In the past 3 months I have consulted with a number of businesses that have been forced out of traditional banking lines of credit. In one case, the company, a very strong $30 million a year business had been working with the same bank and banker for 10 years. Suddenly this business which had enjoyed a very good banking relationship was forced to find an asset based lender. I believe the bank was suddenly facing liquidity problems as many banks are today and wanted to decrease the number of loans on their books. When it came time for annual renewal, the bank simply decided not to renew the line of credit. The company’s president is one of the brightest guys you will ever meet, but he simply had no experience with issues of dealing with non-bank lenders.
With the prior banking relationship, there was no negotiating of rates or terms and the company had not been in a position to “shop” for a new loan for the last ten years. By the time this customer obtained his $4 million dollar asset based line of credit with our assistance, he and his board of directors were practically pros at all of the “ins and outs” of working with commercial finance companies verses banks. The president of the company found negotiating distasteful, but we finally convinced him that it was just a reality of doing business with a non-bank lender. I have seen this scenario repeat itself several times.
The other trend I have seen repeated during the last several months is for companies seeking a non-bank lender to send their financial package to as many lenders as they can find. Sometimes they are nervous about the process and want to make sure they get a quality offer, sometimes they believe that commercial financing is a commodity. While I personally don’t believe this is the best approach, I can empathize with them and understand why they are using this tactic.
So for those companies facing the prospect of changing lenders and are contacting multiple commercial lenders simultaneously, I would like to offer a few pointers.
If you fill out a lender’s application, read the paragraph at the bottom very carefully. If it allows the lender to obtain a personal credit report on the principals of the company, or allows the lender to file a UCC-1 financing statement, don’t sign it. Instead, write them a letter as a cover letter to give them with the application.
In your letter assert that the information you have put on their application is complete to the best of your knowledge. Specifically state in your cover letter that you do not give permission for a lender to obtain a credit report until you and they feel comfortable that you are likely to work together. Also specifically indicate in your cover letter that you do not authorize them to file a UCC until financing documents are executed. I have drafted a sample cover letter you may download and use.
Having one potential lender obtain your credit report isn’t going to be a problem, but if you are talking to 5 or more lenders, you don’t want each one of them to obtain the personal credit on the principals of the company. First, having that many inquiries will “ding” your credit score and in today’s economy you simply don’t want that. Secondly, Each commercial finance company after the first one that obtains your credit report will see all the names of the finance companies that have obtained your report before them.
When a financing source sees inquiries on your credit reports from their competitors, they often think one or two things. They often think that you are only shopping price and with so many competitors trying to win your business, their chances are lower. This has the affect of causing the potential lender to work less hard. With an abundance of deals to do right now, they often figure they will just not mess with your transaction and will move on to other deals with higher profit margins. The other potential impact is that a potential lender will see the other finance company names on your personal credit report and wonder if there is something wrong with your company. They will wonder if the other companies found something that caused them to decide not to pursue your business. The fear of uncertainty is very strong in today’s marketplace.
I recommend clients use the Internet and obtain a 3 in 1 credit report from any one of the major credit reporting agencies. The price is typically $29.95 for a one time credit report that shows all three agencies records. Don’t pay extra for bells and whistles and unless you simply want to know what your FICO credit score is, don’t pay extra to obtain this piece of information. Once you have obtained your own credit report, make it available to potential lenders to view. When you decide on a likely lender, they will need to obtain their own copy.
When it comes to the issue of the UCC-1 Financing Statement, some lenders will put in the fine print on the bottom of the application a sentence allowing them to file a UCC-1 financing statement with the application. If they do file it and you don’t choose them as your lender, you may be face with the reality that you will have to pay the financing source a “ransom” to terminate the UCC-1. It is a big headache when this happens.
Lastly, do your own due diligence on your potential financing source. Ask for a sample copy of their complete documentation and read it or have your attorney read it. Make sure you completely understand it. Ask for references and call them. Ask about their customer service; ask about how attentive the finance company is once you are their customer. Ask if the finance company has lived up to 100% of their promises.