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.
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.
Financing brokers in the small business financing industry are a critical group that helps bring small business bank account analysis and financing to small businesses that otherwise would not have alternative financing solutions. After our first three months building our broker network, we at Aquila have discovered three key reasons why our best performing broker partners love our network. We describe them below.
High Commissions Small business brokers in the daily funding and merchant lending are SMB marketing experts. They fund their marketing activity through a multitude of channels. The funding for their marketing activities is drawn from the commissions received from successful small business financing. These commissions, paid to brokers, need to be high enough to sufficiently fund the sourcing of thousands of merchant applicants in a very competitive industry. For example, running a Google Adwords, advertising campaign for small business loans costs anywhere from $150 to $200 per registered lead. A lead is simply a completed form consisting of basic contact information such as email address, phone, and company name. It’s up to the independent broker to then contact the business owner and determine whether there’s still a need for business financing. Given low funding rates for high-risk, small businesses, brokers can expect to pay anywhere from $1,000 to $2,000 in marketing costs per funded merchant.
Aquila understands the broker model well as our team was founded by former brokers who have spent hundreds of thousands of dollars in marketing channel activities. As such, Aquila compensates its broker partners with substantial commissions. Aquila pays up to 15 points, per successful deal, to its small business brokers that bring small businesses to its platform. This is more than 6 points higher than the industry average of 9 points. Aquila aims to ensure that brokers are able to continue to fund their successful marketing operations with sufficient revenues.
Small Business Bank Account Analytics As mentioned before, the cost per business lead for a small business funding broker can range between $150 to $200 per lead via a Google Adword campaign. When Aquila analyzes a merchant’s small business bank account, the business’ credit is ranked via an artificial intelligence and deep learning system that improves over time. If the credit rank is too low for financing, Aquila informs its broker partners and continues to monitor the merchant’s bank account. Brokers are freely able to submit their merchant leads elsewhere. However, if the small business bank account improves in a few weeks or months, the broker will capture the commission, should a financing event occur. As such Aquila bank account analytics is a permanent search engine for broker commissions and a trusted partner for small businesses seeking to improve their bank account performance.
Underwriting & Analytics Speed The competition for small business financing creates pressure in the race for speedy financing decisions. Aquila’s team are made up of former, independent brokers who are very sensitive to the issue of time in the business of small business finance. We understand that brokers need to quickly recover their marketing costs to feed growth and business survival. As such, Aquila platform of bank account analytics was built with speed. Our platform is able to calculate bank account performance for daily funding products in minutes. As such, we are able to deliver quantitative underwriting analysis within minutes of a merchant bank account login.
Conclusion As former small business financing brokers, we at Aquila understand it’s important to pay our broker partners well and to ensure they receive fast service for their merchant clients. In the competitive arena of small business finance, we are committed to giving our broker partners an unfair advantage that is unavailable anywhere else, online. If you are a small business broker or Independent Sales Organization (ISO) please give Aquila a spin and sign up to our ISO network here: https://aquilacashflow.com/isos/new and we’ll get you online in minutes so that we will be able to serve your clients and help your business grow.