By Nicholas B. Jalowski, CTP,
CMC Managing Director, Cambridge Financial Services, LLC
There are a lot of people crying the blues about business these days.Whether you call it a recession,a slowdown or just a temporary lull, one thing is for certain, the banking business has hit the skids big time. Commercial bank losses on a national scale have not been this bad since the early 1990s. And that has caused banks to cut back on lending.We are experiencing the proverbial,“credit crunch.”
But what if you are a business that is looking for financing? How do you find the banks and finance companies that are actually lending? And how do you know when they are serious about your proposal?
First, understand that the credit crunch is real and it is not only affecting the real estate market, but general commercial lending as well.The Federal Deposit Insurance Corporation (FDIC) reports quarterly on the banking industry in a periodical called the Quarterly Banking Profile Report. In its latest profile, the FDIC reported that bank income sunk to $5 billion, the lowest level since 1991 and 86.5 percent lower than a year ago. In addition, it noted that loan losses registered a sizable jump in the second quarter. Net charge-offs of loans and leases totaled $26.4 billion in the second quarter, almost triple the $8.9 billion that was charged off in the second quarter of 2007! The annualized net charge-off rate in the second quarter was 1.32 percent, compared with 0.49 percent a year earlier.This is the highest quarterly charge-off rate for the industry since the fourth quarter of 1991.
What this means is that banks are taking hits to their capital base from the ongoing loan losses.That’s important, because banks strive to maintain a certain ratio of loans to capital in order to have enough reserves for situations just like we are experiencing now. If the bank’s capital is reduced, the lender usually has two options to get back within manageable ra-tios.They either raise new capital to replace what was lost, or shrink their loan portfolio to get back on track.
If they choose to shrink the portfolio, they actively seek to either sell off assets, or accelerate the collection of loans. In addition, they may substantially curtail any new lending as they try to regain their capital “footing.”
In this environment, it would not be unusual for a bank to tell its lending staff only to consider loans to existing customers and not entertain new borrowers. (Of course, they walk a fine line in this endeavor, so as not to harm the long-term reputation of the institution.That’s why you may never hear the lender speak about that strategy.)
Prospects Count
This is where the problems lie. New business development officers are measured by not only loans they close, but the prospects they bring through the door. Rarely does a new business officer say “no” to a new loan opportunity. More often, the lender presents the hope of a deal to the borrower, requests an information package to present to the credit committee, and then disappoints the customer with a loan request rejection due to the bank’s current lending policies. The result? Another prospect notched up for him and another three to four week delay for the client.
Research First
So how do you determine who is really in the market to lend, and who is out, but not telling? If you are in the market for a loan, first do a little basic research. I always Google the lending institution. If it’s a public institution, there should be a wealth of information on their financial status. Or you can check specific web sites that rate institutions. I like www.thestreet.com. Once on the site, click under “portfolio and tools,” and you will see a tab for “Banks and Thrift screener.” Type in the institution and you get a rating. Any bank with a “C” rating or lower could mean there are problems.
Second, use professional referral sources. Financial consultants, accountants, investment bankers, and the like all interact with a multitude of lenders for their clients. Since they are networking with them more often than you can, they may know which lenders are in the market and which are not. (Better yet, increase your odds by engaging an intermediary with a successful reputation to represent you in arranging the financing. The savings he or she will save you in time and expenses charged by the lender should far outweigh the cost of the professional.)
Once you identify lenders that are still underwriting new business, don’t let your financing rely on only one lender. Open it to three different lenders and request proposed term sheets from all of them. A term sheet will outline the financing terms and conditions that the lender will consider. It will include typical things such as the interest rate, any fees and the amortization schedule. But it should also include other important conditions such as collateral arrangements, personal guarantees, loan covenants and prepayment terms. If you receive two or three of these proposals, you can negotiate with the lender knowing that there are competitors for the business. As always, competition will cause the lenders to sharpen their pencils when agreeing to the terms and conditions of a deal.
Once you have the right lender and a negotiated term sheet, stay on top of the deal. Do not casually wait for the lender to get back to you with the approval. Set reasonable deadlines for when the approval should be received, and if the deadline passes, question why it is delayed.You may have to move on one of the other proposals because something has changed at the lender in the short time since you initiated negotiations. If you get an approval for the deal, move on to setting deadlines for documentation and closing. In this lending environment, you must follow through as expeditiously as possible.
Yes, there is a credit crunch out there today. But there is financing available for creditworthy borrowers. In times like this, you just have to make more of an effort to find the players and get the best deal. (Editor’s Note: Jalowski is the Managing Director of Cambridge Financial Services, LLC in Edison, New Jersey. He can be reached at (732) 512-9200.)
Authored by:
Nicholas B. Jalowski
Managing Director, CTP, CMC
Cambridge Financial Services, LLC
Raritan Plaza III
101 Fieldcrest Ave., Suite 3E
Edison, NJ 08837
(732) 512-9200
www.cambridgefinancialcorp.com
[email protected]