Seven Ways Banks are Relaxing Loan Terms
June 16, 2014 7:30 AM
Many bankers are accusing their competitors of softening loan terms to stay competitive. Here are seven ways bankers are easing credit standards to court business borrowers.
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Extend Fixed-Rate Pricing
A number of banks are extending the duration of fixed-rate loans, particularly on commercial equipment. This could expose banks to interest rate risk if the Federal Reserve aggressively raises rates.
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Tweak Guarantees
Some banks are reducing how much of the loan borrowers have to personally guarantee. A limited guarantee provides less security for the lender.
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Stretch Out Amortization
Some banks are extending the length of amortization for loans from the traditional 15-year window to as much as 25 years. Stretching out amortizations lowers a borrower's monthly payment but adds to a lender's risk.
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Raise the Leverage
Lenders are open to higher loan-to-value ratios in some cases. Though many banks are trying to stay around 50%, some are moving up to 80%. And there are instances of banks lowering credit score cutoffs .
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Waive Fees
Bankers are reporting that more competitors are showing a willingness to waive cancellation or other fees.
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Lower Debt-Service Limits
Some banks are reducing the amount of debt-service coverage, even though regulators recommend requiring borrowers to have an income stream that is at least 1.25 times cash flow. Old National (ONB) recently said it lost a seven-figure deal to a bid that had no debt-service coverage covenants.
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Ease Collateral Requirements
Some lenders are aggressively lowering collateral requirements on commercial real estate loans. One way is to loosen up on cap rates (the ratio between the net operating income produced by a property and its capital cost).
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