For the past six weeks since the CARES Act passed Congress, it has largely felt like the traditional commercial lending market has come to a screeching halt. Banks and even non-bank lenders converted all of their resources to making Payroll Protection Program loans, commonly known as “PPP” loans, and in a mad rush to access the funding before it ran out, it has felt like PPP is all anyone has talked about since the bill passed in late March. Now that most lenders have gotten their PPP clients funded, many people are asking “What is next? Are lenders still making commercial loans?” The answer is a most definite “Yes!”.
Despite the focus on PPP loans over the past six weeks or so, here at Commercial Lending X we have continued to see traditional loans get done. Not to boast, but CLX ourselves have closed eight commercial loans over the last six weeks and have gotten approvals on another eleven commercial loans over that same time period (and we are not counting any PPP loans in either group). The loans we have worked on have ranged from investment real estate acquisitions and refinances to business expansions, business acquisitions, owner-occupied real estate acquisitions, and debt refinances & consolidations. My point in sharing this information is to let everyone know that commercial lending is still happening, and deals are getting done.
We continue to have discussions with our large pool of over 300 lending partners every day. Although there are certainly some lenders that have pulled back and indicated to us they are not looking to do many if any new deals at the moment, and there are some lenders like some of our non-bank lenders that have had funding issues and are temporarily shut down, the vast majority of our lending partners are still actively lending and looking for new opportunities. Some lenders have even told us they are going to be aggressively lending through Covid-19 and that they see it as an opportunity to pick-up additional clients. In fact, many of our private money / hard money lenders are looking at this as an opportunity to grow their portfolios, and many of our SBA lenders are also gearing up to be aggressive.
Despite their desire to lend, all lenders must face the challenges that Covid-19 has created for their customers and potential customers, which has led to some new underwriting guidelines being imposed. The primary questions and items Banks are now requesting before approving or closing new financing is as follows:
- Is your business open? Just about all lenders will not close new financing for a company that is currently closed down.
- How has Covid-19 impacted your current business?
- How could your business continue to be impacted by Covid-19 going forward?
- Some lenders are requesting projections for the rest of 2020 showing a worse-case scenario if the business continues to be impacted by Covid-19 going forward.
- Most lenders are still trying to figure out what adjustments they will make to cash flow for companies that were impacted by the shutdowns in March, April, May, and potentially into June and July. This could vary substantially by lender in how they look at your business and the cash flow ratios in an approval process.
- For investment real estate acquisitions and refinances, many lenders are now requiring proof of rent collections in the month leading up to or the month of closing. They are verifying this via Bank statements and rent deposits to be sure the tenants are still paying rent.
- If a borrower relies heavily on income from other investment properties they own, some lenders are requiring proof of rents still being paid via bank statements on other properties they own even if they are not financing those properties with that lender.
- If you are trying to buy or refinance a retail, office, restaurant or industrial property and the tenants are not open due to Covid-19 restrictions, many lenders are delaying closing on those acquisitions until the tenants open back up, even if you can prove they are still paying rent.
If answers and supporting documentation can be provided for the above items, then there is a very strong chance your loan request will still get funded. So long as Covid-19 remains a threat to the economy, the above questions and additional underwriting requirements will probably continue to exist from most lenders.
Some customers have gone back to their own Bank to request a modification of terms or a cash-out refinance to get additional working capital for their business, and despite the presence of plenty of collateral, their Bank has told them “No”. Please do not be discouraged if this happens to you. The regulatory agencies have given guidance to Banks and Credit Unions that provides them substantial flexibility in offering loan deferments or short-term payment modifications on loans for up to six months without the Bank being required to downgrade the risk grade on the loan. Under normal circumstances if a borrower’s business is doing well and a Bank makes an accommodation to extend the amortization, provide cash-out, waive covenants, or make other changes to the structure of the loan, it is not an issue and does not require a change in the risk grade if the performance metrics are the same or similar as to when the loan was originally or last approved. However, if the business is struggling at all or has been impacted by economic conditions (in this case Covid-19) and the performance metrics have worsened, if a Bank makes accommodations to the borrower similar to what was just discussed, then that accommodation is identified by the regulators as a Troubled Debt Restructure (commonly referred to as a TDR), and calls for an immediate downgrade in the credit rating on that loan and any other loans in that customers relationship with the Bank.
Why is a downgrade in the Bank’s risk grade on a loan or lending relationship an issue? Banks must reserve more capital against loans with higher risk grades, which makes it more expensive for the Bank to keep that loan on its books from both a capital and an income perspective. Any change in a loan that causes it to be classified as a TDR requires a major downgrade in the risk grade and additional capital to be allocated to the loan. Because of the risk of having an accommodation classified as a TDR, many Bank’s will refuse to make such accommodations for their clients. However, if a new Bank steps in and approves a new structure for that same client including all of the items you want, and you meet that Bank’s underwriting criteria with that structure, then that new Bank can put that loan on their books at a normal risk grade and there is no TDR. In order for many business owners to properly restructure their debt to survive the downturn, they will likely need to switch Bank’s to avoid the TDR classification that they would be exposed to at their current institution. If your Bank tells you “no” on a debt restructure you feel is practical and makes sense, then it is probably time to look for another institution to provide you with that financing.
One option borrowers often overlook is the option to use SBA financing to consolidate and rework their debt. Via SBA loans borrowers can extend out the amortizations on their debt and get funding even without being fully collateralized. We have discussed SBA financing separately in our newsletter and if you think it might be a fit for you, we encourage you to look at that article. There is also the option to use short-term private money / hard money loans. Although typically more expensive, often times these lenders provide flexibility and they make loans with no payments or interest only payments and can provide cash-out if there is sufficient collateral when a traditional bank might not provide cash out. There are other options available beyond just traditional bank financing if traditional lenders keep telling you “no”.
Overall commercial lending is still happening. Going into this crisis the US Banking market was at the healthiest level it has ever been with higher capital levels, larger loan loss reserves, and having come off of some very strong earnings the past couple of years. Banks are poised to continue lending through the crisis and there are plenty of opportunities to secure financing. If your institution is not willing to work with you, or you want to pursue other financing options whether it is to consolidate existing debt, expand your business, buy a business, or start a business, we definitely have lenders and solutions to help you out. We are here to answer any questions you might have, and we have plenty of both traditional and non-traditional funding options available to our clients, the majority of which are still lending.