Loan Recycling for Customer Relationships
The signs that credit remains tight abound. The Federal Reserve’s Senior Loan Officer Survey shows that banks are demanding additional collateral, more cash flow and more equity. The National Small Business Association found that 43% of surveyed small business owners needed funds but could not get financing.
Bankers might want to step back and ask themselves:
- What business are we in?
- Are we really practicing relationship banking when we turn away the majority of businesses looking to do business with us?
- What resources did we expend to get a business to come to us in the first place only to turn the entire relationship away because the credit didn’t fit?
- What might we do differently if we were on the same side of the table as the customer?
If we were to look at this process through the eyes of the customer, or more precisely the potential customer, what might this look like? Here are the three general ways a customer can be rejected:
The Street Decline: The potential customer describes his loan request to the loan officer. From that, the loan officer may indicate a variety of reasons why they can’t consider the loan such as the property type isn’t approved by the bank, the loan is out-of-market, the loan is too large, they haven’t been in business long enough, they don’t have a large enough down payment, or maybe they had a prior bankruptcy or credit issue. The loan officer says no and the potential borrower continues down the street to the next bank.
The Credit Decline: This is where the bank is willing to entertain the deal, which proceeds through the underwriting process and is turned down somewhere along the way. This can be for a variety of reasons depending on the bank’s current credit policy. In some cases this turns into the most dreaded of all scenarios, the “long no.” Again, the potential borrower continues down the street to the next bank.
Existing Borrower Decline: When a bank no longer wants an existing loan on its books it becomes a decline. This time, however, the bank already has the exposure. Perhaps the credit has gone sideways or some covenants have been triggered or it is an industry the bank doesn’t want any more. The customer is notified the bank wants to be paid off and unless the resolution ends up in forbearance or liquidation the customer continues down the street to the next bank.
In each of these cases, the bank has sent a potential customer out the door. How is the bank viewed at that point? Has the bank done all it could to assist the customer in achieving their objectives? Aside from the credit, banks would generally relish the opportunity to get the rest of the relationship, such as the deposit accounts, merchant process, remote capture, personal accounts, trust relationship maybe even a personal or residential mortgage loan. Why then, instead of throwing out the whole relationship, can’t the bank recycle the loan piece, having it completed by a non-competitor, turning what is trash today into treasure tomorrow?
Here’s an example of how this can work in practice. Recently, a doctor’s practice started taking off but she ran out of space in her current office and wanted to build a new medical office building while adding other doctors as tenants that strategically complemented her general practice. For over a year, she went from bank to bank only to be turned down since she had liquidity issues and two prior personal bankruptcies. With the help of the Small Business Administration and an aggressive lender, she got the financing she needed and the bank received a $100,000 deposit relationship along with the merchant account, related fee income and personal accounts. All those banks that turned her down along the way lost the opportunity to pick up a valued relationship.
If bankers are in a customer-centric relationship business, then it would be an essential part of their mission to act not as just a sales person for their own institution’s loans but also as trusted advisors whose role it is to assist each potential customer achieve their objective using all the tools available today. By creating strategic partnerships with alternative, non-competitive loan providers, or with an intermediary that coordinates those services, a bank places itself firmly on the customer’s side of the table.
As a result, the bank gets the rest of the borrower relationship. The bank’s loan officers now become advisors. The bank creates a decided strategic advantage in the marketplace as its loan officers won’t have to say no to credit any longer; they can now provide the potential customer with an alternative. Perhaps, at some point, the bank might even want to put the previously declined credit on their books, something that is now possible because of the continuing relationship.
Who are these alternative lenders? Even after the meltdown of 2008, there remain many lenders that are interested in credits a bank might not want. Many have areas of specialization such as hospitality, convenience stores, agriculture, SBA lending, investor properties, equipment lending, health care, churches, golf courses, single tenant and asset-based lending. Others specialize in a type of lending such as mezzanine loans, preferred equity, commercial mortgage-based securities and bridge lending. They are specialty finance companies, life insurance companies, non-bank SBA lenders, asset-based lenders and Wall Street conduits.
Each of these represents an opportunity for the bank to pick up the remaining relationship. In some cases, the relationship can be large and extremely profitable. Assume that the customer profitability of a non-credit small business relationship is a 2% pretax return on assets and the average relationship is $50,000. That represents an annual $1,000 contribution for each relationship that is salvaged. In many cases it is significantly higher.
Recycling anything requires a new way of thinking. Remember the days when we just tossed out our bottles and newspapers? Now, enterprising companies are taking that waste and turning it into something valuable, for the benefit of all. The same applies to commercial loans. Even in this low-rate environment, customer profitability can be significant even without the loan. Given all the resources banks have spent on customer touch points, credit recycling allows more return on those investments.