For many years, banks enjoyed being top dog in the lending market, writing most of the loans that met their lending requirements and serving as the first-choice financers for mergers, acquisitions, and other commercial deals.
In the last five years or so, however, that top position has come under threat. Banks are feeling more competition for loans from nontraditional lenders: hedge funds, insurance companies, brokerage houses, non-bank finance companies, and asset-based lenders.
The relationship aspect has eroded, and that has allowed other players into the game.
All these lenders have nibbled at—and in some cases gobbled—bank business. Their new place in the lending market is changing the landscape of borrowing, and forcing banks to find new ways to compete for customers.
Feeling the Pinch
The increase in nontraditional lending is a recent development. “I haven’t seen them lending as aggressively or as much in the twenty years I’ve been in the banking business,” says Chuck Mueller, executive vice president of Edina-based Fidelity Bank.
Some of that competition is the result of changes in nontraditional lenders. Non-bank lenders are holding more cash than in years past, much of it created by a robust economy and placed by investors looking to earn stronger returns than those offered by a lackluster stock market.
Non-bank lenders don’t want that
money to sit idle. Loans to highly leveraged or high-risk companies that don’t
interest banks—nontraditional lenders’ usual investment vehicles—aren’t
sufficient for the large amount of cash they need to invest. As a result,
they’ve begun competing with banks to write loans. “There’s so many dollars
chasing few deals,” says Paul Meyering, vice president of Medallion Capital,
Inc., a mezzanine debt finance company in Burnsville. “The stock market has been
stagnant for so many years, and hedge funds and non-bank finance companies have
started to capitalize on returns from outside the stock market.”
Because
they aren’t constrained by the same rules that govern banks, nontraditional
lenders can make riskier, larger, and faster loans. While these lenders are
governed by the regulations of their own industries, those rules typically let
them make independent decisions about loans, including what risks to accept and
how much money to issue in any particular deal.
