Become Bankable, Lender Compliance

There is what is called the “Secondary Market”. This is a financial marketplace where typically Wall Street investors buy packages of loans that have been bundled together by their category, type and level of risk. Therefore, when a lender makes a loan to a business they do not hold onto that loan, they sell it in the secondary market.

Lenders bundle and sell their loans in order to reduce their level of risk and so that they can get back the money they loaned which makes it possible for them to make more loans. Let’s look at an example:

A business lender makes a business a loan for $1,000 at 30% interest on a one-year repayment term. They bundle that loan with a thousand other similar business loans of about the same size and similar underwriting guidelines to show that these loans are of the relative same level of risk. An investment pool is looking to purchase a loan bundle that will provide a 25% rate of return.

The 5% difference between the 30% face interest rate on all the loans in this bundle and 25% rate of return the investors want is called the “Discount Rate” and where the Lender’s profit comes from. The Lender sells that bundle for business loans and for every $1,000 they loan they get say $1,200 back from the bundle sale. They then have received 100% of the money they initially loaned back plus they have a $200 profit. They can now loan that $1000 out again and repeat the process.

So when a lender sells your loan, what does all this mean to you?

First, if the business loan does not “conform” to the category, size and level of risk in one of the bundles they are creating, then they cannot bundle it. This means they cannot sell it and therefore the business loan is declined. Many lenders will exclude or decline loan applications that fall outside of a set of “Conforming Items” which is what we have called “Lender Compliance”.

Lender Compliance is a series of about 20 items that have been found to signal to a lender’s computer algorithm that a business falls within the category of very high of default. In that category it is highly likely there may be no secondary market investment buyers for that bundle, or the discount rate would be so large that the lender could not make a profit making those loans.

If there is no secondary market for those loans then the lender would be forced to hold and service those loans which would tie up their available loan capital and would greatly increase their overhead, so the business is declined for the loan.

The solution to that is when your small business prospects run a free business success scan on your private label, we display with a Red X or Green Check which items of Lender Compliance the business has completed and which ones they have not, making it very easy for them to get them all checked off. These are all fairly simple items to complete for which most business owners can get them completed within a month or less.

By not knowing what the Lender Compliance items are and therefore not completing these items, it means that the business runs the risk of being categorized by the lender’s computer algorithm as a very high risk of default and therefore declined for bankable business loans.

There are a lot of non-bankable business financing programs available for businesses that never complete Lender Compliance, but these non-bankbale loans tend to be very high interest, much smaller amounts, and have very short repayment periods. Again, this is due to the known extremely high risk of default history of loans made in this category. Your small business clients don’t have to live there, they can become bankable.