2012 ... The Tipping Point for Alternative Lending?

I don't know what happened, but starting last Thursday, my phone practically exploded. People who are used being able to get a hold of me were starting to send me irritated emails saying that my voicemail box was full. What happened?

For sure, the holidays are over; but what I think has really happened, is that the alternative financing market has reached a measure of maturity. In 2011, businesses who stepped out of the realm of the traditional bank actually closed some loans with alternative lenders, and were actually able to finance something. They told some of their business associates, and those borrowers were in turn, able to finance something, too. Somewhere along the way, a tipping point was reached.

I should say that the word "alternative" doesn't have to mean "non-bank". In fact I would have to say that a very significant percentage of the loans we arranged in 2011, in fact did have a bank behind them. The "alternative" part in those cases may have more to do with how the loan was achieved, than who made it. Meaning, instead of calling their banker, (or perhaps because they started there) they called a broker, like me. You see, I know what banks are interested in doing what. Or if I don't,I know a broker that does. And us brokers cooperate to 'get er done'.

Case in point: A broker called us last July with a client in western Wisconsin who owned a nice strip mall. It was not performing due to the economy, but it would be performing if the loan were to be reduced by a million bucks. The bank had already told the borrower what it would take to go away, and so we went to work. We worked with a good broker friend of ours out of Virginia, who forwarded the request to yet another broker, this time in New York, who had a bank in their network with an apetite for the deal.

Instead of piling on fees and fees and fees (which is truly what brokers get a bad name for), we all agreed to split the fee that the client originally agreed to at the beginning. The last broker in the chain ran point, and the request was funded first by an interest only bridge loan (so the new bank could purchase the note)and just yesterday, the bridge was exited by a long term note in the 7 percent range. Which isn't the lowest interest rate, but which is still pretty awesome considering the borrower just saved his building and a million bucks. Client his happy, Bank is happy, and all 4 brokers were happy - if we hadn't known each other and cooperated - the deal never would have happened.

The other thing that has changed, is that the very few private lenders who were out there, who do make up the other significant percentage of what we arranged last year, are very happy with their investments. In turn, they have told their friends, and people started looking at their CDs and their money markets and even their 401Ks with new eyes. We've been at this for five years now, and most of our investors only make 1 to 2 year loans, so we have investors who have funded multiple loans for us and our local business borrowers. Our Investors averaged 12% on their money last year.

Now the first thing a financial advisor would do when they read that line is whistle and say "you can't write that!!!" But I can say this, and I can write this, because I don't sell investments! What I can do is give you options with what to do with your money. Read up on "self directed IRAs". Google places like Guidant or Pensco. I tell you what, people can and do decide every day what makes a loan sensible. Perple are capable of determining what is risky and what is not. My favorite line is this: Don't you feel better about being able to drive by your investment and to see it, instead of sending your money to some "money manager" suit in a far away city? How well is your money manager doing?

So I am looking forward to a really great year. Banks do have some money now and they are beginning to lend again. More and more private investors are getting into the market. Capital is being freed up again, in response to the demand for financing. Supply and Demand, its the American way, is it not?

An Asset Based Lending "FAIL"

It's not very normal to write about a funding failure, but there was a good lesson I learned in a recent effort, that I thought I would pass on.

A very good and respectable business brokerage group had found a buyer for a long established manufacturing firm here in NE Wisconsin. The trouble was, despite having good credit and an excellent industry background, the buyer couldn't find a bank willing to finance the purchase. Can't really blame the bank, as this particular business had been hemorrhaging money over the past decade. Once the world leader in its niche, the business was a shell of its former self. Not a lot to work with there, at least in terms of traditional financing.

But the buyer had a turn-around plan. The seller was pleased someone was interested in the business and was willing to consider a percentage of seller financing, but obviously wanted as much money as possible.

The solution we usually offer in this situation, is what is known as a "sale-leaseback" of the equipment. For those of you who don't know what that is, it is this: Basically, an investor who is comfortable with a certain industry will order an appraisal of the company's equipment. They are interested in the stuff that companies use to make, move, or process other things with. In established companies, that stuff is usually paid for, an asset.

Now, this company did have in hand an older appraisal from a couple of years ago; at that time, the value of the "stuff" was set at about two million dollars. Now, you would think that, ok, there is decent value for this company's "stuff", and no matter how bad the economy is, and how poorly the company was doing, you'd think its gotta be worth at least half that, right? That was my assumption, the assumption of the buyer, and the assumption of the seller. We figured we'd be able to work it out.

Now, A sale-lease back lender uses a formula something like this; if something is worth say a hundred thousand dollars given a normal time frame to sell it, (industry term: "Orderly liquidation value"), it is probably only worth 50K if it was hauled off to an auction ("forced liquidation value").

That is the number this type of lender will use as a value. Then the lender will purchase the equipment at a percentage of that value - which can be 50 to 80 percent. There is the money for for seller. Then the lender will turn around and lease the equipment to the buyer until the lease term is up, and when that happens the buyer owns the equipment. In the meantime, the buyer is paying the seller in a separate note for the difference. Everyone is happy, including me, who arranged it all, and earned a tidy fee for my services.

Then the appraisal came back - oh, how can I put this nicely? - completely in the toilet.

The value of the equipment, due to its age and to its custom nature, wasn't even 1/10th of its former value. The buyer backed off, because he realized he may be overpaying for the business. The seller backed off, because if immediate capital was the goal; they realized they could probably do better closing the business and hauling the equipment off to an auctioneer. You have to feel for the poor business broker, too, who brought the two together, suddenly realizing that perhaps he had a business that he couldn't sell to anyone, that is,unless they were independently wealthy and a glutton for punishment. Pity poor me poor me too; who lives for getting good things done and helping people, and being a hero, well I had ultimately helped no one. As my kids put it; this was a complete FAIL.

The lesson I learned; equipment is not equipment is not equipment. A bulldozer may be used by any number of entities across the US. A specialty piece of equipment, no matter how wonderful, or originally expensive, or functional - is just that, a specialty piece, and likely won't be of much value at all, in an asset based lending deal.

Record Fall

I've been bad about posting here, but this is because we have had a very busy Fall.

The most closings have occured with private money, most under 200K, and most around 12%. However we were able to help secure 500K for one client at 6.5%, with a credit union, and a 1.7M funding last week with a local bank, (5.5% locked for 5 years), so the conventional side is still possible, but the deal does have to be very strong to get done.

We are up at bat now with several equipment financing and re-financing projects. From 75K to 750K - I will let you know how they go. We recently were accepted into a national association (NAELB - National Association of Equipment Leasing Brokers), which has been a wonderful way to get connected with direct lenders for folks who need to get some equipment financed. In case you haven't noticed, banks aren't exactly falling all over themselves to do that kind of thing.

As I contemplate the upcoming holidays, with the year drawing to a close, I must admit that I do have a great deal of satisfaction; we have been able to help many people who came to us, and believed in us. A lot of the things we do just can't be done any other way, and in many cases the successful closings had a profound effect on people's lives. What a neat way to support my family. I have many things to be greatful for this Thanksgiving. Here's wishing you and yours the same!

Hot Summer...

It continues to be a hot summer here in Wisconsin, which I personally think is wonderful. It has also been very busy with smaller, (under 1M), short term transactions (2 years is the average), that keep the lights on. We have a couple of really large projects, one multi-million dollar, multi location refinance, a couple others in the 1.5-2M range, but so far, anything with a lot of zeros, most especially if the request has anything to do any kind of construction, has been really challenging. We haven't had a closing in that realm this year - YET, that is. The bottom line is, if you haven't shown really positive numbers in the past three years, 2009 included, (and that's a tall order for just about any business I know of), you can expect your loan request to be turned down by 5 or 6 funders before you may find a fit. But we're getting to nearer to a few closings that will be quite a feather in our cap, and when those happen, I'll be sure to let you know about it.

Oh, as long as I am at it, if you are a private investor, I encourage you to look up "American Association of Private Lenders", it is a great new organization that is sure to be at the forfront of best practices and advice in our industry. I joined recently, and their magazine "Private Lender" is full of good advice.

Small Balance, Short Term Purchase Order Financing, Handled!

We closed a loan last week for a Wisconsin contractor that needed to purchase product for a local job. Trouble was, the distributor gets the parts they needed from an overseas manufacturer, and wouldn't stick out their necks for 15K. He had to pay them upfront. Of course the contractor's customer wouldn't pay for the job till it was done. These days its hard to come up with any kind of cash, let alone 15K to purchase parts that wouldn't be paid for till 30-60 days later.

But the contractor's AR was in good shape, with very good customers, and we had no problem getting a private investor to cut a check that they could take to the bank. The private investor couldn't have been more happy with the rate their were gong to earn over the next 60 days, and contractor got to order the parts he needed. It was probably the quickest, slickest deal we ever closed,(3 days start to finish).

For what its worth, I did do some research to see if there was an institution out there that did small balance commercial funding like this -to no avail. If anyone reading this knows of one, I'd sure like to know about it. In the meantime if you or a client of yours is in the same kind of quandary, give us a jingle; we may be able to help! And if you are an investor who would like to benefit from double-digit returns over short periods of time, let me know!

How to Submit a "Quickie Question"

I call them "Quickie Questions", and I use the technique every single day. I fire off email questions to my favorite lenders in a very brief format, in just a couple of sentences, asking if they have interest in a certain loan scenario. Not all lenders have a front man or woman with this ability, but I have ones that do. I absolutely HATE filling out application forms. I give them what they need and they respond with a "YES, proceed with the usual paperwork." or "NO". Of course, after they see the paperwork it could still turn into a "NO", but at least I didn't have to do all that paperwork just to find out.

I encourage borrowers or brokers to do the same with White Knight. But there is a right way and a wrong way to do it. Here is an example of the wrong way, an actual email I just got today:



"i need funding for Business Acquisition financing 2-2.7 m what are terms fees and condition. Thank You"

This was my reply:

"Hello ____,
Generally, if you have money to put down, have good credit, have experience in the business you are acquiring, and the property is cash flowing, you can get terms as low as 5.8% which are fixed for 3 years amortized over 25 or 30. If you want longer fixed periods of 5 or 10 years, the rate creeps up. Fees are entirely lender-dependant, from 0-4%. My fee for services for something like this is usually around one point, but this is negotiable if lender points come in too high to make sense. Of course you are asking a very open ended question, and loans in my world are so dependant on your own characteristics and business characteristics that even "yes" answers to all of the above could result in an outright denial. I am happy to discuss your scenario over the phone and I may be able to determine if you have a do-able deal in a very short conversation. please call me at ____"


So the bottom line here is, we really need more to go on. Short emails like this are a waste your time...If you don't want to talk on the phone right away, email is fine, but please try to include the information below: (and please be as detailed as you are comfortable in being. Know that we take privacy and confidentiality very seriously. We would never share your information with anyone without your permission.)

1)the location of the project, 2) the loan amount, 3)what you are contributing to the deal, 4)what you want to use the money for, 5)how long you need it, 6)how you intend to pay it back, 7)what is the collateral and what is it worth?

If you present this, I can usually determine very quickly whether we can help or not, and give you feedback on how to proceed. Also, if I get a lot of the same questions all the time, I do try to address them on our website. Please check that over for all kinds of information.

Here's to making our days more efficient and productive!

Great Commercial Rates Available!

I admit it, I usually focus on non-bank funding since the banks all but froze up, but I recently discovered a very nice small balance commercial loan program available through a national bank. Under this program, which will make loans under $500K, amortized over 30 years, I got quoted rates as low as 5.8% fixed for three years, 6.5% for five years, and 7.6% for ten years. The rate is credit score driven so will be higher given lower scores.

I was quoted these rates for $375K loan to refinance a small (8 unit) apartment building in NY, a good point to note because not many lenders like apartment buildings these days... Our fee to pkg & deliver the funding on this deal was 1.25%.

I don't know about you but so far this is making for a Happy New Year!