Money to lend Featured

8:00pm EDT October 26, 2008

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 funding?

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