From macroeconomic shifts to advances in technology, the big drivers of global change continue to have a major impact on the world of commercial lending. And in a pivotal time for the market, three trends in particular are worth your attention.

1. The lending market is generally anemic

Persistently high levels of inflation have gradually taken their toll on commercial lending. With interest rates and borrowing costs still high, especially in western Europe, growth is stagnating and volumes are falling as corporate customers become increasingly reluctant to enter the market.

While growth in syndicated lending also continues to decline, firms are looking to refinance or amend existing deals, rather than originate new loans. But with credit risks rising, there’s also been an accumulative uptick, if not a surge, in defaults.

For the time being, then, the market is focusing more of its efforts on restructuring and less on signing new customers. 

 2. Two loan types are going against the grain

However, certain areas of commercial lending seem to be bucking the low-growth trend.

For example, in Europe particularly, loans linked to sustainable projects have consistently done big business in recent years and should continue to do so in 2024 and beyond.

And depending on the outcome of this year’s election, sustainability-linked loans could start gaining greater traction in the U.S., too.

More dramatic has been the rise of direct lending, which makes up the largest part of the private credit asset class and sees buy-side investment firms lend their own capital to the market.

Now worth more than $1.3 trillion in assets under management, the private credit market is set to reach $2.7 trillion in value by 2027.[1] So, with competitive rates for borrowers and healthy returns for investors, direct lending is yet another, growing source of pressure on traditional banks and lenders.

3. Banks are fighting back and branching out

Competitive threats from direct lenders and digital disruptors make it more important than ever for banks to demonstrate their value to customers and prove why they should still be lenders of choice.

Loyalty from the corporate borrowing community will only go so far. Today’s businesses are almost as ready as retail customers to switch banks for a better customer experience and rapid lending decisions.

The onus is therefore on traditional banks and lenders to complement their all-important customer relationships with efficient, digitally-driven lending processes and a faster time to cash.

But as well as improving their services, banks increasingly need to diversify their lending portfolios so they can sustain their profits. For example, if most of your loans are for commercial real estate, the current drop in demand for office space could be bad news for your business model.

The question is: do you have the commercial lending technology you need to support different types of deals? When the tools you use are built specifically for one segment, it may be time for a more sophisticated and flexible system.

4. Technology is making a difference

Banks are turning to technology to help them improve not only their flexibility but also their efficiency.

Although profits have held up pretty well over the last few years and net interest margins are rising, most lenders are still looking for ways to do more with less and reduce their operational costs.

Outsourcing is one solution. But another tech-driven answer is to digitalize, automate and integrate more lending processes to reduce costly, unnecessary manual intervention.

Technology also puts lenders in a stronger position to manage their risks. In a credit-sensitive market, organizations need robust systems and sophisticated data analytics in place to identify the most viable borrowers and more profitable lines of business.

Then there’s regulation. Modern systems are critical for achieving compliance with the many rules and accounting standards that lenders face – and for managing complex risk calculations.

Plus, the ability to digitize your credit policies will go a long way toward meeting new ESG requirements and proving you’re lending to environmentally and socially responsible borrowers.

Already, 85% of mid-market lenders say a customer’s ESG status, or ability to transition to net zero, influences their credit assessment.[2] With systems that improve auditability and control of lending processes, that status is easier to verify.

Are you ready for change?

In a fast-changing commercial lending market, use of technology now has a more direct bearing on commercial lenders’ ability to attract and retain customers, manage risk and compliance, and achieve competitive advantage.

Many lenders don’t want to fall too far behind; others are happy to simply keep up. But by embracing technology in a big way, you’re better placed to move ahead and become a market leader. 

[1] BlackRock Alternatives, The Growth of Direct Lending, 2023

[2] Grant Thornton, Sustainable finance: a priority for the mid-market in 2023, March 2023