Traditional bank and institutional lending has become outdated in some respects and does not always meet the needs of potential commercial customers. Private investor funding has filled many of the gaps while making investing easier and profitable for all parties involved. Although private funding is not actually lending by definition it is still a highly viable alternative.

The typical traditional bank loans take 3 to 6 months to close. The obvious constraint is if your deal needs to close before 3 months or if the seller is anxious to close in a fast time frame. Private funding typically takes 30-90 days to close and the right mix of information, opportunity and right-time-right-place has seen private deals close in a manner of days!

Most commercial lenders have very specific guidelines on documentation of the source of income or proof of asset ownership. Obtaining these documents from the current owner(s) is a big challenge if not impossible. Tax returns and additional personal information are sought but few are willing to open up their finances to just anyone. Private investors tend not to look at past performance of the property but seek a good analysis of what the future potential is. Be prepared with a sound business plan!

Many borrowers cant qualify for traditional commercial loans if they have existing high business expenses. Again, existing financials need to be examined by the bank to determine if prior performance indicates worthiness for the loan. This time its your financials under the microscope. This type of information is useful in proving yourself to private investors but not required.

Special business properties such as mobile home parks, restaurant /bars, cash businesses, new development construction projects, nursing homes, assisted living centers, etc. may be outside of the traditional lenders interest. The reasons differ but are often related to the perceived risk or lack of knowledge about the type of investment. Again, private investors are more interested in your plan and its soundness rather than the category of property.

Relative short balloon payments on special purpose business loans are fairly common with traditional loans, some due in as little a 3 years. If your business plan does not specifically show how returns on the profitability of the property will support the balloon payment the loan is often denied. Private funding may also have balloon payments but you can always seek a different structure that fits your needs and plan rather than trying to plug your plan into an institutions way of doing things.

Assumability of the loan is not often offered with commercial loans. If your plan for the property includes later selling it for a profit you need to consider how potential buyers will finance the purchase from you. If you cannot transfer the loan to a qualified buyer you will be at the mercy of them obtaining a loan from an institution and meeting all of their requirements. This is time consuming and costly for the borrower creating a delay in you moving on. Conversely, private funding can often be structured so that you may transfer your existing agreement to another without any of the constraints.

Banks and lending institutions often monitor their investments by requiring ongoing financial reporting requirements. Although they are not a partner in your venture they behave like they are. Until you break free from the loan this monitoring relationship will continue. Private funding investors may also require periodic financial reports but as long as the agreed terms of the funding are being met they may have little interest.

Some institutional lenders still require the borrower to live in the same state as the property. In todays realm the reasons for this requirement are lost. Legal issues may be a bit easier to deal with because of the requirement but not enough to limit the borrowers to properties in their own state.

There are many more differences between traditional loans and private funding. The differences usually favor the non-traditional private funding world. You may pay slight more for private funding overall but if you cant qualify for a traditional loan, or the timing will not work you should not even consider cost when comparing the two options.

Posted by admin | No Comments »

If you are a lending investor, it is a big risk to lend money from those who you don’t really know. It is your business security measure to learn about the person whom you will lend money.

Usually, lending investor has a lot of evaluation process before they approve your loan. You should undergo to different evaluation, and aside from the evaluation they will ask you to present proof of property such as car registration, land title and many more. Some require you to have a guarantor, just in case that you fail to pay your dues, they will have some to pressure to help you or will pay the amount of money you borrow.

This process should be strictly implemented, remember you are lending money to those people whom you have met for the first time. They should pass all the requirements needed before approving their loan.

One of the best methods in evaluating the applicants is through background checks. You should learn the true identity of the applicant. In background checks you can have different records such as criminal record, court record, employment history and some property records if any.

In background checks you can identify those who are fraud and who has bad image in terms of borrowing money. Of course you don’t want to be scammed by an individual and lose money; it might lead your business to closure and bankruptcy that most of the lending investor afraid of. Better to conduct background checks before lending money and as a security measure for your business.

Posted by admin | No Comments »

I have often been asked over the years what I look for when analyzing a commercial loan. While all commercial loans are not the same and certainly there is no magic box to decide the fate of a commercial loan, there are some very easy secrets that all commercial lenders and credit analysts look for to determine the credit worthiness of a Borrower. One such method, and a great starting point, is known as the 5 C’s of Commercial Lending.

1) CASH FLOW – This is the most important of the 5 C’s as that is how my loan is going to be repaid. Historical cash flow is a good indicator of future cash flow just as the history of anything is a good indicator of any future event. My Detroit Lions are historically a bad team and indications are that they will be bad in the future. A company that has historically struggled in cash flow often will struggle in the future as that may be an indicator of miss-management, lack of desire for a product, or an excessive amount of fixed expenses to name a few. Conversely, strong historical operations often, but not always, bodes well for future earnings. Simple cash flow is often calculated as: Net Income + Depreciation + Amortization + Interest Expense divided by 12 months of loan payments on the subject loan plus any other debt obligations of the company. The rule of thumb is that this ratio should be 1.20 times or greater.

2) CHARACTER- Many banks may have this ranked in a different spot, I have always felt this was the second most important “C” and in some cases equally as important as Cash Flow. Character represents the strength, ability and desire of a Guarantor to support the debt if called upon to do so. Credit history of a Guarantor, like historical cash flow noted above, is a good indicator of a Guarantors propensity to pay. A loan team will look at assets and liabilities of a Guarantor exclusive of the subject loan. Moreover, Guarantor’s personal cash flow exclusive of the income derived from the subject business is analyzed. These three factors: Credit History, Personal Assets, and Personal Cash Flow are essential facets in determining the character of a Guarantor.

3) COLLATERAL – In event of default, collateral is often times the only way a bank can recover some or all of the loan proceeds and hence is usually the secondary source of repayment on a loan (cash flow is first). Collateral can comprise a myriad of item such as cash (my favorite), various forms of real estate and land, assets of a company such as accounts receivables, inventory, equipment, vehicles, and many, many other choices. Other than cash, banks will margin the amount that they will lend on a type of collateral. For example: for a commercial apartment complex the b ank may lend 75% of the value versus 50% of the value of inventory. This is the hedge in case the loan goes sideways that may allow the bank to recover most, and hopefully all, of the principal outstanding on the loan.

4) CAPITAL – A bank is a partner in an endeavor with a borrower. The loan officer wants to make sure that a borrower has some skin in the game so as to lose something if they walk away from the loan. Capital is the amount of equity or money that is put into a transaction or has been built up by a company through historical profits (retained earnings). The amount of equity in or necessary retained earnings differs based upon the type of commercial real estate, the situation in the market (today you need more equity in), or the type company you are lending to. No magic secrets here but a bank should not have to take on all of the risk. Look at the mortgage industry today to see what happens when the Borrowers take no risk – they easily can walk away from their house and not lose their down payment, because they never had one!

5) CONDITIONS – This “C” is usually such things as competition, management succession, and most importantly today market conditions which you lend in. Some lenders can easily remember to the turning of the century and all concerns over whether businesses were Y2K ready from their computer and operational standpoint. Certain companies were deemed to be more susceptible to Y2K concerns than others. In today’s market, certain businesses or real estate are more likely to experience cash flow concerns or failures than others. In my market, companies tied to the automotive operations, or Tier 1 suppliers, will likely experience cash flow concerns and hence should be evaluated tougher when analyzing the credit worthiness of a Borrower.

As noted heretofore, commercial lending is not done in a box and is not an exact science. Much goes into determining whether a Borrower is credit worthy. Different banks have different criteria but all commercial banks use the 5 C’s of Commercial Lending as a tool to assist with that process.

Posted by admin | No Comments »