As published in Scotsman Guide's Commercial Edition, March 2009.
In the past, many mortgage brokers looked past different types of deals simply because they were focused on real estate. Savvy brokers, however, look beyond their comfort zones and explore new terrains.
One opportunity could be corporate lending. It likely has enough similarities to real estate to allow brokers to use their pre-existing talents. But it also has enough differences to open new doors.
Corporate lending takes place when a company needs funds for any reason other than real estate. For example, a technology company might need additional funds to further develop products, or a clothier might need additional funds to expand into home goods.
The roots of mortgage and corporate lending are similar. Corporate investors make their lending decisions the same way mortgage lenders do. They want to have a reasonable level of comfort that they will get their investment back in a reasonable amount of time and with an acceptable return on investment.
These two loan types also have clear differences, however, including the collateral on which the loan is based, how cash flow factors into the deal and what types of businesses might qualify. Brokers who want to dip their toes into corporate lending successfully should know these differences to recognize fundworthy deals.
Collateral and cash flow
Primarily, corporate loans are based on a business's assets. A company might use its receivables, inventory or equipment as collateral to secure a loan. Although these items might represent millions of dollars, they can be more difficult for lenders to liquidate than real property.
Assume a company used its significant technology investment to secure a loan but could not repay the lender. The lender would have to liquidate the company's computers and other technical equipment that may be obsolete already, making it difficult to collect on its investment.
Many corporate investors know this and are willing to take the risk. To mitigate that risk, they often impose a short loan term, which results in a higher monthly payment for the borrower. A corporate loan might have a five- to 10-year term.
Additionally, corporate lending traditionally examines a business's cash flow carefully. Corporate lenders want to understand if the existing cash flow will support the higher payment.
When looking at cash flow, lenders consider how a business makes it revenue and why it is successful. For many companies, the value of the business is wrapped up in the people running it; if they were to leave, the company's ability to bring in revenue would see great impacts, and the company's value might plummet.
Corporate investors don't want to have ownership in a business that has limited or no value, and they also don't want to make loans that the cash flow doesn't support. The underwriting process, then, scrutinizes the cash flow's predictability and its vulnerability.
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