In Lending, Hope Is not a Strategy

“I’m not sure you understand. Our market is REALLY competitive, and there is just no way we can get those kinds of rates here.”

We hear some version of that statement every time we talk to a new bank. And I don’t mean most of the time, but every time we talk to a bank. Someone tells us that the pricing philosophy we are describing might work in a lot of places, but in just won’t work in a market that’s as competitive as theirs.

Now, I should start by clarifying that we believe those statements. We can see in the data just how brutal the competition is for the best loans, and we can also see that just about every market has a “that guy” who is putting painfully aggressive pricing in front of your customers and prospects. Our assertion though, is that while your current approach might make it impossible to “get those kinds of rates” on the best deals, there is another approach that will get you there. The answer is not to simply tell your lenders to ask for better pricing. Instead, you have a little homework to do first so that you can help your lenders approach the right kind of borrowers with the right deals.

Don’t Just “Sell More Stuff”

The best place to start is with a solid game plan. We find an awful lot of banks are still haphazard in their approach to the market, with the only strategy being to “sell more stuff to more customers.” Heck, if we’re honest, we have struggled with this exact problem ourselves. I think it’s best described in a recent Harvard Business Review article written by Frank Cespedes and Steve Thompson called, “Don’t Turn Your Sales Team Loose Without a Strategy.” The whole article is well worth the time to read, but one passage in particular struck a chord:

“The problem is few firms clarify their deal selection criteria. Either directly in meetings or implicitly in their compensation plans, they basically tell their sales forces to “Go forth and multiply!” And that is exactly what happens.

Relying on wishful thinking to make good deals is never a good idea.

As a consequence, salespeople tend to sell to anyone they can, often at discounted prices to make a volume quota target. There are also opportunity costs: Since money, time, and people are allocated to customer A, they are not available to customers B, C, and so on.

This is ineffective deal management, and it eventually leads to loss of positioning with customers, and, over time, the nurturing of “commodity competencies.” In other words, the sales force gets better and better at striking deals that more customers value less and less.”

Wishful Lending

Does any of that sound familiar? How many banks give their lenders a portfolio growth number, and then just send them on their way? Especially for community banks, trying to be all things to all people is a dangerous strategy. The big guys are playing the same game, and they are exceptionally good at it.

The real problem is what the authors describe as the “nurturing of commodity competencies.” I think we all know what this looks like in the world of commercial lending. It means that most banks in a market offer similar terms, and the only differentiator is rate.

The borrower tells us they are buying a commercial property, and we look up our current price for a standard deal. In some markets this is a 5-year balloon on a 25-year amortization schedule, and in others it might be a fully amortizing 15-year deal. The point is that most banks are afraid to offer something much different from what the borrower is seeing from competitors. So we put our deal on the table and hope that the relationship our lender has with that borrower is good enough that we can win without having the lowest bid.

But hope is not a strategy.

Identify the Good Deals

Instead, we need to be able to offer real value to that borrower. For example, check out the podcast we did with Bill Ragle at Comerica Bank. His team specializes in lending to medical groups, and they don’t have to win deals with low rates. Instead they make it easier for their borrowers and provide valuable advice because they know the industry inside and out. You don’t get that by being all things to all people.

Start by understanding what the “good deals” are for your bank. Cespedes and Thompson touched on this in their Alphatech case study. Alphatech originally considered any company that used laptops to be a prospect. The result was a lot of resources being spent on low (or negative) margin deals, when in reality, 75% of their margins came from just 25% of their deals, and it was driven by one specific product.

This, too, should sound familiar to bankers. What are your best products and which ones are most profitable? Now, spend your time and effort figuring out a way to get more of the borrowers who need those products, and spend less time chasing everything else. If you do those deals better than anyone else in your market, and you can be creative in finding ways to make them work for your borrowers, you’ll find yourself in far fewer bidding wars.

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