Cerebro Capital, a commercial loan marketplace, released its Q3 2021 survey on non-bank lending for middle-market commercial and industrial (C&I) loans. Cerebro reports lenders continued to ease lending standards, making it easier for businesses to get loans, which in turn has driven up loan demand.

Cerebro's middle-market commercial non-bank lending survey reports easing terms in Q3 but anticipated tightening in 2022

Cerebro's ongoing examination of the middle-market C&I loan market includes this fifth-consecutive quarterly survey of non-bank lenders which complements the Federal Reserve's quarterly survey of commercial banks. The purpose of the analysis is to shed light on the $1 trillion non-bank lending industry and polls non-bank lenders, private credit lenders and alternative lenders who work with middle-market borrowers and offer loan sizes of between $2 million and $100 million.

"Two countervailing forces affecting the non-bank lending markets are clearly evident," said Ken Singleton, Stanford University Professor Emeritus. "Loan/Deposit ratios and net interest margins for banks continued to trend down at banks into Q3, even as the US economy recovered. These patterns support favorable supply-side loan terms heading into early 2022."

Detailed Q3 2021 Key Findings Include:

◊ Lending Remained Borrower Friendly: Cerebro's survey reports loan terms have continued to become more borrower friendly as over one third of both non-bank lenders (40%) and commercial banks (33 percent) have indicated they have made it easier for borrowers to get larger loans.
◊ Loan Demand Is Up Across All Lenders: 74 percent of non-bank lenders surveyed saw an increase for demand. On the other hand, 25 percent of commercial banks saw an increase in demand in Q3. Key drivers for increased demand for both non-bank lenders and commercial banks cited by over two-thirds of lenders included:

• Increased accounts receivable financing
• Increased equipment financing
• Plant expansion

◊ Commercial banks and non-bank loan demand differed for borrowers seeking capital to supplement decreases in internally generated funds. More than 50 percent of non-bank lenders cited this as a key reason for demand, compared to less than 6 percent of commercial banks. This is likely due to the higher risk profile that non-bank lenders can underwrite.

◊ Non-bank lenders also saw great demand in loan requests due to M&A activity due to their less bureaucratic structures and ability to offer more risky terms and to accommodate different leverage. 83 percent of non-bank lenders cited the increased demand for M&A financing compared to 55 percent of commercial banks.

◊ Non-Bank Lenders Still Willing to Loosen Standards: As confidence in an improving economic outlook grew alongside market competition and increased risk profiles, lenders continued to loosen underwriting standards in Q3. According to Cerebro data, 18 percent of commercial banks and 25 percent of non-banks surveyed continue to ease underwriting standards. Top reasons for the willingness to loosen underwriting standards:

• Confidence in an improving economic outlook (more than 70 percent of both non-bank lenders and commercial banks).
• Increased competition (more than 90% of both non-bank lenders and commercial banks).
• Willingness to increase risk profile (more than 70 percent of non-banks and 35 percent of commercial banks).

◊ Supply Chain Disconnect is a Driver for Loans: As previewed above, plant expansion and equipment financing has created a demand for working capital. Inventory financing needs remain strong according to 62 percent of respondents in Q3 as prices rise and supply chains are constrained. With many investors requiring the same materials and inventories, costs and pricing are rising. Long-term, the survey reports that as the economy rebounds businesses will begin to reinvest in production, hopefully forecasting less of a supply-chain disconnect.

See the full non-bank lending survey results for additional insights.

What does this Mean for 2022?

According to Matt Bjonerud, CEO of Cerebro Capital, "The Market will continue to see looser loan underwriting criteria as loan competition and appetite for risk among lenders rises for the next few months. However, we expect lenders to begin tightening underwriting standards as they deploy their capital, and the market settles in 2022."

Cerebro's survey data further supports that it's unlikely easing lending standards will continue. The first sign of a pullback was made evident in Q3 with 11 percent of non-banks tightening standards, almost double the prior period.

At the start of 2021, lenders had pressure to lend more capital to make up for the pause in lending during 2020. Lenders put capital to work at great speed as the economy rebounded throughout 2021. As lenders look to 2022, they are expected to be more discerning about the loans they make now as they have deployed much of their pent-up capital from 2020. Furthermore, according to Cerebro data, 40% of respondents anticipate a weakening economy in the next six months which may dampen demand and tighten loan terms.