The near-term future of commercial lending has been tough to predict; however, one thing is certain – interpersonal relationships will remain a key part of the industry. While those relationships will be ever-present, the evolutionary path will require more tools and intervention to scale to meet borrower requirements. Three key parts of the puzzle are people, process, and technology. Most have at least two of them, and some have all three; but do they have them integrated in a way that solves problems?
I’ll break down the current market issues, how the right mix of people, process, and technology can enable the evolution of an industry, and how borrowers, brokers, and lenders can thrive in both ideal and less than ideal market conditions, while not losing sight of how important relationship building has been to this industry.
As a commercial lending marketplace and service delivery organization, we’ve had many opportunities to mesh the components together to help deals get multiple quotes, term sheets, and closed. For brokers, sometimes we’re providing much of the required support that creates an opportunity, as in the case of non-commercial brokers seeking deal placement or a new entrant lacking experience and/or contacts. Other times, we’re providing last-mile visibility and awareness that allows those who are seasoned to drive opportunities home by providing staff augmentation through technology automation and services, geographically specific relationships, and/or a variety of debt types and sources. For lenders, we understand the value is in knowing where to source quality, vetted opportunities from known sources that can convert to investments that meet their current requirements for lending.
Unpacking what I’ve just described, it translates to a series of interrelated activities that increase the probability of successful outcomes. How this is accomplished can vary; however, the difficulty lies in the type of exposure one’s had to building solutions from siloed parts to beat the odds which, as of late, are not stacked in anyone’s favor.
I draw my experience from the technology industry, where I created and offered services that required similar outcomes for many industries, including banking and finance. My experience in commercial lending comes through a series of interactions that had me listening objectively to all parties to find both connections and disconnects. Additionally, my academic and project management background has me understanding the economic side of the puzzle from a strategic standpoint, while being able to execute nimbly at an operational level.
Let’s look at some of the issues and solutions that can mitigate volatility in the current market.
ISSUES / CHALLENGES:
The national commercial loan broker market is both fractured and fragmented
- Internal Factors:
- Inconsistent and lacking deal preparation standards
- Lack of resources and/or ability to setup deals for favorable lender review
- Small pool of lenders to market to; often limited in geographic scope
- External Factors
- Lenders have many deals to choose from and are seeking ‘safer’ deals
- Borrowers have many ways to source support, creating diminishing or lack of exclusivity to the broker, possibly decreasing lender confidence
- Shopping a deal around with many brokers at once to get scale
- Software that markets direct to borrowers who may be seasoned investors, but do not have the experience to run a transaction
Conventional lenders are in a holding pattern.
- Liquidity remains an issue
- Reduction in deposits and refinancing, leading to lower net profit
- Interest rate environment makes refinancing expensive or impossible for borrowers
- Fear of defaults and rising delinquency rates
- Regulatory agencies are preventing growth under the guise of protection from failure
- Imposing lending limits
- Increased scrutiny on portfolios
- Return to the “Too Big to Fail” prevention mindset
Available money is generally just very expensive.
- Alternative lenders are a key, but costly, interim player for any asset
- While these lenders are willing to take the risk, there are high costs associated with shorter terms and fast closes, such as high interest rates and origination fees, and prepayment penalties.
SOLUTION: FOR BROKERS
The key for borrowers is to use a broker to ensure they can expand their reach while being supported and educated about the real-time market changes and transactional nuances. For conventional loans, brokers must set the expectation for depository and operational banking relationships. These go a long way in creating a mutually beneficial relationship-based loan. In the current market, loan requests need to stand out for the right reasons, such as realistic loan parameters, the ability to generate operational revenue, strategically augmenting a region, or the ability to create equity upon exit.
Multistep Loan Approach:
- Brokers must help sponsors be realistic in the type of debt they are seeking and how much detail needed to secure that debt. A short-term, interest-only opportunity at a high rate be may useful in securing and stabilizing the asset now, with a favorable refinance opportunity on the horizon with a bank or credit union when the market and/or the asset are better performing.
Leverage Technology and Service-based Tools:
- Lender aggregation tools for national deal marketing based on lender’s current needs and preferences.
- Maximize deal exposure by using a one-to-many approach, so all possible lender matches are immediately notified, nationwide, and of any relevant type, getting quotes from various sources at once.
- These tools offer support that highlight what lenders are looking for and how best to structure deals for different scenarios. Services can provide support during the processing stage by setting up meetings and helping to gather and securely disseminate public and private information.
- Remarket deals for permanent placement with less effort.
- Consider co-brokering with a shop that can provide pre-underwriting that creates high-quality, consistent informational memos that lenders can trust.
Educational Services:
- Transactional skills are required to close deals. To generate consistently strong income, brokers must get ahead of the curve with structured learning. Knowledge-provider programs are perfect for gathering the required skills.
- Take a business class. Most brokers are entrepreneurs meaning that beyond closing deals, you must run your business. If this isn’t for you, seek out turnkey solutions that can help you stay streamlined and effective.
SOLUTION: FOR LENDERS
Lenders are constantly getting bombarded with potential opportunities. Each comes with its own set of information, presentation style, and requestor skill level. Often, it’s easier to stick with familiar contacts to find the value proposition. However, how many deals get missed due to bandwidth and/or not having formal contact? Combine that with the having to navigate regulatory compliance requirements, and saying it’s a challenge seems like an understatement. With the number of deals seeking financing, and the limited funds available, the ability to turn down what is perceived to be subpar, even though it may not be, is easier than ever. Using technology for efficiency and scalability, while possibly leveraging resources otherwise unavailable, can create opportunities for growth and diversification.
Leverage Deal Aggregation Platforms as a Tool for Sourcing Originations:
In addition to traditional methods for sourcing originations, the ability to leverage technology-rich tools, that have process and people supporting them, can leave the lender time and resources to better vet the borrowing team and the asset. Lenders can now create filters for only what they’re looking to fund. While this may seem very disconnected from a relationship-based originations approach, it’s not. What happens is the same brokers that are submitting quality deals are building a rapport with active lenders, term sheet after term sheet. So, while the lender and broker are now familiar with one another, the broker is introducing new quality borrowers and deals into the ecosystem.
Lenders should seek some of the following attributes when considering technology-based solutions:
- Consistent presentation of prequalified opportunities based on current lending profile
- Predictable workflows that minimize the noise of a chaotic market by leveraging automation to receive only what’s relevant from a trusted source
- Support services and industry contacts for scalability for those lacking staff, cybersecurity controls, or wanting to take on new types of commercial loans
- Ability to view what the market is requesting across any asset class at any time, and to selectively source opportunities at the right time for the institution
- Access to geographically diverse broker and asset pools, increasing the network of borrowers exponentially
SUMMARY
People, process, and technology are available to everyone. Consistency and results may vary. By seeking out solutions that integrate these components in a way that is tailored to drive intended outcomes, you will increase the speed, quality, and probability of closing more loans relative to the current market conditions, regulatory challenges, and competitive players. Most importantly, strong relationships are built and maintained because everyone’s inputs are being used together to create a value chain that benefits the industry’s future.
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Joe Compagno
Founder, Managing Partner
jcompagno@creditunity.com
CONNECT is a commercial lending marketplace built to enhance the lending experience for the broker, borrower, and lender. Using intelligence, expertise, and automation, CONNECT creates one marketplace that transforms how commercial brokers market assets and lenders source funding opportunities.