Seldom are surprises welcomed when applying for an SBA loan to acquire a business, execute a change of ownership or purchase real estate.
In fact, surprises usually mean a change in terms which may affect the loan's outcome or desirability.
The official term for this phenomenon is Retrade.
The term retrade simply means the practice of renegotiating the terms of a transaction after the initial price and terms have been agreed upon. Unfortunately, SBA lenders are also prone to retrade which may come as a surprise and to the dismay of loan applicants.
Let’s explore when and why a Retrade may occur during the loan application process and more importantly how to avoid them.
First, we must understand the order of events when applying for an SBA loan.
After submitting a complete loan package it is customary for the lender to issue a Term Sheet also called a Letter of Interest.
There are three types of Terms Sheets
A term sheet printed upon demand by an inexperienced Business Development Officer without any prior due diligence performed
A term sheet printed on demand by an experienced Business Development Officer with credibility within organization
A Term Sheet approved by a Credit Manager or Chief Credit Officer
It’s easy to understand the veracity of a Term Sheet improves and the likelihood of experiencing a retrade diminishes with more due diligence and higher scrutiny.
However, take note that Wall Street banks, seen on every corner, are notorious for retrading at any point during the loan application process, even right up to the point of signing loan documents.
The reason for this phenomenon may be attributed to inexperienced Business Development Officers, decentralized credit decision making authority and an abundance of obscure lending policies unknown even within the organization until after a loan is formally underwritten and reviewed by a credit manager.
As a rule, I require all of my portfolio lenders to perform a minimum acceptable level of due diligence that includes reviewing the Term Sheet with a Credit Manager or when possible a Chief Credit Officer, significantly minimizing the likelihood of a retrade.
Further, I require my clients and lenders to speak prior to submitting the loan request to formal underwriting so the lender can confirm the due diligence performed up to that point in an attempt to avoid any surprises including a retrade.
I have only experienced three retrade events since founding ThinkSBA in 2019. Two of them by Wall Street banks with a decentralized underwriting center and one due to the need to mitigate unsatisfactory personal liquidity at the time of loan committee. Incidentally, all three loans closed.
As I have demonstrated, the most effective way to avoid a retrade is to require a minimum acceptable level of due diligence and scrutiny and knowing which lenders have a higher or lower propensity to change terms after issuing a Term Sheet.
Good news for my clients is that I consider avoiding surprises and or retrades as my job. Therefore, I take pride in the thoroughness of my process and never take my clients' desired outcome for granted.
Remember, I’m with my clients from start to funding.
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