How This Nonbank Lender Could Be Changing The Financial Industry

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Nonbank institutions seem to have knocked traditional banks out of the running when it comes to lending.

In 1974, banks controlled the lending industry, holding 62% of total loans. Almost five decades later, nonbanks issued 68% of all mortgages in the U.S., demonstrating the financial industry is constantly evolving.

The rise of nonbank lending has given people alternative options, putting the power into consumers’ hands

What Is A Nonbank?

The World Bank defines a non-bank financial institution (NBFI) as a company that does not have a full banking license and cannot accept deposits from the public.

However, NBFIs facilitate alternative financial services, such as investment, risk pooling, financial consulting, brokering, money transmission, and check cashing.

Because of their enormous offerings and benefits, consumers have been drawn to loans provided by nonbank institutions.

With a nonbank loan, people sometimes bypass long bureaucratic processes to more straightforward procedures like completing loan applications and payments digitally with no initial fees and at low-interest rates.

Experts believe that nonbank financial institutions have been able to cater to these demands and satisfy customers by adapting to the digital age and remaining open to company growth. 

Threat To Traditional Banks?

Players like Mill City Ventures III Ltd. MCVT, loanDepot Inc. LDI, and PennyMac Financial Services Inc. PFSI are reportedly posing a serious competitive threat to traditional banks.

Carving A Niche In The Financial Space

Mill City as an example seems to be gradually carving a niche for itself in the nonbank financial space.

Founded in January 2006, the company is a principal investment firm specializing in investments in debt and equity securities of public and private companies to fund their operations.

Mill City says it primarily focuses on investing and lending to privately held and publicly traded companies.

Operating History

In 2013, Mill City elected to become a business development company (BDC) under the Investment Company Act of 1940, raising approximately $11 million.

The company operated as a BDC until Dec. 27, 2019, after obtaining shareholders' approval to withdraw from the designation.

Over the years, Mill City notes that it has provided nonbank lending and specialty finance to companies and individuals on both a secured and unsecured basis. The primary specialty finance solutions the company provides are high-interest, short-term loans, which occasionally involve the company obtaining collateral as security for the borrower’s repayment of funds.

The loans typically have maturities ranging from nine to 12 months and may involve a pledge of collateral or, in the case of loans made to companies, personal guarantees by the business’s principals.

Principal Sources Of Revenue

Mill City’s sources of revenue include origination fees, closing fees, exit fees, interest, extension fees, and revenue participation. The company targets individuals, business owners, real estate owners, housing redevelopers, and small-business owners.

Nature Of Lending Operations

• Nonbank lending and specialty finance
• Asset-backed loans
• Settled claim purchases
• Tax anticipation loans
• Real estate bridge loans
• Litigation finance
• Public market companies
• Title loans
• Opportunistic acquisitions
• Mortgages

Since starting nonbank lending operations in January 2020, the average loan size and weighted-rate trajectory have increased year-over-year. This is because the company’s focus shifted to making higher-dollar loans that usually have additional features.

Key Investment Considerations

• Management has experience in entrepreneurial ventures and finance.
• The company is not subject to many of the regulatory limitations that govern traditional lenders or institutional competitors.
• The company’s lean operating costs allow for greater income statement leverage.
• Management continues to focus on moving the blended portfolio returns “up and to the right” in the context of proper risk mitigation.
• The company takes advantage of inorganic growth opportunities in the market through complementary and accretive acquisitions.

Read more about Mill City Ventures at millcityventures3.com.

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Featured photo by Mill City Ventures III Ltd.