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Business Buyers: Lenders Are Tough!

November 8, 2012

The days of the good ol’, friendly banker are gone!  They do not exist.  There are very RARE exceptions, and if you find one, hold them close to you in a warm and loving embrace!.

Historically, banks were locally owned and operated, with close links to the communities they served.  In fact, they had such links because they had a stake in those communities.  They invested in the local neighborhoods, knew the people within that area and the issues that were important to the survival and growth of the community.

This is no longer the case.  With (again) RARE examples, the banks have no real link to the neighborhoods they serve, because the vast majority are huge, national institutions, impersonal and operating not on the basis of local interests, but often, purely predicated on actuarial checklists, which sometimes have no relevance to the local community.  Decisions about lending are frequently made by people hundreds or thousands of miles from the Borrower’s location, with no knowledge of the local conditions, needs or local trends.

We had a recent example, in the sale of a $2.5 million Liquor Store that had experienced 20% increases in sales and profits for each of the past five (5) years – and this year’s year-to-date income suggested an even more aggressive growth pattern.  The agreed price was extremely moderate, given the tremendous profitability that was being generated by the store.   A major bank was approached, and even gave an initial approval and set of terms that were tough, but acceptable to the Borrower.  The proposed loan was predicated upon SBA support.

(As the Reader probably knows, the SBA does not lend money, itself; its purpose is to guarantee or insure the majority of loan amounts made by the banks.)

It took reams of paper and five (5) months for the bank to formally change its mind and finally decline the loan.

Why?

In this case, it was not a checklist that doomed the deal, but the decision of one person, acting in a unilateral way, with no direct access to the Borrower and never having seen the store or the area.  Because one decision maker – a faceless person, hundreds of miles from the business location – decided she did not like Liquor Stores!

There is no appeal to that person by the Borrower, no ability to better  understand her objections and no discussion.  Borrowers are not allowed to meet with the ultimate decision maker, so that they cannot apply any undue influence on the decision maker.  No meetings; no phone calls.  Nothing.

The Borrower is a relatively large depositor with the bank.  The deal finally got done with another Lender, with no more than about a 45-day processing time.  The bank lost the depositor, taking with him the money in his accounts and more than $5 million in Revenue that could and should have been processed through the bank from the business, on an annual basis.

One of the most fundamental questions is:  Why did it take five (5) months to deny the loan, when the denial had absolutely nothing to do with the qualifications of the numbers?  The bank took months to study and verify the earnings and profitability, demanding report after report, verifications and detail from the Seller and the Borrower, each of which was immediately and completely provided.  Ultimately, the bank ignored all of that data and denied the application for the most fundamental of reasons, which was that the bias of the decision maker suggested that she would not consider such an application, apparently regardless of the viability of the (very legal) business.

But remember that banks are, at their most basic, businesses themselves.  The issues that resulted in this particular deal are not uncommon.  Frequently, loan officers in the local branches will provide a Borrower with incredibly positive comments that suggest the attractiveness of the application, the assurance that the bank can and would love to do the deal, only to find that the bank later reneges on such promises.   Local Loan Officers are sometimes simply the bank’s sales force; they tell you anything you want to hear, in order to generate a loan application.  Most are very sincere and well meaning, but may have no real authority or even knowledge of what is entailed with the decision making process.

Frequently when a loan denial is rendered, the bank will blame the SBA; it was only by aggressively questioning the loan officer in this case that we discovered that the loan application had never made it to the SBA: It was stuck in the bank’s own dark and dank back passages, with the denial coming from its own, internal decision making authority.

The lack of borrowing capability was exaggerated for several years by political considerations throughout the USA, since the economic turn-down of 2007.  The vast majority of financial aid programs had been directed toward massive business enterprises, such as GM and AIG, with small businesses being largely ignored.  Yet, virtually every Economist you can find will agree that when the recession of the 1980s occurred, it was the growth of small businesses that pulled the Country out of its financial doldrums.  It is small business that creates the highest volume of jobs, rather than big business that largely involves paper transactions, and do not appreciably increase jobs and decrease unemployment numbers.  (This is not taking shots specifically at GM; while jobs at the carmaker are vital to save, increasing numbers of its jobs are replaced by a combination of robotics and overseas component manufacture.  It is always interesting to hear pleas to “buy American”, when the majority of auto parts are actually made in Asia, and are simply assembled here in the good ol’ USA!)

So, how does the Borrower overcome this kind of banking difficulty?  One way is to be extremely careful about lending scams that have increased, as credit tightened.  Many of these appear to be coming out of Britain or Canada; however, several we uncovered had postal information in England, but the perpetrators were located in Nigeria.  It is truly an international problem, and the US is not exempt.

Many such scams offer unrealistic terms.  Most say there are no fees up front, but they stick you with a required cash fee after they provide you with an “approval”, but before settlement.  Then, you never see them again!  If the fee is $5,000, keep in mind that the con artist can live fairly well on $5,000 in Nigeria, for a number of months.  (We are not picking on Nigeria, either; we have visited Nigeria for business reasons, and have a number of professional links in that area.  But it is also an area that seems to be the source of an inordinate number of scams, nonetheless.)

So, how do you overcome the difficulty in getting a business loan?

One way is to use a legitimate Loan Broker.  Many of these people deal with regional and the few remaining local banks that still exist.  They can find you a lender that is willing to do a loan for the type of purpose you need, almost from the beginning.  (One Broker with which we deal was getting Motel loans at the worst part of the recession, when no one else was capable of doing so!)  They can compare loan alternatives to try to get you the best terms available.

Many times, this means going outside of the area.  There are unquestionably, regional differences in lending strategies, among lenders.  These are normally, only understood by people that deal with a variety of loan sources, in a variety of geographic locations.

DO NOT pay fees up front.  It is not necessary.  You will be charged by a Loan Broker, without question.  But these should be paid at settlement.  Any appraisal charges or application fees should only be paid directly to the bank he/she locates for you.  Those are sometimes required and you would have no choice – but that comes well after the loan process is in place.

Depending upon your requirement, banks and the SBA may not fit your need.  A Loan Broker can potentially find investors or other, non-traditional lenders for you.

A Loan Broker cannot help you with an unrealistic transaction.  If it is a bad deal, no one will want it.  If you have atrocious credit, you need to repair that before looking for loans from any source.  If you have no money to put down, if you have no relevant experience, you need to rethink your own game plan.

Can you get a difficult loan by yourself?  Sure!  You can also repair your car yourself, build an addition onto your house all alone and brew your own beer.

The questions are:  What is your level of expertise?  How much do you need, for what exact purpose, and in what time element?  Do you have the contacts or the time to develop those contacts?  Is it worth it for you to contract with a more qualified person, to obtain the best potential results in the most efficient manner?

Though rare, the “friendly” banker still exists.  Ask for people who have had good lending/banking experiences and try to find those rare birds…they are worth their weight in gold!

(Receive in-depth, personal consulting online, with The BAF Group’s principal at https://clarity.fm/donaldbarrick .

The BAF Group LLC is a full service Business Brokerage, with a history of more than a decade of service. Its Principal Broker possesses 25+ years of Business Sales and Divestiture. Although most of our work is involved in the Mid-Atlantic States, we have represented Sellers and Buyers throughout the Continental USA, and a number of overseas Buyers, as well. Some of our listings and additional information about us can be viewed at www.bafgroup.com. Thank you for your interest.)

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