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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   July 2014

Get Real About Want and Need

An honest financial assessment pays dividends in raising capital

Get Real About Want and Need

Anyone who has ever been shopping in the presence of a young child has seen what happens when want overrides need. Children tend to want everything that catches their eyes, but parents know better what their children actually need, such as replacements for the shoes they’ve outgrown rather than a shiny new toy.

Believe it or not, a similar contrast between perceived wants versus actual needs often applies to business owners and investors when they’re looking for capital. Commercial mortgage professionals who understand this phenomenon and recognize how to deal with it when working with their clients will be better prepared to find more options and results when securing financing.

Entrepreneurs are heavily invested in their businesses. They start their companies absolutely sure they will succeed. Consequently, they believe that any bank, investor or venture capitalist will share their vision and agree to provide however much capital they want. Unfortunately, that’s not often what happens in the real world. Rarely are business owners actually able to secure all their desired funding.

In addition, they are inclined to make other fundamental errors when seeking capital. First-time entrepreneurs have a tendency to do one of two things when it comes to determining the volume of funds to ask for:

  1. They ask for more than they need.
  2. They ask for less than they need.

Either one may lead to disappointment and frustration.

When you and your client ask for more money than is actually needed based on the parameters of a deal, the investor or banker may question your intended use of funds, increasing the probability that the deal will be turned down. On the other hand, if you and the client ask for too little, your investor or banker may question your knowledge of the business and view the deal as a risky venture.

The bottom line is that before asking for funds, mortgage brokers and borrowers need to do their homework to determine exactly how much capital is actually needed for a real estate investment by considering all costs involved in the deal. Having done that, the next critical step is to determine where the borrower is most likely to be able to acquire the needed — as opposed to the wanted — capital.

Here’s where another dose of self- honesty is important. Your client may want to get funding from a bank or private investor. The lending and investing criteria that would qualify the client for this type of funding might not be met, however. Factors like the age of the business, personal and commercial credit scores, historical profitability, cash-flow analysis and a host of other items could derail any realistic hope of getting capital from a bank, venture capitalist or angel investor.

What is actually needed is to identify a source of funds that is accessible given a realistic assessment of your client’s current overall situation. For example, alternative funding options such as invoice factoring or merchant cash advances may be determined to be suitable avenues available to your client when more conventional loan options are not realistic. The financial cost of these options may be slightly higher than the borrower wants to pay, but ultimately need trumps want when it comes to getting the deal done.

Financing options and the cost of money should be looked at in the same way: Do what your client is able to do right now. As the client’s company evolves and grows in the future, other opportunities will become available, but without obtaining financing now, the client may never have those opportunities.

Part of being able to see things from this perspective involves understanding that conventional lending and a financing alternative such as invoice factoring are not the same thing. Therefore, attempting to apply the rules, processes and pricing models of one to the other will result in confusion and frustration. They are, however, different means to the same end: obtaining capital. It is essential to understand which model gives your clients the best opportunity to obtain their required financing.

The key point to remember is that as a mortgage professional, you need to take help your clients take stock of their current circumstances to take full advantage of the options that are currently available to them. Remind them that things change and their future options will as well, but for now, you are focused on getting them the financing they need. There’s a good chance you and your client will eventually get what you want if you first focus on getting what you need.  •


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