Six months ago, we launched our insights and analysis into the 2017 top performing SIC codes by profitability for short term loans. We reviewed the performance of the top five (5) most profitable small business NAICS codes over the period of a year. We also analyzed the worst performing five NAICS codes, as well. Today, we are share our analysis of the performance of American small businesses after the first 6 months of the 2018 business year. If you are an ISO or a small business finance professional, please use this information to help tailor your marketing to capture the highest wins, at the lowest costs.
Number 2 industry code: Professional, Scientific, Consulting and Technical Services. Industry code: 54
Professional, technical and consulting services usually include highly-skilled, professional services. Examples of small businesses in this segment include accounting services, security services, Information Technology (IT) consulting, and Human Resources (HR) consulting. These firms are usually led by one owner who has a “key client” contract, or relationship, driving a major share of their deposit cash flow to the business. This industry segment enjoys its highest cash flow days are during the first 2 quarters, or six months of the year. As such, their performance so far continues to be strong in 2018. We encourage brokers and ISOs in our network to pursue this group as their window of performance will slow down as we head into the fall.
Number 1: Information Publishing (Communications, Software, News, Books) Industry code: 51
The Information sector comprises establishments engaged in the following processes: (a) producing and distributing information and cultural products, (b) providing the means to transmit or distribute these products as well as data or communications, and (c) processing data. The main components of this sector are the publishing industries, including software publishing, and both traditional publishing and publishing exclusively on the Internet; the motion picture and sound recording industries; the broadcasting industries, including traditional broadcasting and those broadcasting exclusively over the Internet; the telecommunications industries; Web search portals, data processing industries, and the information services industries. This section includes sales to both Business-to-Consumer (B2C) and Business-to-Business (B2B). These companies experience growth during periods of increased business activity. It’s our view that this group continues to perform well in the first half of 2018 and may outperform the other small business segments in Construction and Real Estate.
Our portfolio is growing and the data above could be subject to a number of different impacts including seasonality, economic trends, business trends, and even random noise. However, we’re confident that for ISOs and brokers tuning their marketing, the big money is in the publishing and technical consulting businesses for the first half of 2018. We are not sure if these numbers will hold, but if acquiring customers in these segments are low costs, then funders will most likely fund if they can forecast good repayment recovery.
At Aquila, we want to share our insights into the performance of the small business lending market, specifically in the construction industry. We want to empower the brokers, sales teams, and ISO partners in our network to identify the best funding opportunities that will generate the most revenues, and at the lowest cost for their marketing and sales operations.
As we head to wrap up the second quarter of 2018 small business financing, we want to alert our ISOs to a trend that we are seeing in the construction market: The end of the United States Construction boom.
Given where we are in the economic cycle and the trends we are noticing in our own data, Aquila is ready to call a top on the United States Housing boom launched in 2010. Here are our top three reasons why we believe we are correct to make this call.
Housing starts at a 4-month low as home prices and mortgage rates rise
After 8 years of continuous growth, housing starts statistics have started to show fatigue. In April of 2018, housing starts hit a four month low as the multi-family segment in housing construction continues to cool. What is the “multi-family segment”? Multifamily residential (also known as multidwelling unit or MDU) is a classification of housing where multiple separate housing units for residential inhabitants are contained within one building or several buildings within one complex. A common form of this home is called an apartment building.
Housing starts in the US slumped 3.7 percent month-over-month to an annualized rate of 1,287 thousand in April of 2018, following an upwardly revised 3.6 percent rise in March. It is the lowest rate in four months, mainly due to a sharp fall in the multi-family segment. It compares with market expectations of 1,310 thousand rate.
The volatile multi-family segment dropped 12.6 percent to 374 thousand while single-family starts, the largest segment of the market, edged up 0.1 percent to 894 thousand. Overall, housing starts declined in the West (-12 percent to 346 thousand), the Midwest (-16.3 percent to 164 thousand) and the Northeast (-8.1 percent to 114 thousand) but rose in the South (6.4 percent to 663 thousand).
Of course, it may be that this is a seasonal or random adjustment, a possible breather in continued growth. However, we think that’s not the case against slacking demand due to increasing mortgage rates and increasing home prices. As the Federal reserve continues to raise interest rates, mortgage rates will continue to rise, leading to a subsequent cooling of demand and a drop in mortgage applications. We are seeing the impact of tightening monetary policy.
Mortgage rates have been creeping up. The average 30-year, fixed-rate mortgage is now more than 4.5 percent. Home prices are also rising. And the combination is putting home ownership out of reach for many Americans.
Rates are on the move higher again, and that caused mortgage application volume to drop 1.5 percent last week from the previous week and 15.4 percent than a year ago, according to the Mortgage Bankers Association’s seasonally adjusted report.
Construction volume submissions are down over 2017
At Aquila we have noticed that construction submission volume in our 367 ISO partner network continues to decline. Compared to 2017 construction submission in the first half of 2017, Aquila 2018 construction submissions have fallen by more than 30 – 40%. At Aquila, lower construction volumes have coincided with higher lender competition for increased volume. When we see other lenders lowering their underwriting requirements for increased construction volume, we know they are responding to decreased, overall demand.
Construction business defaults are on the rise over 2017
At Aquila we’re seeing an uptick on construction defaults in our bank data analysis of hundreds construction small business bank accounts. More constructions firms are submitting for short-term financing with existing and ongoing defaults with banks and many MCA companies. At Aquila, we’re seeing an uptick of at least 50% of all new construction submissions with current MCA funding defaults or over-extended, short-term debt positions. We expect this number to grow and the number of submitted construction deals with healthy balance sheets to continue to decline.
What do ISOs need to do today?
ISOs should continue to take the performance and other incentives that their lender partners are giving to compete for their declining construction business. This short-term growth will not last as ISOs and other lenders compete for this declining share of the small business lending pie with more marketing dollars. The inevitable decline in volume requires ISOs to look elsewhere. To seek growth, ISOs need to focus on new SIC codes that will thrive in a slowing construction-driven economy. ISOs can call our team for early release information before we share this data with the industry. If you are not yet an Aquila broker partner, you may sign-up for Aquila’s ISO program here.
If you are already an ISO, please call us or send us an SMS today at +1 (415) 598-9549 for one of our team members to share more valuable insights into the top SICs, generating the most commissions, on our platform.
Aquila’s engineering and data science team monitored over 20,000 small business bank accounts, in 2017. Today, we still work to clean that data and assemble quality insights that will benefit small business owners, small business investors, and ISOs. Our first post The top five most profitable, small business US industry SIC Codes of 2017 proved to be our most engaging content for the entire year. As such, we wanted to follow-up with more helpful insights that would bring folks back. Today, we’re going to share the top five (5) small businesses SIC categories that we’ve learned are currently at the highest default risk in 2017 and possibly 2018. These business sectors make up the bulk of business loan losses that we identified in our customers bank transaction data. We think that awareness of the risks and causes of defaults in these categories will help the ecosystem make better decisions and lower the total, small business borrowing defaults and bankruptcies, overall.
Number 5: Construction (NAICS CODE: 23)
There’s an old joke that is known around the business financing circles that goes: The best time to default is when you fund a North Eastern US construction company in winter. In our analysis of commercial and residential construction, we noticed that construction companies successfully secure some of the most financing of any SIC code in the United States small business population. Construction companies, whether sole proprietors or larger companies have compelling cash flow volume that highlight the strength of their businesses during economic boom times as well as construction-friendly season. Also, due to their long accounts receivables payouts, they appear to have large A/R balances which make for attractive financing targets. However, irrespective of the high demand for their services, and their large overdue invoices, these companies rank fifth in our highest default risk categories. It’s our view that construction companies are very sensitive to acute cash flow problems that arise from the following surprises in their businesses:
Dramatic Winter slow downs and slow Spring pickups
Equipment damage and replacement
Customer defaults and slow-pay receivables
Staffing turnover and customer disputes
Companies that sell unsecured financing to this group need to keep business financing extremely short, possibly not much longer than 60 to 90 days. The risk of cash flow problems are simply too high for longer duration financing. Ideally, construction small businesses should secure their funding via equipment or real estate financing for longer durations. As the United States economy continues to unwind from low-cost credit, in 2018, we expect this group to enter into possible business activity contraction. Small business owners in this space should begin to enforce their receivables payments quicker and use caution in taking on new financing.
Number 4: Other Services (including funeral homes, salons, pet care) (NAICS CODE: 81)
Other Services companies in this NAICS code consist of companies that are, according the Bureau of Labor statistics, establishments that “are primarily engaged in activities, such as equipment and machinery repairing, promoting or administering religious activities, grantmaking, advocacy, and providing drycleaning and laundry services, personal care services, death care services, pet care services, photofinishing services, temporary parking services, and dating services”. These companies provide services that are not defined in the other NAICS industry codes. Although this list may be a moving target, we think the cash flow risks of these businesses tend to follow a similar pattern. The low barrier to entry or startup of these businesses, their store-front requirements to perform the services, and very defined-activities makes this industry group extremely open to competition, via low-skilled to medium-skilled workers. As such, most of these businesses usually struggle to adequately anticipate and adjust for adverse cash flow changes. In our dataset, we have a high number of spas and hair salons that were launched by first-time entrepreneurs. Many of these businesses suffered location problems, shifting customer demand and tastes, as well as increased competition from other entrants into their markets. It’s our view that merchants in these businesses should be funded only after they have proven mastery of their business structural patterns. In short, small business owners with less than 1 year of business should avoid seeking unsecured financing or receivables factoring. The risk of default due to merchant inexperience, and industry structural risks, may just be too high for lenders to recover their business financing, either receivables or business loans.
Number 3: Administrative support and waste management (NAICS CODE: 56)
This group description is misleading. It may sound vague and possibly just about waste management. However, you are most likely familiar with the companies that make up this group. These include the following industries:
Temporary Help and Staffing agencies
Travel agents and Tour Operators
Security guards and Security systems
All companies in this grouping had strong cash flows. They all showed compelling volumes of receivables and ongoing business deposits to their bank accounts. So why do they make our #3 in the list? When we analyzed the incoming and outgoing cash flows, we noticed that companies in this SIC code had usually high negative days or low average daily balances, in spite of the high volume of income deposits. When we interviewed these merchants, they informed us that their margins were usually quite low due to the large payables for employee labor that make up their businesses. Low margins contributed to ongoing cash shortages which drove them to acquire business financing. However, these companies consistently showed trouble in repayment due to limited margins to cover their financing costs. Ongoing and troubled payment usually resulted in defaults and company closure.
Number 2: Wholesale and retail trade (NAICS CODE: 42, 44, and 45)
The activity of wholesale and retail trade is mostly weighted toward retail trade due to the high number of retailers relative to wholesalers. The companies that may secure receivables factoring and financing usually fall in the familiar categories that include:
Automobile dealership and repair
Furniture and home furnishings
Food and beverage stores
Clothing and General merchandise stores
The cash flow of the successful firms in these companies looks attractive, but there are numerous risks that cause companies, in these SIC codes, to struggle with business financing repayment. In the automobile sector, for example, many companies depend on consumer automobile demand to drive revenues. When automobile sales drop due to economic or cyclical trends, these companies usually are unable to recover previous strong incoming cash flows to cover their small business debts. In 2017, many banks and small business lenders stopped extending business credit to automobile dealerships. Increased levels of defaults and the soft consumer demand for new cars led to substantial portfolio losses. As for gas stations, they suffer from similar problems we outlined earlier in the Other Services sector: High cash balances but very low margins. Most gas stations struggle to secure credit from traditional banks. As such, they reach out to alternative lenders who may lack the data necessary to properly underwrite these companies, particularly in a changing credit cycle. At Aquila we are impressed by the number of alternative lenders we track on the bank statements of these companies. However, this group usually makes up one of our biggest groups of defunct bank accounts that eventually close due to business trouble.
Number 1: Transportation & Warehousing (NAICS CODE: 48 and 49)
If you’re reading this you’re most likely nodding and saying to yourself: “I wonder when he was finally going to get to the trucking section!” Surprisingly our data set of transportation companies is heavily weighted to trucking, passenger transportation, and small businesses that support the freight industry. We believe this is because most transportation business owners are unable to secure traditional bank credit and must turn to alternative receivables financing companies. When we analyze the bank transaction data of this group, we notice that nearly 1 in 2 business loan and receivables financing contracts from this sector usually ends in default. Similar to construction, merchants suffer from equipment damage and failure that is costly to the business. If you are a trucker and your only truck is stolen or in an accident, you are unable to generate revenues and continue business. Also, the sole proprietor nature of this business compounds default risk to the highest of any industry segment analyzed. Of course, we do see trucking and transportation companies that survive with the same bank accounts for more than 6 months to a year. However, they are the exception. Lastly, the low cost to exit this business means that many truckers simply walk away from their business debt obligations or take their business into bankruptcy. We expect as the US economy continues through this cycle, defaults in this space will rise, keeping it at the top of our list the Five Highest Default Risk SIC Codes of 2017.
Aquila shares its default information with all stakeholders, including business customers, brokers, and receivables investors. If you missed our top 5 Best Performing SIC codes, just click that link and grab a copy.
We particularly encourage affiliate and channel marketers to use our list above to guide their marketing dollars and efforts to the industries that will generate the highest return for their marketing dollars. Aquila offers a flat 10 points for all closed deals in this group to new partners. To get started, login to your Aquila Cash Flow ISO dashboard and share your ISO referral link with merchants that are from the best performing industry segments.
Aquila is a small business, cash performance analytics, and receivables financing marketplace. In November 2016, we at Aquila, launched our first small business, bank analysis and receivables financing transactions. More than a year later, over 4,000 Small Business merchants and their Independent Sales Organization (ISO) partners come to us to seek cash flow support and receivables financing. In 2017, Aquila monitored over 20,000 merchant bank accounts, extracting bank data, and seeking cash flow patterns that would help small businesses survive. We studied small businesses ability to complete payments on short-term debt including, receivables financing, leases, and credit card debts. Today, we are excited to share the top five (5) SIC codes where small businesses have the best cash flow performance. Merchants in these codes are able to meet their short-term, debt financing payments, and without too much stress on business operations.
Number 5: Professional, Technical and other Consulting Services (NAICS CODE: 54)
Professional, technical and consulting services usually include highly-skilled, professional services. Examples of small businesses in this segment include accounting services, security services, Information Technology (IT) consulting, and Human Resources (HR) consulting. These firms are usually led by one owner who has a “key client” contract, or relationship, driving a major share of their deposit cash flow to the business. When a consultant/owner loses a key client, cash flows are disrupted and it may take time to identify a new client or to secure a new long-term contract. When a consultant gains a new client, owners often will finance their contract with advances against their future receivable payments. These businesses are also sometimes seasonal. Accountants and bookkeepers, for example, usually don’t see their businesses pickup until after the Christmas and New Year Holidays. As such, slow cash days are very common for these businesses at the end of the summer. During these slow periods, this industry group is at its highest risk for slow pay or possibly defaults on their obligations. This industry segment enjoys its highest cash flow days are during the first 2 quarters, or six months of the year. We encourage brokers and ISOs to increase their marketing to this industry just before the end of the year and into January and to limit marketing before the slow summer months.
Number 4: Finance and Insurance (NAICS CODE: 52)
This industry segment consists of mostly insurance companies run by franchise business owners and may include insurance franchises as well as financial advisors. Insurance does not appear to suffer the strong seasonality as some other industries, such as bookkeeping and accounting services. Insurance products are sold all year round. The merchant bank data that we analyze, in this space, reflect consistent revenue deposits, tied to a major franchise partner’s brand. These franchise enterprises appear to have sufficient marketing resources to help their franchisee drive continuous business sales all during the year. This group performs well on continuous average daily balances that are well over $2,000 per day and with monthly deposits that may easily surpass $20,000 per month, for single-franchise owners. The number of business owners who enter these businesses are consistent and reliable.
Number 3: Accommodation and Food Services (NAICS CODE: 72)
On Aquila, the majority of companies, we see, in the accommodation and food services group are retail food businesses. Size varies from large city restaurants, all the way to small coffee shops and even street food vendors. These small businesses are usually single owner and their merchants have consistent, localized, demand that they are able to support with their businesses unique location. This group also appears to be well targeted by alternative finance companies. Our analysis of their bank transaction records show a number of alternative financing companies that support them with various financing products. The low barrier to entry into this industry segment also makes this a very large and active industry segment. It’s our view that this group may see the most competition from small business financing brokers, making acquiring clients in this segment the most expensive of all five. We are not confident that this segment will experience high growth, given competition intensity.
Number 2: Health Care and Social Assistance (NAICS CODE: 62)
Merchants in this group included several elderly care facilities and nursing homes. Rehabilitation centers and wellness centers were included as well. We continue to see more merchants from this segment come to Aquila for cash flow analysis. We are confident that as Baby Boomers continue to enter into retirement, this group will continue to grow as a small business opportunity. The barriers to launch facilities appear to be low and we have seen a number of single-owners of companies in this group. This group exhibited some of the highest, consistent deposit cash flows of all businesses on Aquila. However, these businesses appeared to have the lowest operating margins of our top five grouping, as most of their payables were to labor and real estate expenses. Nonetheless, we continue to see many new companies and growing established companies in this space. We expect it will continue to perform well in 2018 and beyond. We recommend that sales executives and brokers continue to target this industry group.
Number 1: Real Estate Rental and Leasing (NAICS CODE: 53)
In 2017, real estate rental and leasing was Aquila’s best performing small business NAICS code group. These small businesses generated substantial business revenues. Merchants in this group usually had the best cash flow performance and gross margins that allowed them to seek out and repay their business financing comfortably. This group also experience the lowest number of short-term defaults or cash flow problems of all industry groups. Out of the Aquila sample, this group exhibited high average daily balances over a sustained 3 month to 6 month period well over $10,000 in balances, per day. These merchants also had the least number of judgements and liens against their business, or owners, for prior non-repayment of financial obligations.
Given the threat of rising interest rates, in 2018, we are unable to predict whether this group will continue to perform as strongly in 2018 as it did in 2017. However, we encourage brokers, sales executives, and ISO teams to direct their marketing dollars to this industry and ancillary or related businesses that will depend on it success.
For the rest of February, Aquila offers a flat 10 points for all closed deals in this group to FIRST TIME FUNDING ISO partners. To get started, login to your Aquila Cash Flow ISO dashboard and share your ISO referral link with merchants that are from the best performing industry segments and let’s fund.
Aquila Cashflow keeps thousands of small businesses alive and growing
The Aquila Cash Flow receivables finance, marketplace re-launches its Independent Sales Organization (ISO) Dashboard with extensive underwriting bank intelligence and status features. Brokers, seeking to close more of their merchants fundings, now have new tools to speed up the process and win larger commissions.
San Francisco, CA — (February 2018) – Aquila today announced the re-launch of its new ISO and Broker interface, Aquila Cashflow ISO Dashboard. Aquila matches thousands of small businesses to sophisticated institutional investors that want to enjoy the additional yield from short-term, high turn-around, debt participation. Aquila’s ISO Dashboard speeds up the process for brokers to onboard and secure funding for their merchant clients that need funding, today.
“When I connected to Aquila, my cleaning business was in a tough spot. No one wanted to help me and my credit was in tatters. One of my trusted brokers decided to help me connect to the Aquila platform. Within hours, they analyzed my business cash flows and predicted how much funding I needed to cover my receivables. I had never experienced anything like it. They move so fast and know my business.” Bob Caramusa – Caramusa Commercial Cleaning, Chicago
Aquila’s Cashflow upgraded ISO Dashboard relaunches with a focus on giving ISO and funding brokers faster access to successful deal closes. Aquila recognizes that brokers have a limited amount of time to close the maximum number of deals. Aquila’s new status partitions for Active, Funded, and Inactive merchants allow brokers to check the status of their active and contract-ready merchants, first. No longer will merchants need to wade through pages of disqualified, and funded merchants, to identify and move their most profitable deals. Brokers that want to check the status of upcoming renewals on already funded deals now have a dedicated view of these merchants.
Not every business merchant is immediate fundable the day the merchant’s application is completed. Aquila never let’s a promising merchant account die. Aquila delivers ongoing bank analysis for brokers to understand their merchant business performance in real-time. Small Businesses that link their bank accounts to Aquila are able to qualify for funding, each day. As soon as a merchant’s banks perform within underwriter requirements, they are funded immediately. ISOs only have to follow-up with merchants to close on their contracts and confirm wire deposits. At Aquila, if merchants don’t qualify for funding, today, they may qualify tomorrow. Aquila’s business performance insights gives ISOs an edge on sales that is not available anywhere else.
Contract renewals are the easiest sales for daily funding ISO and brokers. Aquila ISO Dashboard now allows ISOs to see their funded contracts progression and qualification for renewals, in real time. As merchants complete their contracts and show strong business performance ISOs are able to secure them renewals and fundings the same day. Aquila now pays all renewals on each Friday, of the week, so ISOs don’t need to wait to get paid.
“ISOs are the Emergency Medical Technicians (EMT) of small business funding. They move fast because the business patient needs extreme financial care and attention, fast. At Aquila, we listen to what our ISOs are trying to get done so that they are able to get their deals funded and renewal commissions paid. Without our strong and speed-driven ISO network, we wouldn’t be as successful as we are today. Therefore, we intend to service our partners well” – Taariq Lewis, CEO of Aquila
Login your Aquila ISO Dashboard here and start closing more deals with Aquila.