Amid an economy-wracking health crisis, banks of all sizes have been tightening lending standards while increasing interest rates, collateralization requirements and covenants on various loans, according to the Federal Reserve. Premiums charged on riskier loans, which include those made to small businesses in sectors like hospitality, also are on the rise.
It’s a much different lending landscape compared to a year ago, when the economy was humming and banks were enjoying record earnings and lending more freely.
And it’s those factors that largely inspire the launch of Encore Funding, a private alternative lending business and the latest venture of Cleveland’s Joel Adelman. Charged with building up Encore is vice president and Adelman confidant Matthew Williams.
Encore is a business that Adelman once envisioned developing as one of several investment verticals within AdCap Management, a family office in Pepper Pike opened in 2018 a few years after Adelman sold Advance Partners — then a provider of financing and services like payroll management and tax prep to small staffing firms — to Paychex Inc. for $296 million.
With a focus on clients underserved by banks, Adelman eventually determined alternative lending should be its own business. But with banks taking in new clients and offering cheap money, that wasn’t so much a priority in the past couple years.
“I would say there was a time when I thought we would be doing several types of bridge lending,” Adelman said. “But now with Matt aboard and us structuring Encore, it really feels like we can make a concerted effort into underserved middle-market businesses that are just unable to attract capital.”
In mind for Encore are companies with less than $10 million in earnings before interest, taxes, depreciation and amortization (EBITDA), a size many traditional regional banks tend to be less interested in, since smaller loans mean smaller yields for the lender. Smaller loans also tend to come from higher-risk businesses, like restaurants, that banks shy away from all the more in an unpredictable economy.
This could leave some needy borrowers in a lurch, especially with uncertainty swirling around the future of additional government stimulus.
As an alternative lender, Encore is designed to be flexible with terms and creative with collateral in the deals it considers versus traditional banks. That, of course, comes with higher interest rates for the borrower, which could be in the range of 12% to 20%.
But Encore, which officially launched in September, isn’t looking for any equity stake in its clients.
“An upside for (borrowers) is there is no upside for us beyond our rate,” Williams said.
Encore is operating independently from AdCap but works in concert with it, possibly being an investment area for members of the family office seeking potentially market-beating returns in alternative investments.
Encore currently is backed by at least $100 million in capital. And Adelman said there is no need to draw outside investor partners right now, though that could change in the coming years.
As Encore gets going, potential lending opportunities could be with smaller to midsize businesses in just about any industry. Clients could be mom-and-pop restaurants, manufacturers needing a new piece of equipment, small law firms bridging financial gaps or those seeking structured settlement loans or litigation financing.
“We will probably find a niche we get very, very good at and probably focus on,” Williams said. “We will kind of figure out where we want to play and what fits us.”
He said the firm seems a few weeks out from cutting its first deal.
With a need for capital intensifying during a tumultuousness economy and tighter lending standards dictating the current landscape, Williams anticipates growing the business quickly. He’s projecting accruing 20 million in dollars outstanding by this time next year.
“We’re looking to grow into a very, very large private lender, and a competitor in the space,” he said.