Know Your Borrower

Know Your Borrower

May 7, 2015: The face of business lending seems to be changing again – and not for the best. Once upon a time businesses had options when looking to grow, expand, or even branch out into new territory.

These transactions that were once based on feasibility and, to some degree, benefit to all, have become alarmingly one-sided – and not just from the usual suspects.

Big Banks and the Modern Day Business Loan

In the aftermath of the recent recession, big box banks have made staunch changes in the way they lend money to businesses. Today they are more rigid than ever in their adherence to the terms outlined in their loan underwriting criteria.

In order for a loan to be granted, the application itself must fit into a nice tight box of loan application perfection. If not, the loan is rejected out of hand – without giving a thought to the owner of the company seeking the loan, the track record of the business, the reallocation of personal assets, character, reputation, or even personal liquidity.

In many instances banks are missing out on amazing opportunities and robbing the public they serve of jobs, new innovations, and new products that represent growth, which has remained sluggish years after the reported end of the recession.

The Evolution of Private Lending with Business Loans

Unfortunately, the sad fact remains that many private lenders that were once risk takers in the world of business lending are turning to those same formulas and digging in their newly risk averse heels.

In other words, these private lenders are beginning to behave more like banks with all attention focused on following some mystical formula and burying their noses in the Loan to Value (LTV) of the transaction that leaves them blinded to the true potential of the partnership – the part that isn’t always printed on applications in black and white.

What’s Wrong with Following a Formula?

Nothing at all. There are often valid reasons the formulas exist. The problem isn’t in following them, so much as it lies in following them to a fault and in absence of other information.

There’s only so much a business owner can include in a loan application. If you want the true measure of the situation and a better evaluation of the actual risks involved, you often need to move beyond loan applications and formulas to get to know the borrower in question.

A recent private loan transaction with a large private lender was set to close then at the eleventh hour the private lender decided that they were uncomfortable with the values of some of the underlying collateral and would be reducing the loan amount by $400,000 (roughly 22 percent).

What the lender didn’t account for was the fact that the borrower was only borrowing money so he could monetize two additional assets in his portfolio that would net nearly $4,000,000 in cash over the next six to twelve months. Money that would then be used to repay the private loan in full.

The world of lending is changing fast, but private lenders, in particular, need to pay attention to details that aren’t in black and white in order to avoid missing out on transactions that could prove highly beneficial for lenders and borrowers alike.