This article are provided for information purposes only, and are not intended as legal advice.


Financing a business in tough economic times – do you use a broker or not?

August 27th, 2009

In the economic climate, many banks have reached their limit on certain type of financing and many are not willing to take on new customers.  They may tell you that they look at any transaction these days but it takes two months for them to review your application, they hum and procrastinate and then turn down the financing with an excuse.  That recently happened to a client but I was told two months in advance by another banker within the same bank, his loan application will be turned down because off the record, we are lending to current customers and rarely look for new customers. 

 

The business owner also needs to be aware of the financing available.  I saw one business change banks three times in a year.  They were always at their local branch and did not have a commercial bank manager.  While they were on holidays in the Caribbean, they met a banker from back home who they did not know and became a client shortly after they finished the holiday.  Who says you should not always be selling your services, no matter if you are at home or abroad.  They got a business loan secured primarily by a collateral mortgage on their house and an additional line of credit however the additional line was subject to review engagement financial statements being prepared and other terms and conditions.  They did not realize that there were conditions in the loan and were frustrated when they were not able to access the entire loan.

 

If you are trying to do financing by yourself, without the use of an accountant, lawyer or broker, there is no  one to explain the process and interpret what the documentation says.  Contrary to this person, it is not up to the bank to explain what the definitions mean in an term sheet.   Based on the criteria in the loan proposal, it would be an additional three months before they would be able to access the additional line of credit that is assuming that the financial information can support the terms and conditions of the loan.

 

Many businesses try to save a brokers fee and costs and try to do the financing by themselves.  If you take your financial statements to a banker they will take the information, put it into a computer program and presto, you either qualify for the loan or you do not.  A broker would have been able to help with the package, explain what happened in the past to the banker, look for ways to financing the future.  I know a business who is expecting a very large new customer to start soon.  Unfortunately, bank loans are based on what you did in the past, they never look at what you are about to do. This new customer could double the sales of  the business.  The owners are trying to do their own financing, have been turned down by many financial institutions and are not planning for the future cash flow needs.  The worst possible thing that you could do is not raise enough financing and if you have to go back to get more financing in a few months, that will not be looked at kindly by the financier.

 

Finding financing is function of the bank/firm that you have approached but also the person within the lender who you are approaching.  If you are taking to a junior person at the bottom of the totem pole, you will get the standard replies.  If you have access to the credit officer through your contacts, then you can find out what their appetite is for and cater your proposal to exactly what the credit officer, not the loan officer thinks that they are looking for.

 

What is important, contacts, personal relationships, access to many people who are funders.  Saving a fee may not be wise, you may not end up with the loan or your loan could be at a higher rate than another lender.  Some lenders will have a different loan to value for real estate than others, others will go higher but also have a higher interest rate.  This means that some banks may provide a mortgage equal to 50% of the value of the property and another one 65% the value of the property. The loan amount is far higher in the second proposal.  The goal is to find the lowest cost of funds with the highest loan to value.  If you pay a brokerage fee and it is say $30,000 but if you saved 1.55% interest on a $5 million mortgage for 5 years – isn’t the fee worth it?  The brokerage fee  is a fraction of the tax savings.  Many people will say, I do not want to pay the fee but few look beyond the fee to see would you be further ahead if you used a broker?

 

Trying to save money may end up costing you money in the long run.  The only difference is you will never know how much it cost you to do your own financing because you will never know what the broker could have done. Brokers know who is lending and who is not and what size of deal each firm is looking for.  Every time you apply for a loan, someone does a credit check. Every time there is a credit check, the next person sees that you have already approached five other lenders. Why would they even look at your proposal since they know that you are shopping the deal.  What may happen in this case, the first few lenders may turn you down and the last few will not even look at your application.  You will lose in the long run therefore do not shop your financing around   Deal with one firm at a time.


Filed under: Financing — Gary Landa @ 8:57 am


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