Achieving profitable C&I loan growth in today’s economy
This guest post by Justin Barr, President of BankDATAWORKS.com, summarizes his presentation on niche commercial & industrial loan strategies for financial institutions that are working in today’s market. The New Normal: How to Achieve Profitable C&I Loan Growth in Today’s Economy was the most recent webinar in Sageworks’ 2013 webinar series. The series is an offering of free, educational webinars that are led by banking industry experts who bring unique market intelligence, insights and best practices to our financial institution clientele.
Niche C&I lending strategies
By Justin Barr
The recent real estate meltdown has made clear a need for diversified credit risk and cash flow. In response, many institutions have moved to balance real estate loan concentrations through C&I loan growth. However, they face a challenging market landscape, including increasing competition, weak loan demand and regulatory scrutiny. To help overcome these challenges, some banks are turning to niche C&I lending strategies, two of which were the focus of the webinar, as follows:
Accounts Receivable Factoring. This is a financing methodology where the lender actually purchases the accounts receivable (A/R) assets at a discount from the ‘borrower’ on an ongoing basis, rather than advancing against the A/R as a secured lender. For the lender, A/R factoring presents a number of advantages including ownership, control and in-depth, real-time insight into every aspect of the performance and condition of the borrower’s business. Banks that have adopted this specialty finance capability are able to safely and effectively finance companies that either don’t qualify for traditional asset based lending structures, or are not able to obtain sufficient availability from such structures. As a result, these banks are able to service an underserved market segment with lower competition and above market yields.
SBA 7(a) Lending. The SBA 7(a) program is the largest SBA lending program. It is designed to finance businesses that would not qualify for bank financing through a 75% Federal Government guaranty. For the lender, SBA 7(a) lending presents a number of advantages, including the ability to sell at a premium the guaranteed portion of 7(a) loans into a robust secondary market. Banks that have adopted this niche lending strategy are able to effectively finance companies that don’t qualify for traditional bank lending structures. As a result, these banks are able to service an underserved market segment with lower competition and above market effective yields.
Institutions that are interested in entering these niche areas of C&I lending face a decision as to whether to buy, build or joint venture. Buying can result in immediate market impact, but has significant upfront costs and is a permanent commitment. Through building its own internal capability, banks can maintain control, but there are significant up-front human resource and MIS costs and yet a slower and uncertain market impact. Banks choosing to joint venture benefit from an immediate market impact and variable costs, but have to contend with reputation risk associated with the joint venture partner.
A recording of the presentation and slides are available at the following link: The New Normal: How to Achieve Profitable C&I Loan Growth in Today’s Economy.
Justin Barr, President of BankDATAWORKS, Michael Iannaccone, President of MDI Investments, and Jon Winick, President of Clark Street Capital, contributed to this webinar presentation. Iannaccone and Winick are also BankDATAWORKS Advisory Committee members. BankDATAWORKS is a web based banking industry business that produces comprehensive data, analytics and narrative analysis on all U.S. banks and U.S. banking markets.
