Where do businesses go when they need to borrow money? Most go to traditional banks or a Small Business Administration (SBA) loan program. Some turn to hard money lenders like Actium Partners. If the current market is any indication, there is a good chance that the COVID-19 pandemic will drive more businesses to hard money – and it’s not for the reasons you might think.
Yes, there will be those small businesses in need of fast cash to keep themselves afloat until the economy is back on its feet. Most of that money will come from SBA loans funded by government coffers. As for those non-emergency needs, businesses are about to find it a lot more difficult to get money from banks.
Underscoring the impact COVID-19 is having on business lending is a move recently made by JP Morgan Chase (JPM). According to Motley Fool, JPM has overhauled its underwriting criteria for new loans. They did so out of a desire to lower their own risk. JPM has no idea where the economy is going at this point. They have made the conscious decision to be a lot more conservative in their lending until recovery is apparent.
What must be understood here is that underwriting criteria is something that banks and hard money lenders approach differently. Underwriting is the process through which a financial institution takes on risk. It is a process that involves quite a bit of research and analysis.
A typical bank’s underwriting process starts with basic criteria. Bank officials look at the borrower’s income, credit history and score, debt load, etc. Only after the borrower gets through the first round of criteria do banks even bother digging more deeply. Their second round of research and analysis looks at the loan itself – especially in relation to what the borrower’s business needs are.
It stands to reason that complicated underwriting criteria becomes even more complicated in times of economic downturn. The more underwriters research and assess, the more risk they discover. Thus, underwriting criteria is often modified during downturns so as to eliminate as much risk as possible.
You could say, at least in a technical sense, that hard money lenders undergo their own underwriting process. But that is only if you adhere to the traditional definition of the term. Underwriting has changed so much over the last few decades that a bank’s typical underwriting process looks nothing like what a hard money lender does.
Hard money lenders rarely look at borrower credit history and score except as they relate to determining interest rates. They also are not likely to look at a borrower’s debt load or business needs. Hard money lenders are primarily interested in the value of collateral.
Business owners with hard money experience know this. They know they can get loans from hard money lenders even when banks will not touch them. They also know they can get fast approval. They do not have to wait weeks on end for a hard money lender to complete the application process.
It is quite possible that more business owners will turn to hard money after finding banks uncooperative. Even as banks overhaul underwriting criteria in order to protect themselves against a stagnant economy, hard money lenders are hard at work evaluating each and every deal on its own merits.
This looks like a golden opportunity for hard money lenders to shine. They have the opportunity to show the business world what they can do, and how well they can do it.