Will Banks Ever be Able to Quickly Fund Small Balance Loans?

Will Banks Ever be Able to Quickly Fund Small Balance Loans?

While many bank executives are eager to see a loosening of the regulations foisted upon them by Dodd-Frank, those changes alone should not immediately lead to a greater prevalence of small balance loans for small businesses and real estate investors. The barriers to profitability in this segment of the loan market are simply too great to overcome for many traditional financial institutions. As such, many industry observers believe small balance loans will naturally drift towards private lenders and other alternative financing providers.

Why do non-bank lenders have a natural advantage in the small balance loan space?

Bank’s approach to the small balance loan segment is cumbersome and costly. Many banks underwrite small balance loans using the same process as larger loans. A $100K loan goes through the same layers of review and analysis as a $1 million loan. The sheer cost of underwriting and monitoring the loans makes approval unlikely and funding un-timely. Private lenders can focus on the merits of a transaction in making decisions allowing for a higher likelihood of approval and more streamlined funding process.

Bank profitability analysis dictates a new approach. Many banks operate a diversity of businesses with individual business line P&Ls. If bank’s employee-intensive and high-cost lending segment focuses on loans under $250k, management will quickly identify that segment as a drain on capital and a drag on profitability. Even with fewer regulations, the underwriting, monitoring, and compliance costs of lending will likely continue to increase, requiring banks to focus on larger loans that can better absorb the initial and ongoing costs of a maintaining a loan portfolio.

Few banks can create new solutions for the small balance loan market. As the banking business has consolidated, banks are increasingly focused on cutting expenses. As such, the ability to creatively market and underwrite a small balance loan platform has only weakened. Few banks are willing or able to make the kind of up-front investment necessary to service this segment of the market. Private lenders are nimble enough to market, underwrite, and fund these small balance loans quickly and efficiently.
Alternative providers can offer an enhanced customer service experience. Many private lenders operate like the small businesses they seek to serve. While they leverage technology where appropriate, they understand that many small balance loan borrowers require a level of in-person or telephone-based follow-up and support throughout the borrowing and repayment process.

Alternative providers are increasingly experienced and effective in underwriting and funding loans quickly. Banks’ shortcomings in making small balance loans has created a need that providers of alternative financing and private lenders have filled with increasing effectiveness. The market for private loans becomes more robust year after year, improving the likelihood that small and medium sized borrowers will find capital from a non-bank entity.

Private Lenders only succeed if a borrower succeeds. Banks look to provide a suite of services their borrowers: cash management, deposits, investment management, etc. Accordingly, a bank often assesses a borrower’s total relationship throughout the lending process. By seeing a borrower as a diversified revenue stream, bank often overlook the most fundamental aspect of their relationship. Private lenders are solely focused on working with their borrowers to ensure a successful borrowing experience.

Worth Avenue Capital, LLC has been in the private lending business since 2008. The company has helped many clients shut out from traditional banks and financial institutions. For all the reasons mentioned above, Worth Avenue Capital, LLC continues to see a demand for its unique brand of high-touch private lending. If you would like more information about small balance loans, or if you want to speak to an expert in the area, please contact us. We would love to help you fund your small balance loan needs.