Business owners are concerned about a potential economic downturn, but, according to Ron Carl, a commercial loan officer with Brentwood Bank, it’s an opportunity with an upside.
“By taking a moment now to look into what a community bank lender has to offer, you can put your business in a significantly better position no matter what happens with the economy,” Carl says. “The more unique your business needs, the more ways your business will benefit from the hands-on approach of a smaller community bank.”
Smart Business spoke to Carl about flexible financing and ways to ensure your specific needs are met.
What might a smaller community bank offer that a large commercial bank might not?
What a community bank lender can do is have a better understanding of the borrower. A loan originator from a large commercial bank is primarily going to look for opportunities that conform to that institution’s lending guidelines. If business practices are encountered that don’t fit within the institution’s boiler plate and are outside the norm, it’s an immediate red flag. This can frustrate operating companies that need financing structured a certain way because of the nature of their business and operations.
Lenders at smaller community banks can be more accepting of these operating circumstances because they can spend more time getting to know how the business operates. They may also benefit from working within smaller, less rigid organizations, which can allow for more flexibility in structuring the loan to meet certain needs, while still meeting all their institutional lending guidelines and requirements. The bottom line is that the more a business needs custom-tailored loan terms and conditions, the more it will benefit from a community bank that specializes in providing them.
How can owners find the right bank that’s suited for their specialized businesses?
I know of one prospective lending client who asked very specifically about what kinds of knowledge the bank had about operating companies, in terms of cash flow issues, working capital, equipment needs, liquidity requirements, etc. The bank then provided examples of similar situations and how each deal was structured. The client wanted to see how the bank approached the underwriting process and how it analyzed the operation, including the relationship between receivables and payables. It’s a much more complex situation to analyze (from a credit analyst’s standpoint). You’re looking at, potentially, a half-million-dollar working line of credit, additional equipment needs, the seasonality and type of business, concentration of revenue a whole host of issues. What this entrepreneur was really getting at was: ‘Will you be able to understand what my company does?’ He knew that if the lender understood his business, he was going to get a lot more out of that relationship over time.
What are some other things that a community bank may be able to offer?
You want to look for diversity, in terms of the loan amounts that an institution is financing and looking to finance. Diversity is important because it means that the institution can service a $20,000 need as well as a $2 million need. With some of the larger commercial banks, it’s not unusual to discover they may not want to bother with the smaller amounts. And with many smaller niche institutions and community banks, you can find the capacity to fund loan requests up to $5 million.
You may also want to look at institutional stability. Is the bank being impacted by mortgage loan losses, is it a stock bank with shareholders exerting pressure for earnings (or to sell), is it tightening credit standards, will good credit risks with unique needs like operating companies get caught in the squeeze as a result? In the end, you not only want to go with someone who knows what he or she is doing, you want to go with someone who you know is going to be around.
What opportunities would you recommend, given the current economic climate?
The rate environment continues to make refinancing or repositioning debt an attractive option whether it’s as a preventive measure to hedge against an economic downturn or to fund growth-related needs. Now may be the time to ‘equity out’ and fund improvements with a cash-out refinance. Terming out debt over a longer period may also be worth considering, particularly for the business that sees a slowdown ahead or is concerned about rising costs of materials and anticipates needing more liquidity. At the very least, you’ll want to review terms and conditions that you currently have in place, and look to see if there’s an opportunity to reduce your payments by amortizing over a longer term. This may also be a good time to assess whether a line of credit is needed to provide short-term working capital during slower periods.
Also, if you’re not happy with the way loan terms and conditions have been handled in the past, this is the perfect opportunity to give the community bank lenders the chance to prove what they can do. Today, a community bank lender can offer big bank capabilities, knowledge and specialized expertise, but with small bank flexibility, personal attention and on-site loan servicing from people you can ask for by name and who are readily available to you. For many businesses, that would be an improvement in any economy.
RON CARL is a commercial loan officer with Brentwood Bank. Reach him at (412) 409-9000 or firstname.lastname@example.org.