part of of of the lending, you know, segment spectrum, if you will, is still, a year or 2 or a couple of steps behind, where they could be in terms of, employing, AI and, other other smart learning tools. It also skews the lender skew in general towards, old older folks. And you are obviously a little bit less likely to to use AI. I do sense that that's slowly changing, but again, a little bit slower than, than you would think.
Andres Sandate:Yeah. Yeah.
Howard Abrahams:Which is counterintuitive and perhaps counter to what you might be reading about.
Andres Sandate:Well, you know, everybody seems to be putting AI at the end of, you know, their their domain now. And I've heard from private lenders and non bank lenders say, you know, it's an eye roll sort of factor now when they see that stuff come in. Last question, you know, take your sort of former world, Wall Street, Institutions, top 10 questions, 10 answers, and now this world, which is entrepreneurs, building companies, you're relating to them because you're building an organization, more with funding. When you look at the contrast, my last question for you is, what are the what are the most exciting things, about where more with funding is today and kinda where you wanna take it, you know, over the next, let's call it, 5 to 10 years when you think about where the institutional business was, you know, when you started in it and when you ended.
Howard Abrahams:Yeah. I do see some parallels in terms of investment structures that I worked on, you know, back in the 2000s. I was working on fund of hedge funds and, it exists a little bit where we could create a a a structure. Let's just call it a fund or an SPV to invest with several of the managers. I've started to build a very close relationship with certain lenders.
Howard Abrahams:When I say managers, I meant lenders. I started to build a very close relationship with some lenders who are, letting me participate in deals alongside them. So to think about, you know, sort of a a parallel to my previous career is perhaps starting to build a vehicle while I bring in other investors into into those, investment vehicles and let investors participate in some of these loans, which is really an asset class, that that, for the most part doesn't exist and doesn't investors don't have access to. You might have access to sort of Blackstone's, you know, Fortune 500, highly efficiently priced, sponsored loans alongside private equity firms, where you're providing the debt to a private equity transaction. But in the lower lower middle market, the sort of 1 to $25,000,000, as you called it, opaque, mispriced, slightly inefficient, market.
Howard Abrahams:There's just a tremendous amount of opportunity to, partner with those lenders. And I believe that I've built or am building these relationships with these lenders where I could, create a vehicle for that. So that that's sort of one goal. And then perhaps, you know, as I get busier and busier to create, experts underneath me. 1, it was only handling accounts receivable.
Howard Abrahams:1, it was only handling equipment loans. 1, it was only handling purchase order financing. So develop this team of, experts so that we can, very carefully cover any any borrower.
Andres Sandate:Yeah. I mean, that's fascinating because the landscape is, number 1, it's gigantic 250 relationships. That's a lot of folks to cover and the mandates are changing and the needs are changing and the capital, like you said, the dials are constantly. And then you have just the nature of the private economy. In the US, the vast majority of the economy and the GDP is in the private, you know, company space.
Andres Sandate:It's not in the necessarily the public markets contrary to all the news and headlines you see about the magnificent seven. So I, so I I think there's a lot of room to run. I'd love to have you back on ATL Wall Tower to talk about more with funding 2.0 and kinda where you're going and get some updates on the asset management and the verticalization of of the business. But with that, we're gonna have to cut it out. Thank you for joining me today, Howard, on ATL Alts.
Howard Abrahams:Thanks so much, Andres. Really enjoyed talking to you.
Andres Sandate:Alright. We look forward to seeing you soon. All the best, and have a great weekend.
Howard Abrahams:Thanks.
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