2018 Lending Market Updates
By Steve Mariani
By now you should be aware of the 3 or 4 major changes the SBA has implemented that affect business acquisition lending dramatically. If not, just re-read our last three newsletters. This month I would like to share with you what we’ve seen in our local markets and from around the country. Business is booming and yes, I said it, and am knocking on wood as the words leave my mouth. We are seeing broker volume increase across the board in all different industries and in all different cities. The multiples on listings seem to be much more in line than say three years ago when we noticed it was more of a seller’s market. The buyers are optimistic and understand the opportunities and listings that they review today may not be available tomorrow, so it seems that deals are often coming together faster. So how does this affect your office and more importantly, your bottom line? I can tell you in our shop our call and transaction activity continue to increase almost daily and I’m guessing yours is too.
As my travel and speaking engagements increase and I answer questions from brokers all over the country, many of the same questions continue to surface. I’d like to share a few of the most frequent questions with our readers as I am sure many others can also benefit from these answers. First question, and it’s more of a statement, YES, Diamond Financial ONLY servers the broker markets. Our acquisition lending is the most aggressive and creative in the nation and I was surprised to learn that most people thought we worked for buyers directly. It may appear we work for the buyer but we only do if they were referred to us by a business broker. We do not solicit any business directly from the public and we never have. What that means is we live where you live, making transactions happen.
Next is on the aggressiveness of addbacks. This question is always asked, do you see lenders being more forgiving and accepting of add backs in 2018. Here is my answer. If it’s logical that an expense will not carry forward to a new buyer and it does NOT blatantly create an IRS fraud concern, then yes. Items like home offices, lease or loan payments on a seller’s personal vehicle or even family members not working in the business are all examples of items we should be able to address with underwriting and have added as acceptable cash flow. Items more in question in today’s markets are cell phones, health insurance, personal travel, fuel and repairs to a personal vehicle, etc. The above said, nothing is written in stone but just off the initial feel, these items might be tougher. Lenders will not allow a buyer to go without health insurance and they all know a cell phone is a must for any business these days.
When discussing direct lenders, this question is always asked of us. How should I determine if a lender is a good fit for a transaction before I submit the entire deal. Today I’ll explain how we do it and offer a few suggestions on how you can screen the lender and the deal upfront to save much time and frustration. Because of our high volume levels we do enjoy a different level of attention but in any case here is a list of ways you can quickly be sure your talking to the correct lender, or determine they are not the right one for your transaction.
- Does the amount of goodwill in your transaction match the lender’s appetite? Does this lender usually approve and close loans of this size? If not, be concerned;
- Is the lender certified PLP? Do they provide enough business to the SBA to have the authority to sign for the SBA themselves or must their loan packages be sent to SBA for review, which could add weeks to the process? You should be working with PLP lenders;
- How many loans have they written this year in this specific industry? If they have written any then this lender is most likely a good fit. If this is the very first they are considering then I would be concerned;
- What was their overall SBA volume in dollars last year? The reason I say “in dollars” is that the SBA also rates lenders by “number of loans” but using this can greatly skew the results. The number of loans may be vey high but if their average is below $25,000 then I would be considering a different lender; and
- How experienced is your contact at this lender? Typically referred to as a “BDO” or business development officer with a title of “Vice-president” of SBA lending, these run the range of experience levels so don’t be fooled by titles. We see many entering today’s markets working for new and inexperienced lenders which creates nothing but complications. If you know your BDO and he has been in the industry for multiple years then he typically will provide a higher knowledge and experience level.
Here’s how we do it!
In our offices we will only submit an entire transaction for underwriting after:
- Spreading the last three years of financials along with the interims to determine cash flow coverages;
- Reviewing the buyers PFS and Resume’ to understand their related experience;
- Understanding the buyer’s logistic plan; and
- Receiving a lender term sheet FULLY screened by the underwriter and/or head of credit
To further explain the true difference, it’s in item d above. Here is what we demand from our lenders. Do not provide us a term sheet or proposal if this transaction remains in question on any level. We require our lenders to ask any appropriate questions upfront if they need more information on any items at all. We are always happy to expand on any aspect of the transaction BEFORE they provide a lender term sheet. Once we receive a lender term sheet we enjoy a 94% closure rate and now you know why.
Don’t misunderstand this, we do have lenders that will pass on a specific transaction but it’s in hours and not days or weeks allowing us the time to speak to another financing source. In short, we demand they produce a commitment letter that matches their term sheet or they pass on the transaction within hours. Now you know our secret to success and we hope it helps increase your broker volume.
Bottom line, we all know that lenders come and lenders go, but if you are not closing at least 94% of your received lender term sheets then it may be time for a change. Give us a try and learn what real customer service looks like. Diamond Financial has been building broker success since 1996.
AskDiamond@easysba.com is always available for specific questions regarding this or other SBA rules.