English: “Sorry We’re Closed” sign at Little Grill Collective in Harrisonburg, Virginia during MACRoCk music festival. (Photo credit: Wikipedia)
As you noticed I haven’t posted anything on this blog in quite a while. I have been cranking out content on my business website so if you want to get more of my blogging on business finance, leadership and executive coaching go to Shelton Business Services LLC website. Unfortunately personal finance topics can only be found here for now. I hope you come on over and check out what I’m writing about at Shelton Business Services, LLC
So long and thank you for reading!
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Is the borrower/lender relationship like dating? Or more like a marriage. Either way it is important to treat your lenders like life partners.
There is a right way to secure business financing that will preserve your lending relationships. I am assuming you had a good relationship to begin with. You can maximize your borrowing effectiveness and promote business growth by being a good borrowing partner.
This is one of the seven principles for becoming a more durable borrower that we talked about in previous post. The search for a loan is a critical tactic in your business plan and you want more borrowing effectiveness by nurturing your lending relationships.
Invest time, effort and money in your lending relationships before you need a loan. Creating a close professional relationship may help you get better loan terms and pricing and may facilitate the credit approval process. Be a loyal customer by aggregating your banking business with a few select lenders. Be flexible. A good loan agreement is one in which neither side gets everything they want and feels they left something on the table.
May you have a richly blessed borrowing relationship until loan maturity do you part…and beyond.
When all the loan bids are in there are two tasks remaining in the bid process. The first is distasteful and the second is fun.
Your goal is to pick a winner quickly. Bids can go stale due to changes in credit market conditions or within a particular lender. How you award the loan business is a critical and sensitive issue. Move quickly to pick a winner after tallying the final bids.
The first step is to tackle the unpleasant but necessary task to preserve your lending relationships. Make the sorry-but calls first to let the runners-up lenders know they did not win the loan business. Soften the blow by giving a non-binding commitment to include them on your next loan request.
Finally, make the most fun call to the winning lender. The result of a complicated process over weeks or months is finally over. The winning lender will be very happy to get the nod for the new loan business. Now the next phase begins. Closing and funding the new loan.
Best and final or sharpen your pencil? What does that have to do with getting a business loan?
There are two main approaches for managing a loan bid process.
- Best and final permits the lender to make one bid without the opportunity to revise their loan quote.
- Sharpen your pencil gives the lender a second chance to move terms and pricing closer to the leading bidder.
You may have a virtual tie among two or more lenders so you need to bend your best and final policy to allow another turn of bidding and break the deadlock. You might have a lender so far outside the competitive bids that a second chance doesn’t make sense. Adapt to the bidding environment.
Decide ahead of time which bid philosophy you will take and stick with it. Let all competing lenders know the ground rules for bidding. A best and final approach will prompt lenders to put their best quote forward knowing there is no second chance.
Level the playing field for the finalists by fairly sharing consistent information about the bids to-date. It is best to give general parameters or data ranges about the competitive bids instead of specific quote details.
You can preserve your lending relationships and get a competitively priced loan by following a sound bid management policy for your next round of business financing.
In business borrowing it is o.k. to have multiple lending relationships. Unlike marriage where monogamy is the ideal structure, borrowers can nurture relationships with several targeted lending sources.
But be discrete to avoid damaging a lending relationship. Confidentiality is a top concern for lenders. They want to keep their proprietary bid details from competitors.
Keep your lenders happy with these tactics for discretion:
- Don’t shop your quotes among lenders. They all talk and you will lose credibility.
- It’s not worth a few basis points in interest rate to sell-out the leading bidder.
- Keep close control on electronic and paper lender correspondence by limiting distribution to those in your organization who need to know.
- Don’t disclose the winning loan terms until after signing the loan application and then try to limit disclosure to data ranges. Runners-up lenders will press for market data but hold them off until you ink your deal.
A term sheet will often contain boilerplate language requiring confidentiality as a condition to providing the quote. Be a good borrowing partner and avoid shopping quotes to competing lenders. The small gain you make in pricing or terms could have lasting negative consequences for your lending relationships.
Create your own micro capital market. How? Get more than one loan bid.
Two quotes provides something to compare so do yourself a favor by asking at least two lenders to bid for your loan business. If you have more than one competing lender then you’ll need to track the bids.
You can do this by maintaining a current loan quote matrix. Create a simple spreadsheet to track bids from lenders. Include basic information such as:
- lender name, loan officer, phone number and the date you submitted your loan proposal to the lender.
- Record any funding requirements in the bid like maximum loan to value (LTV) and minimum debt service coverage (DSCR) tests.
- Track the quoted loan amount, interest rate and fee structure.
- Look for any required reserves such as property taxes, insurance and capital improvements.
- Make adjustments to the stated interest rate to account for fees and reserves so you are comparing like loan terms.
There are many other terms in the lender terms sheet to track during the bid process. The loan quote matrix will help you monitor the loan bid process and quickly compare quotes to select a winning bid.
You must design a compelling request for proposal (RFP) to maximize your borrowing effectiveness. Invest time and money to produce a professional loan request that will represent you in front of the credit committee.
Your RFP should contain a cover letter with these borrowing objectives:
- Highlight whether you want fixed or floating rate debt
- Specify the desired loan term
- Ask for the right loan amount
- Highlight any ancillary terms that are important to your company such as recourse.
The RFP body should contain the following sections:
- An executive summary of the project
- key components of the business plan
- Market and demographic data if applicable
- and summary financial data for the borrower, sponsor and the collateral.
A pro forma return on investment (ROI) calculation is essential information for new business property. Pictures tell part of the story so be sure to include photos of the loan collateral.
Your chances of securing a great business loan are much higher if you lead your search with a professionally designed request for loan proposal.