Clearly, Iago was not a banker weighing the wisdom of loaning money to an adult entertainment business.
As noted in a recent article published by AmericanBanker.com, the hesitance on the part of many banks to provide loans to (or invest in, or do any other kind of business with) adult entertainment businesses doesn’t appear to be based on concern over the prospective debtors’ ability to repay the loan.
Citing data from IbisWorld, the article reports that the nearly 4,000 strip clubs in the U.S. “earned $1.3 billion last year on $6.6 billion in revenue” and the clubs’ aggregate revenue “grew by a 1.8% annual rate from 2012 to 2017.”
In most business spaces, such numbers would be music to a lender’s ears, a signal of a healthy industry sector in which there’s money to be made through reasonably safe and secure lending. This isn’t how most banks view strip clubs and other adult entertainment businesses though. Adult businesses, fairly or otherwise, are viewed as a source of “reputational risk.”
“It would not surprise me to learn banks shy away from strip clubs,” said William Isaac, former chairman of the Federal Deposit Insurance Corp (FDIC), who added that the Office of the Comptroller of the Currency lists reputational risk as one of the factors FDIC examiners should take into account. “I have no difficulty believing examiners would frown on loans to strip clubs. “After all, the OCC and FDIC identified loans to payday lenders as fraught with reputational risk a few years ago.”
While the article cites one sizable bank loan to a company which operates strip clubs – a 10-year, $81 million loan deal to Houston-based RCI Hospitality (the operator of the extensive “Rick’s Cabaret” chain of clubs) by Home BancShares – smaller companies and individual clubs typically struggle to find banks willing to work with them.
“They have a very difficult time receiving funding,” said Angelina Spencer-Crisp, executive director of the Association of Club Executives (ACE). “And if you’re new to the business, most banks will say ‘no thank you’ even if you have strong credit. Banks are a little bit skittish.”
“Skittish” might be putting it mildly.
“Do a lot of banks engage in lending to gentlemen’s clubs?” said George Blackburne III, the owner of Blackburne & Sons Realty Capital, a firm that American Banker reports has made loans to strip clubs in the past. “The answer is no, no, a thousand times no.”
Interestingly, one banking consultant, Bert Ely, told the publication that while there’s reputational risk in lending to adult businesses, the practice isn’t as controversial as lending to medical cannabis businesses. Ely also suggested that when it comes to reputational risk, there’s no hard and fast rules about what kind of businesses carry such risks for the banks which do business with them.
“A lot of times, reputational risk is in the eye of the beholder,” Ely said. “It ought to be left up to the judgment of the individual bank.”
Plus, as noted by another financier, Bancography CEO Steven Reider, reputational risk may be overstated in general.
“You’d be hard-pressed to find people who know the other clients a bank serves,” Reider said, adding “There’s no level of risk that can’t be mitigated by sound credit policy.”
For banks which can stomach the reputational risk, adult businesses are far from being the riskiest proposition on other fronts – including the likelihood of defaulting on the loan.
“I think I’d rather finance a gentlemen’s club than just about any other type of property,” Blackburne said, adding that if anything, his strip club debtors are a ‘problem’ because they pay him back too quickly.
“You know what the biggest problem is? Those borrowers make so much money that they keep doubling up and tripling up on their payments,” Blackburne said. “They pay me off. I’m not a bridge lender. I want my money to stay outstanding.”
When one considers some of the controversial business sectors with which banks do extensive business – “factory farms” often criticized for their inhumane treatment of animals, casinos built on the extensive losses by their customers, companies of all stripes which have earned a reputation of being bad employers – the hesitance to work with adult entertainment businesses due to reputational risk concerns becomes even harder to fathom.
Add to that the list of crimes and scandals which have plagued the banks themselves, and you may come away asking who the real source of reputational risk is in this equation.