A Case for Portfolio Lending

[Will Gaston]

All:

I have used the commercial lending space to double my business in the last three years and wanted to share some things that I've learned about portfolio lending and smaller community banks. I currently have 7 figure loans with three different portfolio lenders in my market and another 6 loans with four other local lenders.

Commercial loans typically have shorter amortizations, higher rates, and have balloons but there is also lots of upside for the right investor. Portfolio lenders certainly have their share of underwriting guidelines and boxes that they need to check before giving loans. But in my experience they have much more flexibility than conventional loans. I've been able to cross-collateralize on existing notes, financed no money down deals, and obtained a large unsecured credit line all through smaller community banks. 

Some of these are obvious, but they weren't to me 5 years ago. Maybe these will be of use to you.

1) Find a bank (or banks) that actually value your business:

I wasted way too much time with a larger regional bank who wasn't the right fit for me nor I for them. There are probably banks that want to give you loans, but you have to seek them out. I have seen tremendous variations in underwriting guidelines, rates, and requirements with banks that are literally across the street from one another. Call the 10-15 local banks in your market before you complain about a lack of capital. 

Remember: Banks need to make loans!

2) The smaller the bank, the more I like them:

These small banks actually value my loans and want my business. They know who I am and that helps a lot knowing that the underwriters already have all of my financials on file. Wells Fargo and Bank of America are probably the last 2 places I would go ask for a loan. They don't like residential investing/non W-2 borrowers. So why force a square peg into a round hole?

3) Credit Unions are worth a shot:

Credit Unions are very under utilized within my network of investors. They often have some flexibility on loans that even other small banks can't match. Even with a very large loans (1MM+) they can often get it done with participation from other credit unions. One of the softest underwriting departments in my market is at a tiny Credit Union. They have no seasoning requirements on refinancing on investment property. 

4) Lots of negotiating room:

Despite what I assumed in the beginning, a lot more of the loan and the requirements of commercial lending are negotiable. It seems like just everything in the transaction is. Fees, rate, term, down payment, and balloon are all negotiable depending on the deal and what else you're bringing to the table. They don't like the deal? Offer to move your operating accounts over. They think the risk is too high? You can offer a 3 year CD as collateral. It's mostly negotiable and doesn't hurt to ask. Plus it's fun to get creative.

5) Most of my lenders ride by the property first:

Another reason to buy in great locations. Most of my lenders drive by the property to make sure it's in a location they're comfortable with. Losing money on any loan is a big deal to a small bank and they want to get it right. One of my lenders actually does the inspections on all of the construction loans. He personally shows up in a suit and tie to verify the work being done.

Portfolio lending is probably not ideal for somebody who wants to put their business on cruise control. The balloons and rate adjustments can be obstacle for sure. It can, however, be a great fit for an investor seeking growth and flexibility. 

One of the best habits buy and hold investors can commit to is regularly seeking out new lenders.