It’s true what they say: When it’s crunch time, experience counts. A lender in a crunch called me recently with a situation where I called on my experience – and a lesson I learned early on.
JOE CDC. Richard: My boss suggested I run this past you because you’ve been in the profession even longer than he has. I have a loan request where one of the owners has only an 18% interest in the business. From what I know, he doesn’t have to guaranty the loan because he owns less than 20%. That’s what I told him when I marketed to him.
Now, I’m in a crunch. I have the TPL commitment and the bank is requiring the business owner to guaranty the loan. When my boss heard that, he said our CDC also had to require the guaranty or we would have a preference. So, what’s a preference? Does the TPL have one? How do I get out of this?
ME. Yeah, I’ve been in the profession for a very long time indeed. So you’d assume I know just about everything about everything. My experience doesn’t give me any special knowledge I admit. But I’ve dealt with many issues. And preference was one of the earliest. I remember it well.
It started when I got a call from Bruce at the SBA. I don’t recall his title. I just figured he was the Grim Reaper, because his calls were never good news. I was dead right.
BRUCE SBA. Richard! The bank is already getting a first lien on all the collateral on a loan you worked on. How could you possibly have structured it with fewer guarantors? You’re making SBA take all the risk. If the loan goes bad, the American taxpayer will have to pay. You are giving the bank a preference. That is just unconscionable, I tell you! Unconscionable!!
ME I could see my co-worker a few desks away smirk as he reached for his Funk & Wagnalls, presumably to look up the meaning of “unconscionable.”
Well Bruce was right. My loan was in second place, but I had fewer guarantors. I had more risk but the bank had better security. Yep! That’s a preference alright!!
Later on, I learned how to deal when the TPL wants more collateral than I do. I ask the TPL if they would agree that in the event of default, they first attempt to recover against the extra guarantor. If the TPL collects something, it reduces the debt senior to mine. I have the same collateral as I had before, but the senior debt got reduced. Far from unconscionable, conscientious I say!
Bruce, Joe and the American taxpayer are now reassured.
Senior Associate, CDC/504 Programs