declines happen, even to us
It doesn’t happen very often to our offices, but it does happen a few times a year and it is extremely frustrating considering everything we disclose and explain upfront to avoid this exact situation.
By Steve Mariani
September 17, 2019
When we receive a decline, it’s typically due to an interpretation or misunderstanding of an approver. Lenders don’t see surprises such as bankruptcies, short sales, or horrible credit scores from our applications. That is our job to screen them and we’re very good at it. It’s also not going to be due to a lack of cash flow or debt service coverage, or even the buyer’s required salary draw. Each of the above are considered and fully explored prior to a lender ever seeing a transaction from us. So, how do we still get declines you might ask? Although it’s not a simple answer, it’s one our industry must live with, as in all of my 25 years in financing, it does still happen here.
How we do it
Let me first explain our process to put this in perspective. Once our office receives an acquisition transaction, we begin by completing our full three year cash flow spreads which includes all the acceptable add-backs, new debt service, buyer’s required salary, along with a 25% coverage ratio at a minimum. If this shows our numbers are in line and the business trends are not showing a declining trend, the business side is then complete, and our attention turns to the buyer’s documents. We review their credit in detail, explore down payment sources to show the money, and then consider the buyer’s resume’ or experience level in this particular industry. If all these check out, we consider this a complete and acceptable file ready to begin our screening process.

After a call with a lender, we learn that they have an interest in considering the loan request, or decide to pass on the opportunity. Typically, a lender passes on a transaction due to their internal considerations: they no longer consider gas stations, hotels, home-based, or whatever underwriting criteria they must conform to. Passing on a transaction is not a decline, and we accept that with no concern. We understand every request is not for every SBA lender. That said, if they do pass on the loan, it needs to be within the first day of file release as we must answer to all the parties involved. Still acceptable and usually business practices to this point.

Once we receive a green light from a lender, and they issue a term sheet for the transaction, we now consider them committed and hold them responsible from that day forward. It should also be mentioned that we do not accept term sheets from development officers or salespeople UNLESS it has been fully vetted with whoever needs to ultimately sign off on the approval. Handing us a term sheet produced and solely reviewed by the development officer or salesperson is not acceptable here. Once our buyer and seller agree to the terms this lender has outlined, we move into credit, and are expecting an approval and nothing less. Most times we get it.

Once it is in underwriting, and supported by all who have reviewed it, the deal may go to “committee” for final approval. Committee is where the loan request may be put in jeopardy. Depending on how many executives make up that committee, personalities and past experiences can stand in the way of the approval. As an example, one high volume lender we use had a committee member change and the committee was comprised of only four people. The newer member came over from the conventional loan side and is extremely conservative, hence our recent decline. This member did not like or support the industry we presented, and actually convinced other members of the committee to side with him. Our previous relationship and volume levels seemed not matter to him at all and he stood on his decline. At this point, we are now six weeks into the process and switching lenders puts our deal at risk on many levels. We must turn this around quickly and bring in another lender, or explain why this transaction is not happening at all. We all know that time kills deals, and so do lenders if not controlled properly and have expectations set accordingly.

Why we do it
Although keeping declines to a minimum is the single most important factor in our industry, we must understand that it will happen a time or two each year. Our volume levels have dropped considerably with this lender as we slowly replace them in our portfolio. We maintain our lender portfolio at six lenders with a few more standing on the sidelines. We intentionally limit it for the specific reason of keeping our volume levels with each to a point where we financially matter to them. Once their policies change, or we determine they are changing lending criteria, it’s usually the beginning of the end of our relationship. Today, our firm works with six more lenders than we did just two years ago, as markets, lending criteria, and rules constantly change.

Based on our experience working with brokers throughout the country, we have uncovered some interesting information that may help you increase your profits moving forward. What we have found after conversations we have conducted on this topic is that most brokers are spending 30-40% of their time securing financing or assisting the buyer in securing the financing. We were extremely surprised at this revelation. Most brokers we spoke with had an average deal size of between $250,000 – $1,200,000 and found more concerns with time spent hand holding their lender through the entire process.

What we found over our 22 years in business is that once a lender starts heading down a negative road (during initial screening) on a transaction, turning them around becomes a battle which rarely turns out positive and always takes too much time. We do not do this anymore, and have learned that replacing a lender quickly is a better use of our time. The difference here is that we have the ability to demand a quick screening of any deal with our preferred lenders based on our relationships, and this saves time.

Again, what is the actual cost of time dedicated to financing in your office? I could never begin to guess, but what I can suggest is that it may be worth your time to explore and evaluate your true cost of time spent with lenders on a per-deal basis. 2019 has begun with lender adjustments everywhere from what we’ve witnessed. Lender staffs keep changing as they jump from lender to lender, and guidelines to guidelines, each with their own specific criteria and policies. With all the lending options available in today’s market, I’m sure picking the right lender for the right deal sometimes becomes a challenge. Most times, you probably find the most appropriate one quickly, say within a week or so. If all goes well, you’ll provide answers to initial underwriting questions and then in more detail as the loan request moves through the system. Eventually you secure an approval and move to close, which you also should stay involved in as this cannot be left to the buyer without guidance.

The concern comes when the lender requires more and more information while showing no true level of interest, just trying to fit this transaction into their new specific “lender guidelines”. Now your two or three weeks (I’m being conservative here as many times it’s five or six weeks) into the financing aspect of the transaction, but a concern of one type or another keeps popping up, be it a license, a landlord, the buyers resume’, or just a numbers concern from the lender or (and I bite my tongue here) a flat out decline. Now we must start the process over but are many weeks into the letter of intent and the seller starts to be concerned. Adding to the list of time wasters, calming down the seller and keeping him on board with the transaction is another full time job that we understand. Your compensation is lowered yet again with each decline as your investment of time increases yet again.

Here’s the bottom line. Hold your lenders to a set time frame, be it a day, week, or more, but have them commit to providing an answer by a predetermined date. No exceptions!

Diamond Financial Services