Oftentimes, one of the greatest challenges to overcome with borrowers is that they may not wish to disclose any of their holdings and view the property as the exclusive value to closing their loan. Although we are on their side as mortgage professionals, one must look at it from the lender’s perspective. Imagine all the pieces of collateral the banks have sitting empty in their inventory since the recession. All of those foreclosed properties with little or nothing down that defaulted and ended up stagnant on the bank’s balance sheet. If for any given reason the business fails and the borrower does not have any liquidity to fall back on, the bank ends up having to foreclose.
When faced with providing the all important PFS (personal financial statement) it’s important to disclose all liquidity and assets. One of the FAQ’s often heard from borrower’s is “Well…how much do I need to show to get the loan approved?” The moment a lender hears you ask this question, it poses a red flag. First of all, it shows you aren’t being forthright with your application and secondly, it sets a bad tone with the banker as it indicates you are not serious about getting the loan closed. The better your asset base is on the PFS, the more likely you are to get approved. Another thing to remember is the more liquidity you have to show, the better rate and terms you will receive.
For some reason there is a misconception that the bank is out to harbor all of the borrower’s assets once they find out what they have but it’s simply not true. The bank is not necessarily looking for additional collateral to securitize the property unless the borrower does not have a sufficient down payment. They simply want to insure their investment in the property is sound including the person who has to make the payments. It’s much the same with down payments.
When asked how much are you putting down on the property, borrowers often respond…”Well, as little as possible of course.” Putting down as little as possible is fine, however terms are generally more favorable to those with more skin in the game. It’s much easier to walk away from a property with only 10% invested than it is with 30% invested which is why terms are more favorable to those with a larger down payment.
Since the Recession, the days of walking into your local bank armed with little more than a yellow pad, pen and your driver’s license to sign up for a loan are long gone. Most successful borrowers became so accustomed to this ‘sign and drive’ type of lending that they now find it very challenging to jump through all of the necessary hoops to get through the approval process. Couple with that the need to disclose all assets, especially liquidity, and it becomes a challenge.
Liquidity can mean several different things and most certainly is not limited to funds on hand or ‘mattress money’ (money hidden under the coils of your inner-spring mattress). It simply means there are funds available with ease of access should the opportunity arise that the business suffers a short fall. They can be investment funds, such as 401ks or stocks, but bear in mind that those may be subject to tax ramifications should they be withdrawn prior to the time allowed. These are necessary, not just from a lender requirement. It is oftentimes a federal requirement to insure the lender does not end up with a number of foreclosed properties whose performance was less than stellar and whose borrowers had nothing to back it up with in the long run.
The liquidity of the borrower also shows a purposeful plan to safeguard his business and properties with reserves. The more in reserve, the more likely the loan will perform well. Additionally, when the term expires, the lender is much more likely to offer improved terms for the following term since the borrower kept up their end of the bargain for the initial term.
The next time you apply for a business loan or commercial mortgage, put yourself on the other side of the conference table and take a good long look at your application. If you find yourself shaking your head at the sections marked N/A or left blank altogether, you may want to dig deeper into your pockets to share all of the information. Oftentimes, liquidity coupled with a transparent financial statement can shed light on improved loan terms.