Webster defines Differentiation as “…the process of making something different in some way; stating the difference or differences between two or more things…” Isn’t this the key in most businesses? Unless you operate in a business that has a monopoly, you need to constantly show the world how your company is different, or better, than everyone else in your space. How do you do that?
The lending business is no different. There are numerous lenders out there in virtually every niche imaginable. Why choose one over another? Does one have better pricing? Better structure? Better terms and conditions? Nicer people? What is it that differentiates one lender from another? Let’s take a look.
Pricing is always key when borrowing money, as who wants to overpay? When comparing costs, it is important to look at the total cost of the lender’s offer, and only compare lenders that are offering the same product. Often times, borrowers compare a proposal Celtic generates to their current banking relationship. Guess what, Celtic’s costs are higher.
Celtic isn’t a bank and shouldn’t be competing with a bank, as we serve different markets. If the bank can fill the need of the borrower, they should remain where they are. The borrower is typically speaking with us as the bank can no longer serve the borrower’s needs. Not a fair comparison if one can deliver and the other cannot.
Structure is also very important as it speaks to whether the lender can lend the borrower what they are looking for. Does the lender just like revolving loans or do they do term loans as well? Do they like larger term loans, or do they have a cap on the size?
If one lender is cheaper, but can’t deliver on providing the borrower with what is needed, does the cheaper pricing matter? Probably not, unless the borrower can live with less. If Lender A can lend $1,000,000 at 10% and Lender B can lend $2,000,000 at 12% and the borrower is seeking $2,000,000, what good is the cheaper option? Borrowers can’t get hung up on lower priced options that don’t work for meeting their needs. If it doesn’t work, it is not a viable option. If the borrower can make do with the $1,000,000 loan, then it is worth considering.
What opportunities is the borrower passing up by taking the lower amount? With the additional funds, could they grow their business? For the incremental interest, can the borrower grow their business, enhancing the bottom line and enterprise value? If so, it seems like an easy choice, but one many entrepreneurs get hung up on.
How about loan covenants? Does one lender restrict the borrower from doing things? Do financial covenants put the borrower in a box to operate or are they flexible enough to allow for variations the business is bound to encounter? At Celtic, we don’t use financial covenants as we prefer to let the business owners decide how to run their business and not manage it to covenants to make us happy.
Another common approach in receivable lending is the use of a lock box system for remittances. The theory is to take the temptation away from the borrower to divert money away from the lender to themselves or others. 99% of the borrowers are honest and ethical, so lenders make 100% of the borrowers comply with this to protect against the 1%, as the 1% can be very costly.
What costs associated with the lock box is the borrower responsible for picking up? What is the disruption to the borrowers business in getting all of their customers to send funds to a new address? Does the borrower lose visibility on who is paying them, or what is the delay? At Celtic, we believe in providing more control to the borrower and do not require a lock box system at all. With us, the borrower’s customers continue to pay them directly, to their address, not ours.
How about the response time from the lender? Is there anything more frustrating as a business owner than when you need an answer to something important to you and can’t get one in a timely fashion? Can you pick up the phone and call someone that has the authority to make the decision about your issue, or do you have to wait for someone to get back to you, only to have valuable time go by? Make sure you have access to the decision makers at your lender, or at least, understand their process for making decisions, large and small ones, so you can set your expectations accordingly.
And there is always the concern of the lender’s ability and certainty of closing. The borrower may have a terrific proposal and go down the path with a lender who changes the terms after their due diligence or is unable to close at all. It is important to know ahead of time what the lender’s approval process is and who is involved. Celtic has an easy and efficient underwriting and approval process as senior management is involved in the process prior to the proposal being issued. Being a non-regulated private company, we are able to deliver on what we propose.
Lastly, how long does the lender tie up the borrower? One year, two, three or more? If the borrower is coming to a non-bankable lender, they should not be penalized for getting healthy early and being ready to transition back to bank financing. Celtic’s standing policy is that we let the borrower out anytime the borrower is ready to move back to the referring bank, whether that is two months or two years.
The moral of the story is to make sure you understand what differentiates you from your competition so you can adequately educate your referral sources and customers to help them make an informed decision. Competition is fierce, and you can’t win every deal, but you can enhance your chances if the market clearly understands your strengths and weaknesses. Do you have enough differentiators to make you stand out from the rest, or are you just one of the pack?
At Celtic, our money is as green as everyone else’s. We are not usually the cheapest nor the most expensive option, the question is…are we the best option? Competitive pricing, sound structure to include larger term loan facilities, flexible terms, no financial covenants, no lock box system, experienced and stable management (top two people have been with the company a combined 50 years!) and access to decision makers from the start helps differentiate us from the crowd.