Lending is always about finding an equilibrium between the search for profit and the avoidance of losses. A lender’s platform stands at the fulcrum between risk and return. Each loan comes with risk, as well as risk management. We need lending for growth, but inevitably that growth leads to excess, which produces losses, which often leads to some type of crisis.
Ignorance may be bliss in the short-term, but lenders don’t get paid to be ignorant. In fact, they will pay a hefty price if they are ignorant. They must ask questions, perform due diligence, pay attention to a multitude of factors and create an effective monitoring structure for all investments.
So as the current credit cycle lumbers through its umpteenth year of steady growth in lending, as leveraged finance companies continue to show low default rates, no signs of relief from intense competition and pressure to deploy capital, as budget deficits grow larger and larger, all amidst a slowing global economy and warning signs about future economic growth, the challenge of being a lender is truly as substantial as ever in the summer of 2019.
Increasing the debt to record-breaking levels was a calculated risk taken by policy-makers, lenders and borrowers alike. We knew what we were doing, but the alternative of economic stagnation was unpalatable. Short-term pleasure is always hard to resist, in all facets of life, personal and professional.
We believe that it is during times like this that commercial lenders have a real opportunity to differentiate themselves. The lending decisions that are made now will determine the long-term winners and losers. Faced with the formidable challenge of balancing the necessities of capital preservation, prudence to investors and the search for growth and profits, it is during the late stages of a credit cycle that the best lenders will stand out. By focusing on disciplined underwriting, customer service and rigorous adherence to core principles, the best of breed lenders will survive and thrive, in both the short-term and the long-term, no matter what future periods bring to bear.
No matter what happens to the economy locally, nationally and globally, the best lenders will stand out by serving their various constituencies and staying consistent, active and responsible. Lenders have to keep lending and not make knee-jerk reactions, while at the same time accepting the realities of the current marketplace. Hard work, hustle and discipline always pay off in the long run for all market participants, for lenders and borrowers alike.