Banks need more Loan Opportunities – But Where Should They Turn?

While not universally true, there does seem to be a general diminishment in the pool of business loan customers.  While there can be regional differences across the U.S., generally, rising rate environments make doing business more expensive, which indirectly causes some companies to put off expansion, upgrades or other activities that drive commercial loans. Other factors include political uncertainty, the status of the economy and even specific elements such as the cost of energy.  The impact to bankers is a reduction in loan fees and interest, the largest income element on the P&L.  A business that planned to add a new facility or upgrade equipment that might have generated a $1.5mm loan decides to … wait.  The income associated with that loan cannot be replaced without seeking out a new loan opportunity.

In a recent conversation with Charlie Brinkley, one of FNBB’s Regional Market Presidents, he shared that while rising rates have really hammered the residential mortgage market, commercial lending has held steady.  His wisdom was that as long as commercial rates stayed under 10% (even better under 9%) the commercial market would stay steady. However, factors such as bank liquidity and impingement of the net interest margin are likely here to stay. Liquidity may force banks to make choices as to taking on new borrowers. If you have limits on how much to lend, why choose a new borrower who may not bring you deposits over a great customer who already has provided significant deposits? In the end, trying to pull away a new loan customer from another institution can be costly and time consuming so banks will need to balance new customer acquisition with expansion of loans to existing customers.

What then would represent a new loan opportunity to an existing borrower? Any entity that is already banking with you has bought into your brand and culture and you are not fighting another institution for a customer relationship.  But making additional loans to existing customers will likely require you to expand your loan offerings.  And one area of lending that many FIs eschew is capital and receivables financing.  There is a great need for businesses to leverage their accounts receivable, inventory and other assets as collateral.  A key element to understanding this opportunity is to differentiate using receivables as collateral and receivables factoring.

The primary difference between factoring and bank financing with accounts receivables involves the ownership of the invoices. Bank financing with accounts receivables require the business to pledge or assign the invoices as collateral for a loan. The business still owns the invoices and is responsible for collecting the money owed. Account Receivables factoring is where a business sells its account receivables to a 3rd party (Factor) in return for a discounted fixed sum up front. The factoring company owns the invoices and collects on them to recover its investment plus profit. Both options allow the business access to immediate funds needed to advance the business. Are there banks that provide factoring services to customers? Of course!  And there are services available that enable banks to properly manage this factoring process. But for many reasons, most FIs stay away from factoring deals and most factoring is in fact done by non-bank 3rd parties.  But what a bank could do is loan money to its business customers using their assets as collateral, assets such as accounts receivable, inventory and other non-traditional assets.

This is exactly the type of loan that would allow you to approach existing customers with a new service. The assets are usually accounts receivable and inventory but may include virtually any form of business or personal collateral with known equity. But how would your institution manage this type of diverse collateral? Most financial institutions don’t offer this type of lending due to the hassle of managing daily changes in collateral. Those FIs that do offer these loans likely manage this process manually through Excel spreadsheets or purchase asset-based lending (ABL) software. Manual tracking of this collateral using Excel methodology is time consuming and fraught with errors while many automated tracking services are too expensive.

I was recently introduced to a company called Lendovative Technologies (lendovative.com) that offers a product called BB-360. The BB stands for Borrowing Base, which refers to the physical tracking of collateral assets on a revolving line of credit. BB-360 provides a 360-degree view into the collateral valuation process, allowing the financial institution to maximize the funding benefit for borrowing base lines of credit. While no partnership between Lendovative and FNBB exists, I was very impressed with the capability they brought to the problem of tracking non-standard collateral.

BB-360 taps directly into the accounting system of the business, providing periodic updates, based on bank-controlled parameters, of the total collateral position of each customer. Banks determine the percentage of each collateral type that will qualify for the total available collateral valuation and.  With alerts and online dashboards, the bank is instantly aware of each customer’s loan to collateral valuation.

As always, FNBB is ready to assist any of our customers with participation loans, an option that might make even more sense depending on your liquidity or concentration positions.  But in an environment where it may be tough to convince a new loan customer to switch banks, seeking out new loan opportunities within your existing customer base may be a smart, strategic move.  By using affordable tools offered by companies like Lendovative the automated tracking of miscellaneous assets becomes feasible, powering new loan growth.  Advancing C&I lending may only be one option to consider, if you are implementing new services, particularly any innovative lending services, shoot me an email at dpeterson@bankers-bank and share what you are rolling out. I’d love to hear from you.