3 Steps to Quickly Match your Commercial Borrower to the Right Lender

3 Steps to Quickly Match Your Commercial Borrower to the Right Lender

3 Steps to Quickly Match Your Commercial Borrower to the Right Lender

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It’s true.  The world of small balance commercial lending is populated by a much wider variety of lenders than is the residential lending world.  And with the variety of property types and business situations there can be a lot of program options.

But it’s not as complex as you might think.  So, if you are just starting to diversify with small-balance commercial loans, follow the advice here to jump start your process and save some serious time.

The variety of situations in commercial lending is what makes this business exciting and interesting.

Your goal is to quickly find the right lender for your borrower/deal.  You don’t want to be the broker who wastes precious time by calling numerous lenders with deals that are not appropriate for the lender.  Believe me, we see this behavior frequently, but it’s easy for you to avoid that time drain.

As you grow your commercial trade, you will want to add several lender types to your “stable” to be able to serve a broad range of scenarios.  You will become an expert in their programs and you will be able to match borrowers to the right lenders and programs with amazing speed.

Here are three steps to help you quickly find the ideal lender and program every time.

Step 1: Understand your borrower’s REAL needs.

You are a professional listener, or should be.  So, first and foremost, you must take the time to listen and learn the motivations and objectives of your borrower.

Listen closely for those important pieces of the story that don’t necessarily make it to the application – the REAL needs.  Understanding the borrower’s REAL needs is imperative to quickly make the right match.

It’s simple – listen for these pieces of information:

Motivation for Financing – Why is the borrower seeking to buy or refinance now?  How soon do they need to close?  Do they have a balloon coming due?  Is there a purchase contract about to expire? Do they have time for a long loan review process?

Some types of lenders have processes and programs to meet these challenges. Understanding the borrower’s motivation helps you focus on the appropriate lender.

Investment Strategy – In particular, how long do they plan to own the property?  Is this a flip or an investment for the long term?  Do they plan to sell within months, years, or decades?

Lenders have different loan structures with varying prepayment penalties.

Credit Story – Are there credit blemishes that need to be explained?  Has the borrower recently been denied financing and why? Perhaps the borrower was an investor who faced foreclosures.  Or business cycles may have caused tough times in the past.

Different lenders will have different credit story requirements, so you need to know this information in advance.

Property Story – Property type is important for lender matching, but listen for the property history story beyond that.  Does the property have a history that might cause more risk for a lender?  Was it ever used for a purpose that might require environmental due diligence?  Have you visited the property or have pictures? Has the property been repositioned through a capital improvement program that has created value?  Knowing this property history information can be very helpful to most lenders.

Of course, standard application information is also important for your matching (LTV, credit scores, occupancy, cash out, property location, experience and financial strength of the borrower).

Step 2: Match your borrower’s needs to the right lender type.

Make the quick cut – use what you know about your borrower’s REAL needs and motivations to narrow the list of lender types.  Do this step with care and you will quickly land in the right lender’s ballpark, where you’ll find programs that will match your client’s objectives.

commercial borrower

Here’s your list of major direct lender types and the attributes that will usually map to your borrower’s need and story.  Of course there are exceptions, but this will get you started.

Traditional Banks

Banks offer attractive rates, but their credit requirements and underwriting protocols may make it difficult for many borrowers to secure funding.  Banks typically don’t offer extended loan terms, so funding long-term investments may be less certain.  Closings may await long reviews.  Property types may be limited.

Bank loans are available for the purchase or refinance of commercial real estate, to obtain operating capital and funds for business expansion, and to provide financing of the purchase of inventory and equipment.

Advantages of bank loans include:

  • Lower interest rates
  • Multiple financing options
  • Convenience and accessibility to the lender

Disadvantages of bank loans include:

  • Cumbersome application process
  • Lengthy approval process
  • On-going reporting requirements
  • Shorter loan terms (5-10 years)

The Small Business Association (SBA)

The U.S. Small Business Administration (SBA) is a federal agency committed to furthering the growth and development of small businesses. One of the ways it does this is by guaranteeing loans to small businesses made through lending partners nationwide. The SBA offers several loan programs which are detailed on their website.

SBA loans include lower down payments and longer repayment terms than conventional bank loans, enabling small businesses to keep their cash flow for operational expenses and spend less on debt repayment.

Advantages:

  • Up to 90% financing
  • Terms up to 25 years
  • Fixed and variable rate options
  • No balloon payments
  • Most for-profit small businesses are eligible
  • Owner-occupied businesses or properties

Disadvantages:

  • Lengthy processing and approval timelines
  • Additional collateral may be required including inventory, receivable, equipment and equity in your personal residence
  • Fees are high
  • Personal guarantees are required
  • Investor transactions are not eligible

Agency Small Balance Multifamily Loan Program

Fannie Mae provides apartment financing (5+ units) from $750,000 to $3,000,000 nationwide and up to $5,000,000 in certain markets. Their focus is workforce housing that provides affordable housing to families whose earnings are at or below 100% of the area median income. Eligible property types include conventional, rent-restricted, cooperatives, seniors, student housing, and manufactured housing communities.

Advantages:

  • Highly competitive pricing
  • LTV’s to 80%
  • Loans are non-recourse
  • Interest only – partial or full term
  • Fannie Mae supplemental mortgage loans or 3rd party subordinate debt allowed

Disadvantages:

  • Properties must demonstrate 90% occupancy for prior 90 days to be eligible
  • Liquidity and net worth requirements for borrowers
  • Different underwriting guidelines and structure based on size of market

Freddie Mac provides mortgage funding for apartment loans throughout the nation. The lending platform spans the nation, including large metropolitan areas, mid-market cities, and smaller communities. Eligible properties include conventional multifamily housing with five residential units or more, including conventional housing with tax abatements and Section 8 vouchers.

Freddie Mac also supports affordable housing. Historically, roughly 90 percent of the loans financed in any given year support low- and moderate-income households who earn no more than the area median income. Loan amounts range from $1,000,000 to $5,000,000.

Advantages:

  • Highly competitive pricing
  • LTV’s to 80%
  • Loans are non-recourse
  • Interest only – partial or full term
  • Cash-out

Disadvantages:

  • Properties must demonstrate 90% occupancy for prior 90 days to be eligible
  • Liquidity and net worth requirements
  • Different underwriting guidelines and structure based on size of market
  • No supplemental financing available

Non-Bank Lenders

Non-bank lenders typically have less rigid restrictions than banks.  Non-bank lenders are financial institutions that extend credit or loans to consumers and businesses who do not qualify for financing from traditional lenders.  These lenders include Marketplace Lenders, hard money lenders, conduits and life companies. They offer permanent, bridge, and working capital loans. Loan amounts range from a low of a few hundred dollars to $100 million depending on the lender and their source of capital.

Advantages:

  • Streamlined underwriting process typically resulting in faster closing timelines
  • Ability to finance credit-challenged borrowers or transitional properties
  • No depository relationship required

Disadvantages:

  • Rates and fees tend to be more expensive
  • Lower leverage
  • Less government oversight

Learn to identify the lender types and you’ll be on your way to navigating advertising and directories to find your best sources.

Step 3: Match your borrower’s needs to the right program type – look beyond interest rates.

Now that you’ve found the right lender, you will want to drill down to specific programs that will work for your borrower. Lenders have clearly differentiated programs and options.  You should be able to sort through them quickly.

Remember the stories you listened for in Step 1?  Well, you’ll use that same background about investment strategy, motivation for financing, credit story, and property story in this step to find a lender and program.

Commercial small-balance programs are determined by amortization, terms and prepayment penalties, rates, cash-outs, and other terms.  Don’t make the mistake of focusing on just one element.  Instead, take the time to study how each attribute forms the full value for your borrower.  Focus on your borrower’s REAL needs.

Take a program’s rates, for example.  If you recommend a program based only on a low rate, you could be doing your borrower a big disservice – especially since the lowest rates are often offset by prepayment penalties or covenants that could harm their bottom line.  Think of your borrower’s purpose for the loan:  Do they want to keep the property for a long time, or do they intend to turn the property for a quick profit?  If your borrower wants a short term solution, the rate won’t make much of a difference.

Of course, you will also want to look closely at the lending bank or company itself.  There are big differences between lenders in the quality of their service and certainty of funding.  You and your borrower certainly don’t want to go through a long approval period only to have the deal rejected.

Summary

So matching your commercial borrower with the right lender should be a snap.  Invest your time in Step 1 to learn the borrower’s real needs, get to know a stable of lenders and their programs, and you will sail through the process.

Christina Sanchez

Silver Hill Funding

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