The economic recession has impacted much of the financial market, resulting in liquidity and capital concerns in some banks and subsequent failure in others. This has left many people nervous about their investments and whether or not there is money available for lending.
For the most part, community banks remain financially solvent and have continued to be open for business as usual. Community banks have always been fairly conservative in their lending practices, which has minimized the problems incurred as a result of the mortgage crises.
“You hear a lot about the difficulties some of the big banks are dealing with and assume that everyone is in the same spot, but they’re not,” says Ron Carl, a commercial loan officer with Brentwood Bank. “Community banks have traditionally maintained their lending standards and didn’t loosen their lending practices or expand into arenas of higher risk.”
Smart Business spoke with Carl about the advantages of using a community bank, how lending practices have changed, and how to take advantage of money that is available for lending.
What are the advantages of using a community bank?
Community banks have always been about relationships, not just doing a particular transaction, but providing services and creating relationships with customers. That philosophy hasn’t changed. Community banks seek long-term relationships with their customers, expanding and providing services to meet their needs.
Traditionally, community banks may have been perceived as being small and therefore only providing minimal services; but that’s not the case in this day and age when there is so much competitiveness. The community banks are dependent on continuation of the local customer relationship. Due to some of the recent mergers and changes in the services provided, many people are starting to realize that they’re tired of being part of the crowd, so they’re seeking the important quality of a good banking relationship.
Have any of the lending practices or guidelines changed?
It’s getting back to lending basics — adequate down payment, the financial capacity of the borrower, credit history and proper analysis of the collateral being offered as to value and marketability. As a result of the bank crisis, the administration, via the Federal Reserve, is evaluating the current regulatory lending standards, which had been somewhat self-regulated. But for the first time, some of these regulatory issues are being addressed. There have already been some changes, with ongoing discussions continuing to occur in many venues.
Commercial lending is still a viable business. There are people borrowing and lending, and the market is still open. The mortgage market is also opening up now with attractive interest rates but incorporating more traditional lending practices. Community banks are well positioned for that because they never strayed far off the path in that environment.
What do banks look for in a good borrower?
They look at the borrower’s overall income via tax returns or accountant-prepared statements to insure that he or she has adequate cash flow to repay the loan. When the loan pertains to rental property, the lender evaluates the cash flow of the property for adequate debt coverage.
Banks also want to make sure the borrower is sharing in the investment risk via sufficient equity in the transaction. If the loan involves real estate, the property’s value is determined to see if it supports the loan. Factors considered in the evaluation include the specific use, location, marketability, current condition and possible future plans of the borrower.
Banks also look at a person’s personal financial statement. Your ability to amass a net worth and have some liquidity on hand reflects your ability to manage those resources. So, even if there are some of life’s challenges, you have some reserves to tap in to for additional support, if needed.
A borrower’s credit history (credit report) is a critical piece of the lending puzzle. From a lender’s perspective there is a vested interest in how you pay your existing obligations. Credit scores are always a factor, but not the only factor, as other issues may impact the score.
Community banks still consider the borrower’s character. The question will be: Is this someone the bank feels comfortable with, and does this person have the confidence, knowledge and experience to manage a property or a business?
How can a borrower take advantage of the money community banks have to lend?
The worst thing a prospective borrower can do now is sit on the sidelines. While there are still some concerns about the economy, it could also be a time for opportunity. Rates are attractive, money is available and if you ignore that, you may miss out on an opportunity to take advantage of a good deal on property, equipment, or expanding your business for the future.
If you have some ideas or plans, now may be the time to go have a conversation with your banker. Banks will continue to perform their due diligence in evaluating a possible loan. Ultimately, they can work together to meet each of their respective goals in providing quality loans and long-term customer relationship for the bank and a successful future for the borrower. If the boat is sailing for you, make sure you’re on board.
Ron Carl is a commercial loan officer at Brentwood Bank. Reach him at (412) 409-9100 x286 or firstname.lastname@example.org.