The Tightening Commercial Credit Market

Although the fallout from the various large bank failures earlier this year seems to largely be behind us, the banking industry is continuing to struggle from a wide variety of stresses that do not seem likely to disappear anytime soon, including the following:

• Shrinking Deposit Balances - Not a day goes by where there is not news of shrinking consumer deposit balances, which is impacting all Banks.  But on top of this, rising interest rates have led many individuals to pull excess balances out of Banks to invest them in other higher yielding funds, putting further strain on deposit balances.  Banks lend their deposits out, so banks need to have excess deposits to keep lending.

• Declining Net Interest Margins - As interest rates have risen, banks have had to raise interest rates on money market accounts, certificates of deposit and other bank instruments to keep deposits in their institutions.  On top of that, many Banks have loan portfolios with fixed rates locked in well below current Fed interest rates, which are putting stress on net interest margins.  As net interest margins decline so does Bank profitability.  The stress on profitability is causing lenders to have to raise interest rates for new loans well above where market interest rates should need to be, creating additional stress and making it harder to get loans done.

• A Growing Number of Problem Loans - Many lenders are seeing the number of problem loans start to spike up.  This is being driven by economic factors such as inflation as well as by higher interest rates and other market stresses businesses are suffering from.  When problem loans spike up, lenders usually tighten their lending standards to protect the Bank’s loan portfolio from further deterioration. 

• Dropping Real Estate Values – Without a doubt, commercial real estate values have been declining in many markets and asset classes, specifically as it relates to office buildings and retail properties.  Higher interest rates have further compounded this problem.  This is creating additional stress on Bank loan portfolios causing many Banks to back away from lending directly to office and retail properties, as well as some other asset classes and construction projects. 

• Declining Economic Conditions – The downgrade of the U.S. Government debt combined with other economic weaknesses Banks are seeing, has caused a growing concern we are heading into a recession.  Lenders have become more conservative in lending, especially to those businesses and industries most likely to be impacted by a recession. 

• Liquidity Issues – The reason Banks, like Silicon Valley Bank, fail is not typically because of bad loans.  Banks typically fail because they end up in a position where they no longer have the liquidity necessary to operate.  Today, as a fallout to the recent bank failures, Banks are hyper focused on having strong liquidity, which means maintaining a higher level of cash on hand.  One way to do that is to lower a Bank’s loan-to-deposit ratio, which is the ratio between the amounts of deposits a Bank has versus the amount of loans the Bank has.  In order to lower this ratio, most Banks must reduce the amount of lending they do or push out maturing loans.

With all of the pressures Banks are currently facing, it is not hard to believe they have pulled back on commercial lending.  Unfortunately, a pull-back in lending and market liquidity is one of the things the Federal Reserve is seeking in order to slow down inflation.  If less capital is available in the market, then less pricing pressure can be put on the price of goods and services because there are less dollars to chase those goods and services.  However, when lenders stop lending and access to capital tightens up too much, that is often what causes a recession.  When businesses do not have access to capital via loans to support operations in troubling times, in order to stay liquid businesses often times have to layoff staff and cut other expenses, which has a ripple effect throughout the entire economy.  In essence Banks tightening credit out of concerns about a possible recession ends up being one of the factors that contributes to that recession taking place. It becomes somewhat of a self-fulfilling prophecy. 

SBA Lending - The New Standard Operating Procedure and the Changes to Be Aware Of

As of August 1^st, 2023, the new Standard Operating Procedure (“SOP”) for SBA lending (Small Business Administration Loan Programs) went into effect.  There were many changes in the new SOP which impacts the SBA lending programs quite substantially.  And as with any government related program, not all of the changes have been fully flushed out yet.  Almost daily different interpretations and guidance have been released regarding many of the key changes, which is making it very hard for lenders to implement the changes.  CLX created a summary of many of the key changes we think most SBA Borrowers will want to focus on along with some feedback of how they are actually being implemented and any on-going interpretations or discussions impacting their implementation.     

Key Lending Programs to Consider in 2023:

Single Family & Multi-Family Investment Property Program – using an application and either existing property income and expenses or projected property income and expenses, we can finance single family and multifamily investment properties on a 5/1, 7/1, 10/1 Arm or a 30-year fixed rate and cash-out up to 75% of value and purchase money up to 80% of cost depending on cash flow.  Qualifications are largely based on the subject properties ability to support debt service at as low as a 1.00x debt service coverage ratio and the borrower’s credit score.  This program is a great way to get cash-out of existing investment properties and maximize the return available. 

Conventional Bank Property Acquisition or Refinance Loans – We still have many Banks and Credit Unions being aggressive in the financing they are willing to provide for acquiring or refinancing owner-occupied commercial properties or acquiring or refinancing commercial investment properties (retail, office, industrial, etc.).  We are still getting loans done with strong fixed interest rates, and are not only getting 5-year balloons done but also 7-year and 10-year balloons as well as some 5, 7, and 10-year ARM mortgages done as well (where the loan is fixed for 5, 7, or 10-years with the rate adjusting every 1, 5, 7, or 10 years after the initial fixed rate period for another fixed rate term), with an entire loan term of 20 to 25 years. 

SBA 7A Loans – whether buying a business, buying 51% or more owner-occupied commercial properties, starting a business, needing capital to expand your business, needing funding to refinance existing 51% or more owner-occupied commercial properties, refinance other business debt, or a combination of any of the above, SBA 7A loans can present a great solution for you.  With 10-year loan terms for business debt, 25-year loan terms for real estate debt, and blended loan terms between 10 and 25 years for debt that is a combination of both owner-occupied commercial property debt and business debt, SBA 7A loans provide long-term amortizations reducing monthly debt service.  SBA 7A loans can be used to consolidate existing debt and reduce monthly payments, while also getting additional capital to operate your business.  Also, SBA 7A loans do not need to be fully collateralized by hard collateral and typically they come without any loan covenants (future conditions to hit like a debt service coverage ratio).  For businesses that are struggling to hit existing debt service coverage ratios at their existing banks, sometimes a restructure into an SBA 7A loan will help them qualify by extending out the payments into a longer amortization.  For Borrowers who are short the collateral to support existing debt obligations, the SBA can step in without being fully collateralized and provide the capital necessary to refinance debt or expand without being fully collateralized so long as the cash flow is there to support the loan based on SBA amortization schedules.     

SBA 504 Property Acquisition and Refinance Loans – Utilizing the SBA 504 loan program, you can now qualify to purchase, refinance or construct 51% or more owner-occupied commercial properties and existing business equipment debt into long-term fixed rates via the SBA 504 program, including refinancing other existing government guaranteed debt such as existing SBA 504 loans and SBA 7A loans.  You can secure 10-year fixed rates on equipment and 20 to 25-year fixed rates on 51% or more owner-occupied real estate with strong long-term interest rates.  In some cases, you can even take cash out up to 85% of value to cover other business-related debt, and with no cash out can refinance up to 90% of value.  

Low Documentation Owner-Occupied Commercial Property Financing – Utilizing bank statements versus operating statements or tax returns, we can refinance owner-occupied commercial properties into either a 5/1 ARM or into a 30-year fixed rate mortgage with rates and provide cash-out up to 70% to 75% of property value depending on the property type and available cash flow.  This program is great for businesses that lost money during Covid-19 but still had revenues and have equity in 51% or more owner-occupied commercial properties.   

Low Documentation Commercial Investment Property Financing – Utilizing leases, a rent roll, an operating statement, and bank statements for the property versus tax returns, we can refinance commercial investment properties into either a 5/1 Arm or into a 30-year fixed rate mortgage with rates and provide cash-out up to 70% to 75% of property value depending on the property type and available cash flow.  This program is great for real estate investments that did not report sufficient cash flow historically via tax returns or recently became stabilized and the Borrower is looking to get cash-out.  

Become a CLX Referral Partner

Do you have customers in need of commercial financing and you do not know how to help them?  Here at CLX we offer several programs in which you can become a referral partner and earn commissions on opportunities you run across.  You can be involved as little as providing us with a name and phone number.  Or if you prefer, you can help manage the client through the entire lending process.  We have many training tools and marketing materials available to us to help you grow your own client base.  Please contact us directly at info@commerciallendingx.com if you are interested in learning more about referring business to CLX.  

About Commercial Lending X

CLX is a small business that specializes in helping other business owners get the business loans and financing they need to be successful.  To learn more about CLX and the services we provide please check out our website at www.commerciallendingx.com.  You can also contact us directly at info@commerciallendingx.com or via phone at 888-975-0007.