Interview with Mergermarket
Fountainhead Commercial Capital, a Lake Mary, Florida-based non-bank, direct commercial lender, has postponed a planned capital raise to prioritize making loans to small businesses, said CEO Chris Hurn.
The abrupt business interruption due to the pandemic is causing a signicant cash flow issue for SMBs, making it difficult or impossible for them to make payroll or fulfill accounts payable without borrowing, Hurn said. Assuming business activity returns to normal, there is still going to be a massive overhang of debt for SMBs across the country, he said.
“We know how critical this capital is that we provide. We want to try to help as many people as possible,” Hurn said. Fountainhead lends to SMBs across industries, with a lot of businesses in hospitality, franchise restaurants, manufacturing, and professional services.
Fountainhead was in the process of interviewing investment banks to advise on its Series C but decided to put the effort on hold around mid-March because it was seeing a flood of inquiries from small and mid-sized businesses seeking loans, Hurn said. At one point, it received close to 1,000 inquiries within a two-day time period, he said.
The lender “may still do something” as far as a capital raise but it is hard to put a timeframe on the process, Hurn said. Fountainhead is redirecting its efforts to underwrite Small Business Administration 7(a) loans to help small and mid-sized businesses cope with the disruption due to the pandemic, he added. The SBA 7(a) is a general-purpose loan often used as working capital.
Fountainhead is privately held by Hurn and two partners, who are veteran asset managers on Wall Street, he said. The original plan was to raise at least USD 100m in debt and equity to fund growth and enlarge the firm’s lending capacity. It was aiming to attract large family offices, venture capital or private equity firms, he said.
While the three partners put in capital to capitalize the company, it also has “warehouse” lines of credit from commercial banks, Hurn said. It also sells the guaranteed portion of SBA loans to large institutional investors on the secondary market.
Fountainhead provides SBA 7(a), SBA 504, and low loan-to-value conventional loans to SMBs across the country. The SBA 504 loan program is designed for investment in commercial real estate or heavy equipment.
While the SBA loans are underwritten by banks and commercial lenders, in case of default, the Small Business Administration will cover up to 85% of the loss for lenders.
Fountainhead generated about USD 250m in loan volume in 2019, Hurn said. About 30% was in SBA 7(a)s.
For 2020, Fountainhead was expecting to make around USD 150m in SBA 7(a) loans, USD 200m in 504 loans and another USD 100m in conventional loans, but now it stands a good chance of making USD 500m only in SBA 7(a) loans by the end of the year, Hurn said.
Fountainhead started out with SBA 504 loans and began offering SBA 7(a) loans in February 2019, after it closed the acquisition of a Small Business Lending Company 7(a) Loan Program license, one of the 14 created by the SBA. It took about two and half years to complete this licensing process, Hurn noted.
by Yizhu Wang