Posted by David Butler on December 17, 2000 at 13:50:50:
Probably the most important thing you need to recognize is that there is not a “Conga-line” of lenders all queued up waiting to offer credit loans for note buying! Second, there are a huge number of variables that will come in to play… what works for one fellow may not work for another - depending on the individual’s background, credit rating, net worth, and contacts/connections;the marketplace he’ll be working in; the economy at a given point in time; the types of funding sources that are available to him; and the policies and objectives of those funding sources.
And each of these factors offers Its own set of variables, which means that a number of different scenarios will likely come in to play - and will often create a broad variation in what one individual may be able to accomplish, as opposed to another… even in the same community, and even working with the same funding source. But, there are some general rules that can be applied, which offer the best chance of overall success in pursuing such a credit line.
First and foremost - you obviously will need to be able to talk to investors, lenders, and referral sources, in an intelligent and clear manner about what you do - and how it can benefit them. That means you have to know your stuff, and to some degree, you have to know their stuff! This is one time where it doesn’t pay to ask a lot of questions going in the door. (The time to do that is if they turn you down!).
Couple of observations about bankers. It is important to remember that just like anyone else, they come in all shapes, sizes, and flavors. And in each case, they are also influenced by their banks policies, so there are two variables to work around in that instance. It is helpful to remember the old salesman’s mantra, “Some will, some won’t, so what!” So, you keep trying until you hit one that works for you.
The second part of the equation. Bankers in particular are extremely concerned about security, and like all funding sources, they aren’t too impressed by an opportunity to sponsor the Village Oaf! They need to see a clean, carefully crafted Financial Package regarding your proposal, and you need to approach them as you would a job interview… for a job you really want! They need to feel good about you, and about what’s going to happen with their money. And usually, they measure success not by just how secure their money is, by the amount of headaches a client is likely to cause them.
Three things you will have to be able to discuss with all bankers… credit history, your business, and their business. And you have to be able to present this discussion well on paper, and in person. Am I getting kind of redundant here???
Anyway, don’t walk in to a bank in the blind. Since credit history is the heart and soul of the lending business, a person can reasonably expect that they ought to know everything they can about how the industry works, and about their own credit story… before they walk in to talk to a banker, right? Study your credit report ahead of time. Find somebody who will pull your credit report and share your score with you. If you can’t get your score, or you want to keep inquiries off of your report, simply contact the three major repositories directly and order your report from EACH ONE. It won’t be scored, but it will come with instructions on how to interpret it, and give you some idea of where you stand. Study our FREE report THE CARE AND FEEDING OF YOUR CREDIT REPORT (and BE SURE to review the related reports mentioned in the body of that report) at:
Next, you need to show them you know their business. Start boning up on the financial pages… most major newspapers carry that information, and so do a ton of Internet sites. Yield spreads, bond rates, bank prime, float, discount rate, etc, all are terms you should be able to joust with comfortably. You are asking a banker to loan you money for a financial business, buying and
selling debt instruments. Think he would like to know that you have a basic understanding of his world? Raising money is a quintessential sales job - can you think of any successful salesperson who doesn’t sell based on the buyer’s needs, rather than their own needs?? Most buyers (and bankers) just don’t care about your needs… what they want to know (and know confidently) is what can you do for them - and will you cause them headaches?
Last, obviously, you have to tell them about YOUR business. That will be fun;-)
In this regard, you will find it helpful to become completely familiar with note grading and pricing parameters. Our FREE report, NOTE GRADING/PRICING GUIDELINES will be extremely valuable to you for that purpose. See
Here’s a basic lay-out for a Secured Warehouse Line of Credit Loan Request:
- Amount requested
- Terms for Repayment
- Source of Repayment
- Available collateral
- The industry overview
- The marketplace (the economics of your specific geographical operations)
- Your age, experience, education
- your business operation (don’t ask for operating capital for your business
[they generally will want no part of
that] - you are looking for a credit
facility, strictly to purchase note inventory)
- at least two years of tax returns
- personal financial statement
Some other generalities - credit rating and net worth will be important variables IN MOST credit line decisions. Credit score won’t be as critical by itself, so much as your credit profile. Your score may be lower due to the fact that you have invested heavily in the past year, and possibly took on a lot of debt for that purpose. This won’t be the negative factor that derogatory credit entries will be. Depth and aging will also be important (most lenders will like to see at least 12 months rating on at least three major credit sources, each having at least $1,500 in credit limits - and 36 months rating on at least one major account (mortgages and automobile loans will count the most).
As a rule of thumb, most funding sources will also like to see a net worth equivalent to the amount of credit you are requesting, regardless of the collateral you are offering. They won’t be too comfortable lending a $500,000 line to someone with only $75,000 net worth - all other factors being equal. A great deal of this mindset has to do with psychological positioning. They can not see you as a big money guy, because you haven’t been there yet. The flip side of course, is that they loan you $75,000 - and then grow the line along with your developing track record. The bigger you grow, the more they feel comfortable in lending larger amounts to you.
And, this will play into your collateral requirements as well. Depending on the type of paper, and your personal situation, lenders will generally want to see hard equity going in to your deals, ranging from 10% to 60%, AFTER the discount is taken into consideration (i.e. based on YOUR purchase price of the notes). However, if you are strong enough, they may front 100% of the pricing… although in this instance, they will generally want personal guarantees, over and above the collateral.
Finally, with bank sources, you will generally be limited to “clearing stops” of 6 months to one year. This means they will require you to pay the credit line off by the “stop” date. To truly prosper in the discounted note business, you will eventually want to find lending sources that will provide you with “rediscount” lines… where you can have three to five year “clearing stops”, so you don’t have to turn your portfolio over as often. This often involves developing private lending sources, sponsored by well-heeled individuals or small entities (such as self-directed pension funds, individual SDRP’s, etc).
Due to the numerous request we have received over the past six months, we had hoped to have a course out on this topic by midDecember - but we have not been able to meet the timeframe. However, if you would like to be made aware of it when it does come out, be sure to get your FREE subscription to CREO’s Insider Reports here on this site, and ANN’s Update Ezine at: http://notenetwork.com/at.cgi?a=118510&e=/mailinglist.html
Hope this helps, and best wishes for your success…
David P. Butler