For most business borrowers, the use of inexperienced business finance advisors or just any mortgage broker that happens to “dabble” in commercial financing will be a mistake that can potentially have enormous consequences.
It is my hope that you do not make any of the mistakes (from the following list below) that some business owners and real estate investors have made in the past. Most of these have been painfully shared to me by my past clients and others from my Synergy Real Estate Investment Club members.
Yes, it is good to have a rapport with a lender, particularly when you need a loan. However, there are new real estate products offered constantly, and it is worth your time to check out some of the other possibilities before going straight to your favourite lender. Not to mention that they know you are assuming they will give you the lowest rate possible and best terms because you are a loyal client.
This is a misleading thought process since I have already tested this out with many of my clients’ files and found that to be false.
On one occasion, I have received 3 different sets of terms and rates from 3 different account manager from one commercial lender. That experiment showed there was a 25 basis point difference and 15 points cost difference for my client.
Do you have the time or inclination to do the very same to find the best lender out there and then go to 3 different branches to find the best account manager to give you the best terms and conditions? Wouldn’t your time be better spent elsewhere? How much do you value your time?
Some rate shopping clients that come to me even found out that I was able to receive terms of up to 0.50% or more from the very same lender they had approached. Why do these commercial lenders offer Commercial Financier like myself better terms and conditions? There’s many reasons that I have discussed in a previous blog that you can read here (linky).
The simple answer is this: They know I know how this game works. They know that I know who the competitors are. They know that I know what the market is willing to offer. The best part is, I already do 99% of the work and all they have to do is put a rubber stamp on it. A file from me is “that easy” for them to work on.
Even some veteran mortgage brokers have this false assumption. As my previous experiment have concluded this is not true. Also, the pricing of the loan may depend on what volume of business the lender that you are approaching has already done and currently carry on their books. If they have already capped out on that sort of loan towards that industry, you may be out of luck. Since lenders cannot really turn away good clients for no apparent reason, the lender can justify going above their cap by increasing the pricing of this loan higher than they normally would have offered. If you or your client happens to be this unfortunate client, then you would be paying far higher than a competing lender would have. You wouldn’t have known that because you already started with the wrong assumption.
However, the opposite of what everyone assume is true though. Some lenders do offer better products and better pricing on specific occasions. For example, a lender with excess funds would offer the best terms and rates for a short period of time to get more business or to gain market share in that specific sector. The sad reality is that these lenders do not advertise commercial rates or mortgage products anywhere (offline or online) when they have surplus funds and only people in the industry are aware of this. Sadly, some clients that come to me afterwards found out too late that they could have had 0.50 percent to 1.00 percent lower rate or longer amortizations and would have benefited from that extra cash flow.
If you think you’re saving money by not having a team to help you to point you in the right direction. You might be lucky and be okay. How would you know ahead of time that there won’t be any problems? For example, by not choosing the right kind of lawyer can be costly. You should hire a commercial real estate lawyer — one who is very experienced in working on the types of real estate loans you are seeking. This is not the time to go with a friend or brother-in-law who happens to be a solicitor. If things go side-way, would that lawyer have the experience to help you deal with it? Chances are NO. Another example is using an appraiser that your friend or realtor recommends may also be a waste of your money. Every lender have their “approved” appraiser’s list and your appraiser may not be on it. It would be a terrible waste of time and money to spend a few thousand dollars more to redo an appraisal. A commercial broker can give you all of the contacts that you need to create a successful team to carry you from A to Z with a lot less stress.
I love this quote from Donald Trump and wholeheartedly agree.
My thinking used to be “I can do it myself mentality” but as I get older and learn lessons the hard way, I’ve found a better way. Either I pay with my mistakes or pay someone else to learn from their mistake. I find that paying someone else (an expert) and learn from them is much more effective use of my time and make more money with the time that I gain by not making the same mistakes.
In life you pay for it one way or another. Why pay a higher price (learning from mistakes) when you don’t have to?
What about operating lines of credit for the business? How about additional costs for renovations or mezzanine? Is there enough money afterwards available for those? Can’t really run a business in an empty shell of a building or be successful on a shoestring budget.
Most advisors overlook short term financing (SBA/SBL loans) that may be required because they are only focused on what you ask. Some are proactive and dig deeper about your needs but most do not ask these sort of questions consistently. Its a costly mistake to find out too late afterwards. It is much easier to combine and discuss this ahead with the lender rather than try to cover the short term financing after the asset has been secured. SBA/SBL loans can be financed concurrently and would be an easier up-sell for the commercial account manager rather than post funding of the purchase.
I have completed 100% financing for certain types of business and construction projects in the past. Even for developers who thought they wouldn’t be able to finance 75% of their project. This was achieved because we brought it up earlier in our discussions.
Lesson to be learned here is that if a bank is willing to lend you ALL the money that you need at a cheap price, why not take advantage of it? Why be afraid to ask? Besides, it’s an expense and can be written off against your profit. For real estate investments, it’s a bargain when you can use more of someone else’s money to leverage to grow your net worth and treat that as an expense!
Most people are missing out on hidden fees such as annual renewal fees and mandatory monthly banking fees would change the true cost of borrowing. Different lenders even have different insurance requirements. The last loan I helped finance saved the client nearly $5000 in insurance cost just from one of the lender’s insurance requirement. If two loans are equal, who wouldn’t want to save $5000? This is just a minor item.
Most major banks have terms in their loan contracts that are not good for business owners by tying up their asset or dramatically decreasing their cash flow. Every term and condition that they can get away with they will try to put it into the agreement to make the security of their loan stronger. Whether those conditions are in your best interest or not that’s debatable. I have seen collateral mortgages that have been placed on loans for the full price of the property (or higher) when they only borrowed a fraction of it. What happens when they need the money and they have income or credit issues? The bank won’t extend any more money and with that large lien against their property, they won’t be able to access secondary market for short term funds. How is that good for the client?
Nothing is forever. No-one can say that they would be doing what they are doing forever. Most business owners have long term strategy for their business and they would most likely have an exit strategy for their business. However, most don’t even discuss this with their banker and sign up for the term loan without understanding the impact of what they have just done. What about the prepayment penalty and prepayment privilege? Most bank financing lack this in their agreement unless it is brought up during the discussion.
Most borrowers blindly sign on the dotted line without understanding the impact that this may have on their future plans. Having an enormous penalty for early payment of their loan could curtail any exit strategy from their business. To the defense of the lenders, it is not their business to ask you about what you plan to do in the next 3 to 5 years. Forget about 5, 10 or 15 years in the future. It is not their job per se. Hoping everything will work out in the end is not a good strategy. As most successful business owners will tell you, hope is NOT a good strategy.
If your exit strategy has been planned and discussed ahead of time, you would make sure these questions are answered up front and mitigated beforehand. This will also allow you to have succession planning in place which I discussed in an earlier article here (linky). Hey, not everyone will stay and do what they do until the day they die.
Have you completed your financial statements for the most recent year of your business? If not, can you provide a draft or interim financial? Are you writing off expenses that should be personal expense? Don’t be greedy by adding those to your business. By showing real, actual numbers that are more positive could yield more dividends than the measly percentage that you would receive from writing off those expenses. Hold them back or defer those expenses into the future if you can. Ask your accountant for advice on how to do so. If they cannot help you, I can recommend a few expert accountants who can assist you in these matters. I certainly hope that you are actually using an accountant instead of a tax preparer from H & R block? What I’ve found out and many of my formerly frugal clients have found out is that for every dollar that you save by using the wrong professional, it can cost you 10 times what you saved or more.
Some clients in the past have been creative with their income such that they have no taxable income to declare (ie. living on share holder loan repayments). Just because you don’t have taxable income means you don’t have to file your income tax. A savvy and proactive accountant would usually advise the client about this situation and get their client to file regardless of income or lack thereof. One simple reason, when you need money and financing is involved, most lenders want to know that you are NOT owing the government any moneys or have back taxes unpaid. How can you show that if you do not have your taxes filed? No proof = no money. Sorry Sir! As a Seinfeld sitcom character once said, “No soup for you!”
At least this is how most lenders would view your loan request if you did not have the time to spend on developing a business plan or have clearly written plans and goals down. If you didn’t bother to sit down and take the time to set goals or written plans, what does that tell me about you? Is that what you want the lender to think about your attitude and effort towards achieving success in your project?
Besides that, how do you know you have reached a milestone without putting up a post to identify where you are at? If this is a startup, a napkin presentation would be sufficient but if you are looking for a term loan then a detailed executive summary would be required to achieve an approval.
Benjamin Franklin said it best:
I’ve seen so many business owners that started off in their business or real estate investment journey with bad advice or lack of advice. Many of these clients paid a major price of missed opportunities and tax savings because they could not leverage their investments or their business. Most have intermingled their business with their investment properties or personal affairs.
You either pay for expert advice of an expert such as an accountant or a real estate lawyer to set you up properly or you lose out on every opportunity that comes your way. By being properly set up, you are well prepared to have your assets to take advantage of tax breaks and leverage the appreciation of your asset. At the same time allowing your personal income and credit to be left untouched so that you can take advantage of opportunities that only require your personal finances.
Most business owners spend so much time and money invested in their business but aren’t prepared to invest on their business. Being well prepared means you have separated your investment and business liabilities from your personal ones. With the help of a lawyer and a designated accountant, they would be able to set you up properly.
A great quote to consider by Theodore Roosevelt: “Nothing in the world is worth having or worth doing unless it means effort, pain, difficulty…”
Being cheap will cost you more in the long run. Take the time to do it right, it will be worth it.
I find that many applicant do not fully disclose everything about themselves or why they are “really” needing the financing until when they’re up against the wall and need to divulge everything. Yes, lenders want to hear “what” you are going to use the money for and “how” you are going to repay them. However, lenders don’t like it when they’re not fully disclosed of all the facts that could affect the security of their loan and the whole story behind the need for the loan. This is not helpful to the broker either. When something that may seem trivial to the borrower that is kept out of the discussion could actually be quite important in assisting in gaining the approval from the lender. This is only half of the reason for why you are doing the financing.
The second part is not an important part of the financing process but should not be overlooked. It can be the difference between failure or success of this project and future ones.
Why are you doing this? If it is only for the money, then you really, really need to sit down and look at it again. What will the money do for you? Why is it important to you? As with most business, investing in commercial real estate or buying a business may not be all roses. Some days things may not turn out the way you had planned it or expect it to be. One day, you may find yourself staring up from the bottom of the barrel. You don’t want to test your faith and your belief just because your business or real estate investment has temporarily taken a beating for the worst.
If you are in business for the right reason and motivated by a very long term strategic goal, any short term bumps (no matter how severe it is) along the way would not derail you. You will be able to persevere and reach your end game. Failing to have a definitive purpose and mindset before you start on your journey, you will end up where you might not want to be. At the side of the road with a flat tire and no spare one to be found. Know your why!
One of my favourite quote is:
“Nothing is as good as it seems and nothing is as bad as it seems.”
They say hindsight is 20/20. That may be true but I strongly suggest not to test out that theory with your largest investment you will ever make. Get a team of expert to help you.
Most bank advisors will cover some of these potential mistakes, good mortgage brokers will be able to advise you on most of them but you will need a great Commercial Broker to help you to avoid all of these mistakes and many more that I have not mentioned.
As you can tell it is important to have an expert professional to help you with your taxes, your health and your car. It is equally vital to retain a great Commercial Mortgage Broker or Commercial Financier to help you achieve the best result for your financing needs. I guess I better add these and many other potential “mistakes” to avoid in the 2nd edition of my book.