For the past year Ivanhoe Capital Advisors (agent of MVB)/ MVB Bank (member FDIC) have been pre-qualifying businesses for SBA loans. It has come to our attention that there is a huge problem in this practice. There are a lot of banks and lenders who are pre-qualifying businesses and putting out term sheets, but not fully underwriting the file.
At times we even wonder whether they have even looked at the file at all. What good is a term sheet that will just get picked apart in underwriting because it either wasn’t thorough enough or was just too generic? It seems like some of these banks are promising things up-front that they won’t be able to deliver on down the road. How does this benefit anyone? This can be a real issue for a potential buyer who thinks this pre-qualification is legitimate and moves forward only to be disappointed.
Banks’ Pre-Qualifications: Empty Promises?
Just to shed some more light on this subject. We have even seen some pre-quals where the bank is very non-specific. They will say things like “up to 90% financing for this business.” What if this particular business, at this sales price, doesn’t qualify for 90% financing? How does this benefit anyone? Are they just doing this because they want to appease the business broker so they keep sending over deals? It just does not make sense and is not the way Ivanhoe Capital Advisors (agent of MVB) / MVB Bank (member FDIC) want to do business. We believe it is very deceiving and almost a form of bait and switch.
Our Pre-Qualifications Are Funded
At Ivanhoe Capital Advisors (agent of MVB) / MVB Bank (member FDIC) we take a deep dive right away on the business and make sure there is proper cash flow or DSCR (Debt Service Coverage Ratio). We also verify that all the seller’s discretionary earnings are legitimate and make sure we can use these in our final underwriting. If we foresee any issues that might come up down the road on our initial analysis, we will tell you right away or ask for further information on it.
We want to be able to understand all aspects of the company before we issue anything. We put together pre-qualifications like we are in final underwriting of the file right away. The last thing we want to do is go into underwriting and find out that we missed something that could have been caught right away. That is why 95% of our pre-qualifications actually fund.
Now at times we can be unpopular because we speak the truth and want to be honest from the beginning. When a business is over-priced because it does not service the debt properly, we will let you know. This at times can cause animosity to either a seller or a broker who felt they priced the business properly.
However, we understand we have a job to do and that is to do the proper math to show that a business’s historic cash-flow can sustain a loan of that size. If it does not, then we have to tweak something and sometimes it is the sales price.
In conclusion, just beware of lenders who promise a lot up-front and lead you down a rabbit hole to only end up not being able to cross the finish line with your client. That is something no one wants to endure.