There is a lot of activity in the
lending arena as the economy has
strengthened, and interest rates are
still attractively low. With the
Why Banks
Do Not Lend
Loans
on Certain
ve
r Conservati
that Appea
numerous requests for loans, many
banks are finding that they do not
need to attract borrowers. They do
not want to spend time having to
explain to auditors [or even bank
board members] why certain loans
are being made when they have
many “slam dunk” loans that are
“cookie cutter”. Banks are finding
that they cannot charge enough to
the borrower to justify the extra
time, expense, and risk to make a
typical “nonbank” loan.
An alternative to conventional financing can be found with private lending companies. Private
lending companies do not have the same reserve requirements and will generally provide loans
with much less hassle and more expediently. These private lending companies are more interested
in “equity based” lending, meaning that they are more interested in how much equity is in the
property at the time they make the loan as compared to the DSCR or credit issues of the borrower.
This provides the private lending companies an opportunity to fill a gap where the banks have left
off – loans that are not generally considered risky but still need funding. However, the price of
capital is higher because the private companies do not have the same access to capital that banks
do. They cannot provide FDIC insurance to their capital resources; thus, they have to pay a higher
rate than depositors of banks. In conjunction with higher access to capital costs, these private
lending companies must charge the borrowers a higher [than bank] rate for the money. The benefit
to the borrower is the access to otherwise unavailable capital; in addition, the borrower usually
does not have to jump through as many hoops as applying with a conventional bank and will
almost certainly be able to borrow in a shorter time window. Many borrowers find borrowing from
private lenders worth the extra cost.