Private lending options provide a valuable source of cash to help business owners meet working capital needs.
Many small businesses in Canada are in need of support to restart their businesses as COVID-19 restrictions are cautiously lifted and the economy begins to fully reopen. One in six small- and medium-sized enterprises, totalling 181,000 Canadian businesses, were at risk of closing permanently due to the pandemic, according to one report by the Canadian Federation of Independent Business. As a result, many of these businesses are looking for creative cashflow solutions to cover day to day expenses and kickstart their reopening. This is especially true for seasonal businesses who may be winding down for a slower winter season, and rely on working capital loans or other forms of short-term financing to get through the off-season.
These businesses, currently experiencing a cash flow crunch, may consider traditional financing options like bank loans, lines of credit, and working capital loans. However, mortgage brokers with business for self (BFS) clients may want to consider suggesting a private mortgage. Financing is one of the most challenging issues your BFS clients face, and while working capital loans or lines of credit are generally a good place to start, they can be difficult to qualify for, especially for new businesses and those with diminished or uncertain revenue streams.
Similar to a working capital loan, a private mortgage is a short-term financing solution and may be suitable for BFS clients who want to take out a personal loan to channel funds into their business. A BFS borrower can use a private solution, such as a second mortgage on their residential property, to finance day to day expenses of their business, help pick up the slack during an off business period, or help with marketing initiatives. Private lenders, like CMI, are able to provide fast, flexible financing where traditional lenders are just not willing to consider the risk. Private lenders are able to help small or new business owners access equity in their homes, and pre-pay their mortgage interest from loan proceeds in order to increase available cash flow.
Flexible and customized features unique to private lending offer further benefits to BFS borrowers. Specifically, an interest-only or prepaid mortgage can help owners where their business is not yet earning the level of income needed to cover mortgage payments, and still provide much needed cash to keep the business functioning. With this additional cash flow, your client can put their available cash to work in other areas of the business, like bringing staff back, paying bills, or restocking inventory. When the business becomes more established, or begins to turn a profit again, you can then help transition your client to a traditional lender.
Create a business plan
While a private mortgage on a client’s residential property is a great alternative to a business loan, it’s important to be open about the purpose of the mortgage with your private lending partner. If your BFS client is interested in applying for a private mortgage, it’s important that you guide them through the process step-by-step, and come up with a complete profile of the borrower and business for your private lending partner. Drafting a thoughtful business plan shows the underwriter that the borrower is prepared to manage their business through these uncertain conditions.
In this business plan, include:
It’s also helpful for your private lending partner to know the safety precautions that the borrower is implementing post-COVID, as well as the business’s earnings before the pandemic. In addition, encourage clients to conduct research on trends and challenges in the industry, and a plan to address them, as well as background on the borrower’s expertise in the area.
With this information, underwriters can get a better sense of how a business may recover, and give them confidence to approve the mortgage. Even if business income dropped dramatically over the pandemic, lenders can base their expectations on the details included in the plan.
If you have any questions about a residential private mortgage as an option for your BFS clients, contact your CMI BDM.