How should I vet a lender?
December 26, 2023
by a searcher in San Francisco, CA, USA
What are the different factors to consider when choosing a lender? Should one go with whoever can provide the lowest interest rate, or are there other factors to consider? For example, Live Oak seems to be able to provide some level of value, because if they're willing to lend on a deal it provides some assurance the business isn't a dud.
I'd love to learn some of the tangibles/intangibles the community considers when assessing financing options.
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
First, you need to know that the type of institution is a good fit for your business. Each Bank and Credit Union has different loan types and industries they prefer to lend in. Getting with the Bank that likes your industry or loan size is important. Some lenders will not work in certain industries as all, or are not as experienced in those industries so they will not be as aggressive.
Secondly, you need to know you have the right lender within that institution. There are plenty of lenders that get a few deals across the finish line because they put term sheets out on everything. You want a lender that has the trust of management, that knows how to vet deals through their institution's system, and says no to deals more often then yes, meaning he/she really knows what they can or cannot get done.
Third, not every type of deal will get done by every lender. Some lenders require more in a seller note or more equity down. Depending on how you structure your deal it might not be a fit for a certain lender. Not all lenders will provide a line of credit. If you need a line of credit on your deal, you want to start with a lender that can provide that line. So you need to find the right lender that can handle the structure you have negotiated.
Lastly, at the end of the day the pricing on a term sheet is important, however, it is not the most important thing. You also need to consider whether or not there is enough working capital built into the deal, the amount of time it will take to get to an approval, and how often that lender gets a term sheet to an approval and then to a closing. I had a client get a term sheet from a lender on his own that was an interest rate well below market. He worked it with that lender for three months to have that lender ultimately say no. I knew up front the chance on that lender getting the deal done was very low. You want to go with lenders you can trust to get deals done with the terms provided. There are some lenders that will provide terms with a lower rate and then at approval the deal terms will look different. You do not want to get stuck with that result.
Here at Commercial Lending X we only work with proven lenders with a strong track record that we know can get deals done. We also know exactly what each Bank we work with lends on. We require all of our lenders to vet deals through their credit team before issuing terms, and because of that we have a 95%+ success rate in our term sheets turning into approvals (absent something undisclosed coming up during the approval process). Any term sheet you get in less than 24 hours of submitting a deal I would question unless you are confident that lender knows their system inside and out. I hope this information helps.
from Montclair State University in Odenton, MD, USA
1. Many SBA shops are not familiar with the search fund model. The SBA rules just changed and a lot of SBA lenders will have a learning curve. It’s important to discuss the bank’s appetite for your type of deal upfront. Using an SBA loan broker who specializes in this space will help that. Live Oak seems to like this model and is in the forefront when it comes to education.
2. I would inquire about the underwriting process for deals. . Some banks give their underwriters lending authority, some have to get credit committee approval. This process can play a role on how long your deal will take to get approved.
3. Does the SBA BDO have a good understanding of their bank’s credit overlays? In addition to the SBA rules, each bank has their own credit overlays which will impact how your deal is structured.
This is to name a few. I’d happy to chat offline if you have more questions.