Preparing for Uncertainty in the Commercial Lending Process

Transcript of Real Estate Revealed Show on AM560

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Sunday, December 6, 2020

 

Good Morning.  As always it is a pleasure being here this morning.

This morning I wanted to discuss Preparing for Uncertainty in the Commercial Lending Process.

We certainly try to make getting a commercial loan as smooth as possible here at Commercial Lending X, but people need to be prepared for the ups and downs in the process.  In order to cover what you can expect I am going to run through the typical process of getting a commercial loan.

  • Step 1 is deciding what you need and want to borrow. It is important to be sure you are asking for the right loan amount and right product.  As an example, we often have clients come to us that have recently gotten a line of credit from a bank – say for $500,000 – and a few months later realized they now need more money – like $1 million.  The client then goes back to the Bank that just made the loan and the Bank tells them they cannot lend them more money this quickly as they just approved the loan.  So now they are either stuck with the wrong loan amount or they need to go find a different lender and go through the process all over again.  It is important to be sure you identify exactly what you need before going to lenders for an approval.  We help our clients figure out exactly what they need and what they can reasonably expect to get in the market from different types of lending sources.
  • Step 2 is identifying the lenders you wish to apply with. This is not only which institutions you wish to apply to, but with which individual lenders within those institutions you wish to work with.  Not every institution will do every type of loan or will work with every type of business, so you need to figure out which institutions do the type of lending you need (product, size, terms, etc.) and whether those institutions will work with a business in your industry.  Then you need to find a qualified lender at those institutions.  Not all lenders have the same level of experience, know credit well, or knows how to get things done and structured the right way.  It can be hard to find a lender that knows what they are doing and also knows how to work to get things done in their own institution.  To put it in perspective, we have fired over twice as many individual lenders as we work with today and have many lenders we won’t do business with anymore because of how they treat their customers.  The last thing you want to do is have a miserable experience closing a loan with a lender that you do not like to then find out you are stuck working with that lender for the next year, three years, five years, or possibly more.   We help our customers navigate the noise out there and get with the right institutions and the right individual lenders that can actually get their loan done and get it done well, quickly, and be a good relationship for those customers going forward.
  • Step 3 is submitting your application to the lender. Every lender may require some different documents and specific forms.  It can become quite a hassle to produce this paperwork for every lender and getting your loan processed can get delayed quite a bit if the Borrower cannot get paperwork turned in quickly.  Here at Commercial Lending X we cut through much of this hassle for our clients.  Our clients provide us all of their paperwork up front and we work to get their applications completed for each institution they wish to work with, saving them substantial time and speeding up the lending process.
  • Step 4 is getting a term sheet from a lender or multiple term sheets from multiple lenders. Terms may come in the form of a formal letter, but they may also come in the form of an email or a phone call.  It is important to note that term sheets are just a summary of the terms under which a lender is willing to consider making the loan and that term sheets are not formal loan approvals.  Several times a year we have customers come to us that received a term sheet, provided a deposit for third party reports like an appraisal or maybe even had the appraisal completed already by that lender, just to end up finding out weeks or even months later the lender never ended up approving their loan.  They were relying on that term sheet to accomplish a goal with their business or to buy an investment property.  As a general rule term sheets do not mean anything, and typically the quicker you receive a term sheet from a lender the less reliance you can put on that term sheet.  Don’t get me wrong, some good lenders or smaller institutions can turn around quality term sheets quickly and just because you get a term sheet quickly it does not mean that lender is going to deny your loan.  However, good lenders usually take at least a few days to complete some initial underwriting and vet a loan through their credit department or management team before issuing a term sheet as lenders rarely can make credit decisions on their own anymore.  Transactions that have been vetted through the lender’s management before terms are issued are much more likely to get approved then when a term sheet is issued quickly; but even when loans are fully vetted in advance and a term sheet is issued, Borrowers must understand there is no guarantee the loan will be approved.  We never recommend spending money for third party reports based on a term sheet until a full approval is received because if the lender does not end up approving the deal and moving forward, it is not guaranteed another lender will use the third party reports you already paid for.  We have over 350 lending partners, which ends up equating to close to 700 individual lenders (at many institutions you need to have more than one lender because they work in different departments, do different types of loans, or lend in different parts of the country), so we can help our clients find the right partner for them and their specific transaction.  Many of our lenders are not traditional banks or credit unions but are other types of commercial lenders and non-bank lenders.  We have a pretty good idea from which lenders you can trust term sheets and from which lenders the term sheets are not as reliable.  We can help our clients manage the process of reviewing their term sheets and deciding which ones make sense to move forward with.  When the term sheet is issued there is often an opportunity to negotiate the terms to be sure the loan going in for approval best matches with what the client needs or wants.  We help our clients negotiate their term sheets as well when needed.
  • Step 5 is underwriting your specific loan request. This is where things can start to get bumpy.  You are going to get many questions and requests for additional paperwork to back up your loan request.  You will need to be able to respond quickly and accurately.  You never want to lie to your lender, but you want to be sure the info you provide tells the full story.  As an example, we had a client that had a loss in 2019 related to a business unit they shut down because it was losing money.  We provided the financial statements that showed that loss to the lender.  But we also worked with the Borrower to provide a second set of financial statements that were prepared after removing the costs associated with the business unit that shut down.  Those statements clearly showed the company was profitable once that business unit was removed.  Had we not taken the time to prepare the second set of statements and provide them to the lender the loan likely would have been denied by the lender.  But we were able to convince the lender the core business was solid and because of that the loan got approved.  It is very important that you just do not provide answers and paperwork to your lender randomly and that you instead take the time to try and understand why they are asking for it and if you have provided them the correct answer to the question they are trying to ask.  This is when it is very important to have someone reviewing the paperwork you are submitting to be sure it is the correct paperwork, and it is also why it is important you have someone who understands the questions the Bank is asking so that you can get them the full answer.  Sometimes you need to take extra time to prepare more information to fully answer the question the Bank is really seeking the answer to so you can ultimately get to a loan approval.  We help our clients understand what the Bank is asking of them and we try to be certain that with the paperwork we are providing we are relaying the full story to the Bank along with all support for any mitigants to any concerns the Bank might have.  Sometimes underwriters change deal terms during the process based on the financial information provided. It is important to be able to negotiate with the underwriters and provide information that backs up the specific request and need and to ensure the best terms are received.
  • Step 6 is receiving an actual “Commitment Letter” from a lender. A Commitment Letter is an approval from a lender to move forward.  Although the loan is approved at this point, it is important to note that every Commitment Letter provides outs or closing conditions for the lender.  Clear cut conditions can include such things as getting an appraisal at a certain value, getting a clean environmental report, getting clean title insurance, getting life insurance, etc.  However, every commitment has not so clear-cut conditional language in it such as “no material change in the financial condition of the Borrower or Guarantor”.  This language can sometimes trip Borrowers up because if their financial condition does change prior to closing, it gives the Bank a way to get out of making the loan.  Changes in financial condition can be losing customers, a steep drop in revenues or cash flow, or even major market changes.  We had multiple deals approved in March of 2020 that we were working to closing on in industries that were impacted by the Covid-19 shutdowns.  Because of that impact we had several lenders back out of commitments they had issued related to the market change.  Commitment Letters also typically have term limits on them as well.  So, it is important to know up front that a Commitment Letter does not guarantee a closing and you need to move quickly because the sooner you can close the less likely the deal will expire either due to time or due to a change in financial condition.  Commitment Letters can also be negotiated.  Items like advance rates, interest rates, amortizations, lender costs, additional collateral, etc. can sometimes still be negotiated after the Commitment Letter is issued.  It is always easier to negotiate these items up front with the term sheet or during the underwriting process, but sometimes changes happen and they can get negotiated after the commitment letter is issued.  Some items lenders are more likely to change then others.  We help our clients understand what conditions are flexible in Commitment Letters and which are not, and help our clients negotiate the best loans possible.
  • Step 7 is gathering all of the paperwork you need to close. Most lenders will issue a closing needs list that will include legal paperwork, insurance, and third-party reports.  Many third-party reports such as title insurance, appraisal, and environmental reports are outside of your control and will be ordered directly by the lender.  We usually tell our customers this is the time where things can be bumpy.  It is like riding on an airplane, there are times when it is safe to walk about the cabin during this process and there are times when you need to buckle your seatbelt and be prepared for some turbulence.  We rarely see a loan go from commitment to closing without experiencing some turbulence.  Examples of turbulence are a low appraised value, something showing up on an environmental report, an issue with title insurance, a problem from a seller, a change in financial condition or cash flow, last second documentation requests from the lender, etc.  We recommend our clients be prepared up front for the turbulence and understand that if they trust the professionals that they are working with that we can typically get them through this turbulence without too many issues.  We have a very strong track record of closing the majority of the loans we get commitment letters on, and the rare loans that do not close it is typically because of something that was completely outside of our control and is due to a decision by the Borrower or maybe by a seller.
  • The final step is closing your loan. Although the hope is that the closing will go smoothly, often times even closings have some drama.  Last second documents may be required, if there are multiple partners needing to sign, getting signatures orchestrated from everyone can be a hassle, and being sure everyone is on the same page at time of closing takes some effort.  However, at the end of the day once the closing is done the process is largely behind you and you now have the funds you need for your business or investment.  We work hard to help our clients have a smooth closing and be sure everyone is on the same page and the closing is orchestrated in advance so it is as convenient as it can be for everyone involved.

I know the above summary of getting a commercial loan approved and closed sounds daunting, and the way I described it probably makes it sound like a very painful process.  But truthfully, if you have the right partners the process really can go quite smoothly.  You still need to be prepared for any issues that might come up and expect something will come up, but most issues can be worked through.  We have plenty of loans that go from approval to closing within just a couple of weeks.  Although your standard process for a real estate loan or complicated business loan can take 45 to 60 days and sometimes even longer, most loan processes are not that long and can move very quickly.

Here at Commercial Lending X, we are here to answer your questions and help you through the lending process.  We would love the opportunity to work with you on any financing needs you might have.  We process just about every type of commercial loan you can think of from business loans to commercial real estate loans.  You can contact me directly at 630-988-4852 or via email at brad@commercialend.wpengine.com, or check us out on our website at www.commerciallendingx.com.  Thank you and have a great day!

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