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If you were looking for a $300,000 business loan, would you pay and additional $67,000 over three years in order to get a two percentage point reduction in the interest rate?
UNLIKELY.
But that is what plenty of small business owners do because they seek bank financing with seemingly low rates of interest, versus a so called stated income/asset loan that carries an apparently higher interest rate.
HOW CAN THIS BE?
Simple. The low rate loan is a full documentation, conventional loan. The seemingly higher rate loan, the stated income/asset loan, requires limited documentation and no income verification. For small business owners, there is a world of difference. The reason is because the owners of a small and or cash based business may have a very low salary, but quite legitimately derive economic value from the business in excess of $100,000. But stating this to satisfy a bank can at the same time provoke tax authorities, and generate significantly more taxes in the future.
Thus the savings from the apparently lower rate of interest are illusory. Worse, because of potential tax liabilities, low rate loans may result in an effective interest rate that is much, much higher.
We are all brought up to believe that banks finance business. And there is a myth that small banks and small businesses fit hand in glove with one another. But the truth is that banks and small business are actually a tough fit.
The bankers are not bad guys. it is simply that banks, even regional community banks that have a vested interest in funding businesses where they operate, are structurally incapable of serving the needs of small and or cash businesses. Banks need plenty of hard assets to collateralize loans. In addition, they are subject to scrutiny by federal regulators on their underwriting policies and practices, and have an expensive monitoring process that favor larger borrowers, those that need to borrow $500,000 to $1,000,000 or more.
For these reasons, non bank lenders and stated income/asset programs can be a viable alternative for cash businesses, "mom and pop" shops, self employed individuals, businesses with environmentally sensitive properties (i.e. auto repair shops, dry cleaners as well as property owners that want cash out, or leverage up to purchase additional properties. In the highly regulated environment of a conventional bank, these borrowers present insurmountable obstacles. In the more entrepreneurial driven non bank lender environment, these borrowers present a myriad of opportunities for which creative solution can be developed.
What is the secret of non bank lenders that offer sated income/asset loans? First, they operate in an under served market: small businesses seeking loans less than $1,000,000, By virtue of this, non bank lenders can identify promising businesses that traditional banks would net even see. Second, non bank lenders are not regulated. This means they can adapt policies that while sound, would nonetheless go against the grain of federal regulators provoking questions and inquiries that bank executives would like to avoid all together. Finally, non bank lenders believe in the value of the real property as collateral. By lending prudently against the value of the real property, non bank lenders need to go no further in assuring the safety of their capital.
Putting all these factors together means that non bank lenders offering stated income/asset programs can provide small businesses with solutions that are more consistent with the challenges they face.
For example, many traditional lenders require cross collateral agreements. These are agreements in which the borrower, after pledging all of the business assets and real property as collateral, pledge their personal property as well. This arrangement can complicate loans, especially when there are multiple business owners whose active participation in business may vary. Because stated income/asset lenders focus on the underlying value of the businesses' real estate, in addition to its cash flow, they generally do not require cross collateral agreements.
STATED INCOME/ASSET LENDERS ARE ALSO MORE COMFORTABLE WITH SO CALLED CASH OUT LOANS
For example, suppose you own a property that houses your business, and you want to leverage the value of you your equity, and take cash out. Perhaps this cash will be used to expand the business. Or perhaps you might view this cash as a just reward for years of carefully managing the business and the property.
TRADITIONAL BANK LENDERS ARE UNCOMFORTABLE WITH CASH OUT LOANS
They often feel that such arrangements leave them vulnerable. By contrast, stated income/asset lenders, which again place emphasis not only on the business' cash flow but the underlying property as well, actively seek such loans. Their appetite for these loans is a valuable source of liquidity for small business owners.
As one more example of how stated income/asset lenders are more geared to the needs of small businesses, consider typical loan covenants. Traditional lenders often seek the right to audit the books of the borrower and have the borrower issue a covenant pledging that the business will perform at its current level or better. A breach of this covenant, over which the small business owner may not have complete control, can result in the borrower being in default, and the lender initiating foreclosure proceedings.
Again, there is nothing wrong with this. After all because banks are the stewards of consumer deposits that are insured by federal funds, i.e. tax payer dollars, they must avoid all risks at all costs. This is why banks operate in what is often characterized as an "abundance of caution mode", which adds bulk to the explanation of why banks are not built for kinds of risks that small businesses typically present.
It also explains why there is such a void in the market for loan and credit services to small businesses. However, stated income/asset lenders have stepped into this void and are actively seeking out companies to provide loan services to help businesses maintain their track record of success, or take a giant step forward to the nest level.
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