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Monday, May 29, 2023

Banks Changing Lending Approach

An improving economy and a shift in the business profile of the area, along with increasing competition among lenders and investors is changing the way traditional banks approach commercial lending. These institutions, once characterized by business loans made on assets, inventory or accounts receivable, are partnering with VCs or setting up their own venture capital divisions, and seeking different lending models better suited to the types of companies emerging on the business landscape. That’s especially true for bankers whose territories include the 101 Technology Corridor. But others too are seeking ways to take advantage of the growing health and importance of technology companies that may not meet the criterion banks traditionally employed in their lending. “A lot of startup businesses were getting their funding from venture or angel capital. Once those firms got large enough they did an IPO and went straight to the capital markets,” said Keith Leggett, senior economist for the American Bankers Association in D.C. “Banks were never in the picture. There was a whole segment of small businesses we missed out on who then got larger and prospered.” Not that traditional commercial lenders are jumping onto the startup bandwagon. They still require their borrowers to be going concerns, generating revenues and profits. But more and more they are attending technology networking events and conferences, hoping to gain insights and find creative ways to participate in the financing needs of these newer industries, whether to assist with expansion, mergers and acquisitions or other growth-related projects. “We’ve been in this market for many years, and it’s certainly evolved from what it used to be,” said Paul Whitney, senior vice president and regional manager for Wells Fargo’s Warner Center commercial banking region, which includes Santa Barbara and Ventura counties and the Santa Clarita, Antelope, Simi and Conejo valleys along with much of the San Fernando Valley. “As a result, we have to have more expertise, and draw in more of our company’s resources to serve the market than we used to do. So it’s more sophisticated.” With many of the basic manufacturing companies or distributors leaving the local area, banks like Wells are no longer able to rely solely on the traditional formula of making loans based on assets or inventory and receivables. Technology companies instead may be trading on intellectual property or software development, activities that don’t generate collateral. Wells often works with several different types of the bank’s financial institutions including Norwest Mezzanine Partners, Norwest Equity Partners, Norwest Venture Partners, Wells Fargo Equipment Finance and The Foothill Group, an asset-based lender, and others. “At the moment, we probably use a team approach more often than not,” said Whitney. Traditional banks now also find that, as venture capital funds have moved upmarket, seeking companies that are generating cash flow and profits rather than early-stage startups, they are often competing with these equity investors. And like venture capital firms, some bankers say that they are looking more and more to a firm’s management team as they perform their due diligence. “A large part of our business is headed toward technology and intellectual property and we have to be more adept at understanding these businesses,” said Robert Kahn, who was just named regional vice president and manager of Union Bank of California’s greater Los Angeles middle-market banking, a territory that runs from Long Beach to the West Side of L.A., the San Fernando and Santa Clarita valleys and Ventura and Santa Barbara counties. “Just like an investor, we want to bet on the right management team and what they do and what their vision is. If we can do that, we can find ways to lend into a broad range of industries.” Traditional bankers say they do have some advantage versus the VC funds because entrepreneurs are often reluctant to give up a portion of their companies in exchange for the financing they need. “I know I’m seeing my clients do more and more deals with financial institutions,” said Brent A. Reinke, a corporate partner at law firm Musick Peeler Garrett LLP, which recently opened a Westlake Village office. “They’re straight debt deals.” But the growth in traditional business banking has also created competition for these lenders, leading them to look outside their typical lending models. “A lot of business banking officers are competing with each other,” said William Mark Levinson, chair of the corporate finance group at law firm Alschuler Grossman Stein & Kahan LLP. “Maybe there are a lot of banks chasing a finite number of potential quality companies.” For banks like Silicon Valley Bank, which has long catered to the technology industry, the recent moves by traditional bankers are not new. “Usually we see more interest in the sector when there has been a rebound or a stronger market in technology, which I think is starting to occur,” said Mark Turk, senior vice president and senior relationship manager for Silicon Valley Bank based in the firm’s Woodland Hills office. “Whenever that happens, the traditional banks looking for ways to expand their market share would move back into the tech sector. I can’t say I’m seeing a lot of it yet, but I would expect it to increase over time as these companies move to later stages and get larger and more established.”

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