Searching for Capital
A broker assesses the small-business lending market.
As a loan broker, I have to balance the needs and demands of buyers and sellers in order to get deals done. In my world, buyers are small-business owners who want to borrow money, and sellers are firms who want to lend money for a return. Transparency and honesty from both sides always helps us get to the finish line faster.
With borrowers, this process can be frustrating sometimes. Often they withhold certain information that they think will hurt their chances of getting a loan. As a result, my team members and I have to keep peeling back layers of the onion until we find their particular hidden red flag or flags.
I wish that borrowers would recognize that they are doing themselves a disservice by hiding information from us and from their prospective lenders. They’re simply wasting everyone’s time, because the information will always come out somewhere in the loan process. Sometimes months into a process, we need to go back to the drawing board and start again.
I can count the few times that we’ve actually fired borrowers who we represent. I won’t tolerate any misrepresentation to lenders. But the issue isn’t only with borrowers. Recently, I found myself firing lenders as well. In our work, we’re constantly testing new lenders to evaluate their rates and processes.
If we’re working with a new lender, we disclose it to our client that we don’t have previous experience with them. And sometimes, these lenders don’t fit our mold.
We recently helped a business owner try to get a loan from an established asset-based lender. This company, which has a sales force across the country, lends money to small businesses and uses their accounts receivables and inventories as collateral.
The lender issued a term sheet to our client that laid out the terms of the loan and the requirements that would have to be met to obtain it. My client accepted the terms after struggling to find the down payment of $1,500.
Four weeks into the due diligence process, my client had met every requirement initially laid out by the lender. Then, the lender changed the terms and demanded another $7,000 for additional due diligence. The lender insisted that, because my client was in the mining business, it would have to comply with additional lien searches and take liens on the company’s real estate.
At my advice, the borrower decided not to proceed with this lender. For one thing, the company simply didn’t have the $7,000. And second, there was already an existing lien on the real estate.
My efforts to get the client’s initial deposit refunded have been ignored by the lender. The client has negotiated some temporary relief from its current lender that may give the company some monetary respite.
In another instance, I took a potential borrower to a firm that we were testing that provides cash advances.
We presented the package to the lender, explained the time urgency and described all the potential pitfalls in the deal right up front. The sales representative took the information to their underwriting department, and encouraged us to proceed. We were presented with offers, and then the client was presented with loan documents to sign.
After signing them, there was further underwriting, a merchant interview and a landlord interview. I was advised that everything checked out fine. Then, nearly at the end of the process at a final credit committee meeting, I received an e-mail advising me that the deal had been declined for the precise risks that were laid out to the representative at the very beginning of the process.
Legally, I am sure there were grounds in both cases for the lenders to walk away. In the case of the mining company, I imagine that somewhere in the lender’s term sheet, it stated that the deposit was not refundable. In the second case, I am sure that in fine print on the loan document, it said that the lender could back out of the deal.
That said, the legal documents are far less important to me then the principles of being forthright and honoring your commitments. I would have no issue with the lenders’ actions in either of these cases if they had discovered some fraud or misrepresentations. But that was not what happened. Everything that was disclosed up front was 100 percent accurate.
We won’t use either of these lenders again in our work. We’ve fired them, just like we occasionally fire clients. Unfortunately, I suspect they will continue their practices.
Ami Kassar founded MultiFunding, which is based near Philadelphia and helps small businesses find the right sources of financing for their companies.
Article source: http://boss.blogs.nytimes.com/2013/07/19/why-we-fire-lenders-and-borrowers/?partner=rss&emc=rss