Competing with mythical lending 101
By Stephen Mariani
Now, more than ever, Diamond Financial sits by and watches other lender transactions linger on for months and never close with our hands tied behind our backs. We cannot compete with the mythical lenders of 2014. By “Mythical lenders” we are referring to the many inexperienced so called “Lender BDO’s” promising everything including the kitchen sink and in the end, delivering on none.
Here are 3 true stories of what we have been witnessed within the last 6 months, what the outcome became and what we mean by “mythical lending”.
Case #1: 1,100,000 business acquisition with no real estate
PROMISED: 10 year loan fixed at 4.25% for 5 years, no personal collateral and a 10% down payment. The lender BDO promised a 10 day approval and a 6 week closing. Transaction structure included a seller note of 100M on stand by for the first 2 years of operation. This was in writing and seemed too good to be true to us but the borrower believed it.
OUTCOME: 9 weeks after the client signed the lender term sheet, when the loan actually was approved, the terms looked like this. Interest rate increased to 5.25%, down payment was increased by over 75M, seller note increased to 150M and was put on full stand by for 5 years. The worse news—The broker was forced by the seller to hold the seller note difference of 50M to make the deal happen.
Case #2: 840,000 business acquisition including 425,000 real estate
PROMISED: 25 year term, fixed for 5 years with 10% down and no seller note at all
OUTCOME: 7 weeks later the commitment letter from the lender included a 50M seller note. Loan interest rate .5% higher than proposed and a 17 year term along with a down payment increase to 15%. Being so late in the process, the buyer was forced to accept it and replaced the seller note with an employment contract costing the buyer 50M in the first 12 months out of their cash flow.
Case #3: 2,900,000 business acquisition including 900,000 real estate
PROMISED: 15 year term, fixed for 5 years with 10% down and a seller note of 800M
OUTCOME: 6 weeks later the seller was shocked to learn that the lender was NOT PLP certified and the commitment letter from the lender now included a 1MM seller note and now on FULL stand by. The commitment letter was declined and we regained control of the deal under our initial terms. It closed 9 weeks later through a Diamond Financial program.
We cannot compete with mythical lender term sheets and we’re seeing them more than ever. If you’re buyer is considering an SBA loan in today’s market then we suggest you help them evaluate and determine who can truly produce the loan to close the deal. When truly comparing apples to apples, we can compete, but when comparing apples to watermelons our only option is to step aside and witness the mess. Our policy has always been to produce term sheets that will mirror the actual commitment letters, today’s lenders have no such commitment and it’s costing broker’s commissions all around the country.
AskDiamond@easysba.com is always available for specific questions regarding this or other SBA rules.