Business Mortgage Lending with Sheldon Brow | E014
In this episode of Financial Planning for Canadian Business Owners, Jason Pereira, award-winning financial planner, university lecturer, writer, talks with Sheldon Brow, Independent Mortgage Broker. Sheldon Brow talks about how mortgage lending and debt in general work differently for business owners than they do for the average consumer. He also provides guidance and tips on how to make your life easier as a business owner when you need to apply for debt.
Episode Highlights:
● 01:12 – Sheldon Brow describes what he does in his career.
● 02:44 – Why do business owners have such a hard time getting mortgages?
● 05:53 – Why are independent mortgage brokers such a beneficial option?
● 04:20 – What does the approach to applying for debt look like?
● 10:12 – The vast amount of financial training is unfortunately focused on sales.
● 11:20 – What are his best practices to make access to credit easier for business owner clients?
● 14:17 – Sheldon talks about various types of business loans that people commonly need to take out.
● 21:25 – For business lending, it is really helpful to have big, extensive contracts with big companies, reliable cash flow, assets, and invoices that you have coming in.
3 Key Points
1. Among the plethora of business mortgage lending, some of the variables include not just credit scores, but also debt-service coverage ratio.
2. Seek a long-term relationship with your broker with an ecosystem of financial experts, not just a transactional situation.
3. The better you know your client, the better you can advise.
Tweetable Quotes:
● “I broker mortgages. I am able to shop across more than 30 different lenders and many, many different types of products for both personal and business lending.” – Sheldon Brow
● (Business lending) “A lot of people think you just need a good credit score, and that is a huge misconception.” – Sheldon Brow
● “Why brokers are better in every level of finance, in my opinion, is because they’re not just giving the kind of tunnel vision of what is appropriate at that bank.” – Sheldon Brow
Resources Mentioned:
● Facebook – Jason Pereira’s Facebook
● LinkedIn – Jason Pereira’s LinkedIn
● FintechImpact.co – Website for Fintech Impact
● jasonpereira.ca – Jason Pereira Website
● sheldonbrow.com – Website for Sheldon Brow
● Linkedin – Sheldon Brow
● Call Sheldon Brow – (902)440-2663
Full Transcript:
Speaker 1: Welcome to the Financial Planning for Canadian Business Owners podcast. You will hear about industry insights with award-winning financial planner and entrepreneur, Jason Pereira. Through the interviews with different experts, with their stories and advice, you will learn how you can navigate the challenges of being an entrepreneur, plan for success, and make the most of your business and life, and now, your host Jason Pereira.
Jason Pereira: Hello, welcome to Financial Planning for Canadian Business Owners. Thank you for joining me. Just a reminder to sign up for my newsletter at jasonpereira.ca, where you'll receive notice of all my podcasts, newsletters, whatever else I might be up to.
Jason Pereira: So, on today's show. Today on the show, I have Sheldon Brow, mortgage broker, and I brought him in to specifically talk about how mortgage lending and just debt in general works differently for business owners than it does the average consumer, and look for some guidance and tips on how to make your life easier as a business owner when you need to apply for debt, and with that, here's my interview with Sheldon.
Jason Pereira: Sheldon, thanks for joining me.
Sheldon Brow: Thanks for having me, Jason.
Jason Pereira: My pleasure. So, Sheldon Brow, tell us about what it is you do.
Sheldon Brow: Well, I broker mortgages, so I'm able to shop across more than 30 different lenders and many, many different types of products for both personal and business lending, and there's many, many different kinds of interest rates and many, many different kinds of products, so we just try to make it so that we can search everywhere at once, and basically act like an Expedia of finance for clients on the lending side.
Jason Pereira: Excellent. So, you're independent, not tied to any one major bank, and as you said, 30 different lenders, so yes, there's the first myth to debunk for people early in entrepreneurship. There's more than five banks to go to. Sorry, six. I always forget about National.
Jason Pereira: All right, so the process of applying for debt, in general, when you start a business, people aren't really familiar with that looks like. I actually had someone feel the question to me the other day, saying, "Okay. Well, if I give the bank $250,000, how much would they give me?" And I said, "Well, they'd put it in a bank account, and they'd give you a line of credit for $250,000." And he's like, "I don't get it. So, I'd have 500?" I'm like, "No, you'd have $250,000. They'd use the cash as security."
Jason Pereira: And very confused by the entire concept, because everybody is typically used to the world of, I'm going to go buy a house and I'm going to basically put down a fraction of the down payment and then they're going to give me the rest of the money, right?
Jason Pereira: And that's the normal course of action, because essentially the house is security, whereas business lending, you may or may not have security. So, we'll talk about debt for businesses in general in a second, but let's start with mortgages, which are more conventional. So, business owners have a harder time getting mortgages in general than other people, can you speak to as to why that is?
Sheldon Brow: Well, business is a lot more complex. I mean, there's different industries, so it's very much dependent on the industry. You're very right when you say that people don't necessarily understand lending, especially when they're just coming into the business world when they come from a conventional world of borrowing personally. A lot of people just think you need a good credit score, and that's a huge misconception that I constantly have to coach too, and-
Jason Pereira: Okay, that doesn't hurt, but that's not all you need.
Sheldon Brow: Yeah, it's great to have. It's important to have, but it's definitely not the end all and be all. Debt service ratio is the second biggest one in personal, but then when it comes to business, there's a whole other plethora of variables, and again, it depends on your industry.
Sheldon Brow: Whether you're going to lend to somebody that's a dentist or somebody that owns a restaurant, which there's a lot more risk, and can have more fluctuating month to month revenue. That's a totally different ball game. So, it's very subjective. There's a lot more variables, and you have to have somebody that much better understands your situation and your business than somebody would have to go into a real depth of understanding of personal lending.
Jason Pereira: Yeah. I mean, it's often frustrating for many, because essentially, they really do treat business owners as a separate beast altogether, because they take the time to try to understand everything they can about that business for fear that the "business goes under", whatever it is.
Jason Pereira: However, I have fired back in more than one occasion, apparently bankers seem to think that people who take T4 income never lose their job. I would actually argue that, especially in successful businesses, the business owner is probably the safest employee of that business, yet banks don't treat him that way.
Sheldon Brow: Well, that's actually a really interesting point that you make, because that is probably the way they look at it. We always have a politicians and even banks advertising about, "Oh, Business owners and entrepreneurs are the backbone of society." And whatever else, and if you have somebody that's a business owner or an entrepreneur, in my opinion, this is somebody that has a lot of tenacity.
Sheldon Brow: That has a lot of grit, that has a lot of creativity and ingenuity in the way they approach things, especially if they've been doing business for any period of time, whether it's 5, 10, 15, 20 years, and still the treatment that you'll see with people that have even been with their banks for 30 years with 25 years of self employment still get an incredible amount of scrutiny, so that scrutiny never really seems to go away.
Sheldon Brow: If you have maybe a private wealth relationship, you might get a little bit of extra leeway at times, but even then, that might not do a lot for you, so there's a ton of scrutiny that they're always showing the business owners that, I think, is just exactly the way you explained it. It doesn't always make a lot of sense, where it's looked at as this huge additional risk as opposed to somebody that just has a corporate salary job that could be laid off at any time.
Jason Pereira: Yeah, exactly. Ironically, if you want a restaurant, it's harder to get a mortgage than it is for your restaurant manager, so it's kind of ironic and kind of ridiculous. So, basically talk to me about...
Jason Pereira: First off, before we jump into the solving the problem mortgages and how to apply for them as a business owner, talk to me about independent mortgage brokers and why someone should opt to go with that versus just talking to their normal bank?
Sheldon Brow: Well, the first thing I'll say in regards to that is it always comes down to the person. You've got amazing people sometimes within banks and some people that shouldn't work there, and you've got amazing people that are mortgage brokers and some people that shouldn't be there. The biggest thing I'll say is that you don't want somebody that's transactional. You want somebody that wants to build a longterm relationship for you.
Sheldon Brow: Why brokers are better in every aspect of finance, in my opinion, is because they're not just given the tunnel vision of what is appropriate at that bank. Every different bank has different appetites, and obviously when you're employed at a bank, you're only given that training. I came from two major banks over 15 years, and it was a world of change when I went from one big bank to the other. It was like everything was being turned upside down. The conventional parts, the five Cs of lending, always remain the same, but the way that they look at different industries or different businesses is totally, totally different.
Sheldon Brow: So, being able to use a broker, if it's a good broker that you can trust, that you can have a longterm relationship with, they're going to be able to provide you not just, "Okay, we can do it." Or, "We can not." They'll say, "Well, I've got two or three options for you." Totally different products or maybe the same product that two different lenders, and you're going to be able to get options, and when you have options you have more intelligent insight as to what might make sense for your business, and sometimes you don't even realize that there's an interesting option that you would want to consider if you have a closer relationship and a closer conversation rather than if you just heard the surface level details.
Sheldon Brow: So, getting access to way more products, way more product knowledge a lot of the time, and those brokers have access to professionals at each bank, so if there's even anything that mortgage broker doesn't know about one of the particular banks, they're able to deal with business development managers, senior underwriters, underwriting managers that are going to give them a deeper insight that they need on any particular file.
Sheldon Brow: So, it gives you, to punchline answer your question, way more selection of products and rates, and way more insights into longterm strategies, and I would also hope that with people working with a mortgage broker who believes in holistic advice, like myself, that they would be working with a professional like yourself who does financial planning or an accountant, because that can make a monster difference when you're dealing with somebody that's not just giving you advice from a bank, but somebody that has an ecosystem around them of other financial professionals.
Sheldon Brow: If you've got somebody like yourself, Jason, that's a high net worth client and they're setting up a family trust, and you can't properly explain that income. I had a client in D.C., that was business client, he paid $70,000 extra in interest over five years on his mortgage, because the mortgage person that he used at a bank wasn't able to properly explain that strategy, so that's an epic difference.
Jason Pereira: And it's interesting. So, a couple of very key points there. I mean, oftentimes people will [inaudible 00:08:52] around for their own debt, but then again, I'm always one to believe in outsourcing, especially professionals, and again, we'll go back to the 30 different lenders versus... There's no Canadian out there who is in the lending business who could name 30 different lenders. It's just not something. I can't do it.
Jason Pereira: Secondly, your point about having that proper team, and I mean, $70,000 more in interest because he couldn't explain the structure, right? What can I say? I've had enough interesting and terrible interactions with banks where these people aren't trained on this sort of stuff. They're definitely not trained on stuff like large expensive corporate structures and family trusts and freezes and all that stuff. I mean, I literally sat down with someone just to open up accounts who was "business specialist", believe it or not, and when I said I need to open accounts for a trust, she was like, "You mean a corporation."
Jason Pereira: I'm like, "No, I mean a trust." And she's like, "But that's a corporation." I'm like, "No, it's not. It's a trust. It's something completely different." And then they had to go talk to their supervisor and then told me to come back another day when someone else who knew what they were talking about was there. There's a certain level of proficiency they teach you at these places and unless someone can actually... I mean, that was me. I can actually explain it. Could you imagine if a customer or business owner went in to basically deal with this and have to explain us all to themselves when they don't truly understand the concept themselves? Frustrating. Incredibly frustrating.
Sheldon Brow: Wow, that's a really important point that you make that the training, and I can tell you from both of the ones that I went to. In the first 30 days or so, you get an interesting spectrum of training, but the vast majority of training that every institution that I have worked for, and I believe from all the conversations that I've had with colleagues at other big institutions is, it's all around sales, and we've seen this in the news four or five years ago when they all come under fire.
Sheldon Brow: You're trained so much more on sales, dangerously more on sales, other than once you get an anti money laundering quiz that everybody copies the answers off each other, and they're not really becoming experts in that. It's really dangerous to only train somebody on sales. You can still train sales while making sure to give you those additional insights that are going to make sure to give full and fair disclosure, and [crosstalk 00:10:57].
Jason Pereira: Yeah, there's no shortage of examples of how poorly these things turn out. All right. So, essentially we've established why you'd want to deal with a mortgage broker like yourself, so talk to me then about the types of things that you have to do with banks in general, or just best practices that you have for making access to credit easier for business owner clients that you wouldn't have to do for just the average person that is.
Sheldon Brow: Yeah. So, the first thing is just always going, and I think again, you would understand this better than most because there is what we call in the industry, a KYC. Know Your Clients, and some people will just do a very surface level one. I've talked to you in the past, and you shared that you have a pretty thorough Know Your Client process, because the better you know your client, the better you can advise them.
Sheldon Brow: You don't want to be shortsighted in advice, especially when it comes to financially related things, because the impact can be pretty substantial, so doing that really good Know Your Client interview upfront, and been able to really put together all of the right documents, and the different banks, some are asset based lenders, meaning that they just want to see the collateral that you're securing it against.
Sheldon Brow: Some of them are very focused on cashflow. I recently had a business owner client, who if you looked at his business financials, he had a net loss of $105,000 for the year. However, he had 20 years of monster success in business, and it just so happened that he took a huge withdrawal under his accountant's advice, and had a great year that year, but was just... They had a strategy in order to pay some income tax and do some other things.
Sheldon Brow: So, if you're just looking at that surface level, you want to be able to have all your documents and a good explanation, and connect the people that's doing your lending with your accountant sometimes, because trying to get that information out of clients... Clients are running a business and they're a specialist at whatever it is that they do.
Sheldon Brow: They're not supposed to be lending experts. They're not supposed to be accountants, and I think one of the best things you can do is connect them with your financial pros, so that you're not trying to give that third wheel information, and then they're trying to convey that over to a bank underwriter.
Sheldon Brow: So, make sure that you're giving good, honest information on the application, because when I send this information over to the bank, everything will come out in the wash. Everything will surface, eventually. I think it was like 13% of Canadians felt it was okay to tell a little white lie on a lending application.
Jason Pereira: Oh, that's called fraud.
Sheldon Brow: Yeah, and there's pretty large penalties for fraud. There's been a 52% increase since 2013 on suspicious lending, and everything comes to the surface, so-
Jason Pereira: You don't say? On the backdrop of a raging real estate market, how shocking that is me.
Sheldon Brow: Yeah, and in all forms of lending. I mean, I've got business owners that'll conceal. I had one guy conceal that he had a $40,000 boat loan that he got two days ago. It's going to come to the surface, and if it comes to the service and I divulged everything and made intelligent notes around it, that's a lot better than, I didn't know about it, I sent it in, I thought it would look great.
Sheldon Brow: They find out on their end, and are like, "How come you didn't know this?" Then I look silly, the client looks silly. The application doesn't really look like it's something that they really want to pursue fervently anymore. Psychology is a big part of the game in underwriting with any bank. I mean, you want to give the underwriter a clear impression that you're trying to be upfront and honest about everything and mitigate any risks that they perceive.
Jason Pereira: Yeah, it's interesting. It's a commonality, not just in underwriting for... I mean, not just in this space, but also in insurance, right? The underwriters learn who's telling the truth and who's trying to pull one over on you, so it's just a matter of time. You build your own reputation with these people.
Jason Pereira: So, now we talked briefly about mortgages. I mean, those are the more conventional box standard type loans that are easier to get because, of course, they're collateralized and they're more common products, even though there's some variability to them.
Jason Pereira: Let's talk about other types of business loans that one would potentially need to look to take out, because I'm sure we all get exposed to some of them as business owners, but not necessarily all of them depending on the nature of our business, so let's just educate people as to what's out there.
Sheldon Brow: Yeah, there could be a lot of different kinds, but I'll stick to some of the main basics ones, and obviously, there's a lot of different purposes. It's not just to necessarily buy a commercial building. It could be just to make an injection into the business, because they're growing, or they have a great opportunity, or they want to buy some equipment.
Sheldon Brow: So, obviously there would be the standard small business loan that comes in a fixed rate a term. Those are pretty conventional, most people would understand those. Operating lines of credit is something that a lot of companies will usually want to have. I would say the vast majority of businesses would want to have one if they don't, and those usually come at pretty friendly terms. It's attached to a business account a lot of the time, almost like a very, very large overdraft.
Jason Pereira: Now, to be clear though, let's just talk about this quickly. In most cases, and one of the reasons that people often talk up about incorporating is creditor protection, but let's face it, in most of these cases, I'm guessing you're seeing that personal guarantees are required unless you have a lot of assets in the business, is that right?
Sheldon Brow: Yeah. That's really become a definitive new standard that we're at across the board.
Jason Pereira: Really?
Sheldon Brow: It used to be more, maybe a little bit less often, but it's pretty much you can bet on that a hundred percent of the time now.
Jason Pereira: As usual, the bank wants a chicken if you want to borrow an egg. Okay, so yeah. So, what other forms are we you looking at?
Sheldon Brow: So, another interesting one, which... When I get into some of the more interesting ones that I'm going to name now that are maybe a little bit higher cost, these are ones that you, while you want to tread carefully around, I wouldn't go as far as to say that they're necessary predatory lending.
Sheldon Brow: Different kinds of lending have different kinds of risks allocated to them, and obviously with higher risk comes higher interest rates, and sometimes it does make sense depending on the purpose and what you're going to use that money for if you're a smart business person.
Sheldon Brow: So, invoice factoring is one of them. That can be one of the more expensive ones. [crosstalk 00:16:51].
Jason Pereira: So, lets explain that. What's that mean?
Sheldon Brow: So, that's one I've actually run into with a lot of businesses, where they say, "Listen..." And one of the most common ones, I'd say, is construction companies. So, anybody that's doing something where they don't get paid, especially when you're dealing with government and other entities, that they're going to take maybe 30, 60, 90 days to pay you, you have to put all that money up front.
Sheldon Brow: You might not be able to have enough of a large operating business line of credit, and you've got to wait to get paid, so then if you've exhausted your entire business line of credit, now you have to go to someone that does invoice factoring and say, "Listen, I'll give you 15% of..."
Sheldon Brow: It's more not based upon an amount of time, a lot of the time, so if you want to borrow 10,000 from me, you have to pay me back 12,500, for example. It's not going to be an ongoing accumulated interest a lot of the time. Sometimes it is, but it's basically, give me some money because this customer's not going to pay me for a while.
Jason Pereira: Yeah. So, essentially you're discounting the total debt, not giving people access to the full amount, and your spread is the profit more or less.
Sheldon Brow: Yeah. Essentially, you're selling your unpaid invoices in exchange for an advance of usually between 60 to 90%.
Jason Pereira: Fair enough. Okay.
Sheldon Brow: And that company that bought it will actually, most often, collect the invoice amount from your client before they get the remaining percentage minus the fees.
Jason Pereira: I mean, that's relatively common in some industries, right?
Sheldon Brow: It is.
Jason Pereira: Yep. So, what else do we have on the docket here? What other options?
Sheldon Brow: Merchant Cash Advance.
Sheldon Brow: So, the [inaudible 00:18:22] to merchant cash advance and equipment financing, so merchant cash advance means with businesses that accept credit card and debit card payments. Let's say you've done $10,000 a day in sales that run through your credit card machine, that gets usually deposited with most businesses within 24 hours. So, you do your business today, it's settled with Visa MasterCard, it gets deposited into your business account tomorrow.
Sheldon Brow: You can go to your debit exchange company and get what's called a merchant cash advance, and that basically means they'll give you, again at a little bit higher rate, I'd say typically you're probably looking in the range of around or in the vicinity rather of 15 percentage, and they'll give you that money and then they'll take a small percentage out of the money that they're depositing into your account every day as your daily payments. Does that make sense?
Jason Pereira: No, it does. In fact, I'm actually interviewing a company that does that on Financial Planning for Canadian Business Owners. A company called Payability, which has done that on mass with Amazon purchases and Shopify purchases, so it makes a lot of sense. All you're doing is you're shortening the cash collection cycle, right?
Sheldon Brow: Yeah. Exactly, and it just makes it so... And you can usually get those pretty quickly, so they can be approved and dispersed pretty quickly, and that's one of the real reasons people like it and it's just coming out as a percentage of your daily revenues, so it's got what could be considered some pretty friendly repayment terms in a way.
Jason Pereira: Fantastic. So, what else you got for me? There's still plenty more.
Sheldon Brow: So, equipment leasing is a big one. The easiest way to put it is that anything with a serial number, most things with a serial number, you can borrow against. The only thing that's a little bit of an issue with that, that we're a little bit behind the States on, is solar panels.
Jason Pereira: Really? So, there's no borrowing on solar panels [crosstalk 00:20:06]?
Sheldon Brow: Not in the same way that they do in the States. They're not going to come and take the solar panels off your house in a repo. [inaudible 00:20:13] on solar panels has been really tough. I've made a billion phone calls about it. I deal with a lot of solar lending and solar companies that send me business, and usually, we'll try to either get a home equity line of credit or refinance it into the mortgage to make it [inaudible 00:20:28] possible, or a solar financing loan, but basically most things with a serial number, you can borrow against it and use that as collateral to make sure that you can get some type of leasing or borrowing against it.
Sheldon Brow: I'd say one of the most common is big trucks, construction equipment, stuff like that. You'll see construction companies maybe have some type of big piece of equipment that they'll borrow against, because they have a high value a lot of the times. They're paid off, and those I'd say are the most common ones that you'll come across. There's other really, really good obscure ones, but they require a really deep complex explanation that people would rarely really ever run into, so those are your main overlying ones for self employment.
Jason Pereira: Excellent. So, those are various different forms of lending, but really what it comes down to is a [inaudible 00:21:14]. I mean, what it comes down to is if you have assets or if you have money coming to you that is contractually obligated through services, then you're pretty much able to borrow off just about any of that. Is that about right?
Sheldon Brow: Yes, and the only other thing I'd mention is that it's really helpful if you have big contracts with big companies. If you can present that contract and say, "Listen, I'm not just..." Yeah, there's some businesses that, let's say they're doing 200,000 a year for the last 10 years, that could change at any time, but if it's somebody that has a 10 year contract with the governments for contracting services or some other large company that is a million or billion dollar company, those can go along way, but really boils down to your assets, your invoices that you have coming in, or just being able to show a really reliable cashflow.
Jason Pereira: So, let's just talk about one thing that comes up frequently here before we sign off. People are often question like, "The bank seems to want all this other stuff." And let's just be clear on a couple of things. They don't take any risk. People seem to think that they have a certain amount of risky lending they'll do.
Jason Pereira: No. As far as they're concerned... Again, "If you want an egg, where's your chicken? That's what we want from you." So, that's the first piece, and the last piece is, you may have a good relationship with you, but they're not your friend. Okay?
Jason Pereira: On countless occasions, and I'm hearing this even more now with everything going on, you can have a great relationship with them for years and years and years, and then if your business starts to go sideways, "Oh, we can't help you. Sorry about that. No."
Sheldon Brow: The biggest complaint that I hear from business owners is exactly that, is, "When I really needed it, you wouldn't give it to me, and when I didn't need it anymore then you were offering." So, it's the biggest pet peeve for business owners that I found.
Jason Pereira: Yeah. No, and it's unfortunately something that most business owners only discover when it's the worst possible time, so this is another reason why I encourage that people deal with independence wherever possible, because that's a different relationship then the actual lender.
Jason Pereira: That's one that is not based upon, "Oh, look. We have this checklist and you didn't meet this one box this month, so such is life." Anyway, Sheldon, I wanted to thank you for today and taking the time to come on, and giving us some background on the basics of issues and types of debt that exists to business owners, and some guidance. Where can people find you?
Sheldon Brow: It was great to talk to you as well, and you can find me at www.sheldon, S-H-E-L-D-O-N, Brow, B-R-O-W, looks like brow,.com, or (902) 440-2663.
Jason Pereira: Excellent. Thank you, and thank you yet again for taking the time to listen to Financial Planning for Canadian Business Owners. I'm your host Jason Pereira, and as always, if you enjoyed this podcast, please leave a review on iTunes, Stitcher, or wherever you get your podcast. Until next time, take care.
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