According to a recent report by the Federal Reserve Bank of St. Louis, commercial and industrial loan volumes have declined to historic lows. Economic forecasters predict commercial and industrial lending activity will continue to decline year over year for up to 3 years after this recession is officially declared over.
During times of economic adversity, there are always opportunities to make money. It’s a simple matter of thinking outside of the box.
The St. Louis Fed tells us that commercial and industrial loans are at historic lows. The Fed also says that demand for them remains strong. The problem is on the supply side.
Banks and other conventional lenders are in a retrench mode from their aggressive, pre-recession lending practices because of a need to shore up their own balance sheets. They are doing this by withdrawing the availability of funds to potentially high-risk businesses that could cause them unwanted grief from their banking regulators. Instead, banks are cherry-picking their loan portfolios; only making loans available to their AAA customers.
Banks have rolled up the welcome mat to potentially high-risk commercial borrowers leaving thousands of businesses in desperate circumstances. Absent the funds for continuing operations, many businesses will have no choice but to go out of business; thereby worsening an already unprecedented level of unemployment. Some of them could get help with emergency financing from lenders like ElcLoans and some others.
The demand gap for commercial and industrial loans to businesses with less than impeccable credit ratings presents tremendous opportunities for brokers. Fact: experts predict there will be a $350 billion shortfall in the supply of funds for commercial and industrial lending between 4th quarter, 2009 and sometime in 2011.
This alleged shortfall in the supply of funds for commercial and industrial lending is really a misnomer. The funds are still available. They are just available at a different venue and at higher interest rates, beyond the prying eyes of government regulators.
Money is fungible. It will always move to the opportunity that presents the greatest rate of return. When banks cannot make money in their highly regulated commercial lending business, they simply move those funds to their non-regulated commercial lending subsidiaries. It is in these non-regulated subsidiaries that the funds generate a higher rate of return on higher risk loans without the scrutiny of the government.
Not all, but more than a few of the larger banks have non-regulated commercial lending subsidiaries. These subsidiaries operate as free-standing entities. They are totally disassociated from their parents, in name and practically everything else.
They are typically low-overhead, low-profile operations; so anonymous that only the most senior officers of the bank know they exist. They do not want to call attention to themselves by the general public or by government regulators. However, they do a thriving business.
Because non-regulated commercial lenders are low-profile, they typically do not engage in heavy advertising. Because they are low-overhead, they do not maintain extensive field sales forces to drum up business. Rather, they rely almost exclusively on their networks of commercial loan brokers to generate loan volume.
The commercial loan broker is the essential link between businesses that need commercial loans and commercial lenders eager to make loans. The loan broker is a commissioned agent who is compensated by the commercial lender based on the type, quality and amount of the loan.
Contrary to misinformation circulating around the internet, most states DO NOT require a license to broker commercial real estate or business loans. Some form of license is usually required for regulated financial service professions such as residential real estate broker. If you are unsure about your particular state, use the internet to check out your state requirements.
While a license does not constitute a requirement to be a commercial loan broker, other definite requirements include product knowledge, your own network of commercial lenders and clientele in need of commercial or industrial loans.
Product knowledge: If you do not know what you are selling, you will find it exceedingly difficult to sell anything. Short of being a genius, it could take years to become an expert in all the exotic loan and leasing instruments used in the commercial and industrial lending industry. Becoming an expert, however, should be a normative ideal to strive toward while focusing on making a quick sale in the next 60 to 90 days.
You generate income in the next 60 to 90 days by sticking with the tried and proven basic loans. These include accounts receivable loans (factoring), asset-based loans (equipment), sale/lease-back deals, purchase order loans, inventory loans, credit card receipt loans and letters of credit.
There are basically two practical ways of gaining product knowledge: (1) commercial lenders eager to add you to their network of brokers (2) commercial loan brokers eager to add you to their sales force in consideration of a share of your commission.
The no-cost/low-cost route to product knowledge is to approach commercial lenders with your business proposition. Keep in mind that you are an unknown entity. Many commercial lenders will be reluctant to deal with you because they do not know you. Some will, however. It could be a lengthy, hit-miss process in finding lenders willing to play.
The benefit of this approach is you build up your own network of lenders while gaining valuable insight into the kind of deals your lenders will do and the kind of deals they will not do. Although commercial lenders delight in their anonymity, you can readily find them on the internet under “commercial lenders.”
Signing on with an established commercial loan broker is probably the path of least resistance. Many have established training programs for newbies, complete with the requisite training manuals to get you up to speed in short order. The clear benefit here is that established brokers have their established networks of commercial lenders. Therefore, you are not re-inventing the wheel. You are simply plugging into their network. Some have continuing guidance and mentoring. Others do not.
Cost is a major factor in dealing with established commercial loan brokers. Their training is seldom free. We see one company promising a complete training program including a few days at their New York headquarters. This is in return for several thousands of dollars. Another company offers a complete set of manuals and on-going support for a couple of hundred dollars.
What you are willing to spend relative to your perception of good value demands appropriate due diligence. As in every other field, there are a few charlatans in commercial lending who will not hesitate to liberate you from your ducats.
Developing clientele: The one advantage you have in the sales arena that does not accrue to salesmen of other products is the fact you sell money! Every business needs money to operate. Once you put the word out that you are the go-to person for commercial and industrial loans, businesses will come to you, particularly in this economic climate.
The ultimate question in considering commercial loan brokering is the question of income. How much money can you expect to make as a broker? It depends on you. If you work smart and do it full time, you can easily expect to make in excess of $100,000 a year. If you do it part-time, your income will be less. It depends on you.
One indubitable fact: There are a whole lot more difficult ways to make a heck of a lot less money. This is not rocket science. Anybody can do it.