Loans: Bigger is better

Loans: Bigger is better


Opinion
The number of zeros makes little difference to the work involved in providing a loan which is why bigger loans are often better. Or at least easier.

The number of zeros makes little difference to the work involved in providing a loan which is why bigger loans are often better. Or at least easier.

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Size can have its advantages.

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Size can have its advantages. 

Some costs will go up while others are fixed, meaning it doesn’t matter how many goods you are selling, this cost will stay the same, like your combine or workers’ wages. 

It’s the same with people who lend money. In finance, the fixed cost is the costs associated with the due diligence and loan management process. You could be talking $500,000 or $50,000,000. 

The number of zeros makes almost no difference to the work involved in providing the loan.

Site visits, valuation reports, credit papers, discussions, documentation, it all needs to be done for every loan.

This is why when you are seeking a loan or an equity investment, bigger is often better. Or at least easier. You will be able to attract the interest of a larger pool of institutional investors if the amount sought is bigger.

For a small loan, the only parties who will be interested are local banks. Even for them, it may not be worth their time investing resources to understand the deal.

Quick calculations are completed to see if they want to get involved. If the loan to value ratio is within a certain threshold, the answer is yes. If not, apologies. If you are raising a small amount of equity, the likely counterparty will be a high net worth, a pool of capital that is hard to get in front of.

If your capital requirement is sufficiently large, then you can start to attract the interest of some of the larger private equity, credit funds or even super funds.

This is because the potential cash value of the overall return warrants the cost of their time to understand your opportunity.

Most opportunities that come across our desk are suitable for investment, but we ask: is the absolute potential return high enough to warrant the investors time?

The somewhat counter intuitive result of all of this is that the more amount of debt or equity you are seeking, the easier it is to get the funding.

Given of course that your operation has the value and balance sheet to handle the larger investment. 

  • Josh Khoddami is a director at Neu.Capital which is an alternative capital marketplace.
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