Credit Competition

In doing so, Turnquist says, asset-based lenders write some loans that a bank would not. “We often have customers whose cash flow situations are in transition,” she says.

Other asset-based loans, however, are ones that banks would very much like to write. “We compete with community banks on the small to midsize deals,” Turnquist says.

That competition has arisen in part because asset-based lenders are aggressively courting business. But banks have responded by changing their lending parameters, Turnquist says. “Generally speaking, banks are more aggressive than they were five years ago. They are willing to take more risk,” she says. “When banks are more aggressive, the deals that are left for us require us to take more risk or find a creative capital solution for that company.”

Banks: Fighting Back with Service

Taking more risks within the regulatory framework is just one of the ways banks are changing to compete against nontraditional lenders. “This is a reminder that we need to sharpen   the focus on what products and services we can offer competitively,” Syverson says.

The personal relationship banks offer their customers stands at the head of that list. Bankers often live in the same community as their commercial loan customers, and they frequently hold other pieces of commercial customers’ business: retirement accounts, investment accounts, and personal accounts.

Banks can use their customer knowledge to create unique financing solutions, Syverson says. “We may be more flexible—everything’s custom here and it doesn’t have to fit into ‘Here’s our product, here’s what we offer people like you,’” he says.

A personal relationship can also be a conduit for a banker’s expertise, Krohn says. “Building a commercial real estate project is very complicated and virtually never goes smoothly, so you   need someone who can help you work through the challenges.” A banker who has done many commercial real estate construction loans may have that expertise. A hedge fund probably doesn’t.

That personal relationship may even encourage a banker to loan more money when a project hits a rough spot—something a nontraditional lender is less likely to do. “If your business has a downturn, your banker might be more patient than a nontraditional lending source, which might pull the plug on you and start foreclosing right away,” Meyering says.

Business is in a good place now, with strong credit quality and corporate performance, says Peter Pricco, vice president of LaSalle Bank, which is based in Chicago. “As things turn and companies start to run into problems and they need more  of a relationship focus to stick with them, will hedge funds stay with it and be willing to work through problems?” he asks. “Nobody knows.”

Personal relationships also help bankers network to find new customers. “You can no longer sit at your desk and wait for the loans to come in,” Mueller says. “I have to change how I hire and how I train. I’m looking for individuals who can network, be a resource for business clients, and offer a value proposition.” Fidelity wants to keep loan officers on staff longer, he says, and is de-voting more resources to continuing education.

Bank loans are also debt only, Donohue notes, rather than the equity participation a nontraditional lender such as a hedge fund may require. With a nontraditional lender, he says, “you might be able to get something competitive in the single digits, but you’re giving up equity kickers and conversion points.”

Joining Forces

In addition to competing with nontraditional lenders, some banks are partnering with them. The Business Bank sometimes works in conjunction with insurance companies to offer a construction loan for a commercial project, with the insurance company funding a percentage of the project after it’s completed. The insurance company loan pays off the bank financing.