How to Set Up a Commercial Loan Business
Commercial lending is one of the more exciting areas of banking. It also can be very lucrative for the entrepreneur if the business is started and managed properly. Unlike residential mortgage lending, in most states you don't need to be licensed if you're originating strictly commercial loans.There are two primary areas of commercial lending that are available for entrepreneurs: commercial real estate based loans and small business or SBA (Small Business Administration) loans.
- Difficulty:
- Moderately Easy
Instructions
Things You'll Need
- Desire and diligence.
- Ability to work on a fee basis.
- Attention to details at all times.
- Ability to deal with business owners at all levels.
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Set Up a Successful Commercial Loan Business
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1
Think about whether you want to specialize in commercial real estate loans or small business and SBA loans--or both. This is important because the lenders you'll approach are often very different in more than name. Commercial real estate lenders that accept deals from an independent commercial loan business may not do any small business lending at all. Often, if they do, they may not be the most liberal lenders you'd want for your clients. In the reverse, small business lenders sometimes only have interest in commercial real estate as part of a small business loan.
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2
Set up some preliminary relationships with a few lenders. There are no hard and fast rules in the commercial lending industry as those that typically exist in the residential lending market. Some commercial lenders will perform only a cursory examination of your credentials, being more interested in the quality of commercial loans you choose to send them. Others, will require a more detailed application before they allow you to submit loans for approval.
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3
Learn the underwriting guidelines of your stable of lenders as quickly as possible. For example, you have made relationships with two commercial real estate lenders. One prefers 5 to 8 family homes (these are considered commercial) and small strip malls, while the other prefers office buildings, retail, and manufacturing structures. Learn their borrower requirements in detail. What types of borrowers do they like? How much cash do typical borrowers need? What credit score ranges are acceptable?
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4
Become familiar with all SBA lending regulations if you're going to originate small business loans. Since the SBA is a federal organization, their rules are substantially identical regardless of the state in which your borrower lives. Therefore, learn one primary set of lending rules and they will apply to borrowers in Los Angeles, New York, Dallas, or a small town in Iowa.
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5
Decide how much you'd like to make your first year, second year, and in five years. By realistically identifying the income level you'd like to achieve, you can begin to "back into" the number of successful loans or, sometimes more accurate, the number of dollars of commercial loans you need to close to generate the income you want. Estimate that you'll make one or two points (one point is equal to one percent of the loan amount) for each successful loan you originate.
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6
Along with setting up an office, furniture, telephone and fax line, and computer, decide how you'll market your new commercial loan business. While even a very small ad in one or more newspapers will generate a surprising number of phone calls, many of these will not turn into borrowers as they are blind responses. However, if you have some attorneys and accountants in your personal "network", let them know you are in business. They have clients needing commercial financing and many have trouble getting funds from commercial banks. They often, however, will take their attorney's or accountant's recommendation to speak with you because this is a solid reference and they appreciate the personal service you'll give them. If you produce, even a cautious attorney or accountant will gain more confidence in you and they typically will refer more business to you.
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7
Be honest and prepared to work hard for your new clients. Commercial lending is more difficult than residential lending and requires both more patience and diligence. Whether you're dealing with commercial banks or private lenders, they tend to be cautious and conservative as they fully understand the risks of being in the business market. Be prepared to convince them that you are knowledgeable, honest, have concern for them as well as your borrowers, and that you're willing to "package" a commercial loan request to their exact specifications. Complete these steps properly and you may have a very lucrative new business that keeps growing year after year.
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1
Tips & Warnings
Start small if you're not already very familiar with the commercial loan market. After a few small commercial real estate or small business loans, you'll start to get a "feel" for what commercial lenders like and dislike. Starting with a complex $5Million real estate/small business loan may cost you a lot of time and "I'm sorry but I also need more documents" phone calls. Often, you never get to deposit that lucrative fee. But three or four 5 to 8 family loans and a couple of small SBA loans will teach you some the primary basics needed to succeed in the commercial lending industry.
Be totally honest and thorough with your lenders. If you want them to keep accepting your loan requests, you must be sure you're producing a package in a format they want. They can get commercial loans from any source they want. They will appreciate the path of least resistance. A complete package of borrower documents for every loan deal will keep them answering your phone calls and emails.
Don't be greedy with your fee structure. Unlike residential borrowers who may only buy one or two houses in their lifetime, commercial borrowers tend to continue doing deals for years. If you produce the loans they need with fees that are reasonable, they'll continue to call you first when they're ready for another commercial loan. Advertising cost = $0.
