Commercial loans are making a comeback through it may be hard to detect it. While bank commercials lending has decreased, non-bank lenders are picking of the slack. Commercial loans are lines of credit, term loans, SBA loans and mezzanine loans. A new field of private banks called business developments corporations have emerged in the financial sector to provide commercial loans to growing middle market companies.
Business Development Corporations are a relatively new form of commercial lender, though their predecessor companies, known as finance companies have been around for decades. Finance companies emerged in the 1980’s originally as captive lenders to large conglomerates. Companies such as GE Capital, Whirlpool Financial, Greyhound Financial and Heller Financial offered commercial loans to companies that could not get bank loans.
This type of lending was focused on financing leveraged buy outs back in the day. Over the last 8 years, as BDC’s have gained market share, they have focused their sights on offering loans for a wide variety of reasons. In addition to providing LBO-financing, they offer commercial loans directly to companies.
This direct lending approach has created a valuable new capital conduit for middle market companies that cannot get a bank loan. Business development corporations are aggressive and smart and are able to make loans to companies that might not have the best credit. They take a big pictured approach to understanding creditworthiness by looking at a company’s financial track record, strategic position and its future cash flow. Most non-bank commercial lenders today are known as cash flow lenders.
They evaluate a company’s credit based on the level of loans to a company’s cash flow. This approach allows them to be flexible when structuring a loan, and forces them to be a patient, long term lender. The comeback in commercial loans is real and is helping middle market companies sustain strong growth.