The Non Recourse Loan Product
What if I said that a business could borrow money without ever having to pay it back? What if I said that a business owner could borrow money for his business without giving his personal guarantee or a pledge of his or family assets? What if I said that he could borrow these funds at a low fixed rate of interest? I would expect you to say that I must be crazy or certainly living in a dream world: well,perhaps, but I don’t think that either is quite the case.
A typical scenario, particularly in today’s economic climate, is that the business owner approaches his bank for an expansion loan. The banker asks for the appropriate amount of acceptable collateral, personal guarantees, past three years financial statements, both business & personal, along with, perhaps, a business plan and cash flow projections for the proposed life of the loan. The probability of having the loan granted is next to zero. No one is lending today for a plethora of economic reasons. Being persistent and actually applying for a loan, and missing any of these aforementioned components, assures that the banker is off the hook and can readily say no.
Furthermore, should reliance of repayment be based upon the projections and the success of the new expanded entity, makes the chance of the loan being booked even less likely. Bankers in the past were conservative, risk averse, protecting their shareholders interests and their own careers, that is of course prior to the sub prime market bust.
Going the next step in this very common scenario, the bank rejects the loan request by imposing unmanageable covenants upon any perspective deal. These may include 100% cash or equivalent collateral, additional collateral in the form of the owners’ personal residence, restrictions as to the amount of officer salaries / bonus that may be paid, other restrictions to insure that the bank repayment comes first before any long term or officer loans are paid back. For the small to mid-market business owner, the only method of financing business expansion that may work would be in the form of mezzanine financing ( private financing ) available usually by offering some incremental piece of the business. Who first can find such an angel, given today’s climate and furthermore who wants a stranger intimately i nvolved in their business dealings?
After years in the business, I have come to consider and explore alternatives to the preceding and have discovered a gem in the process in the form of a non-recourse loan. The proposal that I am putting forth is somewhat revolutionary, is a win-win for those participants and clearly is ready to hit the general market. Here’s the scoop ! Using numbers, the business owner has an opportunity to expand his/ her business by buying out a competitor or partner, or product or almost any reason and needs $1,000,000.00 to comfortably accomplish this purchase. The owner has tried the usual route described previously and has experienced the same results. Not eager to take on partners, the deal seems to be dead. Not so! With the proposed non recourse loan , this deal has life.
The lender, in this case, will ask for three years financial statements / tax returns of both the business and the principals, projections detailing the cash flow use for the new company and nothing more! Providing that the business and principal have clear records, the business shows a profit and most importantly, the business can demonstrate the ability to repay interest only on a loan of twice the borrowing needed, a deal can be had. In plain English, you need $1000,000.00 you borrow $2,000,000.00! You receive $1,000,000.00 and the lender applies the remaining $1,000,000.00 towards the purchase of the collateral, escrowing funds for servicing the collateral and purchasing a guarantee that the collateral will be liquidated at 100% of it’s face amount at maturity. The collateral purchased will be Senior Life Settlement Life Insurance policies equal to a face amount of $2,000,000.00. Simply, the business owner pays the interest and fees and the collateral pays the loan – – – thus a non recourse – interest only loan !
The usual term of the loan will be seven years with reductions in principal and correspondingly interest, should any of the collateral be retired before the scheduled maturity. An interest rate at or slightly below the market for term loans will provide the borrower with a manageable payment and the bank with a steady income stream above the average loan portfolio earnings rate.
Risk to the borrower, none; to the bank, the business fails and interest payments are not made; principal is guaranteed at 100%. The bank / lender is in a much better position with this deal rather than any other collateralized deal where the collateral may depreciate in value. We all know what has happened to home and commercial mortgages issued at 85-110% of market value on a seven to ten year interest only repayment term. This cannot happened with the propose non recourse loan. Bankers should be chomping at the bit to get their clients in a loan program like this.
So the bank has a loan of seven year maturity, fully collateralized, a new or growing business client , zero risk , maintenance fess paid by the borrower up front seems perfect. There are no losers in this proposal. The purchase of the collateral is ,in fact ,providing a service ,as Senior Life Settlement Insurance policies when sold by the insured ,provide the individual with funds well above the cash value of the policy. The only one to frown on this practice are the insurance companies whose percentage of actual payouts will increase but so will the collection of premiums, as the policies will remain in force for a greater number of years.
In a nutshell, this product proposal has enormous potential particularly in today’s economic environment, and is a way for the banks to utilize so of the tax payer funds that they just received, safely ! Judge for yourself, the proposal works!