Understanding lender appetites

5 minutes
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All right, in this lesson I'd like to talk to you about loan appetites. Now, I've mentioned this before, particularly in the introduction when we went over the course agenda, but loan appetites are very similar to your individual food appetite, where you prefer certain types of food. Lenders definitely have favored industries, and other types of loan structures that they prefer to make. And there's a variety of reasons for this. The main thing I want you to understand is the reason it's important to you as a borrower is many borrowers go out and they do it I call shotgun, the deal to anyone that will listen, they talk to any and every lender that they can find. And they put the loan application in front of that lender or have a discussion about the loan.

That can be okay to some extent, but it can take up a lot of your time. What I would rather you do is think about and talk to lenders about their loan appetite before you apply with them to make sure that this is the type of loan in the type of industry with the type of bar that they like to make in the first place. And there's a few factors that can drive them Here's appetite. One of those can be what they're focused on right now lenders actually can get focused on different types of loan at different times in the lifecycle of the business. They may be too focused in real estate loans, or in the past, and so they're now deciding to focus on non real estate based loans. Maybe they're focused on auto loans, maybe they're focused on lines of credit lenders, just like anything else out there can get focused in a particular area.

So ask them, what type of loans are you focused on making right now. They could be what's called loaned out loaned out is when a financial institution has made so many loans that they're out of capital, that's not necessarily a bad thing, but they're basically out of capital that they can lend to folks and then they're having to borrow to do that. When that happens. A lender may be what's called loaned out and may have decided to slow their lending activities for a quarter or even a year in some instances. They can also their loan appetite can also be impacted by their loan portfolio. And how it's performing just like a stock portfolio of investments that may be performing poorly.

If a lenders loan portfolios are performing poorly, they may be holding off on making loans in general or into specific industries. Also, it could be impacted have they had any huge losses in a particular area, let's say yesterday, they had a loss on a restaurant that they had to do what's called charge off or take that load off their books where they don't anticipate making that money back. If that's happened to a restaurant yesterday. It could be if you have a restaurant and you're applying for a loan today, that they just don't have the appetite for that type of loan right now. Or it could be that they don't have that type of loan appetite in the foreseeable future. Maybe they've had a loss with a particular type of loan.

Maybe they've had lots of losses recently with lines of credit around accounts receivable. So that lenders just deciding that that's not an appetite that they have right now. They could have other unfavorable industries this is this is a common practice. For a lending institution to have what they call unfavorable industries, I'm gonna mention a few. If you're in that industry or know someone, please don't take it personally. These are industries just where the banking industry has historically as a group had poor performance.

And so oftentimes, you'll see these listed for a variety of reasons whether that's regulation based or performance based, there are certain categories where lenders have, traditionally at least the ones I have are considered the unfavorable industries, restaurants, excuse me, restaurants are one of those, they tend to perform poorly. A lot of people love the idea of a restaurant, but they're very capital intensive, and they can be hard to manage. And there's so much competition. I don't know about where you live, but where I live, there are so many restaurants right now that I wouldn't want to open one quick caveat. My family actually has a restaurant it performs really well but it's very well established. So to open one now would be very, very challenging.

Other unfavorable industries can be things like nail salons, can be money service providers, so what does that As maybe your your your cash checking business, maybe your quick loan business, those all have some regulatory burdens around them, but they also don't perform well. A lender doesn't want to make a loan to someone who's just going to turn around and loan that same money back out. So those are some unfavorable industries. Also, lenders may not have an appetite where there are regulatory guidelines that they have to consider. Now, lenders, almost all lenders, I know, make mortgages, but a good example of an area where regulation impacts lending is mortgages, there can be some other ones. And then one last place that lenders often have trouble with their appetite is anything that's a little bit of a social football or has some moral challenges behind it.

So one place that a while back popped up that was very popular was people opening up vaping businesses where they're replacing cigarettes with these vaping equipment and machines. That is not necessarily a bad business. I've actually helped a few of those open in the past when I was working at a lender, but they have a little bit of stuff. Football around them or there's no historical research behind that to prove that it's going to be healthier than cigarettes. And so some banks at the time when that became really popular to open those steered away from those type businesses because of challenges around them, possible regulatory implications and all kinds of other reasons.

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