The regional asset-based lending Business Development Officer (BDO) model, related to non-banks primarily focused on facility sizes of $20+ million, is broken and needs to evolve. In contrast, the model for small-ticket tends to be the opposite – where it benefits to have a strong local/regional force given the ultimate referral base for smaller deals. However, for bigger deals, most firms would be better served by fewer BDOs who are focused on channels and/or specialization rather than chasing geographic coverage that often results in high attrition. For larger-ticket, it’s a tall task to field a national team of the best BDOs in each market, and to this day the majority of firms have rainmaker concentrations—meaning their top BDOs generate most of the deals. The large-ticket regional model is not equitable to most regional BDOs as it primarily creates option value for the house. 

The rationale for the model is that the house should hopefully see every deal in every region, with the downside being high position churn across the entire industry as not every region is equal. It’s rare that credit takes the blame for anemic sales, but the BDO does. To be fair, it’s a complex dynamic, but the overarching theme is that the regional model for national ABL groups has not evolved with the times. Key market changes include: 1) referral source consolidation—fewer firms to refer good deals, 2) less direct bank introductions as they typically now go through turnaround firms, 3) fewer qualified, credit-trained applicants, and 4) continued ABL consolidation and competition. This all creates a more efficient market with less regional fragmentation—although it still exists. Future iterations will most likely place equal value on channel focus and industry specialization than on geographic location. Further, the better a firm brands and defines its sweets spots, the less reliant it is on a large salesforce.

Lending shops are now more sophisticated about branding and positioning. They have databases, national conferences and relationships to mine. This also is driven by the referral sources – most Private Equity groups have debt placement groups who know which 3-to-4 groups are the right fit for a financing and they will reach out to those groups (and will generally reach out directly to the house, sometimes regardless of their regional BDO). This national outreach is working both ways. This partially explains the challenge of being competitive in each region. Go group by group and think about attrition: Was it the BDO’s fault, or was it due to their particular coverage region, limited supply of product, and aggressive banks? The benefit of having BDOs across the country is that it creates the ultimate option value for the company—but on the flip side, it makes BDOs susceptible to adverse cycles.

Imagine a scenario where you are or become head of a group and are tasked with fielding a national salesforce from coast-to-coast. Your only constraints are that your product, pricing and platform are the same or similar to everyone else’s – you do not particularly want to take on risk or stretch, and your pay is average. Yet with these constraints, you are tasked with recruiting A players in every region. Conversely, you could use that same salary cap and hire two to three BDOs who could cover the country by channel (i.e. sponsor, investment bank, distressed community) or by region, but this could be done via centralization or simply by finding the best people. It is worth noting that truly great BDOs are unicorns. 

To be great, you need three unique qualities: 1) strong credit skills, 2) strong sales skills and 3) a strong network. One attribute is nice, two are great, but three are hard to find and not the norm. These A players are presumably happy at existing platforms, have a great book of business, and, oh by the way, make a ton of money based on their existing production. Add to that increased competition and fewer referral sources due to consolidation and the answer is obvious: it’s very difficult to find overachievers in every region—hence the position experiences the highest levels of churn. Not surprisingly, the answers as to why vary greatly when viewed from the lens of both sales and credit executives.

The author would posit that, on average, BDOs are not given fair treatment, and the regional model just makes them more susceptible. Is the goal to see every deal, win every deal, or both? For most shops, the goal is and should be to see every deal around the country and try to win the best ones, which is to the benefit of the house. If the goal is to win every deal, does the BDO have the ability to always be the winning bidder? The answer is a resounding no. None of this is new, including this article. What is different is that we are in a new cycle of consolidation, and many experienced BDOs are set to retire over the next ten years. Flash forward to that future and there will be: 1) fewer experienced applicants, 2) fewer credit-trained applicants due to the banks not investing in credit training, 3) the same or fewer firms, and 4) continued consolidation of both lenders and referral firms. These trends should be inarguable. Bank ABL has long since become a product of the commercial bank, so non-bank ABL is bound to become a product for big direct lending firms—or, more accurately, private credit.

The question to the industry is whether it is time to rethink the model—and if so, how? The model has been a constant for at least half a century and has fundamentally not changed, while the industry has changed. The original concept of a non-bank regional BDO was taken from the old regional bank model where each branch has sales, underwriting and portfolio management, so the BDO was embedded as part of an entire loan production office. Most commercial banks still operate under this model if you look at how many loan production offices the nation’s biggest banks have around the country. The first set of non-banks (i.e., Foothill, etc.) started off with this model. It then evolved into a hub spoke model where underwriting and portfolio management became centralized and BDOs were still spread out. The conversation should now turn to what’s the next evolution as the market is more consolidated, sophisticated and frankly broken out by channels more so than geographically. If your firm has a defined credit product and employs sponsor calling, does it matter where the BDO is based?  This also assumes that there are enough great BDOs to go around.

There are fewer qualified and credit-trained applicants to do the job and firms want performance now, and referral source consolidation is a critical factor. National debt advisory shops and turnaround firms with regional executives who have national rolodexes do not necessarily care about whether their contact is local—they care about finding the right contact. Most firms employ the 80/20 rule pertaining to sales anyway—20% of the BDOs generate 80% of the business, which leaves the others as option value. Special assets rarely make recommendations these days, instead calling in turnaround firms who in turn either run the refinance process or work in conjunction with a debt advisory firm. These advisors typically have strong regional or national lender rolodexes, which leads back to the BDO rainmaker conundrum.

The likely evolution for many non-bank ABLs is to become product-centric where they really pick some type of niche whether it be industry, risk profile or dollar size (or combination thereof) and then use a variety of sales strategies. This would of course include BDOs, but it might be a combination of regional BDOs and national channel focused calling and not entirely reliant upon fielding a team of A players in every region. It is just not a scalable or replicable model when folks are asked to sell a commodity, and good deals are few and far between. The next iteration is going to be different as the available supply of qualified BDOs is going to decrease, fewer inside handoffs occur and many independents become part of larger firms. 

Ten years from now, it’s hard to imagine that the regional model will still be the norm, as non-bank ABL likely continues to migrate to a product within a bigger credit platform rather than a standalone group. The industry is evolving and so should the sales strategies.