Borrowers seek the best terms available from prospective lenders. One way to secure such favorable treatment is to simply know the rules of the road when developing your lender relationships. We reached out to several of our better lending resources and gathered opinions on the major mistakes they see borrowers make time and time again. While some of this seems simple enough, these daily frustrations push many lenders to become wary of borrowers. Make these mistakes and it’s a sure bet you’ll secure sub-optimal loan terms. Understanding the lender’s perspective can expedite your next loan and help you get the best financing available.
Be Organized, Timely and Informative
Communication and timely delivery of information leads at the top of the lender issue list. Many times transaction deadlines must be met to adhere to contractual obligations. However, you will drive a lender mad by demanding they rush as fast as they can, while you don’t do the same. As one bank lender put it: “They pressure us to rush, rush, rush and then they lag; 99.7% of our delays are borrower’s timing issues and disorganization.”
Often, lenders provide a comprehensive needs list. As the borrower, you should drive its completion. You should not be asking your lender “Do you have everything? Did I send you the document?” Know what’s been delivered and what’s outstanding. Then, when you’ve fulfilled the needs list, you can definitively inform the lender that the list is complete. Ignoring items (hoping they will go away) or making a lender ask for the same thing over and over is bad form, and it can hurt you. It’s also preferable to send information in one complete package rather than piecemeal items.
Additionally, there should be a single project lead (perhaps a CFO or office manager) who can provide all due diligence materials, making sure the needs list completes in a timely fashion. It may also be a good idea to have a weekly call with your lender and key individuals from the borrowing team to make sure things stay on track. Borrowing is a laborious process and the borrower must make sure to put aside the appropriate amount of time to handle requests.
Post close, the need for good communication doesn’t ease. At all times, borrowers should provide accurate information, even more so if things take a turn for the worse. One private lender had this to say: “Communicate with your lender at all times. Burrowing your head in the sand helps no one. We’ll be a lot more inclined to work with you through difficult times if you talk to us.” Make sure that as a project progresses you keep your lender well informed of progress, even when negative issues arise.
Disclose Critical Issues
We are almost surprised to see disclosure as a top issue. Our mantra: “disclose, disclose, disclose.” You must disclose any critical issues about the project or the borrower up front. You can’t sneak an issue by your lender, and you’ll pay the price in the end for any attempt to do so. One of our lending relationships had this to say: “Borrowers that don’t disclose everything up front (or erroneously do) create headaches. We will find out eventually, so it’s best to lay it all out there upfront. Especially when you’re working in situations that have timing pressure.”
Negative issues are not insurmountable. Plenty of loans have been completed despite significant issues with either the property or the borrower. Bankruptcies, criminal convictions, environmental issues, and even litigation may be overcome with the right lender who understands what they are getting into up front. Disclose early; if a lender passes on providing a loan on that basis, he or she wasn’t the right lender for the project and you’ve avoided wasting his or her time, preserving the relationship for future business.
Nurture Your Lender Relationship
Many times borrowers are overly concerned with numbers rather than the intangibles when selecting a lender. They think the lender with the highest loan proceeds and lowest rate and fees must be the best. There is more to the best lending relationship than simply price and proceeds; we heard this expressly from our survey and cannot agree more. Lender intangibles include: their track record, process, decision makers, loan covenants, documentation, execution risk, loan servicing post close, and perhaps most importantly, the reputation your lender enjoys with other investors and/or developers.
The other side of this “intangibles coin” is simply people. This business is, after all, a people business. As you cultivate deep and meaningful relationships, you engender goodwill. Getting the lender to like you is good for business. An attitude that you, the borrower, are the belle of the ball and you must be wooed to conduct business with the bank may well lead to missteps. You’ll likely get more results if you approach it from the perspective that you need to win them over rather than vice versa. As the old adage goes, “you can catch more flies with honey than vinegar” added one lender on the subject.
Lastly, a word of caution on negotiation. You can and should negotiate the best deal, but be tactful in your approach. You can’t bully your way to better terms; listen to your lender and work with them during the negotiating process to get to a place that works for everyone. First off, have realistic expectations and know what the market offers for the loan you seek. There is an amount that can be reasonably negotiated and there is an amount that asks too much; know the difference. Lastly, be careful about overt bidding wars or shopping terms around. Lenders hate this and the benefit of saving a few basis points may come at the cost of a vibrant lender relationship.
Show Financial Strength and Liquidity
Net worth and liquidity are crucial to securing financing, as is your experience. We often see borrowers with weak financial statements who believe that non-recourse loans solve these financial woes. However, liquidity is essential to obtaining a loan, whether recourse or non-recourse. Lenders need to understand where funds will be drawn from as a result of cost overruns or operational short falls. In some cases borrowers are in the midst of several projects, so maintaining adequate reserves is critical.
As another lender put it: “Believe it or not, the number one borrower mistake that kills a relationship is that they start out a lending relationship with good liquidity and then, after having successful projects, they spend every dime they have on future projects or dirt. Pretty soon we are lending to people who are overextended. They become kids in a candy store. They completely ignore the prospect of a downturn and think they can outsmart the market cycles. I constantly tell people to keep liquid assets on hand for lending goodwill.”
If there are disclosure items with respect to a borrower, such as credit issues, make sure you’ve done all you can to remedy them prior to applying for a loan. The last thing you want is to have open-ended issues. Contingent liabilities, with too much unknown risk for the lender, are a big area of concern here. Make sure all active litigation has been resolved. Finally, when discussing past problems with a prospective lender, be very careful about blaming past lenders. Real, factual information is acceptable, but restrain yourself from blaming others and accept responsibility where appropriate.
These final thoughts don’t fit into any one category, but are worth mentioning:
- Prior to ordering any third party reports, make sure that your selected vendors are acceptable to your lender.
- Don’t make the mistake of hiring an inexperienced lawyer; this is an important one.
- In general, don’t over-negotiate the loan documents. There are probably some critical items to push for, but you aren’t going to get it perfect. Often, the process wastes time and money for fairly meaningless outcomes. The lender will always retain the upper hand. Always.
- Make sure your projections on cost and revenue are realistic. Assumptions that are out of touch with the market or unfounded won’t show you in a favorable light.
- Contingency reserves should be adequate; don’t create a red flag by skimping on these areas of your budget.
Obviously, there are numerous missteps that can be made throughout the process of obtaining a loan. If your shop is not a high volume borrower, the process may not be well-oiled. Be prepared to evaluate your project by fully assessing your financial strength and background prior to engaging a lender. If there are negative issues with your background or the project, disclose them to the lender early in the process. Price and proceeds aren’t everything; carefully consider the intangibles of a lender. Finally, provide clear, honest, and timely communication throughout the due diligence process and beyond.