SBTDC small business

A Case for Industry Intelligence: N.C.'s Small Business and Technology Development Center

 

Rachel Bridgers, NC SBTDCRachel Bridgers (pictured right) is a business counselor at the North Carolina Small Business and Technology Development Center (SBTDC) located at East Carolina University. Rachel helps business owners and entrepreneurs succeed using a combination of real-life business experience, industry expertise, education, and advanced training.

At the North Carolina Small Business and Technology Development Center (NC SBTDC), we enjoy working with businesses in a wide variety of industries, helping them grow and thrive. Vertical IQ’s Industry Intelligence helps augment our knowledge as counselors and provides valuable up-to-date industry information.

We first got access to Vertical IQ in 2020, and I have been using it ever since in my role as an NC SBTDC business counselor. Vertical IQ gives me and my fellow counselors the insights we need about how an industry operates, things to look out for within a particular niche, and much more.

>> Related: A Conversation with N.C. Small Business & Technology Development Center’s Deanna Day

A lot to love about Vertical IQ

There are so many things to like about Vertical IQ! First and foremost, I appreciate how user-friendly the Vertical IQ platform is. The information I need is easy to find and digest. It has two versions of the Industry Profile reports: one for me and one specifically made for the client. I can hand that version to them and use it for our discussion.

I also like that Vertical IQ provides Local Economies information, drilling down to that micro level. Vertical IQ’s metropolitan statistical area (MSA) data can be extremely useful to my clients who are considering launching a new business or growing an existing one.

I love how frequently the information on Vertical IQ is updated. The Quarterly Insights and Coronavirus Updates have been especially helpful during COVID-19, explaining the latest information on how companies are being impacted. It’s very helpful to have those up-to-date facts to share with my clients on a regular basis.

Vertical IQ makes me feel really prepared when going into meetings with clients. The Call Prep Questions cover topics that I may not have considered and prompt questions that I may otherwise not have thought to ask.

Industry News is helpful on two fronts: offering access to media I can connect with and learn from, as well as relevant articles I can share with my clients. I recently had a client who was starting a very niche business. I was able to find an incredibly relevant article to re-engage our conversation. It’s also nice to use the news articles to reach out to clients on a regular basis, let them know you are thinking of them, and share relevant information.

I use the Web Links when someone is new to their industry regardless of whether they are new to business ownership. I recommend people join industry trade groups and associations, and those Web Links do a good job of providing links to those relevant organizations.

The key to credit underwriting success

SBTDC small business

One of my favorite and most-used chapters of the Vertical IQ Industry Profile is the Credit Underwriting and Risks. This information has been crucial to my work, particularly during the height of COVID-19 when banks were being more conservative in their lending. I closely review that chapter and make sure those are the areas we highlight in the client’s loan documentation.

Being able to focus on some of the items included in that particular chapter saves time for the lender. They don’t have to go back to my client to say, “You didn’t include details on this potential risk” because we are able to anticipate some of those concerns in advance when reviewing their business plan or loan application.

Just as important, for entrepreneurs and small business owners, time is money and time is limited, and Vertical IQ saves my clients’ time too. They don’t have to keep responding to the lender’s requests for more details and amending their loan application again and again.

I worked with a client who had previously submitted a business plan to a lender, which was returned by the credit underwriter with certain issues noted. My client was hoping to open a restaurant, and this was during the height of COVID precautions, so there were a lot of issues the lender wanted the business owner to consider before applying for this loan.

The business landscape is ever-changing, so it is crucial to have the latest information. When this client reached out to us, we were able to use the Credit Underwriting and Risks chapter of Vertical IQ, as well as the Quarterly Insights and Industry Trends, to better support their restaurant’s business plan The lender told us that they had never seen a business plan that well-written and well-cited. The Vertical IQ Industry Profile and data were crucial in bringing this all together.

The comprehensive Industry Intelligence you need

I’ve been a business counselor for three years now, and in that time, I’ve used a number of research tools. Vertical IQ provides thorough and highly relevant industry-specific content in a digestible way. It saves time when preparing to meet with a client or gathering information to share with them.

Vertical IQ, in my opinion, is exceptional because of all its special features, like the local data, news articles, and credit underwriting and industry risks information. Further, Vertical IQ’s information sources are very apparent. I have clients who will ask, “Where did you get this data?” so I like that Vertical IQ takes the time to outline their specific reference points.

An invaluable research and meeting prep tool

As a counselor, I find Vertical IQ is a crucial tool, and I know the entire team enjoys using it.

Let’s be honest: Each of us is only as good as our knowledge and resources. Vertical IQ has been an exceptional asset for me and my fellow business counselors. Industry Intelligence support and resources we use with our clients, add value to the services we provide at no cost to them. They get the information they need to be successful.

 >> Learn more about the North Carolina Small Business and Technology Development Center (SBTDC).

>> Free ebook: 8 Ways SBDCs Use Industry Intelligence to Help Small Businesses

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business women at table banking sales enablement

Guest Post: Industry Intelligence Best Practices for Sales Enablement

Cameron Harrison, First Citizens Bank

With an extensive background in banking, Cameron Harrison (pictured right) is the Business and Commercial Sales Enablement Strategist at First Citizens Bank, supporting acquisition and expansion efforts of sales teams across the bank footprint.

I came to the Sales Enablement Strategy group at First Citizens Bank after more than 14 years as a business and commercial banker. I was aware of Vertical IQ in my previous roles at other banks, but First Citizens creates a lot more buzz around Vertical IQ than did my predecessor bank.

As the Sales Enablement Strategist for business and commercial bankers, I support acquisition and expansion efforts of sales teams across the bank footprint. Two key ways I deliver value to our business and commercial teams are by identifying resources that enhance their business development activities and by creating sales programs that drive focus on strategic acquisition targets. Vertical IQ is a key component of both.

Enhancing internal communications, encouraging usage

There are numerous best practices around ways to get the most bang for your buck out of Vertical IQ’s Industry Intelligence.

One way First Citizens is utilizing Vertical IQ’s insights is on our internal website. We have created microsites within our intranet dedicated to specific verticals that we, as an organization, want to pursue. We combine internal bank information with details from Vertical IQ to showcase each of these target industries.

Sharing this Industry Intelligence equips our bankers to approach their prospecting efforts from a place of expertise as quickly as possible. We want them to understand why the bank is interested in that particular industry niche, what’s important to businesses within that segment, call on businesses within it, make an offer to that prospect quicker, and convert them to customers.

Another way we use Vertical IQ is to enhance our internal communication. Sales Strategy publishes monthly newsletters for the field and sales leaders that compiles all of the current need-to-know changes and updates in one communication, thereby minimizing email exchanges.

Prospecting has always been a hot topic in our monthly newsletter. Information on prospecting tools and something new about Vertical IQ is included in every edition. Last month, we shared Vertical IQ’s Nexis NewsdeskTM enhancement. Our goal is to keep this Industry Intelligence resource top of mind so that bankers will naturally use it in their prospecting efforts.

Industry Intelligence to go

Bankers are encouraged to download the Vertical IQ mobile app. We share details about how to download it and tips for incorporating the app into calls. I often recount my own personal experience as a banker, sharing scenarios of when I would use the app:

  • When I was on the go
  • If I got an “in” with a prospect that I thought was a longshot
  • When I was about to get on a call

The app is ideal for those times when you want to have one or two last-minute pieces of Industry Intelligence to make you feel more confident. In my years as a banker using Vertical IQ, I often found that if I had just one more solid, industry-focused question to ask a customer, it boosted my confidence and gave me the assurance to win over that prospect. .

A retail banking multi-purpose tool

business women at table banking sales enablement

On the retail side, Sales Enablement hosts a monthly call with retail managers where we have another opportunity to talk about acquisition success, business development activities, and how to use Vertical IQ to accomplish both.

The Industry Intelligence found on Vertical IQ is helpful for our retail branch bankers as they build small business acumen. We reinforce Vertical IQ as a part of the customer acquisition process during orientation, as well as in sales meetings and planning sessions throughout the year.

Industry Intelligence tools provide a great way to help branch bankers build confidence and feel at ease when talking to a business owner. These tools provide a framework to focus the conversation on the customer’s industry and more effectively build rapport. The Call Prep Sheet  contains good snippets of information in a one-page document that can be pulled out and executed on.

There also are tools in Vertical IQ specifically designed to help branch bankers build their knowledge around credit underwriting. By using the Credit Underwriting & Risks chapter of the Industry Profile to assist in writing a credit memo, the banker can show the underwriter that they understand their prospect’s industry and how risks can be mitigated.

A top-of-mind resource

At First Citizens, we have a similar mission as Vertical IQ. We believe that if you understand the customer you are calling on – you understand where they are coming from and what’s important to them, the challenges they face, their potential opportunities – you can become their trusted advisor.

But having worked in the field, I also know that there is a natural progression of prospecting: You get names, you research the names, you hopefully get a deal from those names. In the process, you sometimes get out of your good habits of using the call prep tools at your disposal – resources that could help you hone your craft.

Through intranet content, monthly newsletters, orientation presentations, and roadshows, our team strives to keep Vertical IQ top of mind for bankers by putting the resource in front of them again and again – and showing them the value that it offers. We truly believe this tool is integral to achieving “trusted advisor” status with our business customers.

 

Photo credit: Amy Hirschi on Unsplash

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men's track race; competition readiness wins

First-Hand Account: How Readiness Wins in a Competitive Market

In this guest post, Jerry Bazata, a commercial lender in Portsmouth, New Hampshire, talks about the importance of sales readiness. Jerry has been successfully incorporating Industry Intelligence into his sales development processes and pre-call planning for many years, and shares the key things you need to know when going into a client or prospect meeting.

Overcoming the commodity selling trap

men's track race; competition readiness winsToo often, we as commercial lenders fall into the commodity selling trap. We answer the phone, and the first thing the prospect on the other end says is, “I want to buy an asset. What are your rates and terms?” We may feel compelled as lenders to commoditize that conversation by talking about our rates, fees, and structure, but the key question is: How do we change that conversation from a commodity to a value-added discussion?

The first step is not being afraid to say to that person on the other end of the line that you aren’t here to just do a transaction; you are here to build a relationship. I recommend saying to them, ‘I’d love to have a further conversation with you about this asset and your business. Can you give me 15 minutes, and I’ll call you back?’ or set up a time that’s convenient for them.

This approach allows you time to tap into Industry Intelligence. Spend 15 minutes gathering as much information as you can about the caller’s business, their market, their industry, and their sector. Start with using an Industry Intelligence solution. Then, open Google Maps and pull up the street view of the facility. Go on LinkedIn to learn about the caller. Armed with this knowledge when you call them back, you can talk intelligently about their business and their industry. That takes the discussion from that commodity level to the value-add level.

Building trust over the long-haul

Now, let’s think about the next step. You get an invitation to talk face-to-face, either virtually or on-site. What do you know about the trends in the industry, the challenges, their cash flow cycle, what they manufacture, and what their product looks like? Do you have similar clients in the bank’s portfolio that you have a relationship with? What did you do for those clients?

Take, for example, a software company with a subscription model. What are the company risks and mitigating factors? What does the business cycle look like? What capital financing did you provide to a similar client?

I always get the question from the CFO, “What do you know about my business?” When you can showcase what you know, that you have done your research, that makes the CFO feel a level of trust with you — that you understand their business so pricing and structure aren’t the main focus.

Several years ago, I called on a company that made harnesses for large equipment. I sent the company president a letter, and I followed up a few weeks later with an article that I’d found about the harness industries. I then reached out to the company president by phone to say I would like to meet with him to discuss how that article might relate to his business’s challenges.

I didn’t hear anything until a year later when the president of the harness company said he was ready to meet with me. He told me he had retained my information on the corner of his desk for a year, and he’d told himself if his current bank messed up, I’d be the first person he’d call. He said to me, “You showed interest in my business. You knew my industry, and you took the initiative.” So keep in mind that your effort may not pay off right now, but that value puts you at the top of the pile where you will be noticed.

The knowledge to offer informed guidance

I see it often with newer business development people who talk about product but don’t relate that to what they want to do for that business. They are selling the feature, but what’s the benefit of working with them and their organization? You have to communicate that in a prospect or client meeting.

For example, I was working with a graphic arts company that was converting from ink printers to digital technology. Through my Industry Intelligence research, I learned that by switching to this new printing process, the company could reduce their payroll expenses. The old ink printer took three to four employees, but the newer technology took one person.

This knowledge armed me with the insight to say to this client, “I can see why you’re making this capital investment; it will save you payroll so you can reallocate those resources to expand your business.” Their response? “I’ve never had a banker come to me armed with that type of information.” It’s all about how well-prepared you are going into that meeting.

When you have Industry Intelligence sources, it gives you the tools to be knowledgeable so you don’t come in as a commodity transaction, and therefore pricing and structure are not the main focal point. Sure, you’ll still have to battle that — people always want the best deal — but it’s not the sole focus of the conversation. When you come to a company and lead with value, the conversation changes to, “What can I expect in terms of rates and fees in order to get the opportunity to do business with you and your bank?”

Take pricing out of the equation

The bottom line is, if you can structure the request for proposal and set the terms, you’ve most likely won the business. If you can say, ‘This is what I think is the best deal structure based on my knowledge of your industry and other companies I work with in your industry,’ the prospect is going to use that as a template to talk to your competitors. Ultimately, however, they will realize the value of you knowing about their business, and they will want to work with you.

I once was in competition for a client with three other banks. My rate and fee were higher, but because I understood the client’s industry, and shared that I had worked with other companies in his industry, he was willing to pay a little more in order to benefit from my expertise. He wanted to work with our bank, and we locked down a comprehensive lending and deposit relationship including cash management services.

Other applications for Industry Intelligence

Let’s take it beyond just talking to business owners. We are all developing centers of influence [COIs] – attorneys, accountants, et cetera. You can take this same approach with developing COIs. If it’s an accounting firm that focuses on the technology sector, for example, that accountant will feel more comfortable referring you to their clients when you exhibit expertise in their firm’s niche.

It’s also crucial not to work in a vacuum. As sales managers, you need to get your team together to build an Industry Intelligence knowledge bank, which can be shared among the entire team. I’ve gone out on joint calls with other lenders so I can share my industry insight and so I can learn from them. This approach is beneficial to the lender, but it also strengthens the client relationship as a whole.

When you get the client’s financials, for example, the underwriter may not totally understand the industry. In your executive summary submission to underwriting, it helps to share your insights into the industry so they can better understand the industry’s nuance and do a better job with risk analysis. That benefits the client and your organization.

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After PPP Ends, Don’t Overlook This Important Fourth “P”

By HD Jacobs, Senior Depository and Lending Solutions Product Specialist at S&P Global Market Intelligence, and Susan Bell Co-Founder and EVP of Sales at Vertical IQ

woman at laptop preparedness call preparationThe Paycheck Protection Program (PPP) was like a safe harbor in a terrible and unexpected storm for many small businesses this past year. Indeed, thousands of businesses that would have otherwise gone under during the COVID-19 pandemic were able to stay afloat thanks to PPP funds.

The program also created a lot of unforeseen work for business bankers as they consulted with clients who needed assistance to tap into the program’s funds. Now, as PPP draws to a close at the end of May, banks and bankers may need to shift into a different gear.

This is where a new “P” comes into play: Preparedness. Preparedness can take several forms post-PPP as bankers seek to help both new and existing clients thrive.

Prepare to find new business

For some bankers, preparedness may involve going after brand-new clients. Their book of business may have shifted seismically amid the pandemic, with some companies thriving while others barely survived or even closed-up shop. As a result, banks and bankers must assess which industries will best balance out their portfolios and target prospects within those niches.

In order to do this, bankers first need to prepare by getting up to speed using Industry Intelligence. They must understand the potential risks facing certain industries, which could in turn impact the bank’s bottom line, as well as opportunities for growth within particular verticals. They also need to know how their targeted industries operate and the latest trends in order to be prepared to have a tailored conversation with prospects.

Next, bankers need to know specifically who within the prospective industry they should target. Which companies in the banker’s footprint are operating within the space? And who should they contact in order to initiate that industry-focused conversation? This is where Market Intelligence comes into play.

Prepare to nurture existing clients

For other bankers, preparedness could mean deepening existing client relationships through advisory conversations.

Maybe the client is new to the bank since the start of the pandemic and their banker has not had an opportunity to really get engaged with them and their business. Or perhaps they only had a small loan with the bank prior to the pandemic, but now new prosperity and opportunities have arisen. Either way, this is an opportunity to tap into both Market and Industry Intelligence.

Using Market Intelligence, the banker can ascertain what portion of the client’s banking relationship is with your bank…and what other potential business may still be on the table to deepen the relationship. For example, do they have a commercial mortgage with another bank? What’s their interest rate? Would a refi at a lower rate be an opportunity to capture more of the client’s business?

Nurturing existing clients also means getting (and staying) up to speed on the ins and outs of their niche using Industry Intelligence: how they operate, the current trends, potential risks, and more. This enables bankers to have industry-focused discussions (not generic) — conversations that truly add value to the relationship from the client’s perspective.

Super-sleuthing to preparedness

In the post-PPP world, the fourth “P” — preparedness — involves using your resources to develop new business, engage with newer clients, and deepen relationships with existing clients. It might sound a bit overwhelming, but all of this can be accomplished with a little  “super-sleuthing.” And the integration of Vertical IQ’s Industry Intelligence with the Market Intelligence on S&P Global Market Intelligence makes it simple.

For instance, use S&P Global Market Intelligence to find in-depth property and mortgage data for 25 million CRE properties, with 15 million business listings (90+ percent of U.S. CRE market coverage). You’ll also find monthly updates of new, amended, and terminated C&I lien and UCC filing activity. This can help you determine if a client or prospect has lending opportunities up for grabs. You also can use S&P Global’s robust search function to target specific businesses in a geographic area and identify decision-makers (including their contact information).

Continue your super-sleuthing on that company’s industry by linking to the Vertical IQ Call Prep Sheet or full Industry Profile directly from the S&P Global database. There, you’ll find the Industry Intelligence you need in order to understand the inner-workings of that client or prospect’s business. You’ll even find tailored Call Prep Questions to get your conversation started and shareable news articles to use as a value-added leave-behind.

Vertical IQ’s Industry Intelligence and S&P Global’s Market Intelligence really do go together like peas and carrots when it comes to the post-PPP fourth “P”: preparedness. Get started today by requesting a demo of S&P Global Market Intelligence and/or Vertical IQ!

>> Related: S&P Global Market Intelligence and Vertical IQ Announce Strategic Collaboration to Support U.S. Financial Institutions

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Swap: Potential Benefits and Downsides to the Bank and Borrower


Guest post by David Nicholson, Owner of Credit Training Inc.

swap, banker meeting with clients pexels-august-de-richelieuFor commercial bankers, a large part of being a value added advisor is understanding the unique challenges faced by others within your client’s or prospect’s industry and offering solutions to those problems. Vertical IQ can help you learn about the types of risks associated with a particular industry so that you can share those insights with your client in an articulate manner. 

But when it comes to the complexities of certain banking products and services, it can be difficult to explain all of the intricacies to a business owner when you don’t fully understand them yourself. 

In this guest blog post by credit expert David Nicholson, he explains the ins and outs of a credit swap. Could this be a useful pricing option for a business owner you know?

The Swap Challenge

Yes, a swap is fairly complicated for sure. Most commercial bankers shy away from swap options for clients as too complicated. But like any complicated item or concept, being able to understand the primary moving parts before tripping up on the details makes a big difference for the bank, the borrower, and the lender. In this blog, I have simplified the moving parts so both bank and borrower can understand. From there, an informed conversation can be had and an informed decision can be made.

For over 20 years, the banking world has been using swaps as a pricing option for clients, and there are definitely nice benefits for both banks and borrowers. What I have found is that there are some people who can talk about certain aspects of swaps, but not as many can talk about it in a way that is understandable and clearly lays out the benefits, and equally as important, the potential downside of swaps for both the bank and the borrower.

It is in this understanding that a commercial banker can inform (not sell) a client about swaps. As a result, when a borrower is well-informed, they are able to make the decision on a swap option.

As a side note: Why is it important for the borrower to get the right information and make a decision and not have the bank’s commercial lender “pushing” swaps? This is because of “lender liability.” Lender liability is a blog in itself. However, when referencing swaps, lender liability is possible if a lender persuades a borrower into a swap without the borrower fully knowing the potential downside to the swap.

As will be stated later in this blog post, the bank does get a large swap fee, which typically equates to about 2% of the notional amount (loan amount being swapped). So there is significant bank incentive to close swaps. This fee connection can lead banks and lenders to the perception of “pushing” swaps onto clients, which relates to the previously mentioned lender liability.

The History of Swaps

When swaps started to become a mainstream pricing option in the late ‘90s, rates were much higher than today. As one of the potential downsides to the borrower, when rates decrease after the swap-related loan closes, the borrower would be “out of the money” (OTM), which also will be discussed later in this post.

It is this OTM effect that had many borrowers upset in the 2000s when rates were decreasing through to 2008 at which time rates hit relative historical lows. This OTM position is in part what led to parts of the Dodd Frank Act, specifically as it relates to derivatives.

The Dodd Frank Act restricted “smaller” borrowers from having access to a swap, as it may have been thought that smaller borrowers are less sophisticated and less able to understand the swap. So in an effort to shield smaller borrowers from the potential downside of a swap, they were restricted from access to the benefits of a swap.

Looking Under the Hood of the Swap

I have been to a number of swap training seminars and classes over the years. While they did provide the mechanics of how the rates between involved parties work, there has always been a “scratching of the head” on the big picture of why a bank and borrower would want a swap-based pricing option.

In a way, equating it to a computer can help visualize this point. I know the benefits and downsides of having a computer. I know it can make my work much more efficient and organized. I also know it will cost me a good amount of money; there can be risk of identity theft; etc. With that information, I can make an informed decision that the benefits outweigh the cost. So I buy the computer. Keep in mind, I do not know how the electronics under the keyboard work. That is complicated. As a user, in a sense, it just works. Working with swaps for 20 years, I can say how the swap works between the lender, the borrower, and the counterparty — that it just works. The details of how it works would be for another blog.

Most all conversations between the lender and the bank and the lender and the borrower are within the benefits and potential downside to the bank and borrower, which is why this blog stays within this framework of benefits and potential downside to the bank and borrower.

Before discussing the behind the scenes workings of a swap (the equivalent of my example of how a computer works), it is important to understand why we are even talking about swaps. Why would a bank and a borrower even be interested in a swap? This gets us to the benefits of a swap to the bank and borrower. Equally as important are the potential downsides.

Benefits to the Borrower

Longer rate lock period

One of the primary benefits to the borrower is the fact that they can have a rate lock for fixed rate loans longer than the typical 5 years. The client can have a rate lock for as long as the amortization period is. This is an important point especially in such a low-rate environment as borrowers tend to ask for longer rate locks on traditional priced loans to hedge against the potential for rising interest rate. Borrowers like to go out 7 and 10 years if possible while banks do not.  With a swap, the bank is fine with the rate lock periods in excess of 5 years.

Potential for “in the money”

With rates at all-time lows, if any time is a good time for a swap, it is now. If rates go up after the swap loan is closed, then the client is “in the money.”  While this “in the money” and “out of the money” figure is a number that can be figured out at any time in the life of the swap, it only impacts the company financially if the swap is terminated within the swap period. So if a swap closed with a 7-year fixed rate to the borrower of 4.75%, and the swap was terminated after 3 years when rates increased to 6.25%, the borrower would get a check. Importantly, a prepayment penalty is different.

My prior comment that a low-rate environment is the most optimal time for a swap is identified here because when rates are at all-time lows (like they are currently), the likelihood that rates might increase rather than decrease seems higher. This is the point where lender liability can come into play. We should state facts as a lender, not state that it is more likely that rates will go up. For example, anyone who thought rates would go up in the last 12 years as our national debt has increased significantly would have been wrong.

With that said, as a lender, I always liked when my borrowers did well. As such, it is my opinion that offering swaps in such a low-rate environment does have more likelihood of an upside for the client than a downside as it relates to rate movement. However, to avoid lender liability, stating the facts and letting the borrower decide if they want to engage in a swap avoids the stated lender liability.

The fixed swap rate for the borrower is typically a lower rate than the traditional equivalent

The liquidity of these derivative instruments through the trading on the secondary market via legal contracts allows for a borrower fixed swap rate that is often around 0.5% less than the traditional equivalent.

Option for the borrower to roll in closing costs

Through the pricing process with the bank’s swap desk, rolling closing costs into the rate is a nice option. For example, when pricing a loan, if Bank A has $15,000 of closing costs that the borrower pays, this $15,000 can be rolled into the interest rate. Although it will vary depending on certain factors, one of which is the amount of the closing costs, I have typically found it falling into the range of 6-8 basis points increase in the rate to cover the closing costs.

The takeaway of this benefit to the borrower is that an all-in swap rate inclusive of rolling in closing costs is typically around 42 basis points less than the traditional equivalent.

Of note: The borrower pays the closing costs at the time of closing and then gets reimbursed approximately three business days after.

Downside to the Borrower

Potential for “out of the money”

As great as it can be for your client to be “in the money” if interest rates go up, it is equally as important to discuss with the borrower the impact of being “out of the money” if rates go down.

It is important to remember that scenarios for “in the money” and “out of the money” are easy for your swap desk to calculate at any point and prior to the swap closing based on projected interest rate scenarios at different projected points in time throughout the life of the swap. It is a good exercise to go through with the client or prospect so they get a feel for the upside and downside potentials.

The client should be fully aware that the swap derivative product is a contract with definitive terms and conditions. There is no negotiating with the bank after the swap is executed. Unlike a prepayment penalty, which many times can be renegotiated or waived, the terms and conditions of the swap cannot be.

Benefit to the Bank

Large swap fee income

This benefit can be substantial, and the fee is able to be recorded on the bank’s income statement the day the swap is executed. Typically, the swap fee is approximately 2% of the notional amount of the loan. Not too many bank-related loan facilities generate that kind of fee income. It can be a significant incentive to have swap fee income as a part of the commercial lender or business development officer’s goals.

I have heard a number of times that the swap fee is a one-time fee and not recurring. That is true, however, if each lender closes on two to three swaps per year, then the swap fee income has a recurring nature to it and can be significant.

It is important to note that this type of goal can create issues related to lender liability where a lender may be “pushing” or “leading” a borrower down the path of a swap. How this happens can be through emphasizing the benefits of a swap while not mentioning or misleading the borrower as to the potential downside to a swap. This is why informing the borrower of the benefits and the downside of a swap is very important. Letting the borrower decide what option is right for them is a good way to reduce lender liability risk.

A typical question that is asked is who pays the fee. Initially, the borrower pays at closing and then is reimbursed a few business days later. Ultimately, the fee is paid through the ticking up of the rate to the borrower.

It is common for the net loan fixed interest rate to the borrower to include 25 basis points. This basis point number is a variable in determining the actual swap fee income for the bank. The higher that number of basis points, the higher the swap fee. Bottom line: The swap fee is paid through the interest rate.

Keep in mind that although the bank does get this robust swap fee income, they also get a lower floating rate than they typically would with traditional pricing (mentioned later in this blog post). This takes us to the next benefit, which also has a negative tied to it.

Bank hedge against interest rate risk with a floating rate

If you have ever been to an ALCO meeting at a bank, you understand very quickly that banks look to hedge a portion of their loan portfolios against interest rate risk. One way to do that is to have floating rate loans. The swap provides a floating rate loan for the bank while, as we discussed, the borrower gets a fixed rate loan. Yes, both sides get what they are looking for

As previously stated, the floating rate is typically priced lower than the bank typically likes their floating rates to be. Remember, this floating rate is tied to 30-day LIBOR, which is currently 12 basis points. This brings us to the next topic, which relates to the downside to the bank.

Downside to the Bank

The floating rate for the bank is typically lower than the traditional equivalent

It is important to note that the swap rate is derived using the 30-day LIBOR rate. As of 3/1/21, the 30-day LIBOR rate is 12 basis points, or 0.12%. From there, the bank adds a spread, a swap fee embedded into the rate and possibly a tick up in the rate to cover closing costs.

As you can see, while the bank does enjoy a hedge against interest rate risk, the rate is more compressed than a bank typically likes. Remember, this is partially offset by the one-time swap fee, which typically is about 2% of the notional amount of the loan facility being swapped.

Credit risk exposure: Collateralize this risk…

The default thinking for a commercial banker is that all loans need to be collateralized, or at least almost always. As with the loan, the credit risk exposure related to the swap needs to be collateralized.

The “out of the money” is not only a risk to the borrower, but very importantly, it is a risk to the bank. The reason is because if the borrower does not or is not able to pay this swap breakage fee, if incurred, then the bank is responsible for the obligation to the counterparty. This is why, during the approval process, banks should run the potential risk calculation and then collateralize this amount along with the traditional loan facility or facilities collateral coverage.

An excellent way to help manage the credit risk exposure related to a swap is to use a legal firm that is savvy in this type of commercial banking legal work. Most all commercial deals use legal firms for closing documents, so using a legal firm capable in this aspect of commercial banking is highly recommended.

Conclusion

There are upsides and downsides to a swap for the bank and the borrower. If your bank is offering swaps to your clients, the key is to understand the upside and downside potential to both the bank and the borrower. This allows for informed banks and informed borrowers. That is the goal for banks: to have lenders who are informed and able to provide real value to clients so they can make informed decisions as to what is best for their company. As a result, a better bank/borrower relationship means everyone wins. What’s better than that?

 

Image credit: August de Richelieu, Pexels

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S&P Global Integrates Vertical IQ Industry Data to Help Lenders Better Understand Customers

By Guest Blogger Cam Saucier, Product Manager, U.S. Financial Institutions at S&P Global Market Intelligence

businessman hunters-race-unsplashThe COVID-19 pandemic ravaged U.S. small businesses and their owners. The lenders who serve them were also challenged in ways not seen since the Great Recession.  

In April 2020, bankers had to navigate a new $522 billion government loan program with limited guidance, while also employing stricter underwriting standards. 

Those who persevered found success in a basic banking principle: To connect best with customers, you need to understand their unique circumstances. These lenders understood not just the general economic hardships faced by U.S. small businesses, but their industry-specific challenges.

Market Intelligence recently announced a strategic collaboration with Vertical IQ. This collaboration will help clients find valuable prospecting opportunities with our Commercial Prospecting solution and improve their outreach outcomes with Vertical IQ’s Industry Intelligence. 

We are thrilled to be working with Vertical IQ and leveraging their unique expertise with industry insight and local/regional business economies,” said Jimmy Pittenger, Senior Director of Financial Institutions at S&P Global Market Intelligence.

Combining business data with industry insights

The Commercial Prospecting solution, one of Market Intelligence’s primary products for U.S. commercial banks, helps lenders discover new commercial real estate (CRE) or commercial & industrial (C&I) lending opportunities. Commercial Prospecting combines the power of three data sets:

  • >> 25 million+ U.S. commercial properties and loan records
  • >> 15 million+ mostly private U.S. business listings
  • >> 70 million+ UCC filings in the majority of U.S. states

By matching these data sets together, we show not only commercial mortgage or lien records, but detailed demographic information about the obligors, which facilitates outreach. 

This solution excels at helping lenders find lending opportunities within their centers of influence. Until now, however, the product couldn’t provide detailed insights about small business industries. 

With the addition of Vertical IQ Industry Intelligence to Market Intelligence’s prospecting reports, clients can now access detailed insights about small business industries. These insights can simplify a lender’s rapport-building process with customers. We’ve matched over 75% of S&P Global’s 15 million business listings to Vertical IQ’s industry reports, according to our internal analysis.  

Through single-sign-on (SSO), we’ve created a seamless workflow for Market Intelligence clients to navigate between the Market Intelligence platform and Vertical IQ. Lenders can view industry reports associated with business or mortgage opportunities without having to constantly sign into different platforms. 

The entire solution is housed within Market Intelligence’s Screener application, a powerful filter that helps users search for data. The application has a save feature for search criteria and an export button for users that want to save Vertical IQ report links in Excel.  

Forming a strategic collaboration 

From the inception, both companies saw the mutual benefits of working together. Market Intelligence was lacking the deep industry data found in Vertical IQ’s industry reports and our clients were interested in more robust data. The strategic collaboration with Vertical IQ was a quick and efficient way to bring value to these clients within a short development cycle.

In 2021, Market Intelligence will be looking for additional ways to showcase Vertical IQ data and expand our strategic collaboration. When it comes to industry data, you can never have enough.

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Image credit: Hunters Race, Unsplash