As a follow up to my February 2026 blog post (https://gulfcoastsba.com/the-gilded-cage-the-perils-of-private-credit-for-small-businesses/), which featured an in-depth discussion of the characteristics of a “bad loan,” I would now like to talk about what makes a loan “good.” Or, more specifically, what makes a loan resilient to economic reality?
Let’s start by describing what “economic reality” really is.
- First, the immutable economic cycle. While a healthy economy is on a positive growth trajectory, it is not a straight line, but rather a wavy one with expansions and contractions, peaks and troughs. Since the ‘70s, the length of the typical cycle has been 8 years (trough to trough), well within the life of a typical term loan.
- Second, within the general cycle which affects us all, there are always pockets (e.g., industries, geographies, etc.) that defy the general cycle to some degree. For example, fast-food restaurants are largely resilient to recessions.
- Third, the dreaded “I-word.” Inflation is a fact of economic life, a side effect of growth and fiscal and monetary policies. Prolonged inflationary periods (a year or more of 3.5% or more, in my book) are among the most destructive forces societies face.
- Fourth, interest rates move up and down, affecting everything from the cost of a mortgage to the interest we earn on our saving accounts.
- And fifth, technological advances. While critical to productivity gains and economic prosperity, technological advances also create “winners” and “losers.” For example, the advent of digital photography put companies such as Polaroid, a former employer of mine, out of business.
There are other important factors, but I think this is a good place to start.
So, what’s a “resilient loan?” Resilient loans put both the borrower and the lender on the same side of the table: lending is NOT a zero-sum activity; both borrower and lender benefit from a good loan and are hurt by a bad loan.
There are four major components that come together to create a resilient loan: the underlying business, the loan itself, the business owner and the lender. I will skip discussing the underlying business and its owner for this write-up and come back to them in a future blog.
The Loan
Two quick disclaimers. First, I am only going to discuss loans to small and medium size businesses (SMBs) and loans ranging from $500,000 to say $12-15 million. In other words, our world. Second, my predisposition as a conservative lender will show.
- Fixed vs. variable rate: Contrary to common belief, a fixed rate is not safer. Sure, if you locked a rate at 2% you are a genius, but the reality is, we don’t know how high and how low a rate will change over the life of a loan. Increasing rates in a moderate-inflation world are typically the result of economic prosperity, and while your loan payment goes up, so should your revenue and profitability. Certainly, in a decreasing rate environment (i.e., now), you don’t want to be locked into a high-interest loan with expensive switching costs. If your ability to service debt changes from yes to no with a 2% rate change, you are borrowing too much.
- Amortizing vs. balloon: For the benefit of both borrower and lender, an amortizing loan is safer. The loan payment is higher, but there isn’t the cliff of refinancing to worry about. Does anyone know what the prevailing interest rates will be in five years? Seven years?
- Longest amortization possible: The benefit to the borrower is obvious; lower monthly payments which gives the business more free cash flow to reinvest. But it also provides better debt-coverage ratio which allows the banker to sleep at night.
- Moderate loan-to-value (LTV) ratio: We often compete on the basis of how much we can lend on any specific project and occasionally lose to lenders who advance more than we are comfortable providing. From experience spanning decades of lending and investing and closing thousands of loans, the high LTV loans are more likely to experience stress and failure for a host of reasons and to the detriment of both borrower and lender. What’s moderate: it depends, and largely driven by the debt-coverage ratio, not necessarily by how much equity was initially invested.
The Lender
One disclaimer; I am a lender.
- Smarts: If a lender is too lazy or dumb (yes, there are dumb lenders) and doesn’t take the time to understand the cash-generating abilities of your company, watch out. They aren’t looking out for you or themselves, just the quick fix that comes from booking a loan.
- Stability: An unstable lender is a careless lender, driven by the need to close loans, not necessarily closing good loans. You are married to that lender for the duration of the loan; do the research.
- Dedicated SMB lending team: Entrepreneur-led small and medium businesses have unique needs which must be understood by the lending team. That team will not only fund the loan, it will also be there with the borrower in tough times. Banks are mostly interested in deposit relationships; find one that’s foremost interested in lending.
- Regulated: I covered the topic of unregulated loans in last month’s blog which you can find here (https://gulfcoastsba.com/the-gilded-cage-the-perils-of-private-credit-for-small-businesses/). The takeaway should be to avoid unregulated loans/lenders.
In summary, a resilient loan combines a strong borrower, a robust loan structure, and an experienced lending institution dedicated to small business lending.
If you are looking for debt capital and would like to discuss how we stack up against these criteria, give our experienced team of professionals a call. You’ll find their full contact information here: https://gulfcoastsba.com/our-people/.