The answer is….don’t just shop multiple banks, shop them aggressively and meticulously. If you’re not the kind of person that wants to do that type of work, there are people who will do it for you and those people are far less expensive than the quarter-century mistake you can make by accepting the wrong loan.
Here’s where you’ll want to focus:
- Collateral Requirements—amount, type and time to release.
- Amount—Banks, as they should, are always looking to have the most collateral they can secure. Many banks will simply ask for every major asset you have when they could approve your loan with less collateral. Scrutinize these requirements. Don’t let it stand if you think you’re giving up too much.
- Type—Banks like assets that are easily located, like real estate. That way if something goes wrong, they know exactly where to find it. Less attractive to banks are assets that are easily moved, like a car or gold coins. If you need, for example, $100,000 of collateral to secure a loan, don’t tie up a $750,000 piece of property when you could use $100,000 worth of blue chip stock. You now have $650,000 more in useable assets.
- Time To Release–Keep in mind that collateral is negotiable not just in the amount or type of collateral you provide but also in the amount of time the bank holds the collateral. Know that your collateral does not have to stay under the bank’s hold for the duration of the loan. Assets used as loan collateral can be released before you repay the entire loan. Make sure you can breakout your collateral as soon as possible.
- Interest Rate—This one is obvious, but know that bankers have a tendency to talk in terms of bigger rate moves such as discussing whether the rate will be 6% or 6.25%. Rates can be pinned in smaller increments. Instead of 6.25% or even 6.125%, a loan can be pegged to 6.057% (for example). On a $2,000,000 loan, that’s $1,360 in the first year alone. It may not seem like much when you’re looking at $2,000,000 (bankers know that), but you wouldn’t put it in your paper shredder once a year.
- Points—Banking is a very competitive business. I can’t remember when or if I have ever paid points on a loan…including the early days when we were young and broke. You should be able to find a bank that doesn’t require points.
- Pre-Payment Penalties—Depending on the type of loan you choose, starting with Conventional vs. SBA, the norms for this penalty fee are one, three or five years. As rates have been historically low in recent years, we tend not to worry about the refinancing component, but as we are discussing here, lower rates don’t have to be the only reason for refinancing. If you can get better overall terms for a cost that isn’t prohibitive, then it’s time to improve your position. If you’re choosing to pay-off your loan early and simplify your balance sheet, then it’s much better if you can get rid this contingent liability as soon as possible. That means scrutinizing this factor before you accept the loan.
- Paperwork—Organizing your documents for analysis by the banks’ underwriters is a skill. Bankers want to make good loans. If your loan package is organized so that it fits into the “banker-speak” format, it makes it easier and faster for the bank to say yes. Don’t underestimate the value of speaking the bank’s language fluently. It is a solid indicator that you are organized and savvy in the financing world, and organized and savvy leads to better terms.
- Credit Score—Everyone would like to have an 800+ credit score, but that’s not the case for most people. Some people have lower credit scores because they choose not to carry debt. There are many reasons for a less-than-perfect score. Unless you have a flawless credit score, be prepared to explain any blemishes on your credit record. Know what the bank sees before they see it. If you need to know more about improving or repairing your credit score, see http://bfsinc.net/high-credit-score-need/
- Type of Loan—Comparing both conventional loans and SBA loans is another way to improve the odds of getting the best loan for you. For a more detailed look at how to compare these loan options, see http://bfsinc.net/use-conventional-financing-sba-financing/
- Protect Your Credit Score By Shopping Banks The Right Way–Don’t reduce your credit score by shopping banks the wrong way. When you’re ready to shop banks or other lenders, time it so you’re in front of the lenders during the same 30 day window. In the infinite wisdom of credit reporting, your credit score will typically drop about 8 points when you are shopping for financing. That’s bad enough especially when you consider that a loan may very well make you a better credit risk—not worse. To add insult to injury, if you shop lenders over two different 30 day periods, for example March and April, you’ll get hit for 8 points for each month. It’s not a perfect science, but it’s very close. Again, be organized and know the system.
- Confirm Bank’s Track Record–In an effort to keep their portfolios balanced, banks move into and out of industries. Ask your bank for confirmation that they have made / are making loans to early education companies.
- Ask for More–Remember that banks are vendors. They are important and necessary vendors in most cases, but they are still vendors…and there are a lot of them. They work in an incredibly competitive environment. Don’t be afraid to ask for more. Sometimes you’ll get it.
As always, we’re here if you have any questions or concerns.
Best to you….
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