Why Am I Disconnected From My Commercial Mortgage Lender?
|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.|
Why Am I Disconnected From My Commercial Mortgage Lender?
The view from the borrower:
- My lender does not understand my business.
The view from the lender:
- My borrower does not manage the growth risk.
It is natural for every enterprise to perceive itself as being both unique and singularly well managed. It has, after all, enjoyed prosperity and with these successes comes an understandable inclination on the part of its owner(s) and management to applaud themselves for their acumen and skills. No doubt this approbation is well deserved, but as their enterprises grow, many owners remain disinclined to acknowledge the possibility that they are able to make the similar mistakes as their peers.
The following schematic demonstrates a number of primary reasons for SME business failures.  The numbers are based on a sampling of some 200-problem loans with various commercial lenders.
 Wynant, Larry, and Hatch, James: Banks and Small Business Borrowers, pg. 260 U. of West. Ont. 1990
(A number of categories involve multiple responses; hence the numbers cannot be expressed in percentages.) Admittedly, the survey remains somewhat dated; nevertheless, it is unlikely that the determinants identified in this study have significantly changed in the interim. Clearly, management competency remains a predominant factor in small business failures.
Even when borrowers have been able to nurse their enterprises to sufficiently successful levels of growth to warrant increasing levels of support from their lenders, there remains a real likelihood that, as they undergo further stages of growth, they will experience similar management problems as their peers. From a seasoned lender’s perspective, there is seldom a financial circumstance that is unique. Each borrower would prefer to envisage his or her own set of circumstances as representing a singular set of conditions, yet it is more than likely that his or her lender has been down a similar road before with other clients.
What are the ramifications to the borrower arising out of the numbers itemized above? Whether you, the borrower, like it or not, the lender will always be conscious of the law of averages. Most people would like to envisage commercial lending along the lines of hockey with the spectacular solo rush and game-winning score representing their enterprise.
Unfortunately, the baseball analogy is more appropriate, where stats weigh heavily into the final outcome. Therefore, as a borrower, don’t personalize your lender’s advice. There is a good chance he or she has seen companies like yours heading down a similar path that you intend to pursue with outcomes that you might be less inclined to contemplate. If the lender is raising seemingly difficult roadblocks, the reasoning in many instances will be based on the lender’s experience with similar situations.
If the borrower can analyze these apparent barriers in a rational and non-defensive manner the direction and focus of the borrower’s overall decision making are generally enhanced, both in terms of specific credit needs and growth planning. By no means is the lender always right by being too conservative or the borrower always wrong by being too aggressive. Most successful entrepreneurs at one time or another have ignored the advice of their financiers. Basically, the point to be made is that usually, neither side is entirely right. The borrower needs to incorporate the advice of the lender in a constructive manner and needs to acknowledge in an impartial fashion that the lender will at times be faced with structural constraints that may override an individual credit decision.
One of the most common complaints among SME’s is that their lenders are constantly trying to restrict their growth. If in the borrower’s view, this is the case, then the borrower should evaluate the reasoning underlying the lender’s approach. After having assessed and re- incorporated into his or her growth strategy the lender’s concerns the borrower may still elect to pursue a more vigorous growth strategy than suggested by his or her banker. This decision will likely involve the need to seek alternate financing arrangements; nevertheless, at least the determination will, hopefully, be grounded on more judicious and exhaustive reasoning.
As indicated, when SME borrowers are applying for credit, they often face – much to their chagrin – an unfortunate reality; namely the ghosts of all the successes and failures that have preceded them to the same commercial lender’s office. If that lender’s institution has experienced repeated grief in financing say restaurants or say antique stores, then the unfortunate antiquarian who is trying to maintain a relationship with said institution will undoubtedly and regrettably experience higher hurdle rates to secure his or her credit needs. To the borrower this may not appear particularly just; however, this is the reality at play and the astute borrower will move on to more productive grounds if they are faced with this type of a situation. Usually, a frank discussion with the lender will reveal institutional/structural roadblocks that don’t warrant protracted disconnects. This is a battle the borrower would always lose because, as indicated in our previous article, the risk assessment remains the lender’s prerogative.
There is one further unseen ghost that influences the lending relationship. Borrowers are first and foremost humans and as such remain unpredictable when it comes to a deterioration in the banking relationship. Lenders have experienced both sides of the coin; from a cooperative borrower who will work in step with the lender to resolve a problem to highly pugilistic adversaries who will use every legal maneuver at their disposal to challenge the lender. A borrower’s behaviour pattern cannot be easily predicted especially when things are running smoothly. (Borrowers themselves can rarely and honestly foretell how they will react to a financial crisis.) Thus, many lenders, based on their personal experiences, presume they will encounter the worst response during a troubled loan situation. This often explains the tenure of legal documentation relating to control in the case of a loan default.
In the final analysis is it important for borrowers to understand what governs the relationship between themselves and their lenders. There are four strategic reasons why it is important for borrowers to understand and manage this relationship:
- Borrowers frequently place an undue reliance on the individual relationship between themselves and their When the lending relationships change, (as they usually do) they suddenly find themselves orphaned in terms of banking support.
- Occasionally borrowers will invest an inordinate amount of effort trying to change the system. They often believe they can successfully influence the lender beyond his or her mandate or, alternatively, believe they can modify the institution’s policies. It rarely works and remains an unproductive use of the borrower’s
- Borrowers often spend a lot of time trying to focus lenders on the marketing aspects of their financing proposals. They don’t realize – and are upset to discover – that to the lender, the marketing issues form only one component of the risk assessment, and even if the marketing plan is sound the credit request may be turned down for other non-sales related issues.
- When borrowers overly personalize advice or directions received from their lenders, they are prone to develop an adversarial relationship that, again, serves no constructive purpose and clouds more strategic management issues. They are also likely to ignore constructive advice and are less likely to apply outside the box approaches to get around road
When all is said and done, it is important for borrowers to recognize the reality that they and their lenders may not always read from the same page. Borrowers’ primary objectives remain focused on the growth of their businesses. Lenders are concerned with the placing of acceptable risk on their books at a commensurate return. If borrowers begin assuming their lenders are guided by other factors; they may be venturing down a Sisyphean path of constantly trying to change a system beyond their capacity to influence.
- It is unlikely that both sides will ever see eye to eye on the degree of risk entailing the credit decision relating to the borrower’s
- It is rare that either side will agree on the desired rate of growth to be pursued by the borrower.
This is not to say that the banking relationship needs to be fraught with conflict and/or misunderstandings. A borrower who is more readily conversant with the lender’s constraints wastes less downtime in non-productive financing requests and becomes more opportunistic in leveraging the relationship to his or her advantage. A borrower, who recognizes the inherent structural limitations guiding the lender’s responses, will not waste resources in trying to become the square peg that fits into the round hole and will in a more proactive and rational manner seek complementary credit solutions to those offered by the first line lender.
In closing, we provide a brief synopsis of:
The Ten Most Common Failings of Both Lenders and Borrowers
- Not recognizing each other’s objectives and limitations.
- Not adequately explaining policies to borrowers.
- Providing inadequate information to a lender to support loan request.
- Maintaining poor lines of communication between review periods.
- Not monitoring borrower’s progress and failing to provide regular reporting to lenders.
- Relying on security as the source of repayment.
- Reluctance to accept advice or peer comparison measurements.
- Using approved sources of financing for alternate purposes to circumvent policy.
- Inability to manage the balance sheet.
- Inability to manage growth (The next article . . .)
The next article…