Concerns about credit and the availability of commercial financing dollars have
never been more front and center in the minds of local business operators.
“The issue today isn’t about shopping for
favorable terms or who can give them to
you,” says Nicholas A. Garrubba, senior vice
president and chief operating officer of
Brentwood Bank. “Right now, it’s become a
matter of availability it’s about who has
the capacity to actually fund loans and
extend credit to business customers.”
“The perception in the marketplace is that
banks aren’t lending right now, but that’s not
true,” Garrubba adds. “Some of the larger
banks are caught in a capital and liquidity
crunch, but others have plenty of money to
lend. You just have to know where to look.”
Smart Business spoke to Garrubba about
where to find commercial funding and what
business operators can expect to gain when
they obtain funding in today’s economy.
What’s causing the credit crunch at many of
the larger banks?
There are several things going on. The fact
that a number of the larger banks aren’t lending right now indicates that they don’t have
the liquidity in place to facilitate new transactions. Because of what’s happening in the
credit markets and the restraints on capital for many large commercial banks and
because these large institutional lenders are
suffering under nonperforming assets, they
are being forced to pull back.
Let me emphasize that not all banks share
this predicament. Those who tell you banks
aren’t lending are simply talking about the
banks they’ve been accustomed to dealing
with, which you’ll find is almost always the
large commercial banks. Loan customers at
top-tier community banks aren’t facing this
problem. If you’re looking for a commercial
lender with the ability to extend credit and
provide funding today, you need to look
beyond large commercial banks to other
types of institutions that’s where the
money is that’s available to you right now.
What allows community banks to have
money to lend?
As a general rule, community banks didn’t
engage in subprime lending practices and aren’t carrying the bad mortgage debt that
resulted. Therefore, they aren’t at the mercy
of the credit markets right now. A community bank funds its loans primarily from deposit
dollars. Because many community banks are
traditional portfolio lenders, they never lost
the institutional emphasis on credit quality.
As a result, community banks aren’t the ones
tightening up their credit standards.
Along the same lines, a community bank
that provides its own in-house loan servicing
has the ability to provide custom-tailored
loan terms and conditions. Depending on
your business circumstances, this flexibility
can make a huge difference and it’s something the larger lending institutions simply
aren’t equipped to offer or set up to consider.
So those who are being forced to look elsewhere for financing for the first time should
take advantage of this opportunity to find out
what a community bank lender offers that a
larger institution can’t. You may be pleasantly surprised at what you find.
Is the lack of capital and liquidity at large
commercial banks a temporary phenomenon, or do you think it will last?
You’ve no doubt heard about the mortgage-backed securities that were issued in conjunction with the recent subprime lending
spree. In the commercial banking world,
there are similar instruments known as commercialized mortgage-backed securities
(CMBS). These have been used to fund a significant portion of the commercial loans
being made at the large commercial bank
level. That is, until recently. Now, primarily
due to liquidity issues, CMBSs have become
much more limited.
Given this confluence of market conditions, it’s reasonable to believe the credit
crunch will continue, large commercial
banks will continue to focus on repairing
their balance sheets, and available funding
will continue to be in short supply at large
commercial banks. Funding will need to
come from other places for a while.
What should commercial customers expect
once they do find a lender able to provide
Many of the ‘negotiable’ items that were
commonly being waived when credit was
readily available are now going to be required
again. If you survey the current market, you’ll
find loan origination fees are back, prepayment penalties are back, and clauses requiring the guarantee of principals are back on
the table. Of course, interest rates have
moved up, too.
Not everything has changed, however.
Loan-to-value and debt service coverage
ratios remain the same. And many of the top-tier community banks continue to provide in-house servicing of their loans, offer multimil-lion-dollar capacity and lending know-how,
make loan customization options available,
utilize hands-on lenders who do their own
underwriting, and give you the ability to work
with the same individuals all the way through
the loan application process and beyond. So
there is still plenty of value being offered as
part of the funding package.
For those who became accustomed to the
departmentalized indifference and transactional focus offered at the larger commercial
banks, the added institutional stability and
personalized servicing touch offered by the
top-tier community banks may more than
make up the difference.
NICHOLAS A. GARRUBBA is the senior vice president and COO of Brentwood Bank. Reach him at (412) 409-9000 or