Consider this quote from Senator Charles Waterman: Most of the world is covered by water. A fisherman’s job is simple: Pick out the best parts.

There’s certainly no shortage of fishing poles in the lending stream. The hangover from the 2008 crash is gone; the economy has improved and capital is flowing more easily. There doesn’t seem to be much disagreement that we are experiencing a more fruitful – and competitive – lending landscape. There is an abundance of opportunity and business funding sources are seeking to identify and deploy capital to the most creditworthy borrowers. The effects on both segments are evident.

We have a lot of deal flow and are seeing lenders – even the big boys – becoming much more aggressive on pricing and capital structure. Big banks are making more concessions and are incrementally expanding the size of their boxes, albeit they may still be hesitant to dip their toes in the water for smaller deals that are too far out. Small to mid-sized opportunities that are fairly clean, can generate multiple term sheets from lenders of all shapes and sizes.

This results from a highly-competitive market, especially at the top. Solid deals swimming around in the $20 million and above pool are likely to experience a feeding frenzy. A BDO’s job is to canvass specific territories and industries – nowadays, even more fragmented into industries within industries – so any business in play within that desirable zone that is looking for business funding, is no secret in the lending community. We are all very good at what we do when competing for new business.

Forced to Fish Downstream

With heavy competition in the market, we are seeing the larger banks and finance companies motivated to fish downstream to lure in profitable deals that can be closed efficiently. Of course, the ripple effect makes smaller markets more competitive. The small to mid market is currently very frothy – there is a lot of activity and opportunity in the $3 million to $5 million range. We are getting term sheets from more banks of all sizes on these smaller, under minimum deals they would not have sniffed at a few years ago.

According to one big banker, the larger players that previously drew a line in the sand with a check size of $15 million to $25 million are now entertaining deals as low as $5 million. One reason he feels, is that the hold positions of banks have gotten much bigger, so there is not as much participation in club deals. Since recent bank club deals have lessened, those who counted on that channel have been forced to go direct and originate deals on their own. The lower end of the middle market has demonstrated a considerable amount of opportunity and has become a targeted space for all types of lenders.

We have also seen private equity investors jumping into the capital pool in increasing numbers since 2008 now that the shell-shock of the Crash has become a distant memory. During the Post-Crash period, growing businesses were more willing to give up some of control in order to get growth capital; distressed businesses found it necessary for survival. Now with an improved economy, business balance sheets have strengthened, sourced from improved trends in revenues and profits. The market is ripe with M&A activity, providing additional opportunities – and competition – for the ABL market to jump in.

The Line Between Fishing and Catching

In our industry, we live with a pricing and structure paradox. More banks putting out term sheets with aggressive pricing means finance companies that can’t get there are squeezed out; yet these regulated lenders often lose the deal to smaller finance companies, which can be much more aggressive on capital structure. The delta on pricing is narrowing; the small- to mid-market finance companies are getting much more creative on deal structure and stretching the lending boundaries that confine larger, traditional lenders in order to win the deal.

No matter what end of the spectrum we deal with, every lending institution ultimately has a quota and won’t make numbers by walking away from a deal that meets general portfolio objectives because it’s not the ideal size. In this competitive market, any opportunity that fits a certain credit and pricing matrix is worth a look.

Our firm recently had a privately funded client looking for a credit facility because their incumbent lender didn’t feel they were profitable enough. We doubted any larger, traditional lender would be interested but included those that we thought could be a potential fit, if not for price. After putting out the underwriting details to targeted funding sources, not only did we have multiple term sheets from finance companies, but also from a large regional bank highly interested in pursuing the deal with an aggressive price point, which was important to the client.

In another recent case, a particular client was more sensitive to capital structure and required a higher degree of customization and flexibility than a competing bank ultimately could provide. This finance company was able to get very creative and lend on unusual asset classes to get the deal done.

Having the Right Bait

The big winners in this competitive environment are the borrowers and our industry as the overall risk profile for corporate America has dramatically improved. Even though average pricing has declined, bad debt and non-performing loans continue to decline resulting in improved loan portfolio profitability. Companies looking for business funding  often have multiple options, offering better overall pricing and structure.

We have seen an influx of new funding sources popping up to take advantage of the vast opportunities in the middle and lower middle market. New funding sources tend to be aggressive, but also bring with them a fair amount of execution risk. An effective advisor can cast a wide but targeted net to capture the funding sources specific to a particular client’s needs. Those with especially unique borrowing requirements could use an experienced advisor to identify and hook the right group of potential funding sources. For example, it’s our job to intimately know and understand our client, help craft the right loan structure, vet lender capabilities, and know what components of a proposal everyone can stretch so we can close the loan.

It’s Not a Fish Until It’s in the Bank

The hangover from the 2008 crash is gone, but effects of the headache linger. The so called “bankable box” may be expanding, forcing concessions on pricing and structure and providing borrowers with the benefit of more and better options. However, the exception will not become the norm – at least not any time soon. Every lending source, no matter the size, abides by their credit and pricing parameters. These parameters may occasionally stretch to be competitive, but there will not be any fundamental change. Potential lenders and borrowers still have to fish and catch wisely and should be constantly seeking the optimal balance between pricing and credit availability to avoid repeating history.