As published in Scotsman Guide's Commercial Edition, November 2008.
Some brokers might be familiar with the "four C's" used to judge a diamond: cut, color, clarity and carat weight.
When evaluating credit facilities -- or a loan or collection of loans -- there also are four essential C's to consider: commitment, composition, cash management and cost. Here's a look at each.
Brokers should start by asking if their financial institution is committed to its business or is funding on a deal-by-deal basis. In the present market, many credit facilities are being trimmed or disappearing altogether.
For example, consider a financial institution that does not understand private lending and has issues with its portfolio. It may view your hard-money portfolio with relatively higher interest rates as having greater risk than what is on its books. Or it might seek a broad array of property types and locations, disregarding that you work within a select niche of property types and geographies. Some finance companies do not understand that most private-mortgage companies protect themselves by only funding loans at lower loan-to-value (LTV) ratios.
A shaky credit structure from a company that is not committed to your operations could prove detrimental to your business, reputation and future viability.
Portfolio composition is another important factor. Do both sides understand expectations for loan terms and property types? Can creditworthiness be traded for LTV? What is the process and timing for placing assets on the line for funding? In private lending, re-underwriting every loan can hamper the speed that is vital to the deal.
Each financial institution should work with you to develop a broad outline of eligibility criteria for the types of loans it will fund.
These basic guidelines -- property type, loan-amount range, geographical areas and LTV range -- align with your expertise and help minimize conflicts. But they should not act as hard rules.
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