Top Ten Most Common Misconceptions About Commercial Lenders
|This article forms a part of a series written by Andre Schroer which is intended to de-mystify the commercial lending process. Too often than not, disconnects between Lender and Borrower are triggered by poor communication. To the untested Borrower, the process may seem fearsome, involving mystifying rules of engagement. Buzzwords and industry precepts often appear taxing. Perceptions of risk may not be understood and/or aligned. Hopefully, these articles will assist in closing the financing gap between Borrowers and Lenders.|
Top Ten Most Common Misconceptions About Commercial Lenders
The following list may appear somewhat self-evident and oversimplified; however, it is intended to remind Borrowers that their relationship with Commercial Lenders can be complex and, at times, quirky. A better and perhaps more objective understanding of Lenders’ decision drivers can save Borrowers from pursuing time-consuming and expensive cul-de-sacs.
1. Commercial lenders have an expert understanding of the borrower’s industry.
Each lending situation tends to be particular to its industry and there is often a strong likelihood that a Lender has only a limited level of experience in the Borrower’s own area of activity. In the mid-market lending sector, there are few institutions that have specialized account managers. Rather, within a typical portfolio of between 60 to 100 borrowers there could well be a representation of some 30 to 40 different industry types. Therefore, Borrowers, who are able or willing to assist their Lender’s decision-making process by providing as much useful information as possible on their industry’s makeup, are more likely to improve their loan approval prospects.
2. All commercial lenders are seasoned lenders with good credit evaluation skills and a sound working knowledge of their institution’s lending policies and practices.
The skills sets will vary significantly from one lending unit to another and even within one commercial banking unit. Borrowers could find this factor affecting them in two distinctly different ways: (a) their loan request may be poorly structured in terms of the Lender’s internal lending policies and may, therefore, be likely to encounter a decline; or (b) because of an inexperienced account manager, they may be over secured [e. more heavily secured than would be required by another Lender]. Accordingly, it is important for Borrowers to establish a good understanding of their Lender’s competencies and the level of confidence they enjoy from their immediate supervisors.
3. Commercial lenders have an obligation to support the borrower’s loan request.
If the request is reasonable, the Lender would certainly need to provide a fairly compelling reason why the loan should be turned down. At the same time, there is an obligation from an ethical business approach to communicating fairly and openly the reasons for an approval or decline. However, nobody can coerce a Lender to take on risk that he or she does not have a comfort level with.
4. Commercial lenders have a bias towards certain industries.
In fact, there are certain industries that are harder to bank; however, the reason for this is the historic failure rate of such industries. Such industries will undoubtedly experience higher hurdle rates in securing financing, but successfully meeting such additional obstacles head on may, in the final analysis, not only improve such Borrowers’ financing prospects; but may also, guard against the typical pitfalls facing their industry.
5. A commercial lender’s risk assessment remains objective.
Lenders are people who, like everyone else, suffer from specific biases or entrenched viewpoints. A Borrower who has reached a road block as a result of dealing with such an individual would do better to move on, rather than attempting to sway that individual. In a similar vein, Borrowers would do well to recall that their loan requests might follow a chain of command [various levels of authorization] until it reaches a final decision. There has been many a disappointed Borrower who has been lulled into believing their application was a “slam-dunk” based on an over-enthusiastic front-line Lender.
6. Commercial lenders prefer dealing with corporate borrowers.
There is a general view that scheduled banks would prefer to focus their lending activity on larger corporate, rather than SME  borrowers, where (a) the risk is perceived to be more attractive, (b) the cost of monitoring the account is considerably lower, and (c) where the bank can garner more lucrative ancillary non-lending related revenues ranging from cash management/money market services to private banking for the corporate principals. Be that as it may, there are still a number of Lenders on the street who cater to the SME market and, indeed, even amongst the chartered banks a Borrower will find shops that are favorably disposed to their market segment. There are also other financial institutions such as the Business Development Bank, the Farm Credit Corporation and community credit unions that cater to this market segment. It is, therefore, important for Borrowers to research the terrain and to seek out the right mix in account manager and/or lending shop. Sometimes this might require outside professional support to navigate a constantly changing landscape.
7. Commercial lenders do not provide sufficient guidance to mid-market borrowers.
There is perhaps some justifiable criticism that can be levied at a number of commercial Lenders in Canada that they could improve their communications skills vis-à-vis their borrowing accounts. That having been said, Borrowers need to remind themselves that their Lenders cannot run their businesses. Lenders have a fiduciary responsibility to both their organizations and their Borrowers to provide guidance in a very judicious and non-directive manner.
8. Commercial lenders are generally less likely to be creative in their loan structuring.
This issue ties into point (7). The Borrower can influence this process by initiating more open dialogue. Both parties, if they remain mindful of the constraints facing each side, can still come up with inventive approaches by collaborative problem solving and outside-the-box thinking.
9. Commercial lenders place an undue reliance on security.
A perusal of any typical commercial loan application will demonstrate that the Lender’s review of the supporting security ranks in subsidiary importance to many other issues analyzed; (e.g. management skill, competitive factors, economic and socio-political impacts, and other risk determinants). Also, a Lender will closely examine the sources of repayment. If these are considered in any way uncertain, the loan should not be made (irrespective of the quality of the security). In every lending scenario, security should always be taken as a fallback, not as a source of repayment. Lenders take security to protect their depositors and shareholders in the event of an unforeseen contingency. The amount of security they take is determined by their assessment of the realizable value in the event of such an eventuality occurring.
10. Canadian financial institutions have found fresh ways of dealing with scientific high tech and knowledge based industries.
Lenders of all stripes will be the first to admit that these areas remain challenging. Conventional lending tools continue to be problematic when applied to the financing of knowledge-based industries. Similarly, the financing of those industries that have evolved into single-supplier relationships involves challenging risk dynamics. Without a doubt, these industries will face challenges in securing adequate bank financing. Some organizations such as the Business Development Bank have addressed this area with specific programs. For Borrowers in this arena, it, unfortunately, means reduced reliance on conventional financing sources and the willingness to potentially entertain non-traditional and possibly more expensive financing.
 SME is a commonly used acronym for Small and Medium Sized Enterprises. The size of what would constitute an SME as opposed to corporate borrower varies from one financial institution to the next.
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