Working with Self-Employed Clients

Entrepreneur plan to startup success

Nick Tsimidis, Special to CMT

Self-employed borrowers have long been perceived as higher-risk applicants. It’s not surprising that they took it on the chin when the government started tightening mortgage rules.

That’s unfortunate, however, because this segment includes more people than one may think: lawyers, architects, accountants, contractors, mortgage professionals, investors and so on.

From my experience, this perception of risk is somewhat unwarranted since the self-employed have numerous offsetting traits. Most tend to have a

  • Growth focus – i.e., a desire to accumulate assets through a continuous search for business opportunities, investments and self-improvement
  • Understanding of risk and reward – i.e., a willingness to take risks and a respect for leverage
  • Centre of influence – business owners are often upstanding leaders in their communities.

Business for self (“BFS” in industry parlance) customers also share a belief in service. In other words, they understand that cost is what you pay, and value is what you get. That permits two-way trust, which makes brokers want to work even harder for the client.

But to service this segment effectively, you need a deep understanding of the issues and objectives facing a business owner.

Brokers sometimes get so excited about a new client that we prematurely launch into preparing the application rather than listening and learning about the client’s business. Best practice is to defer the application until you’ve got a feel for the client’s circumstances.

If you remember anything about entrepreneurs, remember that they

  1. Hate paperwork
    Business owners do not respond well to completing forms…at least until they know you.
  2. Have more complex income
    Their tax strategies are often geared to legally minimizing their family’s taxation (and not necessarily to maximizing Line 150 [taxable income] on their personal tax return).
  3. Have intricate business holdings
    Their businesses are often structured for legal and asset loss prevention purposes (something not easily explained on a mortgage application). Many need a mortgage solution that ensures both the applicant and the business have optimal funding for current and future operations.

To service a BFS borrower properly, the mortgage advisor must map out the applicant’s finances and ask exploratory questions. That’s how you know what’s needed to get the deal done.

Here are some examples:

What companies and real estate do you own?

A successful entrepreneur should have an intimate knowledge of his or her companies and real estate holdings, including top line sales information, operating costs, rent rolls and property taxes. Evasive answers to these questions are a red flag.

How do you pay yourself to cover basic living expenses?

Every business owner needs income to pay basic living expenses. Ask for details on the source of this income, how much they receive and how often. Ask up front for two years of unaudited financial statements on the company that pays them.

Who suggested the corporate structure of your companies?

A BFS applicant’s business structure determines the type of personal income on his or her tax return. If the client mentions that their accountant or lawyer was involved, it typically suggests that a tax planning strategy or some other complex strategy (like a holding company) was utilized for a defined purpose. Find out why.

Does your accountant set your salary?

A client may have their accountant recommend a salary/dividend level in order to optimize personal income taxes. If this is the case, ask to speak to the accountant early on. It will save a ton of time later. The objective is to understand whether the client has a choice as to income — i.e., how much does he or she take out of the business via salary or dividends — and if it could be higher, what would that number be?

Do you or your business make monthly payments to a bank, finance or leasing company?

We’re talking things like car leases, equipment leases, etc. The answer to this question helps outline the client’s true Total Debt Service (TDS) ratio, which speaks to affordability. Remember that in some provinces, regulations require that the mortgage recommended is affordable to the borrower. You also want to find out what business expenses they’ve personally guaranteed and/or written off.

Summary

The more complex a business owner’s finances, the more room there is for diligent brokers to add value. But it takes in-depth analysis. These are not wham bam quick commission deals.

That hard work leads to rewards, however. Besides finder’s and broker fees, there are also revenue opportunities from mortgage referrals, asset leasing referrals, asset-backed lending and even consulting fees.

Bottom line: Mortgage rule changes have significantly altered the climate for self-employed borrowers. They need a skilled hand that knows how to structure complex deals, reassure lenders and find the most suitable lender and terms. With the right know-how, a good broker can be the ally they need while reaping the benefits of this growing niche market.


About the author

Nick S. Tsimidis, CPA, CA, AMP, is the President and Principal Broker of Real Wealth Mortgage Corp. Nick focuses his practice on commercial and private mortgage lending and corporate finance, and can be reached at 289-371-3080 (ntsimidis@realwealthgroup.ca).

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