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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   February 2008

History Bears Repeating

Ask borrowers to tell you about their past and future to better understand deals

Brokers who have recently entered commercial lending -- even those with considerable residential experience -- may find it a mind-boggling world of funding options and multi- faceted deals.

If you’re still learning the commercial lending ropes, a few simple-but-important steps in the early stages of the process can enhance the chances of identifying a bad deal or seeing a solid deal through to funding. Following these steps can also help you improve your relationships with lenders.

What to ask

Interviewing your clients for specific loan details and helping them complete the lender application are critical early steps in any deal. Turning clients loose to complete applications themselves may result in errors, misunderstandings or incomplete information.

Instead, you should interview your clients and ask the following questions:

  • How much money do you seek?
  • How will you use the money?
  • What have you done to secure funding for this project in the past?
  • What is the use-of-funds schedule?
  • What is the source-of-funds schedule?

The last three questions can be challenging. They are where commercial brokers, particularly newer ones, can use some guidance.

Look to the past

Let’s face it: If borrowers are knocking on your door for help securing commercial funding, their deal probably has some history. Although it can be awkward or a bit controversial, you may want to ask the clients for details about what they have already done to secure funding.

Asking questions about a deal’s history in a non threatening way can help you identify if a bank has turned down the project. If this is the case, you should feel free to ask why the deal was turned down. It might be an innocent reason -- the loan amount was too small or the bank didn’t offer commercial loans.

On the other hand, it could be because the clients or the deal have a history that will make it harder to secure funding. Learning the reasons behind a bank turndown can help you identify if there are any serious issues related to a deal and if you want to become involved.

Look to the future

Preparing proper use-of-funds and source-of-funds schedules can be extremely valuable to the lender’s underwriting process. If you do not collect and share accurate information, the lender might propose a deal that is inappropriate. This may cause the borrowers to cut ties and take their potentially valuable deal elsewhere.

On the flipside, if you provide incorrect use-of-funds and source-of-funds schedules that lead the lender to offer a deal that is too good, the lender could lose money. And you could damage an important relationship with that lender.

Ultimately, the better you understand deals, the better you can communicate this information to a lender to secure the right type of funding. In an environment where multiple types of loans are available -- each with different benefits and drawbacks --  only this detailed information can help the lender ensure it is offering the right loan.

•  •  •

Commercial deals are tricky for brokers new to the field. A few simple questions and a little digging to determine the history and pedigree of a deal, however, can help make sense of these transactions.


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