Making Money in a Shaky Economy

The last four months have seen a steep downturn in sales of Moneylender.  I asked my bank how business has been lately, and they noticed their branches were oddly silent in August.  Many of my fellow business owners described an eerie quiet lately.  This is by no means conclusive proof of an economic slowdown, but I did review some government metrics that are showing those signs.

In the mid 00’s, defaulting mortgages put a quick end to the easy-to-get mortgages for underqualified borrowers from previous years.  Slowing home sales eventually pulled down the global economy.  Moneylender sales seemed a bellwether, as sales slumped dramatically from 2006 to 2009.  While the lending market languished, so did Moneylender.

While many industries stuttered and shrunk, I saw other industries flourish in a way that sparked my imagination.  As foreclosures soared, drive-by appraisers went into action.  The rental market took up some of the slack in housing demand.  Services that provided support for existing investments were fortified aa growth-related services receded, billing and accounting strengthening over home construction, for example.

What tools do we find lying around us, waiting to be picked up and used for profit and productivity?  Within each of us is a tremendous imagination, a problem-solving mechanism with decades of observations of the world about us.  When the world takes a turn down a new and unfamiliar road, it is our opportunity to branch out into some new adventure.

For me, I have observed several things that present a great opportunity where I live.  I worked for many years alongside a property management company.  I rented my house in Arizona to several wildly different tenants over a span of five years.  I have been doing the taxes for my own businesses and other organizations for years including LLCs, Corporations, and 501c3 nonprofits.  I have arranged contracts for all types of agreements, and revised them through experience.  I have negotiated contracts with state government.  I talk about money with almost everyone, and I’m not even a little bashful about bringing up the subject of how much I make or discussing someone’s finances with them.  I have talked to Moneylender customers for fifteen years, learning about exotic partnerships, yields, deals, pitfalls, regulations.  I lost most of my business, my home, more money than I could afford to lose, and $40,000 of a friend's money (along with that friendship).  But I did it with my eyes open.  That pain and humiliation transmuted slowly, and with great effort, into cautiousness, prudence and planning.

I remember the trepidation I felt when I was about to propose to my wife.  I had the place, the time, the ring box bulky in my pocket.  As we walked along the shore of a small lake atop a mountain at sunset, my heart racing as hundreds of iridescent blue dragonflies skipped along the damp stones at the water’s edge, the sun burning deep orange across the lake.  I wanted the moment to be perfect and all I could think was “Now?  Now?  Now?”  Then I realized the answer was yes, now!  I turned to my girlfriend and asked her to spend the rest of her life with me.  She said yes!  We celebrated nine years of marriage in May.  It is the very best decision I have ever made.  When things line up, it’s time to take the action.

You, too, have an interest in business and investing – you wouldn’t be reading this little article on a fairly unnoticed blog if you didn’t.  There’s some pet project of yours that has been rattling around your thoughts like a stone in the surf on a beach – your mind ceaselessly, patiently working it into a perfectly polished plan.  If the economy leaves you in a position to make a bold new step, take that idea and put it decisively into action.

Fortune favors the bold.  Carpe diem.  The reward will be worth the risk.  Tell us about your experience, your project, or your success in the comments!

And if your project involves lending money or managing loans from other people, use Moneylender Professional to service your loans.  It’s very affordable, full-featured and easy to get started.  Thanks for reading!

Stacking the Pennies Perfectly, Avoiding These Common Pitfalls

I often talk with customers that are dealing with the headaches of trying to account for thousands of loans, often with a team of people each having different responsibilities, and quite a bit of confusion can arise when trying to implement and operate a new system to do the complex accounting demanded by loans.  I’ve summed up some of the pitfalls I’ve seen people fall into time and again, along with the path you should walk to avoid endless confusion and accounting headaches.

Problem: Not relying on the accuracy and accountability of Moneylender’s systems.

You start using Moneylender, but you don’t trust that Moneylender is doing what you want.  Perhaps you were managing your loans in Excel and input every number by hand.  Losing that familiarity with every single penny feels wrong, like your loans are out of control. 

Perhaps you have a strong accounting background, and you want to apply the principals of standard business bookkeeping to the loans as an aggregate and each loan individually.  You expect that the money should all present itself in an orderly, linear fashion on both the loan’s calculations and the bank account.

Solution: Review Moneylender’s transactions in detail so you can be entirely confident in the correctness of the numbers.

In the first example, losing control feels bad.  By checking Moneylender as you might check your hand-calculated values, you can be absolutely certain that the numbers are perfect to the penny.  If the numbers aren’t perfect, you can be sure there’s a setting somewhere that might need some slight adjustment.  Use the Ledger Transactions report that comes with Moneylender to check the individual transactions across the accounts on a single loan.  You can quickly see exactly how much is being charged and applied from the very start of the loan to today (and a little beyond that, even).

In the second example, the way loans function does not conform directly to normal bookkeeping.  An exceedingly common example: a payment arrives at the end of the month, but since you earn interest on a loan monthly the payment is applied to the loan on the first of the next month, after the interest has been earned.  This is exactly what you would expect to happen.  You balance your bank account and attempt to match the principal and interest received on each payment to the balances of the accounts.  You compare the payments to the balances at the end of the month, but because the payments don’t affect the balances until the first of the following month in Moneylender, the funds seem to mysteriously vanish from some reports, and are overstated on others. 

Reviewing the individual transactions on each loan so that you are comfortable with how payments are received and applied will help you get comfortable with the different numbers that appear in Moneylender.  If you can be certain the pennies on every loan are perfect, then you can be certain that the numbers on the reports overall will perfectly account for all the money.  When you are confident that Moneylender is tracking the pennies perfectly on each loan, you will be able to let go of the notion that balancing the bank account and balancing the loans are the same task with the same numbers.  It is OK that the total balance outstanding is different in your bookkeeping when compared to Moneylender’s balances at any given instance in time.

Problem: Wanting the accounting system to know everything Moneylender knows.

You may have been doing the books for a long time, and you know your numbers.  Suddenly Moneylender is thrown in the mix and now you have all these individual accounts.  You want your bookkeeping software to continue to be the authority of all your money, so you try to find an easy way to get each individual loan’s details from Moneylender into your books.  The numbers just don’t fit right, nothing adds up, and you wonder what the heck Moneylender is even doing to come up with these seemingly random numbers on its reports.

Solution: Let Moneylender be your bookkeeping for individual loans.

Resist the temptation to use your bookkeeping software to do something it is not built to do.  In Moneylender each loan is actually a collection of seven separate accounts being tracked simultaneously.  These accounts work in concert to determine all the various figures needed to manage and balance the loan.  You can’t draw a seven-dimensional object on a sheet of paper.  You can’t take seven accounts and consolidate the activity into a single account and retain the entirety of the details.  Moneylender’s systems will do the hard work for you, and they provide you with a crystal-clear audit system to review each account independently – the Ledger Transactions report.  Your bookkeeping software needs to know about anything that touches the bank: principal and escrow disbursals out of your account, and payments received, for example.  You can enter the aggregate interest, fees, and escrow from the payments received into your bookkeeping for profits and escrow information, but avoid getting more detailed than that. 

You bought Moneylender to make your life easier.  You are used to digging dirt, and have become quite handy with a shovel.  Now find you have to break up some large stones, so you buy a pickaxe.  You don’t try to use the shovel to do the job of the pickaxe.  The pickaxe handles breaking up the stones, and the shovel removes the gravel.  Let Moneylender and your bookkeeping software do their respective jobs.  The overlap is probably quite a bit narrower than you expect it to be.

Problem: Over-using one part of the program because it’s familiar.

You have been entering payments on your loans for a while, and you’re really comfortable choosing the right settings on Moneylender’s payments tab.  You run the regular statement like a pro, and you can kick out a payment distribution report, no problem.  An unusual situation pops up and you try to figure out how to make the numbers you want show up in the places you are familiar with using the tool the same way you usually do.  Like trying to use the turn signal in a car instead of the hazard lights.  Both switches make the blinkers blink, but the different pattern stems from totally different situations.  The tool seems related to what you know, but how you activate it is positioned in an unfamiliar place.  The most common symptom of this problem is that you start using negative payments to make a number change on a report.

Solution: Explore and experiment boldly with the less familiar.  Make a portfolio backup or export the loan as a safety net.

If you’re afraid you’ll break something, you can click File > Backup Portfolio to make yourself a copy of the portfolio in case you really do manage to cause total carnage.  Alternately, select the loan and click Tools > Export Selected > type a new name for a portfolio in the window that pops up, and now you have a copy of the loan in an isolated portfolio where you can poke and prod without fear of harming your main portfolio.

Just as you did some work to learn the parts of the program that have become routine, it’s time once again to get out of your comfort zone and learn some more about what Moneylender can do.  With something like 100,000 loans in Moneylender worldwide, it’s unlikely that you’re bumping into a situation that hasn’t ever happened before.

Look in the table of contents of the User’s Guide for topics that are related to what you’re doing.  That is a great way to expand your understanding of how all the pieces of Moneylender can help you solve your situation – adding to the handful of pieces you already know really well.  You’re really good with zip-ties, but think about being great with zip-ties AND paper clips.  So many new possibilities!

I know it’s an hour of your life that you’ll never get back, but watch this video on all the loan settings in Moneylender.  Seeing what each thing does, and how it affects the transactions on a loan will take you a long way toward knowing what’s possible and knowing where to look for more information.

Don’t be afraid to push the (?) buttons on the various windows in Moneylender.  It’ll take you to the exact spot in the user’s guide where you’ll get details on how to use the thing you’re looking at.  It opens a browser window, so it has no effect on Moneylender or your records at all.

Problem: Trying to make the real-world loan match the paperwork at origination.

You just originated a loan, and the borrower paid their first three payments on time.  Everything looks beautiful.  The Payment Distribution report looks just like the beginning of the amortization table.  The sun is shining and the birds are singing.  Then the borrower misses a month and then makes a regular payment, or rounds up their payment to the nearest multiple of 10, or pays an extra $500.  The Payment Distribution breaks away from the Amortization Schedule.

A similar manifestation of this problem is when you’re setting up the loan and Moneylender’s suggested payments don’t match what you have on your paperwork.  You fiddle with the various dates and rates and settings in the loan wizard, but the suggest payments just never quite line up.

Solution: Throw out the idea that correctly accounting for a loan means it has to follow some prescribed path.

I know of but few instances where a loan was repaid exactly in accordance with the amortization schedule.  Fewer still are the lenders that held themselves to the rule that you can foreclose after three months of nonpayment.  The proper and accurate accounting of a loan comes from the correct calculation of interest, adding fees in accordance with the terms of the contract, and applying the payments at the correct times to the correct amounts.

Your loan WILL DEVIATE from the amortization schedule.  This is normal.  Moneylender’s payment suggestions might differ a little from the method used to come up with the loan contract.  This is also perfectly normal.  Just enter the payment amount from the contract, regardless of the suggested numbers.  If the suggestions are extremely different for no discernible reason, there’s probably a setting somewhere that is way off.  If it’s a few cents or a few dollars, don’t worry about it. 

You use the settings on a loan to tell Moneylender the rules of the contract.  Moneylender will then do all its fancy footwork to follow those rules for you.  The systems are built around two ideas: you are going to collect the fees and interest that you are entitled to collect in accordance with the contract; wherever there is the possibility of two methods of applying funds, they will always be applied in the way that follows the rules to the benefit of the borrower.  If the records are set up correctly, you’ll never have to worry about the program taking money from the borrower that you are later forced to give back.  You’ll also get your late fees and interest in accordance with the contract – you deserve to be collecting what the borrower agreed to pay, and Moneylender will do that for you.

The settings define the rules, and the borrower’s performance on the contract defines the balance. The balance is largely out of your hands once the borrower starts repaying the loan.  The interest isn’t going to follow the amortization schedule if the borrower’s payments don’t follow it.  That is normal and correct.  If you are concerned about a deviation from the amortization schedule – look at the amounts and timing of the payments.  If those differ from the amortization schedule even a little, you can forget ever referring to that schedule again, it’s moot. 

You can, of course, manually change any balance in Moneylender at any time using Adjustment settings, but you don’t want to use adjustments to “correct” an interest calculation.  Adjustments should be reserved for actual deviations from the contracted terms – for example, you elect to waive a late fee.  Here you are manually overriding the terms of the contract to forgive the fee, and in Moneylender this takes the form of a Fee Adjustment in the opposite amount of the late fee being waived.  If you edit the interest, you’ll end up doing it forever, and that is not why you bought Moneylender.  There’s a good chance there is a checkbox or other setting that just needs to be changed to make the program do the math slightly differently.

By the same token, Moneylender’s payment suggestions are not as robust as the calculator itself, nor does the calculator care in the least about the math the payment suggestions are using to come up with their numbers.  Once you tell Moneylender how much to expect from the borrower each month, Moneylender happily follows that rule.

Problem: Trying to get every number from a single report.

Each report shows a specific view into the numbers.  If a report shows you the face of a seven-dimensional object from one perspective, you’re going to need several reports to really see a clear picture of the loans.  Line up several loans side by side, and you’ll need many vantage points to truly illuminate the situation.

Solution: Learn the utility of each report in Moneylender, and create your own reports to give you exactly the perspective that matches how you operate.

The Payment Distribution is the go-to report for showing how your borrower’s payments have been applied to the loan.  It does not show non-payment transactions at all.  Don’t try to make non-payment transactions appear on this report.

The Ledger Transactions report shows the individual transactions and resulting balance in any one of the seven accounts on the loan at all times over the life of the loan.  You can choose the account to show from the Account dropdown at the top of the window.  To see each transaction on the loan, the Ledger account is your overall balance.  If a borrower wants to see something on their loan balance, give them the ledger for some reasonable period of time.  To see the fluctuations of their escrow account over time, run the Ledger Transactions report on the Escrow account.  To see if they were paid current, ahead, or behind, run the Ledger Transactions for the AmountDue account.

To determine your money in and out (principal you gave to borrowers and payment you received) use the Cash Flow report.  To see how much principal was loaned and received, interest was earned and paid, fees were charged and collected within a date range, use the Financial Activity report.

To get a list of the individual payments received with a date range use the Payment Reconciliation report.  This report is especially helpful for reconciling your records in Moneylender to your bank account, whether directly against the bank records or through bookkeeping software as an intermediate step.

Add columns to reports when you just want a little extra information that’s related to the rest of the data on the report.  If you want some numbers for a certain period of time, and it’s not closely related to the information on a different report, create a brand-new report.  It’s ok to run several reports.  It’s not too painful, even with 10,000 loans, to let the report compile the numbers for a bit.  You can load multiple reports concurrently if you want.  Often, stuffing all the columns on one report will take longer to load than the combined load times of two reports where the same data is logically separated.  The report engine will try to load only the data required to compute the values for the columns of the report.

If you took the Payment Reconciliation report and added the principal balance to it, and put a sum on the new column, the total of all principal balances is an unreliable and incorrect number.  Since Payment reconciliation lists each payment on its own line, and the principal balance is the principal after each payment was applied, and you might get two payments from the same loan within the report date range, you’d have two principal balance numbers from the same loan getting added into the sum at the bottom of the report.  Making a separate report explicitly to list the principal balances of the loans in your portfolio ensures you don’t inadvertently start doing your books against a set of numbers that are functionally erroneous.  This can be especially tricky when you have months where only one payment arrives for each loan, making the number appear to be reliably correct, and then to have that number kick out something wrong later when you get double or zero payments on a loan.

Problem: Wanting to track all the individual loans in the accounting software.

Your accounting software is the master of your finances.  It needs to know everything about the flow of funds through your business.  Moneylender is a calculator that helps figure out balances, but the valuation of assets and final authority of all your business holdings must rest within your bookkeeping system.

Solution: Treat Moneylender as the absolute authority of the value of your loans.

You have a shovel and a pick now.  You don’t want to break rocks with the pick until you figure out how to break rocks with the shovel.  Bookkeeping software is not built to account for loans with any degree of convenience.  Moneylender is not built to do your company’s books, either.  They are two very different tasks.  You have invested $500, or $1000, or maybe even $5000, to outfit the people in your organization with Moneylender.  It is a powerful system, built to do the accounting for your loans.  Honor your investment in this system by shifting the responsibility for the loans into Moneylender.  Don’t worry, it can handle the pressure.  There are tens or possibly hundreds of billions of dollars being serviced in Moneylender, and other currencies, too.  Moneylender is in use all around the world, in every conceivable configuration, to handle the requirements of businesses of all sizes, from the accidental lender with one loan for $3,000 to the national lender with thousands of loans across all sorts of regulatory boundaries.

Lean on Moneylender.  Let it do its work for you.  If you get stuck, we’re here to help.  You made the right choice investing in Moneylender with both your money and your time.

Problem: Wanting to reconcile loan balances against the bank account from month to month.

You can reconcile your payment entries and the principal paid out to the bank.  Moneylender shows you how much you paid out, and how much principal was paid back in.  Yet, when you try to get these numbers to add up at month end, Moneylender’s reports are frustratingly misaligned with each other.  How could anyone trust a system like this?

Solution: Don’t worry about matching up balances for specific date ranges when you’re working in terms of payments received.

Everything in loans has two dates – the date you got the money, and the date the money actually affects the loan balance.  It is almost more common than not that you’ll receive money one month, but it’ll show up on the next month’s reports.  Just make sure you haven’t misapplied any payments, everything made it into the bank ok, and you can double-check that your disbursals have properly paid out of your bank across your loans.  Beyond that, your bank doesn’t know enough to help inform you of your loan balances.  But Moneylender DOES have the knowledge.  Moneylender can tell you exactly what the principal balance is at all points in time on any loan and you can review every single transaction Moneylender generates for accuracy and applicability.  At the end of a loan, when it is closed and the balance is zero, then you can be certain that the total principal you’ve paid out in disbursements on the loan will exactly equal the total principal received from payments on the loan (plus whatever amount you might have had to charge off).  The month-to-month boundaries are not as important.  Use the total interest received for the year from the Payment Reconciliation report if you want a cash accounting style of your interest income.  Use the total interest paid on the Financial Activity report if you want more of an accrual style accounting.  In the end, neither one is particularly more correct than the other, so pick the one you like the most and stick to it.  Moneylender can give you the numbers and you can feed it into your books every week or month or year.

I hope this hasn’t come across as a lecture.  My eight-year-old son knows how much I love to pontificate on the minutia of technicalities.  Some of the greatest despair I hear on phone calls with customers is when they’re trying to appease a bookkeeper or an accounting team that wants their bookkeeping software to understand loans the way Moneylender does.  And it’s a hard pitch to sell that some of the bookkeeping and accounting is going to have to be done outside the familiar systems.  At the very least, Moneylender is going to need to be responsible for the balances and amounts due on all the loans.  Any attempt to transcribe that balance and receivables data out of the system is likely to create confusion, double-entry, and long-term problems.  A couple hours tinkering in Moneylender’s reports might be all it takes for a CFO to trust that Moneylender can break up the boulders into easily shoveled gravel.

If you aren’t already using Moneylender, you should get yourself a copy and simplify the management and servicing of your loans.  We pride ourselves on making some truly outstanding loan servicing software.  We want everyone to have access to it as a tool to gain greater profit, efficiency and accuracy.  Thanks for reading all this way.

Tell us your stories about working over your books with loans in the comments!

Commercial Loans: Choosing a Repayment Structure that Fits the Deal

Lots of commercial lenders have a style they like to use when setting up their loans.  For lenders that might be considering a deal, and want to tailor the financing to match the situation, here are some examples of how commercial loans are often structured to match the situation.

Interest rates

Increasing Rates – Example: every year the interest goes up one percent - interest is at 5% the first year, 6% the second year, and 7% the third year.  Sometimes the interest might jump from 8% to 13% after a year, and then 14% after another year, etc.

Why might you do this?  If the deal is expected to take a set period of time, financing costs are lower if the deal happens on schedule.  Interest rate hikes can add pressure conclude a deal expeditiously if the cost of delay will be higher.  If you want to be out of a deal by a certain date, it can add incentive for a borrower to seek alternative funding once they’ve completed their initial startup and will have access to better terms.  The rate increases might be related to relative risk – such as depletion of the borrower’s operating funds as the work progresses on a project.

Balloon Payoff

If the borrower only needs to money for a short period of time, or the loan is predicated upon a lump sum receipt, the loan may have a set final date or be completely open ended.  It is common for the borrower to make interest payments over time, but there are also situations where the interest accumulates unpaid and paid off with the rest of the loan.

Examples of this type of loan include real estate deals, where the loan will be paid in full when the real estate is sold.  Some financing during lawsuits might cover attorneys’ fees during the suit and interest builds on the amount of the loan, and when the settlement is finally awarded, the loan and its interest are paid off in their entirety.  If the ending is set in stone, or completely unknowable, you can structure your contract to define how you will be compensated during the loan’s lifetime and then again at its conclusion.

Progressive Disbursal

It is super common, on deals where expenses are incurred incrementally, that principal be granted to the borrower on an as-needed basis.  The disbursals might be set on a specific timeline, contingent on the achievement of defined milestones, or provided on an as-needed basis.  When setting up the deal, put it in writing what the exact criteria for disbursal of funds will be if all the funds are not provided up-front.

Because there’s no one correct way to loan money to someone, feel free to tailor your deal to your tolerance for risk and your level of trust in the other party.  The one with the money gets to set the terms, after all.  Make sure the terms work well for you.

This post was brought to you by Moneylender Professional.  It’s an excellent commercial loan management and servicing software system.  It can handle all of the variations described in this article, is easy to use, and provides fully auditable calculations for every loan.  If you’re making commercial loans, try out Moneylender Professional.

Tell us your tricks for tailoring commercial deals in the comments!

I’m in charge here.

How a borrower perceives you is the key to where you rank in their priorities.  With a little practice, you can perfect a persona so your borrowers will keep payments to you at the very top of their priorities.

Many of the articles on this blog talk about the math or the rules of lending.  This time, I want to get a little deeper into purposefully posturing yourself in your relationship with your borrowers.  I’m going to lean on the ideas I read in the early 2000s from the book Winning Through Intimidation.  It’s an amazing book about how the author, Robert Ringer, was tricked repeatedly by big money investors and real estate developers as he refined his ability to make himself central to the deals he was brokering.  His story takes us along as he transitioned from repeated, painful commissiondectomies to impressing his clients with aerial tours in his private Learjet.

He discovered that surviving in the cutthroat business of high-dollar commercial real estate required him to become the very embodiment of the deal that was taking place.  Both his buyer and seller needed to see him as absolutely central to the quality and profitability of the transaction.  Their absolute confidence in his judgement was the cornerstone of their own belief that they were getting a good deal.  Without him, there was no deal.  He shared his hard-learned lessons so we don’t have to suffer through the same misfortune.

The Anti-Pattern

Let’s look at a situation as the case-in-point that we really want to avoid.

Someone you don’t know sees your advertisement for loans and approaches you for money.  You agree to give them a loan with a monthly payment plan that spans two years and they happily skip off with your cash.  They make a payment or two, the second payment comes a little later than the first but not beyond the grace period.  Around time for the third payment, you get a phone call from the borrower – they’re coming up short for funds this month and they’re going to miss your deadline.  They tell you it’s just not possible to get you the money and that you’ve been such a great person so far, they’re sure it’s fine for you to waive the late fee and missed payment.  They’ll absolutely have everything back in order for you next month.  Not wanting to get off on the wrong foot with someone you will be dealing with for another two years, you give them a word of disapproval but agree to their request.

You are now a manipulatable idiot and will likely never see a good return from them again.  The borrower will likely approach you after 16 months of mediocre payments and tell you that they think their loan is just about paid in full because they borrowed X and their payments have more-or-less totaled up to X at this point.  They tell you that you shouldn’t be so greedy, your rates are too high, you’re unreasonable and rude and bad, and you should accept their offer to pay off early with nearly zero profit to you as your only chance for redemption from being a stingy, miserly scroodge.

Feels bad, but you did this to yourself.  This is hardly a worst-case scenario - probably closer to being the middle case between a total write-off and perfect repayment, and it is exceedingly common.  Thankfully, Robert Ringer gives us some excellent advice that will prevent this kind of disaster if we heed him with diligence.

Cold and Crisp Professional

No matter what, you must be the absolute authority.  Your borrower needs to perceive the legality, enforceability, collectability, and certainty of their repayment.  It’s not enough that you know that your loan contract will hold up in court, that your fees are within the legal limits of local regulations, that you are properly licensed to make and collect loans.  Your borrower needs to know beyond a shadow of a doubt that these things are true.  You must make your borrower believe that in any circumstance, every single applicable authority over the flow of funds will agree with your judgements and demands.

You want your borrower to associate you with authority.  You DON’T want the borrower to believe they can use government and other authorities to push you around.  DO NOT scare the borrower – this will bite you in the butt later.  DO make sure the borrower feels that when they’re talking with you, it has the same effect as talking to a judge in court – that you know every rule that applies.

If done correctly, when the borrower is applying for a loan, they’re going to feel like they’re making a serious and irreversible decision.  They’ll feel the significance of the commitment they’re making.  They’ll picture themselves making a deal with a large, opaque, unquestionably authoritative corporation.  It’s that picture in their head that you want.  They need to perceive you as professional.

One of the best ways to do this is to anticipate their questions and needs, and supply the answers in ways that show you as a consummate professional.  Put key information out front.  Have an easy to read summary sheet with the basics like the interest rate, APR, grace period, late fees, overpayment handling, applicable fees, conditions of default, allowances for reinstatement, if you will defer payment in times of hardship, what qualifies as a hardship, how that will affect the total cost as unpaid interest accumulates.   Don’t bury the cost of the loan in the paperwork.  If a borrower is surprised that a charge or change to their account has happened, you didn't give them everything the needed to know before they needed to know it.  Anticipating the things that might come up, and being extremely clear about your rules will make you look like a seasoned professional and not someone just dipping their toes in the pool for the first time.

If the borrower is getting off track later in the loan, be sure that any statements, notices or letters you send have all the details about how they can get back on track and the penalties for getting any further off track. 

You Deem Them Worthy

If the borrower feels like you look down on them or that they’re not important to you, it will corrode your relationship.  It’s important that they think you want them to succeed – which you, of course, do.  While yes, you are the authority that shows how this loan will work, what the costs will be, and what will happen if they stumble – it is also imperative that they feel like they are embarking on a deal with someone that is on their side.  Sure, you’re the one charging the late fee, but you can also be the one consoling them that while, no, you cannot waive the late fee, you’re sure they will have sufficient effort and luck to get back on track for next time.

You made need to come down hard with letters and paperwork that inform the borrower of consequences of their underperformance, but there should always be the hint of confidence that they can turn it around.  Essentially, you get to play both sides.  Your rules are inflexible once the deal is struck, but you also believe that the borrower has it within them to fulfill their end of the bargain.

I once read about a study that confession of mistakes and forgiveness actually led to people making more positive choices.  That people, guilty from their bad choices, are prone to making further compromises in their integrity.  A release valve for those bad choices, such as confessing their sins and offering forgiveness led to more ethical choices in the future.  You can use this in your lending.  When a borrower messes up, allow them to come clean and to right their wrongs.  Don’t waive your fees or interest as you’ll be sliding down a slippery slope, but let them know you understand their hardship and make terms with them to put it right.  That feeling of doing the right thing will motivate them to perform on your loan in the future.

Make the effort to really demonstrate that you see their successes.  However, this should never come in the form of waiving the carefully explained and contractually defined fees and costs of the loan.  You are the authority in all of this, and you cannot give them the impression that their original opinion of your significance was mistaken. 

Let’s look at the usual terms for making a loan modification to address underperformance and hardship.  The modification is not actually a concession to the borrower – the lowered interest rate and reinstatement of the loan to good standing is offset by a modification fee and capitalization of the outstanding interest.  It really is a trade off – the borrower isn’t getting a discount, just a break from being in default.  If done right, you actually make more money overall, the borrower feels like they’re finally back on track, and the borrower feels like you see that they’ve done their best even though they messed up at times.

Not to Be Messed With

One of the first big wins for Ringer in Winning Through Intimidation comes when the parties to a deal are attempting to perform a commissiondectomy – to cut his broker fee out of the deal – by citing law that only a broker licensed within the state where the property existed could collect a brokerage fee on the sale of real estate.  What these people didn’t know was that Ringer was well aware of the law and had applied for, taken and passed the brokerage tests, and was indeed licensed in the state in question to broker real estate transactions.  The parties bitterly paid his commission.  If he hadn’t done the work, and just assumed that he wouldn’t have trouble collecting what he was due, he’d have walked out of the deal empty-handed.

The State of Georgia in the USA forbids anyone to make efforts collect on a debt unless they are licensed by Georgia to do so.  One Moneylender customer has borrowers that move to Georgia, and are essentially uncollectable.  You can give money to people in Georgia, but try to collect and boom!  $1000 fine.  At least one of their borrowers took out a loan and just never made a payment again, hiding behind the Georgia collection laws.  Being licensed to collect debt would enable them to make good on the dozen or so borrowers that have moved to Georgia over the last several years.

Some states require certain disclosures in the loan agreements, place limits on how much a lender can charge and control the timing for various fees and interest calculations.  Some regions require continuous audits while other may not audit at all or might spot-audit.  Your compliance must always appear the status-quo from the borrower’s perspective, even if you quietly freak out every year when it’s audit season.  Present any corrections as just a normal part of business, instead of an admission of incompetence.

And most importantly, squash any talk from the borrower about your loan being unimportant or lower on their priority list.  If a borrower says they have to pay some other bill first, remind them of their obligation to you – the trust they placed in you, your belief that they have integrity and that they are expected to rise to the challenge.  Make no mistake, you will not waive any fees nor forestall any scheduled defaults or acceleration of the loan.  To skip a payment is to invite a world of additional costs, costs the borrower does not want to pay.  Be extremely clear that the consequences are part of the loan agreement, not something that just happens willy-nilly, at a whim, nor are they reversible or up for debate.  If the borrower is forgetting how businesslike and professional you were when they first took out the loan, remind them that you are the authority on what they owe.

Rock Solid

People tend to forget things, especially feelings.  After months of paying on a loan, they may have adjusted their opinions about the perceived benefit of the loan with the costs of the loan’s payments.  They may be beginning to feel like this is no longer a deal they like, or it’s worth it to continue paying.

To counteract this, treat every chance to communicate with the borrower as an opportunity to reinforce the image of authority and importance in their mind.  Every regular statement is an opportunity to remind the borrower that your loan is the highest priority of their debts.  To show that repayment to you is the first financial goal they should have.  Show them that your debt is the key to their financial success.  If your statement appears in their mailbox or inbox at exactly the same time every month, they know you mean business.  If they get a late fee notice on the very day when the late fee is charged, there’s no mistaking the fact that the grace period ended before they payment was in your hands.  If they get a quarterly or annual account summary, with some kind of meaningful information about their account – it shows that you are a business, their loan is your breakfast, lunch, and dinner.  Simultaneously routine and important to you.  Choose your wording carefully to convey your professionalism.  “You owe us $8000” sounds very different from “Your balance stands at $8000”. 

I’ve seen a lot of private lenders, especially individuals that make loans in their free time, that only reach out to the borrower when the payments don’t show up after a month or two.  Some don’t even bother reaching out at that point, and might be looking at a loan where there’s been no payments for two years!  Don’t fall into the lazy assumption that your borrower will treat your loan as more important that you do.  If you don’t continue to stoke the flame of their impression of you, eventually they’ll forget that they thought highly of you at the beginning.  It’s much easier to throw a letter in the mail each month, than to try to drag a loan back into repayment after half a year without payment.  Consistently reaching out to the borrower will keep your image where you were so careful to place it in the beginning.

To support you in your impressive image of infallible professionalism, I recommend using my software, Moneylender Professional to service your loans.  You can customize all your letters and reports and statements to print or email to the borrower whenever you like.  All the balance calculations are handled by the system, you need only tell it once how your loan is structured.  It has many essential tools for being an effective and professional lender.  Used the world over by lenders large and small to service hundreds of thousands of loans, you can be confident that your borrowers will imagine you as a serious lender.

Thanks for reading!  If you have an experience where you wish you had tried harder to command respect from a borrower up front, or you wished you hadn’t let that respect slide later on, tell us about it in the comments.