Borrowing 101: Who Needs a Broker?
Starting a business is exciting. Everything you’ve imagined producing becomes a possibility. The creative aspects of your product or service are tailored to your vision, and your best business model is critical to success. Once you’ve crossed the t’s & dotted the i’s, you may feel acquiring financing is a simple call to the bank.
If that sounds familiar, you’ll need to learn the process of commercial lending from the foundation up. The less you know, the greater your cost is likely to be. In very basic terms, banking is a business that generates growth from lending. Lots of assumptions are made based on advertised rates and personal experience. For example, lots of folks have car loans. Some money down, an advertised rate, and regular installments are quickly understood. The quicker you pay down your debt, the better, right?
Imagine being penalized for paying off your loan early. Personal loans generally benefit from eliminating months of interest payments; however, commercial loans more often include a “prepayment penalty”. The last thing a borrower considers is the possibility of being punished for making substantial installments on their debt balance. If you’re seeking to finance a business property, don’t assume the rules are the same as those of your home mortgage. Just as you want the best return on your investment, the lender wants the best possible return on the loan. In other words, you aren’t buying something personal; you’re investing in your potential to generate wealth.
When you mortgage a home, the loan will be paid off at the end of the term. When you finance a business property, the debt will most likely continue at the end of the term. “Balloon” refers to the total remaining debt. At that time, there’s a choice to pay off that balloon or to refinance the debt. In other words, acquiring that first commercial loan begins a process that tends to continue. Not only are terms important for your initial loan, times change, rates change, and the need to negotiate remains a key component of maintaining competitive financing for the duration of your business venture.
While it is possible to pay off debt, it’s not necessarily more prudent to eliminate its value as a legitimate tax deduction. Business expenses are inherent parts of managed value, and like the commercial loan, they aren’t personal. Somewhere, at some time, someone said, “You have to spend money to make money.” From your first lemonade stand to your last financed enterprise, you’ll need to spend money. Will you spend it wisely?
The option of enlisting a third party to assist in the loan process is often misunderstood. Why would you add to the expense of borrowing if you could simply avoid it? The simple answer is advocacy. The bank represents its own interests as it describes available rates and terms. A broker is an intermediary between a lender and a borrower. This is a professional who respects the structure of lending and its institutional rules. The broker also understands the long range effects of the product you choose. The contract between a borrower and a broker should involve every stage of the process from application through closing. The type of loan that serves a new business won’t necessarily be a good fit later in the evolution of its profit generating timeline. Your advocate assumes the role of steering you towards the best available product at the time that you’re needing to borrow.
As in any profession, there are excellent brokers and those who perform under par. How does a customer enter that relationship with commitment and trust? Start with questions to friends and colleagues. Ask for referrals. A good broker will come with endorsements from their clients. Once you’ve gotten a name, make the call and ask more questions. Review the service agreement. It should be readily understood, and any questions should be answered without leaving confusion on the page. Consider the fee structure; it should be clear. Although there is often a fee to bind the contract, the initial payment tends to reflect processing charges. If you’re asked to pay significantly prior to any representation, reconsider your choice of professionals. It’s standard for brokers to be paid a commission at the closing of the loan. The smaller the loan, the less they earn. The greater the loan, the more they earn.
Finally, consider the chemistry between you and your advocate. This is a working relationship. You’ll be working with all the intimacies of money including what you have, what you qualify for, and your financial potential moving forward.