Commercial Loans Blog

What is a Merchant Bank?

Posted by George Blackburne on Tue, Aug 25, 2015

Barings_BrothersYou're an English ship captain in London, and the year is 1772.  You have made seven successful trading voyages to India, and when you successfully brought your return cargo home to London, you made your financial backers absolutely stinking rich.  They put up 2,000 pounds to finance your voyage, and they sold your return cargo of silks, spices, and gold for 37,000 pounds.

You are now ready for your next voyage.  You go to Barings Brothers, the largest merchant bank in London, and you negotiate a deal.  The merchant bank puts up 2,500 pounds to rent a large trading ship for you, to pay the exorbitant premium for ship insurance, to pay the wages of the crew, and to pay for the outgoing trade cargo of British textiles, machine tools, and gold.  You put up your life (only a handful of other captains have survived seven voyages), your expereince, and your leadership.  If the voyage is successful, you enjoy 10% of the profit.

Please note that Barings Brothers is not making the captain a loan.  The merchant bank is taking a tremendous risk, so it is not going to be content to earn some sort of interest rate.  Barings Brothers is actually investing in the venture.  If it fails, and you, the captain, somehow survive, you do not owe the merchant bank a dime.  The merchant bank simply gets 90% of the profit if you succeed.

 

Bear_Poop

 

The topic of merchant banks came up this month, and I doubt that even one finance worker in a hundred truly understands what a merchant bank really is.  Sooner or later in the commercial mortgage business someone is going to come up to you at a banking conference and claim to be a merchant banker.  Today's article will help you to recognize either a fraud or one of these very rare animals.

According to Investopedia, a merchant bank is "a bank that deals mostly in (but is not limited to) international finance, long-term loans for companies, and underwriting.  Merchant banks do not provide regular banking services to the general public."

I think this definition is wrong.  It was correct two hundred years ago, but not anymore.  Merchant banks are not banks in the sense of taking FDIC-insured deposits.  The Comptroller of the Currency would never allow a national bank to take the kinds of risks typically taken by merchant banks.  Merchant bankers are go-go investors.  They are almost like speculators.  They take very high risks in order to earn very high returns.

 

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I like Wikipedia's defintion better:  "A merchant bank is a financial institution that provides capital to companies in the form of share ownership instead of loans. A merchant bank also provides advisory services on corporate matters to the firms in which they invest. In the United Kingdom, the term 'merchant bank' refers to an investment bank."

While this definition is much closer to modern reality, its still not quite right for America.  In America, investment banks are quite different from merchant banks.  Merchant banks actually invest in the equity (frequently the common stock) of the venture.  This is the key concept about merchant banks that makes them different from investment banks (stock brokers who help companies go public) and commercial banks (which accept insured deposits and make comparatively low-risk loans).

You will recall that equity is the business owner's share of the company.  If you own 20% of the outstanding common shares, you own 20% of the business.  Shares of publicly-traded companies are often called equity.  Equity is different than debt because there is no interest rate and there are no required monthly payments.  The equity holders merely share proportionately in any net profit, after all other bills are paid.  The equity holders are also the first capital holders to get wiped out if the venture fails.  They are the holders of the first loss piece, just like the guy who contributed the down payment for a real estate deal when the first mortgage forecloses.

 

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Modernly merchant banks no longer rent sailing ships for risky trading voyages.  Instead, merchant banks provide venture capital by buying late-stage shares in private companies that are close to going public.  They make high-yield mezzanine loans.  They invest in preferred equity.  They provide venture equity (most of the cash equity in a real estate development project required by the bank) to real estate developers.  The common theme is that these are go-go investments - high-yield, high-risk stuff.

So what does a modern merchant bank look like?  The modern merchant banks consists of two or three guys in suits sitting in a small office at the top of an office building owned by the life insurance company or privately-held bank.  Remember, merchant banks do NOT accept deposits.  They are merely an investment department.

So where does a modern merchant bank get its money?  Answer:  The profits of some cash cow company, typically a life insurance company or a bank, privately-owned by the same owners as the merchant bank.

Let me explain this in English.  You and two partners form a bank.  You set it up, for tax reasons, as a bank holding company at the top of the organizational chart, with the bank itself underneath it.  In other words, you and your partners own the bank holding company, and the bank holding company owns the bank.

The bank is phenomenally successful, and you award yourselves $4 million per year each in salaries.  You don't need more personal income.  Your house is so big that you seldom even visit most of the rooms.  The last thing you want to do is pull money money out of the bank because you're giving 55% to the state and Federal government in income taxes.

You want your profits to stay within the bank holding company, so they can generate even more wealth.  Therefore you pass your bank profits up to the holding company (an 85% tax-free transfer), and the bank holding company funds the formation of a little merchant bank, also underneath the bank holding company.  You then use this growing pool of cash to make go-go equity investments.  If you invest well, soon you are swimming in wealth.

Now here is something that will shock and surprise you:  Ninety-five percent of the guys who claim they are merchant bankers are either con men, liars, uneducated fools, or blowhards.  They are trying to either steal someone's advance fee or to dazzle you with their ... malarkey.  Never trust a man who claims he is a merchant banker.  In real life, there are only a handful of genuine merchant bankers.

By the way, it is highly-illegal to call your company a merchant bank.  The word "bank" implies that you offer deposit insurance, and the Office of the Comptroller of the Currency would go absolutely bat-snot if they discovered you.  Therefore if someone ever hands you a business card that reads, "So and So Merchant Bank", you will know instantly that he is a con man.

 

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Topics: Merchant Banks

Easy Way To Earn Huge Referral Fees As You Sleep

Posted by George Blackburne on Tue, Aug 18, 2015

Referral_Fees-1A few years ago, Alicia, who was running C-Loans at the time, called up a guy named Alan Dunn and said, "Alan, I'm about to make your whole day.  Do you remember that hyperlink entitled Apply for a Commercial Loan that you put on your website?  Well, guess what?  A borrower clicked on that link and applied for a $19 million commercial real estate loan using C-Loans.com.  The loan closed, and we have a referral fee check for you in the amount of ... $21,250!"  Holy Moly, can you imagine getting a call like that?

First of all, let me reassure you that referral fees for commercial real estate loans are perfectly legal, even if you are not a licensed mortgage broker or a licensed real estate broker.  You just can't be involved with negotiating loan terms.  All you can do is introduce the borrower and the commercial lender.  After that, if you are not properly licensed, you need to get out of the way and not try to play intermediary.

The strict prohibitions about referral fees or kickbacks that you've heard about apply to home loans.  Home loans are loans on single-family dwellings, residential condo's, duplexes, tri-plexes, and four-plexes, what we call in the industry one-to-four family homes.  The government doesn't want unsuspecting home loan borrowers being steered to unscrupulous, high-cost residential lenders simply because the lender is offering kickbacks.  Commercial borrowers are considered far more sophisticated and don't need such protection.

You too can earn some of these huge referral fees.  Here are more details:

Do you have a webpage?  If so, you could be earning $5,000 referral fees as you sleep. All you have to do is put a simple hyperlink on your web page that says, "Commercial Mortgages".  In return C-Loans will pay you 1/8th of a point on any closed commercial mortgage loan that came from your site. (On loans of $5 million and higher, C-Loans itself only earns 25 bps., so your referral fee will be one-third of 25 bps.)

The C-Loans On-Line Commercial Mortgage Application System is totally awesome.  The borrower or broker (yes, you get paid if brokers use it too!) merely completes a 4-minute on-line application.  Then he asks for lenders.

More than 750 nationwide commercial mortgage lenders participate in the C-Loans System, including several life insurance companies, virtually all of the largest 50 banks, dozens of major conduits, and even a handful of REIT's. The system also has a number of hard money lenders for subprime deals and bridge loans.

Your borrower studies the rates of each lender and then chooses six lenders.  He submits his loan application with just one simple mouse click. Within minutes he will receive by e-mail several quotes or turndown notices.   If the answer is no, he simply clicks on more lenders until his loan is approved.   The system is soooo sweet.

"Gee, George, it sounds great. I wouldn't mind getting a $10,000 referral check out of the blue someday. What do I do?"

Simply create a "Commercial Loans" hyperlink on your site and point it to http://www.c-loans.com

"But George, how will you know that the deal came from me?"

Our computer captures the URL of the referring site and prints it right on the bottom of the loan application. When a deal closes, we merely go to that site and tell them the good news.

"But George, how will I know you won't cheat me?"

C-Loans, Inc. is the sister company of Blackburne & Sons Realty Capital Corporation, one of the oldest hard money lenders in the country. Blackburne & Sons was founded in 1980, more than 35 years ago. We are entrusted by our 1,000+ private investors to manage and service more than $50 million of their mortgage investments.  The balance in our trust account is often over $2 million.  To be entrusted to handle this much money for this long, we pretty much have to be impeccably honest.

"Gee, George, this all sounds very interesting. Is there anything special I can do to increase my chances of making some serious dough?"

There are two things you can do. First of all, be patient. Don't give up. Commercial loans take on average four to five months to close.

Secondly, put our link on every one of your web pages at least three times. Maybe one link will say, "Commercial Loans". The second link might say, "Commercial Mortgages". The third link might say, "Apply for a Commercial Mortgage." They should all point to http://www.c-loans.com. One link might be at the top of each page; the second link might be on the left side; and the third link might be on the bottom.

Remember, this is a numbers game. The more loan app's you submit, the better your chances of making some serious dough. A nice referral check of $21,250 would pay some bills, huh?

Brand New Additional Option: For just $95 we will create a special partner link for you that will allow you to -

  1. Imbed a "Commercial Loans" hyperlink in your email newsletters and even in the signature block of your daily emails. Without this special link, we can only track referrals from websites, not email newsletters or even everyday emails. I'd insert your special partner link right in your signature block. Hey, you never know when one of your wealthy borrowers or real estate brokers might happen to need a commercial loan.

  2. Receive a copy of every commercial loan application generated by your website or emails. This way, if you happen to see a commercial loan that you want to broker out yourself, you can jump on the lead and call the borrower.

By creating Commercial Mortgage hyperlinks all over your website (I'd put two or three C-Loans hyperlinks on every one of my webpages - why not, huh?), you give yourself a chance to earn some big referral fees while you are sleeping.

Want your own partner link? Please call Mick Carlson at (574) 855-6292 or email him at [email protected].

If you don't regularly blast out an email newsletter, and you are not worried about getting a copy of every commercial loan app generated by your site, then you don't need to speak with Mick. Just insert the "Commercial Loans" or "Commercial Mortgages" hyperlinks all over your webpages and point them to C-Loans.com.  Remember, that lucky-lucky guy, Alan Dunn, didn't have this fancy, special partner link.  He just put pointed some hyperlinks on his website to C-Loans.com.  Our automated tracking system did the  rest.

 

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Topics: referral fees

Brokering Business Loans - As Opposed To Commercial Real Estate Loans

Posted by George Blackburne on Fri, Aug 7, 2015

Business_Loan-1Thirty-five years ago, when I first founded Blackburne & Sons, I had never closed a commercial real estate loan.  In other words, I founded a commercial mortgage company before closing my very first commercial mortgage loan.  Pretty audacious, huh?  Today my commercial mortgage company is one of the oldest commercial mortgage companies in the country, and it services over $41 million in private money commercial permanent loans.  You will recall that a permanent loan is just a garden variety first mortgage on a commercial property.

Therefore it is not as audacious as it sounds when I say that I am founding a business loan brokerage company today, despite the fact that I have never closed a single business loan.  I am going to learn the business as I go, and I am going to share everything I learn with the public using this blog.  My sons and employees will learn the business with me by studying this blog.  You can too.

First of all, what do I mean when I say "business loan brokerage"?  A business loan - as opposed to a commercial mortgage - is a commercial loan secured by something other than commercial real estate.  A commercial loan could be an unsecured loan to a business or a loan to a business secured by the personal property owned by the business.  By the way, personal property does NOT mean private property.  It doesn't mean my personal stuff, like my underwear.  Personal property is a legal term of art that means every kind of property other than real estate.  Real estate is land and that which is affixed to the land.

 

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I don't know if you caught it, but I slipped from business loan to commercial loan in the above paragraph.  You will recall that commercial is just a fancy word for business.  They mean exactly the same thing.  Therefore a commercial bank is a bank that makes business loans (in other words, a garden variety bank), as opposed to an investment bank, which makes investments (buys and sells stock investments).

Business loan brokerage is the business of placing business loans with banks and finance companies for a commission, and very few states, if any, require a license to broker business loans.  This is huge.  This means that if you got financially beaten up during the Great Recession, and it is now impossible for you to get a mortgage broker's license, you can still earn a living brokering business loans.

Here's another reason to get excited about brokering business loans.  Business loans close fast.  Most business loans close within two to three weeks because there are no appraisals to obtain.  Some business loans have closed in less than one week.  Compare these times to the 60 to 120 days required to close a commercial real estate loan!

So how am I going to learn business loan brokerage?  I intend to have my staff (my oldest son George IV initially) interview scores and scores of business loan lenders and business loan brokers in search of answers to the following questions:

  1. Quick Screening Questions.  No loan officer wants to waste time processing a commercial loan request that has no chance at all of closing.  There are surely quick questions that an experienced commercial loan officer will ask the borrower in order to pre-qualify him.  So what items of information will a lender want to know upfront in order to quickly pre-qualify the commercial loan request?

  2. Initial Loan Documents.  In a preliminary package, what documents will a commercial lender need to see so that no one wastes time pursuing an undo-able deal.

  3. Loan Pricing.  How are commercial loans typically priced today?  Are they fixed rate?  Adjustable rate?  What's a good price?  What price is an outrageous gouge?

  4. Recognizing Do-able Deals.  What does a good deal look like?  What situations or conditions make a commercial loan tougher or absolutely impossible? How do you tell a good deal from a bad one?

  5. Brokerage Fee.  What kind and size of fee should a business loan broker charge?

  6.  Underwriting and Financial Ratios.  How are business loans underwritten?  What financial ratios do business lenders use?  What is a good ratio?  What is an unacceptable one?

Someone from C-Loans, Inc. - probably my son George IV - will blog on each one of the above subjects.  Some of the subjects, especially underwriting and financial ratios, will almost certainly require several blog articles.

But not every business loan is the same.  There are a number of different types of business loans, and my staff will have to blog on each of the above topics on each of the types of loans described below:

  1. Equipment financing.

  2. Equipment leasing.

  3. Accounts receivable financing.

  4. Factoring.

  5. Inventory financing.

  6. Asset-backed lines of credit.

  7. Lines of credit.

  8. Unsecured business loans.

  9. SBA 7a loans.

As you can see, we have our work cut out for us.  I envision about 60 blog articles before we are finally through.  But you can also see that if we answer all of the above questions for you about all of the above different types of business loans, you will really know your stuff.

And remember, this training is free!  Just follow along.

 

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Topics: Business Loan Brokerage