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The ‘shopping’ block


Rate shopping is an important part of seeking out financing. Understanding how much borrowing money is going to cost in both the short and long-term is key to making an intelligent, business-minded decision. Unfortunately, shopping for financing isn’t always about finding the best terms or rate. In some cases, people will shop for any possible lender who can get a deal done. Usually, these types of desperate measures were reserved for those who probably couldn’t get approved anywhere anyway, but recently a new form of this ‘shotgun’ approach has emerged.

Customers appreciate the ability to go to one place and get everything done. In a perfect world, a customer could go to their vendor to pick out the equipment, then get financed and funded, and make payments directly to their vendor as well. In the real world, it happens more like this:

1) Vendor takes a credit application
2) Vendor sends an application to their preferred lenders
3) If declined, vendor sends to alternative financing options
4) As a last ditch effort, the vendor might refer the customer to a brokerage house.

The problem with this scenario is, that many vendors are submitting transactions to multiple brokers rather than simply sending directly to funding sources. That is not to say that there aren’t good brokers. If there’s one thing I’ve learned from this business, it’s that there truly are professional brokers out there who know the business inside and out and can help their customers. The problem is that many brokers utilize the same funding sources. To understand why this is a problem, picture being on the other side of the equation.

Imagine that you are a loan officer at a bank, working in a department specializing in equipment financing. On a given day, you see a variety of applications, but on this day in particular you get bombarded by three different brokers with three different stories but the same applicant and roughly the same equipment. Each broker, when notified about the multiple submissions, is oblivious to the other brokers also working the deal. What’s more troubling is that the vendor is the person who submitted the deal to multiple brokers. Each broker then, in the course of trying to get the applicant approved, has submitted the customer to three or four funding sources a piece before converging at the same funding source before the loan officer now looking through the file.

This is a real scenario we encountered just the other day. Upon further investigation, it was discovered that the customer wasn’t even aware that as many as ten or eleven different lenders had reviewed their information. The moral of the story: customers need to ask more questions about where vendors and brokers are sending their applications. Utilizing the aforementioned ‘shotgun’ approach might expose the deal to more chances for approval, but it also raises red flags with a lot of lenders. For starters, it creates the impression that the customer is seeking out a lot of equipment at once. Because brokers package submissions differently, a more generic submission or a disparity in price could be incorrectly characterized as an additional ‘split’ transaction. Moreover, this strategy creates some doubt as to the credibility of the transaction and causes the lender to weigh statements from all of the brokers in making their decision, which can lead to an applicant being portrayed in an unfavorable light.

Lenders must have a permissible purpose to access a customer’s credit report per the Fair Credit Reporting Act. Most vendors and brokers use language in their credit release (next to the signature lines on the application) allowing this permission to be ‘assigned’ to the agents of the broker. Thus, when a customer signs a single application, their credit can be accessed by anyone who gets the application third hand and has the permission of the original party the customer applied with. The best way to prevent this from happening to require the vendor or brokerage to state in writing who they are submitting each transaction to. Don’t leave it up to them to simply ‘find a place that will approve you.’ Rather, take charge and ask to be involved in the process. Otherwise, you could be dealing with some red flags that will take a while to come down.