Managing a finance portfolio isn’t just about growing the number of performing accounts, or even keeping accounts in a performing status by quickly resolving collection issues. In fact, these operational tasks tend to be easily delegated and handled by most companies with experience. What is difficult, however, is deciding on how to temper the desire to grow with the desire to obtain a perfect balance of new accounts from a variety of industries.
Investors are no doubt well-aware of the age old advice to ‘diversify, diversify, diversify.’ Creating a portfolio of accounts as a funding source is not all that different from building an investment portfolio, and thus, is subject to the same wisdom. Establishing too deep a concentration in one or a few industries can be disastrous if the economic environment changes in a way that disproportionately impacts one of those sectors.
Summers are interesting for us as a funding source because we start to see a lot of people looking for change. People who have worked for a transportation company for years have decided to become owner/operators for the first time. Individuals with a background in logging have decided to obtain their own equipment and start their own operation (or continue where a failed one previously left off.) The problem is that companies like ours have to resist simply taking on all of the business before us. It’s tempting to grow as rapidly as possible (not to mention downright fulfilling to be able to help a lot of people get on the path to reaching their life goals), but throwing too many eggs in one basket can result in negative repercussions for everyone involved.
For us as a funding source if gas prices escalate unexpectedly or manufacturing subsidies are cut, it could be the start of a scenario where there are fewer opportunities for owner/operators. For our current customers, this could lead to a reduction in cash flow and a strain to make their payment to us. For customers in other industries, this could result in an increased cost of funds for new accounts, as companies like ours struggle to make up the difference in losses. One of the lesser known effects is that, ultimately, we might simply hand out fewer approvals to truckers or loggers.
Rather than allow economic factors to close off opportunities in certain fields, we prefer an approach rooted in keeping close tabs on the balance of industries in our portfolio. While we evaluate transactions on an individual basis and have no restrictions or biases with respect to industry, we also pay attention to our growth rates in different sectors to ensure they are in line with a stable expansion model. There is no perfect balance, we’ve found, as there is not so much an absolute composition we’re striving to mirror, but rather a dynamic set of rules that change on a daily basis.
Funding sources that make a conscious push to protect the future of their fund are not only guarding their own business interests, but are assuring future customers access to affordable financing with few, if any, restrictions. In that way, we have found at least one perfect balance: we’ve balanced our own desire to grow with our desire to continue to offer reliable equipment financing to our brokers, vendors, and customers.