I’ve spoken with several lenders over the past couple of months and one topic that has been mentioned recently is: Options. Small business owners are becoming more knowledgeable when it comes to financing for their business and are also being more aggressive in seeking out the best deal from competing lenders. For those who just offer a conventional financing scenario – for example, 80% financing on a real estate deal, it usually comes down to getting beat up on the rate you are offering or the length of the fixed rate period. If you are in a very competitive marketplace for deals, there is usually at least one lender out there who is willing to undercut you on your best rate.
So how can you compete in the battle of interest rates? Provide your customer with options. There’s nothing wrong with leading with your conventional package. But showing other potential options - SBA 504 and even 7(a) - can go a long way in getting the deal.
Here are some of the benefits to the lender in providing options:
- · Provide “goodwill” to your customer
By providing options, you are showing your customer that you care about them and want to get them the best financing available. I’ve had several SBA 504 deals where the lender won out over competing lenders because they were the only one to offer an alternative to conventional financing.
- · Save your customer money
How would your customer feel to know that they might have an option to save on the amount of cash injection that would be needed? Even if they have what would be required through conventional financing, would it be better for them to keep some of that available for working capital or to fund future growth? Or what if coming up with 20% cash would be difficult or impossible, but you still like the deal? Going beyond the restrictions of conventional financing might make a good deal better from your end as well as the customer’s.
By providing an SBA 504 option, the risk to the lender is reduced to 50% of the financing. This is especially important for those customers who you would like to work with, but who might fall a little short of normal underwriting criteria or are involved in specialized industries such as hospitality or are start-ups.
- · Get an acceptable return on your loan
Rather than having to price your loan as low as possible to get the deal, including an SBA 504 loan as part of the financing and the beneficial rate that comes with it, you might be able to price your 50% portion at a more standard level. When the customer looks at the blended rate between the two loans and the fixed-rate nature of the 504 loan for the entire term, they may be willing to accept a higher rate from you.
Despite your best efforts, offering just a conventional financing package might not win you the deal, especially in a competitive lending environment. But by providing options, you increase your chances of presenting a financing scenario that would appeal to your customer. This might be important, especially to lending institutions that are more conservative.
So, lenders, rather than going by the adage “If you can’t beat them, join them”, how about you take the approach of “If you can’t beat them, offer options”.
For more information about financing projects in Pennsylvania using the SBA 504 program visit www.sedacogldc.org or contact the SEDA-COG Business Finance Department at 570-524-4491 or firstname.lastname@example.org.