Today’s private lender sales teams lack experience in true credit risk analysis, making pre-qualifying harder in a market that is producing tougher deals with less experienced sponsors. Here’s how to fix it.

It’s 2023. You may be sitting at your desk wondering, “How has everything changed so much?” Where are the days of our originator’s phones ringing? Why aren’t our capital partners interested in buying loans?

Unfortunately, your questions shouldn’t start with how, why, or where, but with what. What do you have to do in this market to remain successful and relevant in the private lending space?

Understanding the Current Credit Environment

Private lenders must understand today’s credit environment. Put aside the pricing aspect and just focus on this one piece for a moment. Our industry, some will say, is still in its infancy; therefore, some of the talent we have seen lacks deep-tenured experience in true credit risk analysis. If this is the case in your shop, you have two options:

1. Bring in new talent that does have deeply tenured credit analysis expertise to replace the check-the-box mentality. Think back to the days of mortgage lending when the ability to repay, the capacity to repay, and the willingness to repay were all part of the thought process.
2. Bring in new talent that can quickly help you train current talent into true credit analysts.

What should resonate here is is that this challenge is not just operational. Lenders whose sales teams lack deep credit analysis skills in pre-qualifying deals will struggle in this market. The days of vanilla fix-and-flip or rental property loans are over. The market is producing tougher deals with less experienced sponsors, riskier collateral, and thinner margins.

Investors are scrambling to find deals with an acceptable ROI, and some are moving to asset classes they aren’t familiar with; others just accept lower profits. For any deal, ask yourself what the exit strategy looks like. Is your lending shop a good steward to your partners for both current and future loans?

If your originations and operations teams don’t have the right experience, your credibility with partners and ability to raise capital could suffer. Long-term relationships with your borrowers/sponsors will also be impacted. Both groups must be equally strong to balance risk and create a harmonious and thriving shop. (Traditionally, capital markets is also part of a lending shop’s business, but that isn’t the focus here.)

Originators (Sales)

The tenure of folks sitting in sales seats has increased, but there’s a lack of confidence that originators have the credit risk analysis skills needed to be successful in the current market. Many, at best, have been order takers: a warm body who answers the phone, asks a series of prescripted questions, checks off boxes, and moves paper to the next group for review.

If you have been operating under this model, you will and should experience turnover. In today’s market, your sales/origination team needs to be the front line of defense. They must have a deep understanding of guidelines and, more importantly, the intellectual curiosity to dissect that information before that deal hits the pipeline.

Here are the key areas sales/originators should focus on:

• Profitability. Is this deal profitable for the borrower/sponsor? Margins have gotten thinner, so if an originator doesn’t know how to pencil a deal to help the borrower/sponsor understand how the deal will or won’t make money, what value is the originator bringing?
• Documentation. Do you have a clearly defined process for deal submission and review before moving that deal into an operational review? An originator needs to analyze the collateral—as well as the sponsor. Do they have tools available for pre-valuation determinations? Have they been trained in reading credit reports, background reports, and key documents like bank statements, entity documents, or others? Each of these could reveal potential pitfalls.
  We all want our originators hunting new business, but if they can’t quickly define or vet what a good loan looks like, their deal conversion will be low, and their frustration will be high.

• Ownership. Do you have the right compensation structure that provides incentives for originators to take on an ownership mentality and drive the right deals into your shop? Do you have strong leadership that can teach, advocate for, and hold your originators accountable?

Operations (Credit and Compliance)

If the expectations for the sales team are high, you better have folks in your operational roles who can help originators find ways to close deals. Yes, to be successful in this market, your sales team must operate in tandem with your operations team. The days of one ruling over the other should be long gone.

The most successful lenders categorize this as “production” versus “sales and operations.” You can still have a head of sales and a head of operations, but those leaders should view any given deal not just as volume, but as volume that will perform and be profitable.

An ownership mindset is also key to the operations team. Have you established a compensation structure that incentivizes not only a balance for credit risk but also for urgency and commitment to a process? Operations needs to be as invested in making good deals to great sponsors and to having great collateral as your originators are. If they aren’t, your scale will be unbalanced.

There is just no substitute in this market for having the right skill set in the right seats. If you have not already begun an analysis for a successful model, the time is now. You will need to act with courage and deliberate intent. Some of you will just go through a tuneup, while others will need to undertake a complete rebuild. Either way, the time for action is now. Right now.

Following “old school rules” doesn’t mean you lose sight of innovation or pioneering new lines of business. We must all continue to do those things to keep the private lending space a viable option in the overall lending market. Nonetheless, you must keep the basics of evaluating risk at the forefront of everything you do. Doing so will help protect your front-end customer as well as your back-end partnerships—and set you up to be a preferred partner for both.