Although there are plenty of economic indicators out there, following what is happening in the lending markets is another good one that is often overlooked. To give our clients a better idea of what is going on in the lending markets, below is a brief summary of what we have witnessed over roughly the last two years.
At the start of 2013 lenders came out of the gates looking to put new loans on their books, and there was a flurry of activity. However, by mid-2013 that flurry had slowed. Although it is not 100% clear what caused the shift in lenders’ mindsets, it appears concerns over the economy, the government shutdown, lenders hitting goals earlier in the year, as well as a continuing tightening of credit standards are largely to blame for the slow down in lending in the second half of 2013. Many anticipated the start of 2014 would be similar to that of 2013, with a flurry of activity from Bank’s to put new loans on the books. And although most Banks were aggressively out there marketing and claiming to be open for and looking for new business, in 2014 it has been a struggle for most businesses to borrow money. That struggle has mainly been based on a continued tightening of credit standards even further in 2014. Although there are exceptions to that rule, in general most Banks are more stringent today on whom they will lend money to then they were even a year ago.
So why are credit standards even tighter today? It is primarily due to an overall shift in how Banks handle lending. In the past managers and lenders on the origination / sales side often played a roll in the approval process. However, due to pressure from regulators and continued management concerns over a separation of church and state (or in this case lenders and underwriting), the underwriting departments for most Banks have become more centralized and autonomous, operating separately from the sales team. Lenders on the street now have very little to do with the approval process, and in many cases even their managers no longer have a say in what gets approved. In most cases the approval process is now controlled by central underwriters and credit managers who have nothing to do with the sales process and often times are compensated not on portfolio growth but on portfolio performance, incentivizing them to not take on risk. This has left the sales teams at many Banks, who now once again have growth goals, to be on the street actively marketing and looking for deals, but in a position where much of what they bring in gets denied if the credit request is not 100% pristine.
The good news is there are plenty of Community Banks that have gotten healthy again and are sitting on plenty of cash to lend. Community Banks are aggressive, and often times willing to take on some of the risks associated with deals that the bigger banks are not taking on, partly because the credit team is not as separated and partly because they see higher rates of returns in deals with a bit more risk. There are also plenty of lenders with larger Banks that are getting a handle on the types of deals they can get through their credit departments, allowing for quicker and better feedback. Overall there are still plenty of opportunities to get financing done. But the day of walking into multiple banks and getting multiple approvals is long gone. Now it is much more likely for an individual to walk into multiple banks and get multiple denials, and it is considered lucky to walk into multiple banks and get one approval, making the lending process frustrating for most commercial loan borrowers. It is now that much more important for a commercial loan borrower to not only get to the right institution, but also to the right individual lender within that institution that understands enough about credit that they know how to navigate their Bank’s credit process.
All of this difficulty in getting financing comes back to the economy. Companies struggling to get the financing they need to grow are limited in the amount of growth they can achieve, and hence the profits and jobs they create. Also, there appears to be a sense that part of the reason credit departments and bank managers are still conservative in whom they will lend to is because they are still not confident the economy has fully recovered. After five years of consistent, albeit slow, economic growth, many credit managers are afraid another recession might be around the corner. What they fail to realize is that it could be their own tight lending standards that hurt small business and help to make another recession a reality.