Business people wonder what type of lender is best for them – who will lend them the proverbial umbrella in a rain storm, but at a fair price, with the fewest hoops to jump through. There is no “one size fits all.” The personality of the business owner and the management team, the financial performance of the company, and the goals of the owners will all be key factors in determining the type of lender that will be best for the unique situation of each borrower.  

Let’s discuss four different lending approaches:

• Traditional Lender
• Asset-Based Lender
• Private Equity as Lender
• Private Equity as Investor

A traditional lender could be either a national or a regional bank. National banks often have the ability to lend a higher dollar amount (known as the lending authority) to one borrower or group of borrowers, and have more brick and mortar locations. Regional banks typically focus on the small to mid-size businesses located within the bank’s geographic footprint.  

In both cases, the financial institution is highly regulated. Standards applied to and requirements of borrowers of traditional lenders are relatively uniform due to the impact of state and federal regulators. All borrower relationships are rated according to a rating standard, and certain rating classifications require specific actions, such as an annual appraisal.

With traditional lenders your relationship with a specific individual at the bank can be key. The banker can be your advocate within the bank, and specifically with the decision making committees. Borrowers are able to develop strong ties to a specific lender.

The traditional lender looks at recent financial performance (Capacity), the management (Character), and the collateral (Capital). These are the 3 C’s of credit. The business will need to meet the standards of the traditional lender in each of these areas.

An asset-based lender is able to focus more on the assets being pledged, and less on recent financial performance, although recent performance will also be considered. This lender relies less on the capacity of the borrower and more on the collateral of the borrower.  

The asset-based lender is either a division in a traditional lender, a separate entity owned by a large financial institution or a separate entity entirely. The type of entity impacts the regulations the lender must deal with. If the asset- based lender is a division of a traditional lender, the regulatory standards will apply. If the lender is a separate entity, the lender will have more flexibility to relax standards.

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