Posted on: January 20th, 2020
The talk of megabanks has dominated the regulatory airwaves over the years. As they have grown to gargantuan size, they not only become extremely large but also insensitive to the needs of middle market companies.
As they grow, they focus on scale and on organizing their resources for maximum efficiency. What they gain in speed and efficiency they usually lose in customer service touch and relationship focus. Lending departments within these huge banks focus on satisfying their check-the-box approach to lending as a commodity product. It’s not about creatively addressing a customer need for a specific structure, but rather proposing a structure that meets the needs of the lender.
Many of these banks have extremely high borrower size requirements such as EBITDA greater than $10 million. It makes you wonder if they understand the size and potential of the middle market, with rules such as this. The creation of these megabanks and their exit of lower middle market lending has led to the rise of a new breed of commercial lender, community and regional banks. These banks are experiencing a renaissance due to their focus on relationship banking and middle market lending. These banks, as distinct from Megabanks, are regional and even hyper-local. They focus on commercial real estate as well as commercial and industrial loans, which are loans to operating businesses.
As providers of C&I loans, they are able to provide high value cash flow based loans, structured on a multiple of a company’s adjusted EBITDA. Most will want a personal guarantee due to the under collateralized position of the loan. Most loans will have an amortization of 5 to 7 years, depending on the industry. Due to their smaller institution size, these lenders make quick decisions and move fast. Community banks and regional banks usually have flat organizational structures with loan decision authority located in your community. They use a business person’s approach to underwriting and seek to learn the basics of the business. They are not solely looking at the liquidation value of your collateral like so many large banks do.
The overriding approach with these smaller lenders is that they value the relationship and want to get to know you and your business. This approach is both refreshing and effective in the business world today. Given the rise of digital lending and the impersonalization of megabanks, this pragmatic approach is a better way for both lender and borrower.