IRVINE, CA—Despite the lack of federal oversight, independent lenders still need to perform for their investors in order to be successful, Business Loan Capital's business EVP and director of commercial lending David Manser tells GlobeSt.com. As we reported earlier this month, the firm has created an innovative multi-million-dollar fund structured exclusively for the pursuit of directly financing owner-occupied commercial properties. The new fund is focused on the $500,000-to-$7-million loan sector. We spoke exclusively with Manser about the reason for the loan range and capital-markets trends he is noticing.

GlobeSt.com: Why is your firm's new fund focusing on loans in the $500,000-to-$7-million sector?

Manser: We have lots of bank experience in the SBA area, and it's all owner-occupied financing. With a lot of the problems that happened in commercial financing during the last downturn, referral sources would find deals and present themselves as lenders, but they're really brokers selling on the secondary market and moving on—there's no skin in the game. That's a very active market today, where you can sell loans for a premium on the secondary market, but that's not what we're doing in the owner-occupied market we're servicing.

We're providing capital where we're holding a piece. We'll fund a $1-million transaction as SBA 504, and we'll provide a $1-million first and fund either 100% of it or, to get more legs out of our fund, we'll fund a percentage of it in a junior piece and find a participant to fund the majority piece. In return, we will get a little bit of interest-rate spread. It's a little bit of benefit for us and a huge benefit for small businesses.

For us, we're building out a balance sheet. Not a lot of non-bank lenders get to build a portfolio. But also, when we take a deal to a secondary lender, it means a lot to them if we're going to fund a percentage of it first because we want to be in the game. To them, if we're bringing it to them first and putting our own money into the game, knowing that how we get paid depends on the performance of the loan, that changes their attitude toward it. Combined with how we underwrite deals, they know that the deal makes sense. That creates more accessible capital in the market. We're not just shining up a transaction to make it look good; we're underwriting it, and we're going to stand behind it side-by-side with the borrower and the bank that's going to fund it. With this fund we are creating more access to capital for small businesses.

GlobeSt.com: What does the size of these loans say about trends in deal size or the types of loans needed today?

Manser: As far as our targeting that dollar size, it's a first-trust deed size. Minimum transactions are between $800,000 and $900,000 and go up to $7 million or $8 million. That's where the 504 market is centralized. The SBA's 7(a) loan program market dominates right now, mainly because 7 (a) lenders get such a high-premium guaranteed portion of those loans. But sophisticated borrowers realize there's a lot of interest-rate risk with 7 (a)—and we are arguably in a rising-interest-rate climate—whereas 504 is fixed rate. Most 504 loans are in the $1-million-to-$1.5-million range, not a whole lot larger, and are other than ground-up transactions. We live in Southern California where the dollars are a little bit bigger, but we also do deals around the country, and from a total-project-size standpoint, most are in the $1-million-to-$3-million range.

GlobeSt.com: What other capital-markets trends are you noticing?

Manser: I have noticed that a lot of lenders are getting more aggressive, but I'm not sure if they're competing for return or competed for actual product and loans. There are definitely more and more players coming into the market, but commercial lending is very relationship oriented from the borrower's side. It's very touchy-feely because as a lender you wonder, “Is this guy going to be able to pay me back?” So, it's very important from the lender's side that we are presenting a very good track record on defaults. It also helps that we're stepping up. From the borrower's side, that helps as well; it's important to have relationships with borrowers and referral sources in order to get deals done. It's more important than having to compete on price. We're not Bank of America or Wells Fargo, but we aren't far off from what they can offer. We're not anywhere near the cost of hard money. We're able to thrive because of our reputation and track record. It's still a matter of performance and consistency that makes the difference.

GlobeSt.com: What else should our readers know about this fund and your company?

Manser: Our line is, “We don't have the perfect loan, but we love almost perfect.” That doesn't mean we'll take on anything, by any stretch of the imagination—we say “no” to deals more than “yes”—but we feel there are a lot of creditworthy deals that are turned down at the bank level either due to regulatory pressure, legal lending limits or geographical or property-type limits. Also, the borrower may be in a time crunch where we can step in and help. Even with banks expanding, they still can't help some creditworthy borrowers.

Non-bank lenders aren't cowboys. If we have a deal that goes bad, we have investors we have to answer to, so we have perhaps even more responsibility and more at risk than traditional lenders do. While we don't have a federal agency breathing down our neck looking at what we're doing, we do have individuals who are looking at our performance. Even though we're not regulated that way, we're still regulated by our performance.