5 Big Mistakes A Commercial Loan Broker Can Make
Running a commercial loan brokerage business can be very rewarding and profitable, but it could also be a struggle if a commercial loan broker falls in to some of the bad habits that we see in the market today. These bad habits can not only hinder a loan broker’s ability to get deals done, but they can also constrain a commercial loan business from growing.
1. Only going after the “Big Elephant Deals”: This is a common trait that we see with brokers in the commercial finance market today. It is gets very easy for a loan broker to quickly calculate commissions on large transactions in the tens of millions of dollars and lose sight of due-diligence and what’s really going on in a particular deal. As commercial loans go up in dollar amounts, they tend to get very complicated in structuring and there are only a few lenders in that space that can do very large deals. Another factor to consider when chasing large is fraud and how legitimate the transaction is. The higher the dollar amount, the closer you have to look at everybody involved in the deal which leads to increased scrutiny on the lenders part. There are also countless people who have “big dreams”, but no money to invest in their own project. Lenders that play in this arena like to have the sponsor or borrower come to the table with a decent amount of liquidity or net worth compared to the loan amount. What can typically happen with brokers is they get a large deal in the door, have the client sign a fee agreement, and then sit back and try to work the deal to death and not concentrate on any other deals because they think they are cashing in on a large commission check. This is a big no no. Often times these deals (if legitimate), take up to a year to close, so in the meantime the broker is starving because no income is coming in. The point we are trying to get across, is a commercial loan broker should always have “bread and butter” financial products that always bring in income and are easy to close while doing large transactions. This way they don’t starve themselves.
2. Not identifying a financials product’s core market: Commercial loan brokers routinely try to market a lenders product without properly identifying the market or demographic that it serves. When marketing any product one has to know the problem that the particular product solves to its users. So with that said, if you know of a problem that a particular industry is going through, and if your financial product can alleviate that problem, that would yield a better return on investment from your marketing campaign. In that marketing campaign, you would highlight the benefits to your audience rather than the features of that particular loan product.
3. Trying to fit a square peg into a round hole: This is one of most common mistakes we see brokers make with lenders. Instead of studying what their lender actually wants and their underwriting criteria, sometimes brokers try to push a deal for approval when it does not meet their criteria for funding. Brokers try to “convince” a lender why they should do their deal. This only creates a sense of incompetency from a lenders view of the broker and leaves a bad taste with the lender. Commercial loan brokers need to study the types of deals their lenders will do and want to do. They should also note the underwriting criteria before submitting a deal so that this can be done by the broker prior to submission to save time.
4. Getting involved with broker chains: Particularly in the commercial finance space, the practice of “broker chains” seems to pop up everywhere. A broker chain is a string of brokers that are involved in trying to find financing for one client. To clarify, you have one client who needs financing going to a commercial loan broker to find financing. The loan broker then goes through another broker who then goes through another broker to find financing. A chain develops and then starts the never ending problems for both the client and brokers involved. Like the old grade school game of “pass on the secret” through a line of children, the more people passing on information the more skewed the message gets and information lost. This happens with a broker chain. Also you have the problem of too many fees. Let’s say each broker wants a point or 1% in the deal and there are 4 brokers involved, then that is 4% that the client has to pay not counting the lenders points if any. The ultimate person who gets burned in these situations is the client. So good etiquette would say not to get involved with broker chains. A commercial loan broker can work on deals from other brokers, but keep it to a one broker maximum with no other parties involved.
5. Not having fee agreements in place first: Without having proper fee agreements in place a commercial loan brokerage business mean nothing. There are so many brokers that don’t have the proper worded fee agreements in place when operating their broker business. Agreements are meant to protect the brokers business and more importantly insure the commissions that are to be paid so without having this agreement in place, it exposes the commercial loan business greatly. Some brokers get excited about a deal and try to get it to a lender before any fee agreement in signed by their client. This of course could cause a problem once the client is disclosed of who the lender is. That is why it is always best practice to get any and all agreements out of the way before a broker spends too much time on any given deal.