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How the recession impacted lending and the ability to get a commercial loan

Coming out of the downturn, many private companies had not been able to get venture capital funding and had to look internally or to commercial banks to get capital or leverage.

“As the economy comes back and commercial banks have more capital at their disposal, things are improving regarding the ability to get commercial loans,” says H. Jesse Garcia, senior vice president and group manager of Bridge Bank’s commercial lending office in Palo Alto, Calif.

Some companies may have stressed their banking relationship during the recession and will likely go out into the marketplace, after returning to profitability, to look to get more from a new banking relationship. Understanding what qualifying conditions commercial banks are looking for will prepare companies to work better with their commercial banks and leverage what they have to offer.

Smart Business spoke with Garcia about the lending climate and the criteria commercial banks use to qualify loans.

What do commercial banks offer to private companies without venture capital funding?

Commercial banks can offer a variety of loans, including lines of credit backed by accounts receivable, equipment financing, term loans, acquisition loans and commercial building loans where a business buys the building in which it works to facilitate its business.

Commercial banks qualify non-venture capital-funded companies on three main factors:

  • Historical performance, which includes profitability, cash flow and its record of servicing loan payments;
  • Secondary sources of redemption, which could include accounts receivable or inventory, but could also be fixed assets or assets that the owner pledges; and
  • The business owner’s personal guarantee, including the strength of his or her personal assets.

When looking at these three criteria, a borrower generally could have a deficiency in one area and mitigate it by strengthening another to improve the chances of getting a loan.

From a lending perspective, what is the difference between closely held businesses and venture-backed companies?

Typically, closely held businesses have a much smaller group of individuals holding the company, and these individuals don’t want to sell a portion of it to bring in capital. Depending on the market, companies could be limited on sources of capital because of their narrow market share. Normally these privately owned companies need to run with a much leaner finance and strategic group, and the main focus of the owner is building the business and knowing their industry. Owners often lean on their commercial banker, CPA and other advisers for resources to grow the business. More successful private businesses have a more cohesive core of professionals around them who are extensions of their finance group.

What should these private business owners look for in a commercial bank?

They should be looking for an experienced banker and a bank that’s focused on commercial lending. Lending to privately owned businesses is a niche in banking and it takes a very keen eye. Experienced bankers can guide you through many loan products or ways to leverage the company — some more limiting than others, depending on your rate of expected growth. Being able to have a banker who understands the pitfalls of products helps owners make more appropriate choices when thinking about how to leverage their company with commercial banking debt.

Also, owners often want to work with a bank that understands the landscape of other professional service providers who can help their business. Many companies don’t have the wherewithal to bring in strategic financial consultants, so it can be helpful to be guided to the right professional service providers.

Is the old adage, ‘Banks only lend money to those companies that don’t need it,’ true?

While this might be spoken tongue-in-cheek, there are people who think this might be true. It refers to the belief that banks only lend money to companies with high profits because they have more cash on hand and, therefore, a greater ability to repay. Conversely, it implies that banks aren’t there for companies that really need the money. This has been reinforced because of the lending conditions that some have perceived to become prominent following the economic downturn. However, this really isn’t the case.

Good commercial banks work with companies through many situations, and banks have really stepped up during the downturn to provide or continue to provide loans as companies push through the difficult market. One thing that may have happened during the downturn is good banks had to look internally and see what their clients’ needs were and keep resources available for them. This means they were not as outward looking and not as aggressive in pursuing new clients. But over last two years, as the economy has turned around, there’s been more certainty in the market and banks are again looking outward.

How has the underwriting for these businesses changed during the past several years?

In the commercial lending market, the types of financials and tax returns it takes to underwrite loans has not changed too much. Commercial banks have generally needed a lot of information to examine the business’s ability to pay back debt. While this is still true today, the current market is perhaps more conducive to borrowing compared to a few years ago. Banks have increased capital reserves in the recent past and as a result are more eager to lend. They are looking to diversify lending to include more commercial loans in their portfolio. Companies with adequate cash flow are attracting a lot of attention from commercial banks. There seems to be a good market for companies to get better pricing and terms than what they had two to three years ago.

H. Jesse Garcia is senior vice president and group manager of Bridge Bank’s commercial lending office in Palo Alto, Calif. Reach him at (650) 462-8512.

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