Real Business Loans for Real Small Business

If you were looking for a $300,000 business loan, would you pay an additional $67,000 over three years in order to get a two percentage point reduction in the interest rate?

Unlikely…

But that's what plenty of small business owners do because instead of going to a business finance consultant, they seek bank financing with seemingly low rates of interest, versus a loan from a non-bank lender that carries an apparently slightly higher interest rate.

How can this be?

Simple. The low rate loan is a full documentation, conventional  loan. The seemingly higher rate loan, requires more limited documentation and may not require full income verification.

For small business owners, there is a world of difference. The reason is because the owner of a small and or cash based business may have a very low salary, but quite legitimately derive economic value from the business in excess of $100,000. But stating this to satisfy a bank can at the same time provoke tax authorities, and generate significantly more taxes well into the future Thus, the savings from the apparently lower rate of interest are illusory. Worse, because of potential tax liabilities, low rate loans may result in an effective interest rate that is much, much higher.

We are all brought up to believe that banks finance small businesses. And there is a myth that small banks and small businesses fit hand and glove with one another. But the truth is that banks and most small businesses are actually a tough fit. The bankers aren't bad guys. It's simply that banks - even regional and community banks that have a vested interested in funding businesses where they operate - are structurally incapable of serving the needs of most small and/or cash based businesses.

Do not blame the banks.

Banks need plenty of hard assets to collateralize loans. In addition, they are subject to scrutiny by federal regulators on their underwriting policies and practices, and have an expensive monitoring process that favor larger borrowers – those that need to borrow $500,000 to $1 million or more.

A small business owner should not change banks when their business loan application is declined.
 In the highly regulated environment of a conventional bank, small business  borrowers present insurmountable obstacles.

This why an honest banker should refer you to a non-bank lender or finance broker. In the more entrepreneurial driven non- bank lender environment, these borrowers present a myriad of opportunities for which creative solutions can be developed.

What is the secret of non bank lenders?

First, they operate in an under served market: small businesses seeking loans of less than $1 million. By virtue of this, non bank lenders can identify promising businesses that traditional banks would not even see. Secondly, non bank lenders are not regulated. This means they can adopt policies that while sound, would nonetheless go against the grain of federal regulators provoking questions and inquiries that bank executives would like to avoid altogether. Finally, non bank lenders believe in the value of real property as collateral. By lending prudently against the value of real property, non bank lenders need go no further in assuring the safety of their capital. For example, many traditional lenders require cross collateral agreements. These are agreements in which the borrower, after pledging all of the businesses' assets and real property as collateral, pledge their personal property as well. This arrangement can complicate loans.

Putting all these factors together means that non bank lenders offering these loan products can provide small businesses with solutions that are more consistent with the challenges they face, especially when there are multiple business owners whose active participation in the business may vary. Because these type of lenders focus on the underlying value of the businesses' real estate, in addition to its cashflow, they generally do not require cross collateral agreements. This is why customer -service driven bankers refer their business clients to business finance consultants to get the most fiscally smart solution.

These non bank lenders are also more comfortable with so called cash out loans.

For example, suppose you own a property that houses your business, and you want to leverage the value of your equity, and take cash out. Perhaps this cash will be used to expand the business. Or perhaps you might view this cash as a just reward for years of carefully managing the business and the property.

Traditional bank lenders are uncomfortable with cash out loans. They often feel that such arrangements leave them vulnerable. By contrast, non bank lenders, which again place an emphasis not only on the business's cash flow but the underlying property as well, actively seek such loans. Their appetite for these loans is a valuable source of liquidity for small business owners.

As one more example of how these lenders are more geared to the needs of small businesses, consider typical loan covenants. Traditional lenders often seek the right to audit the books of the borrower and have the borrower issue a covenant pledging that the business will perform at its current level or better. A breach of this covenant, over which the small business owner may not have complete control, can result in the borrower being in default, and the lender initiating foreclosure proceedings.

Again, there is nothing wrong with this per se. After all because banks are the stewards of consumer deposits that are insured by federal funds,( i.e. taxpayer dollars), they must avoid risk at all costs. This is why banks operate in

what is often characterized as 'an abundance of caution mode,' and adds bulk to the explanation of why banks are not built for the kinds of risks that small businesses typically present.

It also explains why there is such a void in the market for loan and credit services to most small businesses. However, these non-bank lenders have stepped into this void and are actively seeking out companies to provide loan solutions to help businesses maintain their track record of success, or take a giant step forward to the next level

Look for an upcoming BLOG post, where I will explain what a ‘hard money” loan really is, and hopefully help to dispel some the commonly held myths of  a “hard money” loan…

If you ever have a need to discuss your business cashflow options, please do not hesitate to contact me!