Four Reasons Why Commercial Business Loans are not Created Equally

Posted on: May 2nd, 2019

The market for commercial business loans is a dynamic one subject to a push-pull force of market demand and supply side innovation. As loans become more specialized, the commercial business loan market has become increasingly hybridized with more innovative loan structures. At the same time, as the internet becomes more of a lending platform, loan classification has become increasingly standardized for the sake of distribution efficiency. This creates a situation where the internet commoditizes a specialized product, for the sake of ease of comparison.

Usually, this creates an Amazon-like effect, with a race to the pricing bottom with all other considerations be damned. When this happens, the internet unintentionally creates a level playing field in the mind of a consumer, with products that are clearly non-comparable. Loans are a highly specialized product with several components, with only a few components that can be directly compared. Commercial business loans usually involve a long term contractual relationship.

They are not one shot, one and done deals, where you get the money and never have to deal with the lender again. They involve a series of long term interactions where the lender becomes your capital partner and has many rights and rules that you have to abide by. The best lenders have a simple set of rights and rules and a core competency with one type of loan. Senior management judgement and established credit culture and vitally important in the creation and management of commercial business loans.

Throughout the course of the loan, you may need your lender to help you out and do things not written in the contract. The best lenders understand the ups and downs of business, and give companies the flexibility they need to grow their business. The back end approach of the lender is the single most important component to any loan, and this usually does not get ventilated on any web site. In fact for many people, this falls outside the purview of the decision on which lender to choose.

To choose the right lender, borrowers need to go deeper and understand the differences in approaches by commercial business lenders. Here are four reasons why commercial business loans are not created equally.

Loan Size and Flexibility is Paramount – your success will have more to do with the amount of capital you raise, than the price of the capital. A more flexible, longer term structure is far superior and is worth paying more for. Inexpensive loans are usually overly restrictive and provide little value.
Lender Intangibles are Paramount- quantitative features of a loan, like rate or term, reveal little about the intangible benefits of dealing with a lender. Lenders that are accommodative, flexible and supportive are worth their weight in gold, regardless if their rate is a bit higher than the competition.
Lender Character is Destiny–No two lenders have the same company character or culture. High quality people who are reliable make good lenders. Given the dependency you have on your lender, it is always best to work with people you can trust, even if they are more expensive.
Lender Strategy Is Key – some lenders are short term in focus, whereas others are long term. The lender’s mission is central to understanding their loan product. If you are signing a multi-year loan, it is good to know if the lender plans to keep the loan or sell it off.

In the acquisition financing arena, capital availability is destiny as companies require reliable access to capital to grow over the long term. Unforeseen capital needs usually arise when acquirers least expect it. This can cause some concern for the acquisition financing provider, especially when covenants tighten up and that working capital availability is utilized faster than expected.

Mezzanine debt borrowing is usually a straightforward activity that many companies use for funding of transitional growth. Mezzanine debt lenders are highly transparent about their due diligence approach and their post-closing loan management making it easy for companies to engage with.

Elections have consequences and positive ones at that for the acquisition financing middle market. While much media attention is paid to the direction of the yield curve and the Fed’s likely rate cuts, scant attention is paid to the more important drivers of the acquisition financing market – business psychology and regulatory climate.