President, Commercial Funding Partners
Brokers have a tough task to perform in the United States business economy. The sheer volume of deals that banks won’t do, especially now, is increasing at a significant rate. Even in the equipment leasing industry I am aware of many banks that have suspended business for a quarter or even longer. This problem will exist for the next few quarters at least, giving quality brokers a unique window to fund a high volume of quality transactions. This article is designed to assist them in being effective and efficient in managing the onslaught of deals that will assuredly come their way.
There is a fine line between deals that should and should not be done. It is a tough job to sift through those transactions and evaluate the financials, structure, and stories that will work with those lenders they have had relationships with over the years. They must find the deal killers and find those transactions, without getting too emotionally attached, that have a chance while trying to avoid the number one commandment in the industry…Thou shalt not work on bad deals.
For the past 15 years, my day-to-day responsibilities and those of my team have been working with brokers and reviewing their deal opportunities. CFP’s average deal size is 750,000 with an average term of about 44 months with varying rates and structures. We have paid broker commissions on deals as high as $80,000,000 and as low as $100,000. This is the perspective of this article and quite frankly the only one I know.
The good brokers with whom we consistently fund transactions have some common attributes. Here are the top five.
1 They foster relationships with both the customer and the funder.
If you think that your funding source will circumvent you then do not use them. Make sure the funding source plans to pay you on all future transactions. Many funding sources pay brokers on additional schedules. Some do not. Spell it out in the beginning so you can know who you are dealing with. A simple email or agreement of some sort can avoid future problems.
Much of the time, by its very nature, a deal gets tough to do. The customer loses patience or is suffering from deal fatigue. Typically, the broker does not have to take sides. She should be both the advocate of the customer and the funder. There are, however, times when the funder needs something that the customer doesn’t want to provide. Sometimes it is as easy as a tax return or bank balance. Other times it may be an additional guarantee, cash deposit or some additional structure. The funder is just working on a formal approval and wants to fund the transaction. Don’t lose your perspective by taking sides. Become a facilitator and an advocate.
2 They make sure to check all the boxes, especially the unpleasant ones.
Most of the time, there is always a little something unique about a brokered transaction, otherwise broker services wouldn’t be needed. What is it? Typically, the story or other market conditions can offset the risk that the numbers do not provide. Find that unsightly box and do the research their bank was unwilling to do. Get data that will help tell the story.
When you find it, which a lot of times is not so bad, do not hide it. If the funder finds it on his own, he will feel deceived. If you tell him first and offer a plan, you become a problem solver. It is much easier to get a quick “no” than a long, drawn-out “no” hoping that the funder misses something. Do the work but be careful not to fall in love with the deal. Use a three-strike method. If you cannot get this done with three tries, then you probably have something that cannot be done and move on to the next opportunity.
3 They set proper expectations.
Funding sources want to fund quickly and accurately. They only get paid when they fund and collect all payments. When funders are pushed by the vendor or the customer to fund quickly, especially with transactions over $500,000, it has the opposite effect. Sometimes the process takes some time. It is no one’s fault but if you tell the customer that he will know tomorrow, and it doesn’t happen, then that has repercussions. The transaction can start to collapse into itself.
Remember also, to slow down even though urgency is all around. A customer needing speed causes everyone to slow down. There is a fine line between urgency and desperation. The mistakes I have made in the industry have been linked to responding to an irate customer, a desperate vendor, or an agitated broker. Everybody loses when deals go bad. Pushing to fund has an opposite effect.
4 They give unfettered access to the customer.
Good brokers do not guard their relationship with the customer. Funding sources will have a relationship with the customer for the next 36-72 months. Respect this. When answering questions, remember to know the “why” behind the “what”. Consistently, we see brokers “carry the briefcase” from their customer to the funder. During that process, know why the information is requested. Educate the customer why the question was asked. If you know the “why” the “what” becomes more manageable.
Email and text are poor ways of communication. Communicate as often as possible face to face and voice to voice. Usually, a call or a Zoom can get easy answers to questions. Conversation about the project usually fosters the exchange of ideas and the funder can start the partnership. Our funding ratio increases by 50% when our credit team has direct conversations with the customer. Those on the call tend to have more buy-in when direct meetings happen with the customer. If we expect the cold, hard facts to tell the tale then why is this deal in the brokers’ hands? Most, if not all deals need to be sold. There are few people more qualified than the founders assisted by an experienced broker that can perform this task. I have seen deals that were dead be revived by getting everyone in the same virtual room and brainstorming together.
5 They embrace creativity and structure.
Successful transactions happen when teams of people work together. Consumer banks are tightening credit and others, including leasing banks, have closed their doors to new business. Those courageous groups still in the funding field may need additional collateral, tax structures, and other guarantees. When a deal is declined the next question should be, what do we have to do to get this done?
Structure can create synergy. Creating a tax lease can give benefits to both parties. The payment is lower and can be expensed by the customer. Cash security deposits (CSD) reduce the risk to the funder and can stay on the customer’s balance sheet as Restricted Cash. Performance guarantees can be written in the agreement allowing the customer to get the CSD back in as little as 12 months. The additional interest expense of a CSD can sometimes be negotiated and offset by the higher savings rates of today.
With the credit markets tightening before our eyes, fight back by fostering relationships, checking the unpleasant boxes, setting proper expectations, working together face to face, and embracing creativity and structure.
Buddy Zarbock President Commercial Funding Partners, LLC