Wholesale Business Loans

Michelle Adams

Lending is one of the most important functions of a bank. By extending financial credit and getting principal and interest payments, banks and credit unions make money. It is the most profitable income source for any banking or credit institution.

Just as customers need to hunt for the best bank to secure a loan from, banks also need to advertise their services and look for borrowers.

Even though we may not spare much thought for it, banks sometimes have a hard time finding the right customers. Banks do not lend to just any customer and perform a lot of background checks in order to find those who are responsible with their finances. It is a long drawn process that often takes banks time, effort and money.

Not surprisingly, the larger the bank, the greater the workload. As a result, banks need outside help to find the right customers because they don’t have the time to perform all loan processes themselves. This is called wholesale lending.

Let’s take an analogy to understand the concept better: Rob runs a large manufacturing unit that makes children’s toys. A typical supply chain usually involves the manufacturer making the goods and selling them to the wholesaler, who in turns sells them to the retailer, after which they are sold to the customer. In this case, how would Rob sell the toys?

He has two options: He can either sell them directly to the customer all by himself or sell through a chain of wholesalers and retailers that would ease the pain of having to find customers.

However, the first option actually requires a huge staff to sell the goods to the customers directly. This is also a more expensive process. This is what happens in retail loans where the banks incur huge costs while lending the money directly to the borrowers.

In the second option, Rob doesn’t have the trouble of getting the customers because the work has been assigned to intermediaries. This is what happens in the case of wholesale lending, where the broker takes the trouble of acquiring customers. This is a suitable option for banks that don’t have the means or the manpower to handle all loan functions.

Although retail loans are more common, wholesale lending has also gained popularity in recent times.

Wholesale Loan

Difference between retail and wholesale loan

Even though both are loans extended to individuals or businesses, there are a few differences between wholesale and retail lending.

Retail lending usually targets individuals, with the main focus being retail customers.  Wholesale lending targets corporates or large businesses, with their primary focus, is to lend to corporate clients.

Automobile loans, home loans, student loans, and personal loans are some of the examples of retail loans whereas loans such as a loan for machinery advance, setting up the manufacturing unit, and export credit are wholesale loans. Some major differences between retail and wholesale loans are explained below.

Lower NPA impact

The impact of non-performing assets in retail banking is much lower because the size of lending is comparatively small. Since wholesale banking deals with higher loan amounts, the impact of non-performing assets is also more pronounced.

Monitoring and recovery

The customer base in retail lending is wide, making monitoring more difficult. If the loan turns out to be a nonperforming asset, recovery becomes hard because of the wide customer base.

On the other hand, monitoring and recovery are easier in wholesale lending because of the low customer base. As wholesale lending usually deals with businesses and corporates, the volume of such loans is lower than retail loans. The lower the volume, the easier it is to monitor the loan and recover it when the time comes.

Interest rates

This is another major difference between retail and wholesale lending. The interest rates are lower in retail lending because customers are generally individuals with limited bargaining power and deposit capacity.

However, in wholesale loans, the interest rates are much higher because the customers are businesses and industries, and banks want to make the maximum profits off the loan. Besides, the broker fee is also added to the rate, leading to a rise in costs.

Operational costs

The operational costs in retail banking are high because the bank itself handles all operations, and need to maintain a large network of staff and branches. In the case of wholesale banking, the operations are outsourced to intermediaries, such as mortgage brokers. This lowers the operational costs because there is no need to maintain a large network of in-house staff to cater to a huge customer base.

It is clear from the above that there are various differences between wholesale and retail banking. This is the reason why many banks have separate departments for retail and wholesale lending.

How does wholesale lending work

There is a common perception that wholesale loans have a lower interest rate than retail loans. In reality, this isn’t the case. While it is true that a wholesale loan is offered to mortgage brokers at a lower cost than retail banks offer to the general public, the cost increases when the broker adds his own fees to this rate.

In the end, the borrower gets the loan at the same cost as a retail loan. Because of this, wholesale loans are usually not for the general public and reserved for government agencies, businesses, and corporates.

The functions of the wholesale lender and that of the mortgage broker are clearly marked.

Wholesale lenders don’t directly deal with the consumer, but offer loans through intermediaries such as brokers or other banks.

Some banks may also have their own wholesale lending divisions. A wholesale lender had the power to underwrite the loan and make the funds available. It is the wholesale lender’s name that appears on the documents.

On the other hand, a mortgage broker shops around for the best interest rates and programs for a borrowing client, but they have no power to approve or fund loans.

They simply act as a middleman and receive a small fee. In short, wholesale lenders set the loan terms, underwrite loans, and close and fund loans, while brokers find customers, take the loan applications, and process the loans. Once processing is complete, the broker hands the file to the wholesale lender to disburse the loan.

Wholesale loans have a markup of interest rates that include commission. The broker marks up the interest rate with a Yield Special Premium and gets a commission when they charge the borrower interest rates higher than the market price.

This fee or commission is usually 1 percent of the loan amount for every 0.25 percent that the borrower pays above the market rate. The bonus the broker receives is over and above the origination fees that the borrower pays for the loan origination services.

Wholesale Loan

Pros and cons of wholesale loans

As with any other loans, wholesale loan also has its own advantages and drawbacks.

Essentially, a broker is a middleman that shops around for the best lenders. For this job, they get a small fee from the lenders, because brokers bring them more customers than they would normally get.

There are several different types of wholesale lenders, and it isn’t possible to know about all of them, no matter how many hours you spend on Google. This is when a mortgage broker comes into play. The broker is generally a one-stop shop for finding all the best lenders.

Brokers are usually good for those who do not know much about wholesale loans and would like some guidance and advice. Banks do not have time to offer advice or even talk face to face in most cases.

A broker not only helps you zero in on the best lender but also explains the basics of a wholesale loan and how it works. Those who want a face to face interaction mostly prefer a broker over a bank.

A broker effectively eliminates the hassle of shopping around for the best lender or the best rates. The broker has all information about lenders, so you don’t need to approach the banks directly for anything. This results in a shorter processing time than it would normally take.

Brokers have a relationship with more lenders, which gives them more options. In many cases, brokers can close several deals at once that the banks are unable to. Things run smoothly when a broker is involved.

On the other hand, there are also quite a few drawbacks of a wholesale loan. One of the biggest drawbacks of is the risk to all parties. Because wholesale banks have a large amount of money all in one location, it depends entirely on the stability of the business to ensure the stability of the funds given to the borrower.

If the bank goes into bankruptcy or insolvency, the borrower will lose the funds in an instant.

Since this is a huge risk, many borrowers, especially large businesses and corporates, insure their funds and diversify the location where they hold the money. This is why wholesale banks should maintain good practices and remain solvent to minimize such risks.

Another drawback of wholesale lending is the added fees of the broker. While it may seem that wholesale loans have a lower interest rate, after adding the charges of the broker, the rate is the same as anywhere else in the lending market. Those who choose wholesale loans in hopes of a lower interest rate have nothing much to benefit in this case.

How to qualify for a wholesale loan

Even though there are quite a few differences between a wholesale and a retail loan, they are basically the same thing. Therefore, the requirements for eligibility are also the same. In the case of a wholesale loan, instead of a bank, borrowers interact with the broker. Besides that, everything else remains the same.

Whether you are a business or an individual, the requirements for a wholesale loan are:

Personal credit score: You must have heard a million times that your credit score is the deciding factor whether you are approved for a loan or not.

Even if you are a business entity, your personal credit score is what is more important than the business score. This is because your creditworthiness helps lenders decide if you are responsible with your finances.

Your credit score will vary between 300 and 850, where 300 is the worst. If your credit score is any lower than 500, your loan will not be approved.

A credit score above 720 is the most desirable if you want the loan to be approved within the shortest time and with the least hassle. Credit risk is also analyzed for a loan. For instance, if you have spent more than 50 percent of your available credit, your credit risk is high and getting a loan could be difficult.

Payment history: Lenders consider your total payment history when doing background checks for a loan. They check for defaults on payments or amount overdue, because it paints a negative picture of your finances. You could also be asked for your personal balance sheet, which allows lenders to get an idea about your assets and liabilities.

Income statements: In the case of a wholesale loan, the broker also requires your income statements. This is required for verifying your source of income — where your money is coming from and where it is going to. This is for making sure you are responsible with your finances. In some cases, you might also have to provide a business plan, especially if you are securing the loan for a business venture.

EMI to income ratio: Lenders will also consider the proportion of the loan repayments when compared to your income at the time of the loan application. Your chances of loan approval get lower if your EMI to income ratio exceeds 50 percent.

Both wholesale loans and retail loans have their own benefits and drawbacks. Therefore, consumers are advised to research all options before deciding what is best for them.