When to Shift Terms from Short to Medium or Long (Part II)


Since last week, we have been getting more questions – on both small business loans & commercial real estate loan rates – from our blog post (link).

In that post, we suggested getting in front of customers who are likely to want loans in early 2022. We’ll now discuss what we see coming, as businesses adjust their capital stack structure.


What Is “The Capital Stack” Structure?

Wall Street uses the term “Capital Stack” to describe the mixes of different kinds of loans, loan maturities & their balances, the available credit lines, and the amount of equity shown on the balance sheet. These are shown “stacked” in a table, like a stack of pancakes.

The ideal balance sheet “stack” depends on what the company expects in the future. There are different stacks used for different environments.

A company should always try to borrow money when their finances look good to a lender. It often precedes the time when competitors have problems by 2-3 quarters. Having funds to buy inexpensive assets is often a great strategy.

A great CFO understands how to structure a balance sheet, for different parts of the economic cycle. Understanding the concepts is easy, but doing it is much harder. The role requires you to do things that feel contradictory (such as borrowing money when you don’t “need” it). Doing this well is a valuable skill.

We help CFO’s with our Money and Ideas pieces. In these emails, we make suggestions on what actions to prepare to do over the next 1-2 quarters. We only publicly post a few of our ideas in our weekly pieces. Click on this link if you would like to subscribe.


Our Present Position

We believe:

1) CFOs underestimate the impact of the coming demand for working capital and equipment loans in Q1 & Q2 of 2022.

2) They need to be more sensitive to what commercial real estate loan rates will be in 2022.

3) The time between the application and loan funding will increase.


Outlook For Small Business Loans

We have seen the financing situation get easier, for non-government-insured loans recently. Yet, supply chain questions – i.e. the ability to restock parts and other inventory – are making companies carry more inventory in their plans for 2022. More inventory usually means greater demand for working capital loans (and loan applications). More applications allow banks to be more choosy on who they choose to fund.

Many manufacturing companies have decided to make more of the parts themselves. They are also expanding the production of parts with or by competitors. We expect this demand to continue boosting industrial land values, with the borrowings used to purchase even more in 2022.

Equipment sales (and their financing) will follow the factory site purchases, by 1-2 quarters after.

We expect to see a “one-two punch” in demand in 2022.


Outlook For Commercial Real Estate Loan Rates

Owners should consider refinancing now into a loan that has a longer maturity/term. Loan terms are still generally favorable. We are seeing banks offering fewer non-recourse loans at attractive rates.

This reduction may have come from Zillow’s write-down of a large real estate portfolio in the “home flipper” sector. They reported a very large loss and terminated 25% of their workforce. It is still soon to see if this lending restraint is a pause by banks or a trend.

We suspect the bank loan approval committees have told their field salespeople to increase the percentage of better-qualified customers for two reasons:

1) They are concerned about both Chinese and American loan defaults becoming a trend;

2) Banks traditionally write down loans to clean up accounts during this time every year.


How Does This Impact Us?

This hasn’t affected us here at Diamant Carré.

We keep an active list of lenders that had large loans refinance or payoff recently. These banks need to add new loans back onto their balance sheet. We expect these institutions to be less sensitive (this time) to typical 4th Quarter seasonal factors, and to be very interested in closing deals.

The active list is private and an advantage to working with Diamant Carré. Give us a call and we can guide you to an attractive relationship for your situation and finances right now.

There is still time to put these ideas in place within your year-end planning. Get ahead of your competitors’ “capital stack” adjustments in early-2022.


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