By Jeffrey Moore
It happens quite often in the banking industry that a referral is received and the first thing that is asked is what the Bank’s terms and conditions will be for the opportunity. My experience is that most referral sources are taking a transaction oriented point of view when they might be better off presenting a relationship oriented perspective. Let’s explore the differences.
There are certainly times when a transaction oriented approach is warranted and efficient. This is more likely when the Borrower has a stabilized asset and is looking to lock in a rate on an asset that he/she plans to hold for a long period of time. A referral source generally picks up the phone, calls their dependable financing sources, shares a package of information and looks for a quick response. This approach may be entirely appropriate when the borrower has a clear history, the opportunity is straight forward and the borrower is not looking for anything other than financing the subject project. This is usually an opportunity that is easily financed by a wide variety of lenders.
Characteristics of a transaction opportunity
- Stabilized property
- Long term strategic hold for the owner
- Low LTV
- Non-recourse to the owner
- Attractive to a wide variety of lenders
But what happens when this is not the case? What if the borrower has other assets that they might like to finance in addition to the subject? What if the opportunity represents new construction, a management turn-around or re-position? In this case, the referring party should consider positioning the referral as a relationship. This type of opportunity will require the Borrower and Lender to work together for an extended period of time and it is important that the relationship is a positive one.
Positioning an opportunity as a relationship requires more time and effort. It is helpful if the referral source takes a step back to look at the bigger picture. Typically, referral sources are not worried about the degree of difficulty of monitoring the loan once it is booked. Bankers do. Will the borrower be cooperative? Will they be transparent? Can they provide the needed information both on the property as well as their personal financial statements? Bankers have found that sometimes the sponsor has other assets that are causing a drain on their resources, time and money. Might this act as a distraction for the performance of the subject project and possibly jeopardize the loan? Is there an opportunity to help solve other issues that the borrower might have? An effective referral source can present answers to these questions and help the lender see how this opportunity fits into a bigger picture strategy.
Characteristics of a relationship opportunity
- New construction, turn around or re-position asset
- Future expansion plans
- Flexibility is needed with the structure
- Recourse to the owner is likely
- Loans to related entities are desired
- Depository and treasury management products are desired
- Limited number of interested lenders
Relationships work best when information is readily available, transparent and tells a good story. If you have a borrower that is unorganized or has difficulty providing information on their overall portfolio, or have unexplained gaps in their story, it will be difficult to position that opportunity as a relationship. You are better off positioning that as a transaction and seek to find a lender that doesn’t care about the bigger picture.
Referral sources are looking for relationships too. They hope to complete multiple transactions with the same borrower. Once the referral source has achieved success with a borrower and lender, they want to repeat the process. It is good for all three. Many referral sources are reluctant to “let go” of their borrower because they believe that the lender might cut them out of a future sales commission. This does not need to be the case. The borrower, referral source and lender should be up front about that and agree on how the referring party should be compensated on future transactions. Plus, referring parties will continue to be recommended by the borrower and banker to other interested parties allowing the referral source to expand his network. My experience has been that the best referral sources understand that the banker needs to develop a close relationship with the borrower not only to close the subject transaction but especially to build a lasting relationship.
Referring parties that focus on a relationship are more likely to be successful with their referrals. Lenders are more likely to embrace a referral when a relationship is expected and there is a chance to provide value to the opportunity. There is also a good chance that the terms, conditions and pricing will be better if the lender doesn’t have to work so hard to understand the potential relationship. What are some things you can do to emphasize a relationship?
Ways to emphasize the relationship
- Provide summaries of the borrower’s other debt and discuss future potential for refinancing
- Provide explanations for issues that might be important to a lender that is looking for a relationship.
- Provide summaries of the Borrower’s previous experience with construction, turn around or reposition efforts depending on what is pertinent to the subject loan request.
- Encourage a personal introduction, site visit and opportunity for borrower to meet with Bank’s senior management team.
When making a referral to a lender, it is a good idea to think about what are you trying to achieve? Do you have a “one and done” mentality or are you seeking to build a relationship? Are you simply trying to get the best deal or are you laying the foundation for something more? What is the long-term best interest of your client? If you have a transaction and there are multiple bidders contemplated, give the lender an idea of what you believe are the borrower’s hot buttons. If you or the borrower are looking for a relationship, let the lender know and provide them with information that demonstrates that the relationship will be a good one.
The next time you have a chance to refer an opportunity, consider talking to your client first to jointly decide whether a transaction or relationship approach is best. Take the time to anticipate the questions lenders will likely ask and present the answers in a clear and concise manner. For better results with your next referral, try presenting your next opportunity as relationship and see what happens. Your client and your lender will appreciate it and reward you with a successful deal and a well-earned referral fee.
Jeffrey Moore
Vice President
TCF Bank Corporate Lending
Jeff Moore has 34 years of commercial banking experience, all in the Detroit area, and has been with TCF Bank since 2011. His experience includes investor and owner occupied property financing, commercial construction, business loans and SBA lending. Since joining TCF Bank, Jeff has originated over $70 million in loans by working collaboratively with a variety of clients and referral sources particularly in the self-storage, multi-family, hospitality and healthcare industries.