#5 Closing Liquidity

Number five on the list the borrower does not have enough closing liquidity

As we have mentioned in previous blogs cash is king, so it is no wonder that lenders are now looking very closely at closing liquidity.

What is closing liquidity? Closing liquidity is the amount of ready cash that a client has after the transaction is closed. It is not the amount of down-payment; it is what is left over after the investment has been purchased. Lenders want to know that a borrower has at least six months worth of carry.

If the new investment that the purchaser acquired has any shortfalls the lender wants to make sure the borrower can cover the shortfalls. For example you bought an apartment complex and it was leased to 95%, then all of a sudden vacancies occurred. The lender wants to make sure you can cover those vacancies as you look for more tenants.

Another example relates to business opportunities. You’ve bought a business based on the representations of the seller, the financials of the seller and the tax returns. However, you find out that once you take over the business the clients that the seller represented were going to stay have now jumped ship. The lender wants to make sure that you have enough working capital to survive the transition. In some transactions we are actually able to fund a certain amount of working capital, to have a stronger financial statement. But the lender also wants to make sure that you have adequate funds for reserves available if needed.

In our economic state we are in now, closing liquidity is getting more and more important. The lenders are looking very closely at a clients personal needs and also determining how much discretionary income and savings they have before they are funding loans. The last thing a lender wants today is to take back another property. If you as a borrower having a great deal of LIQUID cash that is going to give the lender a great deal of comfort. So much comfort that they may actually do a deal that they were not originally planning on funding. The obvious reason is that you can support a change in circumstances; the less obvious one is that they can possibly get your “strong” banking deposits.

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