When large firms have loan requests that are too much for one bank to handle, a nonbank, second-lien lender is often brought in to help close the financing gap.
Smaller businesses typically lack that option because they often do not have the size needed to interest second-lien lenders. In those instances, the loan won’t get made or the small business will have to settle for considerably less than what it requested.
Promontory Local Credit, a nonbank lender in Arlington, Va., that opened this week, wants to help small companies get the funding they need.
The firm is a second-lien lender that will focus exclusively on the credit needs of small and midsize firms. Working mostly with community banks, it intends to make second-lien loans of $500,000 to $3 million, potentially increasing the credit available to a business borrower by 25% to 50%, said Jason Tepperman, one of the firm’s principals and the former director of the Treasury Department’s Small Business Lending Fund.
Tepperman said many second-lien lenders will make loans of $10 million or $20 million, but few will lend as little as $1 million to community banks’ “bread-and-butter” clients. These are firms with perhaps $20 million to $30 million of annual revenue that may need loans ranging from $3 million to $8 million to purchase equipment, make acquisitions or buy out retiring partners.
“Our objective is to expand access to capital for small businesses in situations where a bank is able to make most but not all of a loan,” Tepperman said in an interview. “We see this as filling an unmet need in the credit market.”
Promontory Local Credit is affiliated with, but not a division of, Promontory Interfinancial Network, a deposit-placement firm founded in 2002. Promontory Interfinancial has roughly 3,000 community bank clients and it was conversations with some of them that convinced Promontory officials to launch a separate company focused on lending.
“Simply put, we’ve helped Promontory Local Credit to support Main Street banks as they lend to local businesses,” Mark Jacobsen, president and CEO of Promontory Interfinancial Network, said in a press release announcing the new firm’s launch. “It is another way we can help the thousands of banks that are Promontory Network members better serve their customers and communities.”
Promontory Local Credit has $380 million in backing from institutional and individual investors, including several of Promontory Interfinancial Network’s founders, Tepperman said.
Apart from Tepperman, the new firm’s principals are: Alan Colner, a former director at Yadkin Financial, a North Carolina banking company that was recently sold to F.N.B. Corp. in Pittsburgh, and a co-founder of one of Yadkin’s predecessor community banks; and Arcinée Hermiston, a former chief credit officer at Bank of the West.
The key difference between Promontory Local Credit and other second-lien lenders is that Promontory is strictly a lender and will not seek warrants or equity stakes in firms it lends to, Hermiston said in an interview. The rate on the second lien will be higher than that of the bank loan, but otherwise the structure and terms will be very similar.
“From a borrower’s perspective, it’s nothing they aren’t familiar with,” Hermiston said. “There are no surprises or additional burdens.”
The second-lien option will help banks strengthen relationships with many of their best customers, she said. Currently, when a customer has a loan request too large for a bank to handle, the bank will often share a piece of that loan with another, sometimes rival, bank.
Sometimes the participating institution may want something in return, such as a share of the customer's deposits, Hermiston said. In the worst cases the other bank may even try to cross-sell its own products and services.
Loan sharing “isn’t necessarily a bad thing, but in general banks want to keep relationships for themselves," Hermiston said.