We have the benefit of talking to hundreds of commercial borrowers across the country. From small business owners to real estate investors to municipal and public corporations, borrowers are demanding more from their banking relationship. In our informal interviews and dialogue with borrowers, we will highlight the criteria borrower use in selecting their lender. What may be surprising to many bankers is that the lowest pricing and the most aggressive credit structure is not at the top of the list. Borrowers do want a fair price, and they do want market terms, but business owners are not specifically looking for the lowest rate or the highest advance rate without recourse.
Top Five Criteria
Options available to business owners continue to increase. Community banks, regional banks, national banks, credit unions, insurance companies and alternative commercial lenders are all competing for the small business owner and real estate investor. Most borrowers are cognizant of the mistake they make if they focus solely on a lender’s interest rate or advance rate. The five criteria below are what we hear to be the most important criteria that borrowers seek from their lender.
Understanding Their Business
Borrowers tell us that they want a lending partner that understands their particular industry, market or investment objectives. This is important for the borrower for a number of reasons: a) lenders cannot recommend the right solution if they do not understand the borrower’s business and personal objectives, b) in the future if the economy suffers, or the business is challenged, a lender that understands the risks can help the borrower survive, and c) a lender that understands the business can be a valuable consultant for M&A, referrals, accounting or financial advice.
Borrowers do not like a one size fits-all business model. Instead, borrowers are looking for options to help them make the right decision. In fact, borrowers want options presented to them even if they ask the lender for a specific solution. After all, small borrowers are not banking experts and are not familiar with the universal array of products and services. A more innovative lender will offer a wide array of options and then focus the borrower on the best tailored solution to meet the individual needs of the specific borrower. Order taking is not a recipe for successful borrower/lender relationships.
Borrowers not only consider their company’s immediate needs but are looking to find a partner that can address and cater to their business as it grows and evolves. The right lender will have the ability to serve the borrower as their revenues grow, geographic footprint expands, and business processes become more complex. The right lender will also structure immediate financing that will not hamper future business needs so that the solution provided today will be forward-looking and provide the right financing with sufficient flexibility for the borrower’s evolving needs.
Trust and Dependability
We hear from borrowers constantly that they want an honest opinion from the lender even if that opinion supports a competitive product. Borrowers respect lenders that will tell them the truth even if the truth is unpleasant for the borrower or that truth supports a competitor’s solution. If the relationship is not consummated during a specific transaction, the trust and dependability established will lay the groundwork for future business dealings. Borrower detests sales people who tout their solution even if it is plainly not the best option for the borrower.
Quick Response Time
Response time is critical in today’s fast-paced business environment (for both borrower and lender). There are various response times, a) the time it takes a lender to deliver a proposal, b) the time it takes a lender to deliver a commitment, c) the time it takes a lender to deliver closing documents, and d) the time it takes a lender to close and fund a transaction. The faster a lender can accomplish all of these steps and compress the cycle from start to finish the better the response from the borrower and the better the results for the bank.
We hear from bankers that borrowers are demanding the lowest price and loosest credit terms. But the evidence does not support this assertion. Our discussions with borrowers lead to a different conclusion. Borrowers are looking for certain criteria in determining their preferred lenders. In situations where the borrower’s criteria are poorly met (the five criteria above are not presented) then the borrower will resort to demanding the lowest price and most aggressive terms. The many borrowers that we work are very rarely driven by the lowest interest rates or highest advance rates.
Submitted by Chris Nichols on September 28, 2016