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   ARTICLE   |   From Scotsman Guide Residential Edition   |   February 2007

Diversify to Maximize Capital

To gain more business, consider venturing to commercial lending and its related services

Successful businesspeople such as the Rockefellers, Carnegies and Vanderbilts didn’t get to where they did without a keen sense of business awareness. They took advantage of many strategies to maximize their capital and to streamline their assets.

Typically, successful businesspeople wisely diversify their portfolios by offering more products. They also work with the best and most knowledgeable group of people in the business.

A large number of residential mortgage brokers and loan officers, however, are not experienced with one diversification option — commercial mortgages or other types of financing for their clients’ projects. Therefore, they often lose out on a lucrative additional stream of income.

By learning about what your clients need and diversifying your business to offer services to fit those needs — from commercial lending and business lines of credit to equipment leasing and factoring — you can maximize your capital.

Commercial lending

Commercial lending can be frightening to many residential mortgage brokers and loan officers. The truth, though, is that your competitors might be unfamiliar with and will not attempt to learn the basic details of commercial lending.

By doing some homework and becoming familiar with different capital sources and their programs, you can set yourself apart from your competition successfully. You also will be able to provide a value-added service for your clients if you work with a professional commercial mortgage broker who has other products to offer.

From the beginning of the process, it is critical to establish proper expectations with clients. Unlike residential loans, the average commercial mortgage takes longer to close and involves more paperwork. The appraisal process, overall costs and timeframes can discourage clients.

Be certain to help these clients understand the differences and to explain why. Your clients may become confused about the various types of financing available because advertisements can offer low credit requirements, as well as documentation and costs similar to those found in residential mortgages.

Although commercial mortgages do require credit and background documents, there are other types of commercial loan products available to your clients. Some will rely heavily on credit scores, while others will require business plans and projected revenues. By establishing proper expectations, you can minimize the unpleasant surprises.

Generally, commercial projects receive funding and loan programs from much different sources than residential projects. Once you are familiar with the available programs, you will add value to your services.

Unsecured business lines of credit

Along with commercial lending, you can offer many other products to commercial clients. One such product is an unsecured business line of credit.

These products provide lines of credit to 2-or-more-year-old businesses for their operating needs as a source of additional working capital. The principal’s credit requirements often are a minimum FICO score of 660 from all credit bureaus. Lenders generally will loan money to a company based on application only without collat­eral, business financials or tax returns. The interest rates range from the prime rate to the prime rate plus four.

These unsecured business lines of credit have interest-only payments, are revolving and perpetual with no prepayment penalties, have no zero-balance requirements and will never convert to a term loan.

Think of these as a home-equity line of credit for businesses — but unsecured and not convertible.

Equipment-leasing

Another service to consider offering commercial clients is equipment-leasing. Businesses often free up their cash by leasing needed equipment instead of buying it.

By leasing equipment, a business only needs to invest a small amount of cash. The benefits include having less cash tied to the assets and few worries about obsolescence.

Plus, businesses often can write off leased equipment for tax purposes. (Advise clients to consult a financial adviser for more information on tax write-offs.)

Factoring

Factoring is a form of commercial finance in which a business sells its accounts-receivable invoices at a discount.

Businesses always need cash to operate efficiently. Instead of waiting for invoices due in 30 to 90 days, they can benefit from the factoring process by selling these invoices for cash. They can then receive instant cash that they can invest immediately and through which they can produce a greater return.

Another great benefit is that factoring is off-balance-sheet financing, so it is not a form of debt or equity. This makes factoring accounts receivable more attractive to many businesses than traditional bank and equity financing.

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Offering new products and services to your clients will help you to be more professional. By developing your knowledge of commercial capital products and by offering a more diverse product line to your clients, you will set yourself apart from your competition. 


 


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