Thomas B. Mitchell, Partner, Pepe & Hazard, Hartford | Smart borrowers can find funding

If a business wants to borrow money in today’s environment, how has the process/standards changed from say two years ago?

The first change is a fundamental one — who is actually lending at all?  Many banks that were lending two years ago are not in the market right now.  Don’t assume that a borrower’s current lender will refinance an existing loan.  When a borrower finds someone who will talk to them about their project, they will likely find that the underwriting standards have changed dramatically.  Loan-to-value ratios have dropped, debt service coverage ratios have risen and we’re seeing more net worth and liquidity covenants for guarantors.  Spreads on interest rates have risen dramatically, although all-in rates are still relatively low, but many lenders are now imposing floors on their rates. And the approval process has become longer and more torturous, with approval no longer a given – borrowers are finding that commitment letters often have additional or more restrictive terms than the preliminary term sheet issued for the deal. It’s not “how can we get the deal done” anymore, it’s “tell me why we want to do this deal?”

What should a business owner do to increase his or her chances of borrowing money in the current environment?

Be realistic. Understand that times have changed and loan officers are finding it harder to get even simple deals for good customers approved.  Be a willing partner with your lender.  Believe in your business so they will, too.  Don’t push for the last dollar or the last basis point.  Be willing to sign personally for some or all of the loan. Shop around – not because you can, but because you have to.  And don’t expect a lender to cave because you say you have a better deal somewhere else.

What types of deals are being done today?

What I’ve seen locally lately have been fully-tenanted deals — retail, commercial and office.  Specifically, medical office, national pharmacy and general commercial/light industrial tenants.  Multi-family apartment projects still have some takers.  Residential subdivisions, condominiums and most retail are out.  With appraisals being closely scrutinized and appraisers becoming gun-shy, low loan-to-value is very important in all types of deals.

Does the current state of affairs have any upside for both commercial borrowers and lenders?  If so, what?

Yes.  For borrowers, interest rates are still relatively low (although the “floors” of some lenders are rising).  If you have a good property and are realistic, you can still lock in a good deal.  If you have cash, I think there will be more deals to be done over the next six to nine months than the last.  Sellers can’t hold out forever – they’ll have to make a move to reduce the “buy/sell” gap.  For lenders, this is the time for them to show their true stripes.  They talk about “relationship lending”, but will they walk the walk now that times are tough?  Those that do will benefit down the road.