Credit Competition

Ten years ago, bonds were harder to analyze and price. “A person didn’t really know where the market was on a particular corporate bond,” Kujawa says. Now, a trader “can actually go and look at where bonds have traded on a particular day.” That makes it easier for bond traders to track the market—but it’s also squeezed margins.

Large brokerage firms are also motivated by the desire to drive other business, says Michael Wier, president of North American Capital Markets. “If they do the construction loan, they’ve got a shot at the permanent loan,” he says. The brokerage can then sell the loan to one of their companies, or to a client firm, many of which are eager to buy. Five years ago, Wier says, “I don’t think there was as much demand from [brokerage] lenders for permanent loans.”

Commercial loans also give brokerage firms a chance to sell other products: retirement accounts, investments, home mortgages. “All the big boys are very good at cross-selling their services,” Wier says.

Non-Bank Finance Companies: Offers From all Over

Non-bank and manufacturer financing are also eating into bank business. Part of that bite comes from manufacturer financing, where car companies and other manufacturers provide the financing for a customer to buy or lease their goods. “I can’t tell you the last time we did a car loan,” says Leif Syverson, executive vice president and founder of Minnetonka-based Signature Bank.

Manufacturers understand their market niche and have become experts in it, Krohn says. “They understand the risks with their business, and oftentimes they’re in a position to better remarket the collateral if they get it back,” he says.

Commercial financing can also come from non-bank finance companies. Capital One and American Express, for instance, market lines of credit for small companies. They attract business by offering competitive rates and the possibility of a business loan that isn’t personally guaranteed by a firm’s owner.

Some finance companies serve niche markets. “There’s been a flurry of new and growing construction finance companies in the Twin Cities area,” says Rick Wall, CEO of St. Paul’s Highland Bank. “They finance the construction of single-family homes.”

Some non-bank finance offers come from less expected sources. “I looked at a deal and I was so surprised,” Turnquist says. “United Parcel Service offered a commercial loan—a revolving line of credit. The overall package included an exclusive arrangement for shipping services, over the term of the loan at a set price.”

Even the government gets into the act. Some government agencies offer attractive development packages and loan rates as an incentive to draw or retain business in an area. “They’re usually lower dollar amounts at subsidized rates, and these are loans I would be happy to write,” Mueller says.

Specialized or not, non-bank finance companies “are absolutely direct competitors,” Wall says. “They’ll take more risk, but risky customers aren’t the only ones they get. That’s where they start, but then they march uphill. They start on the fringe of the market and work their way in.”

Asset-Based Lenders: Watching the Receivables

Where banks often base loans on a company’s overall cash flow, asset-based lenders make loans based on specific assets. “We’ve drilled down to an individual invoice,” Turnquist says. The lender provides the funds upon receiving a qualified invoice from its client, so those funds can be used before the invoice is paid.

Like other nonbank lenders, asset-based lenders aren’t subject to banking rules. Instead, they lend their own capital and make independent loan assessments. “I have federal and state examiners come in and look at my loans to make sure I’m not endangering the deposit base—that I’m doing prudent lending,” Mueller says. “Asset-based lenders set the risk parameters as they see fit for their stockholders.”