Choosing a Lender in the Small-Balance Market

By Meeghan Fuhr

In the small-balance market, borrowers’ needs aren’t one-size-fits all, and who you choose to finance your portfolio can have a significant impact on its performance and your bottom-line. This poses an important question: As an investor in this market, should you finance your portfolio through a private lending company or a community bank?

Tom MacManus, president, Strategic Accounts at A10 Capital, has experience with both commercial banks and private lending companies, having previously worked for ARA Finance, Cushman & Wakefield Sonnenblick Goldman, GMAC Commercial Mortgage Corp., and Midlantic Bank (now PNC). He provided insight into the different types of lenders and their ability to provide value to customers through customization, geographic reach and service.

Customization: Facing the Obstacles of the Ever-Changing Regulatory Environment

One notable difference between private lending companies and community banks is the impact of regulations. Banks are heavily regulated organizations that face strict rules, largely thanks to the Dodd-Frank Act, created to enforce transparency and accountability following the Great Recession. Private lenders don’t face these regulations and can be more competitive by customizing loan products.

MacManus explains how private lending companies such as A10 Capital bring sophistication to the small and middle-market. “Customers have limited options for lenders who are willing and able to customize solutions to them,” he says. “Although bankers may have this same level of sophistication, they may not be able to implement their solutions due to certain regulations they face.”

One key example of a regulation private lenders don’t face is legal lending limits, or the aggregate maximum dollar amount that a single bank can lend to a borrower. This limit can impede borrowers in the small market from financing their entire portfolio with one bank, and instead force them to spread their loans among various entities, thus prolonging the underwriting process and making it more difficult to negotiate loan terms.

Furthermore, private lending companies often have more lenient guidelines when it comes to personal recourse, prepayment penalties, debt-service-coverage-ratios, loan-to-value ratios and occupancy requirements. These are especially significant to borrowers in the small-balance market, who may have a more sizable portion of their portfolio consisting of value-add properties that will require a period of stabilization.

Geographic Reach: Broad, National Market Knowledge vs. Focused, Immediate Market Knowledge

Investors should also consider the geographic makeup of their portfolio. Private lending companies can usually finance projects in different regions of the country, while community banks typically cannot. For customers with properties in different states, having the same lender finance their whole portfolio regardless of location can be convenient and efficient, since they won’t have to wait for the full underwriting process for each loan request.

While some borrowers may have multiple projects across the country, others like to stick to their own backyard. Community bankers are typically very knowledgeable about the areas they lend in, because it is usually the same area that they live themselves. Generally, in prime markets such as Manhattan, each property may be similar in regard to value and desirability; however, in smaller markets, two properties a block away from each other can be vastly different. For this reason, these customers may find it to be advantageous to work with a banker who has a deeper understanding of the different nuances of each immediate area.

Service: Quick and Streamlined vs. Personal and Long-Term

In the small-balance market, the use of technology and the internet is extremely important for streamlining processes and saving time. Investors in this market often need to work hard and long hours to be successful, and because of this, time equals money. According to MacManus, most customers are seeking a combined approach to service. “Borrowers are looking for the ability to submit information online and receive an answer quickly, but they also want to form relationships with their lender so they can receive customized solutions that fit their personal lending needs,” he said.

Private lenders are typically more internet-friendly and offer online platforms to submit information. Community banks have been increasing their use of technology as well, and have the ability to outperform private lending companies with their capacity to form personal relationships and discuss borrowers’ needs face-to-face. Bankers can also provide borrowers with additional services besides lending, such as personal and business banking, wealth management services, and professional referrals.

So, Who to Choose?

In the end, both private lending companies and community banks have the ability to provide investors in the small-balance market with a lot of value, and choosing the right lender will largely depend on the borrower’s investment objectives and the make-up of their portfolio. For transaction borrowers who shop around for the best loan terms with a quick turn-time, a private lender will typically provide more favorable terms than a bank. However, there is a lot of value in developing a personal relationship with your banker, who can provide a stronger insight into the immediate market area as well as additional services outside of loan requests.

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