Friday, April 9, 2010
Inside the Vault has moved
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Thursday, March 11, 2010
De-Mystifying SBA Loans
I was visiting with a potential client this week who had applied for an SBA loan, he was excited about the possibility especially in light of the increase of the SBA guaranty from 75% to 90% and the waiver of the guaranty fee. He then went on to say that putting up only 10% of the loan amount for collateral was the real exciting part of the deal.
At that point, I called a time out and asked him what he meant. He stated that he understood that the SBA 90% guaranty covered 90% of the collateral requirement for the loan and that he was only having to put up collateral in the amount of 10%. It then made we wonder how many other business owners have the same impression. After all this guy was pretty sharp.
I explained to him (and possibly you) that the SBA guaranty only becomes active when the loan is in default. The bank is still required to secure the loan with business assets and personal assets, if necessary. You might be thinking, Well, what is the guaranty for then? The guaranty exists so the borrower can have a longer than normal time to pay the loan back. For instance, a working capital loan can be paid back over up to a 10 year term versus 1-3 years without the SBA guaranty.
Let's pretend the company has borrow $300,000 and has a balance of $250,000 outstanding with the bank. The company has closed it's doors and either the company or the bank is in the process of liquidating the assets. Once all the assets have been liquidated, the SBA guaranty will cover up to 90% of the shortfall (not to exceed $270,000) with the bank taking the other 10%. In other words, after the collateral has been liquidated and there is a $100,000 loan balance, the SBA will send the bank a check for $90,000 (90%) and the bank will write off $10,000 (10%).
The SBA and the bank never intended for the guaranty to replace collateral and neither should you.
Comments or Questions?
At that point, I called a time out and asked him what he meant. He stated that he understood that the SBA 90% guaranty covered 90% of the collateral requirement for the loan and that he was only having to put up collateral in the amount of 10%. It then made we wonder how many other business owners have the same impression. After all this guy was pretty sharp.
I explained to him (and possibly you) that the SBA guaranty only becomes active when the loan is in default. The bank is still required to secure the loan with business assets and personal assets, if necessary. You might be thinking, Well, what is the guaranty for then? The guaranty exists so the borrower can have a longer than normal time to pay the loan back. For instance, a working capital loan can be paid back over up to a 10 year term versus 1-3 years without the SBA guaranty.
Let's pretend the company has borrow $300,000 and has a balance of $250,000 outstanding with the bank. The company has closed it's doors and either the company or the bank is in the process of liquidating the assets. Once all the assets have been liquidated, the SBA guaranty will cover up to 90% of the shortfall (not to exceed $270,000) with the bank taking the other 10%. In other words, after the collateral has been liquidated and there is a $100,000 loan balance, the SBA will send the bank a check for $90,000 (90%) and the bank will write off $10,000 (10%).
The SBA and the bank never intended for the guaranty to replace collateral and neither should you.
Comments or Questions?
Thursday, March 4, 2010
OK Your banker said it's annual review time. Now what?
A couple of articles ago, I answered the question "why the bank asks for three years financial statements" The answer is they look at business trends that occur based on three year increments. One year is a place in time, two years is a coincidence, but three years is a trend.
If your banker has just asked for your most recent year end financial statement and updated personal financial statement. They may be starting their annual review process for your line of credit or loan.
You might cringe, because last year wasn't too good. However, you give your banker the financials and he/she will be comparing this year with the last two years and looking for trends. Changes in leverage or liquidity due to profits or losses, changes in profitability either gross profit or net profit and changes in activity meaning a slower or faster payment period in receivables or payables. It is likely the bank will ask you, the business owner for an updated personal financial statement to look for similar changes in liquidity or leverage and your cash flow.
Because you live in your business daily, you have probably already reacted to the changes in your business. However, if you haven't given your banker information regularly, he/she has not.
The annual review process gives you the opportunity to discuss with your banker, the changes that have occurred in your business, positive or negative. The flip side of that is it also gives your banker the opportunity to assess any change in the level of risk in loaning money to your company. All banks are required to assign a risk rating to your loan annually. If your company made a $1 million in profit, the risk changed. If you lost $1 million, the risk changed.
I would welcome any constructive comments from bankers and business owners out there on this topic.
If your banker has just asked for your most recent year end financial statement and updated personal financial statement. They may be starting their annual review process for your line of credit or loan.
You might cringe, because last year wasn't too good. However, you give your banker the financials and he/she will be comparing this year with the last two years and looking for trends. Changes in leverage or liquidity due to profits or losses, changes in profitability either gross profit or net profit and changes in activity meaning a slower or faster payment period in receivables or payables. It is likely the bank will ask you, the business owner for an updated personal financial statement to look for similar changes in liquidity or leverage and your cash flow.
Because you live in your business daily, you have probably already reacted to the changes in your business. However, if you haven't given your banker information regularly, he/she has not.
The annual review process gives you the opportunity to discuss with your banker, the changes that have occurred in your business, positive or negative. The flip side of that is it also gives your banker the opportunity to assess any change in the level of risk in loaning money to your company. All banks are required to assign a risk rating to your loan annually. If your company made a $1 million in profit, the risk changed. If you lost $1 million, the risk changed.
I would welcome any constructive comments from bankers and business owners out there on this topic.
Wednesday, March 3, 2010
Did my Business Just get Super Sized?
I talked to an advisor today who called me to get advice on a client's business. (I was flattered) The company has been in business for several years and occupies space in the healthcare industry, specifically pediatric healthcare.
The company had almost $3 million in revenues two years ago, a 27% gross margin and was profitable after operating expenses. The owner has a strategy of obtaining venture capital to make acquisitions, run the company up to $50-60 million in 10 years and sell to a strategic buyer. Good strategy. Right?
Last year, the business grew 38% to $4 million, gross margin increased $200,000, but declined 2% to 25%. The increase in revenues caused the business to increase operating expenses to create a loss for the year and a $280,000 negative swing in profitability.
Wait, isn't bigger, better? In this world of super sized this and mega that, we have bought in to the lie that bigger is better. In some instances, bigger is clearly better. But, in this case, it's not. The incremental increase in revenues caused gross margin to decline 2% on the entire revenue base, operating expenses increased so that company had a loss and a $280,000 negative swing in profitability.
When you grow make sure the growth is worth it. There are situations where losses are incurred to make an investment in the future. But, once the investment is made, make sure the profits follow.
Your thoughts?
The company had almost $3 million in revenues two years ago, a 27% gross margin and was profitable after operating expenses. The owner has a strategy of obtaining venture capital to make acquisitions, run the company up to $50-60 million in 10 years and sell to a strategic buyer. Good strategy. Right?
Last year, the business grew 38% to $4 million, gross margin increased $200,000, but declined 2% to 25%. The increase in revenues caused the business to increase operating expenses to create a loss for the year and a $280,000 negative swing in profitability.
Wait, isn't bigger, better? In this world of super sized this and mega that, we have bought in to the lie that bigger is better. In some instances, bigger is clearly better. But, in this case, it's not. The incremental increase in revenues caused gross margin to decline 2% on the entire revenue base, operating expenses increased so that company had a loss and a $280,000 negative swing in profitability.
When you grow make sure the growth is worth it. There are situations where losses are incurred to make an investment in the future. But, once the investment is made, make sure the profits follow.
Your thoughts?
Tuesday, February 23, 2010
Why 3 years of financial statements??
Did you ever wonder why your banker asks for three years of financial statements when you begin a credit relationship with them? Do they really look at all this information? (yeah, they really do)
Banks do something called trend analysis. Trends for a banker are the changes in liquidity, leverage, profitability or activity (how quickly they are turning receivables or inventory is activity) over a period of time.
One year of financials have nothing to compare. There are no trends. Two years are considered a coincidence. Maybe a change happens between the two years, but will it happen again? Three years is considered a trend by bankers. The reason for that is the change happened not once, but twice.
For example, if your gross profit margin went from 30% year 1 to 25% in year 2 to 20% in year three, that's a trend. Bankers will do this trend analysis on an annual basis when they do the annual review of your line of credit or mortgage or other term loans. Trends can be positive or negative and both are reviewed. The reason they are reviewed is because the bank wants to know if the risk of lending to your company has changed either positively or negatively. They are required to assign a risk rating to your loans every year.
I suggest getting on the same page with your banker by doing your own trend analysis and find out what your bank might be thinking. What do you think?
Banks do something called trend analysis. Trends for a banker are the changes in liquidity, leverage, profitability or activity (how quickly they are turning receivables or inventory is activity) over a period of time.
One year of financials have nothing to compare. There are no trends. Two years are considered a coincidence. Maybe a change happens between the two years, but will it happen again? Three years is considered a trend by bankers. The reason for that is the change happened not once, but twice.
For example, if your gross profit margin went from 30% year 1 to 25% in year 2 to 20% in year three, that's a trend. Bankers will do this trend analysis on an annual basis when they do the annual review of your line of credit or mortgage or other term loans. Trends can be positive or negative and both are reviewed. The reason they are reviewed is because the bank wants to know if the risk of lending to your company has changed either positively or negatively. They are required to assign a risk rating to your loans every year.
I suggest getting on the same page with your banker by doing your own trend analysis and find out what your bank might be thinking. What do you think?
Wednesday, February 17, 2010
The Skinny on Loan Covenants
Covenants, by definition, are promises made by two parties to each other. Banks use covenants to communicate what's important to them in a banking/lending relationship. Most business owners go along with the covenants because they want the loan. At times, the mutual promises made seem to get lost in the transaction.
Most covenants seem to cover issues pertaining to ownership/management and to financial performance. Given the current economy, more attention is paid to the latter. Financial covenants can be a line of credit payout for 30 days. You and the bank promise each other that the line of credit wasn't a permanent investment in the company. The ability to pay the bank out for at least 30 days is proof of that promise. Covenants can also be used to measure leverage ( a debt to worth covenant) ie total debt divided by total equity. This covenant protects the bank and the business from excessive leverage. A cash flow covenant (cash flow divided by current maturities of long term debt) shows both parties that the company has adequate cash flow to cover loan payments with a cushion, typically 25-30%.
Given the current economy, banks are placing more emphasis on loan covenants due to their capital constraints and loan quality issues. Your line of credit may be coming up for renewal or your mortgage loan may be maturing. It would be a good idea to know what loan covenants exist in your loan commitment and did you meet them. Since loan covenants are promises made by both parties to each other, you would expect any broken promises could trigger discussions between you and your bank. Be prepared!
Most covenants seem to cover issues pertaining to ownership/management and to financial performance. Given the current economy, more attention is paid to the latter. Financial covenants can be a line of credit payout for 30 days. You and the bank promise each other that the line of credit wasn't a permanent investment in the company. The ability to pay the bank out for at least 30 days is proof of that promise. Covenants can also be used to measure leverage ( a debt to worth covenant) ie total debt divided by total equity. This covenant protects the bank and the business from excessive leverage. A cash flow covenant (cash flow divided by current maturities of long term debt) shows both parties that the company has adequate cash flow to cover loan payments with a cushion, typically 25-30%.
Given the current economy, banks are placing more emphasis on loan covenants due to their capital constraints and loan quality issues. Your line of credit may be coming up for renewal or your mortgage loan may be maturing. It would be a good idea to know what loan covenants exist in your loan commitment and did you meet them. Since loan covenants are promises made by both parties to each other, you would expect any broken promises could trigger discussions between you and your bank. Be prepared!
Tuesday, February 16, 2010
Real Estate Values, do you have a loan to value exception?
This is a common question. Most banks in the past have financed 75-80% of the value of the property. Some have financed more, few have financed less historically. Many business owners are experiencing mortgage maturities and are seeing dramatic declines in value. When the loan to value exceeds between 80-85%, your bank may notify you that there is a loan to value exception. Loan to value guidelines are set for banks under the Financial Institutions Real Estate Act (FIREA)
Banks are required by law to order an updated appraisal whenever the mortgage has a maturity. The appraisal has three approaches to value. The cost approach-how much does it cost to build the structure in the current market. The sales comparison approach-what are the current comparable properties selling for in this market. The income approach-taking the net operating income of the project and applying a capitalization rate.
Many banks feel that two of these approaches are not currently relevant. Since there is little to no new construction going right now, the cost approach is not applicable in most circumstances. Many of the current comparable sales are either short sales or bank foreclosures, it could be argued that the sales comparison approach does not give relevant data either.
Most banks are using the income approach to value. This approach takes the current lease income (with a slight reduction for potential or current vacancy), subtract operating expenses taxes, insurance and other expenses and come up with a net operating income (NOI). With that number you apply a capitalization rate (the return most investors are looking for in the current market). Cap rates are subjective, but it seems that banks are applying cap rates between 9 and 10%. Some higher and some lower.
Because of the current circumstances going on in the market, most banks feel the income approach to value is most relevant. Specifically, a commercial property is valued based on the income it generates. What do you think?
Banks are required by law to order an updated appraisal whenever the mortgage has a maturity. The appraisal has three approaches to value. The cost approach-how much does it cost to build the structure in the current market. The sales comparison approach-what are the current comparable properties selling for in this market. The income approach-taking the net operating income of the project and applying a capitalization rate.
Many banks feel that two of these approaches are not currently relevant. Since there is little to no new construction going right now, the cost approach is not applicable in most circumstances. Many of the current comparable sales are either short sales or bank foreclosures, it could be argued that the sales comparison approach does not give relevant data either.
Most banks are using the income approach to value. This approach takes the current lease income (with a slight reduction for potential or current vacancy), subtract operating expenses taxes, insurance and other expenses and come up with a net operating income (NOI). With that number you apply a capitalization rate (the return most investors are looking for in the current market). Cap rates are subjective, but it seems that banks are applying cap rates between 9 and 10%. Some higher and some lower.
Because of the current circumstances going on in the market, most banks feel the income approach to value is most relevant. Specifically, a commercial property is valued based on the income it generates. What do you think?
Saturday, February 13, 2010
The 80-20 rule
You've heard of the 80-20 rule. 20% of the people do 80% of the work and so on and so on.
The same applies to financing your business. When you look at how you finance your company (the assets) make sure that you take on at least 20% of the financing risk (equity) and ask your creditors not to take more than 80% of the risk (your bank and suppliers)
If your creditors are taking more than 80% of the risk and they have no upside, you will start getting push back or will have difficulty finding financing. After all, you have little to no skin in the game and all the upside.
Having a hard time finding financing, compare your company against the 80-20 rule.
The same applies to financing your business. When you look at how you finance your company (the assets) make sure that you take on at least 20% of the financing risk (equity) and ask your creditors not to take more than 80% of the risk (your bank and suppliers)
If your creditors are taking more than 80% of the risk and they have no upside, you will start getting push back or will have difficulty finding financing. After all, you have little to no skin in the game and all the upside.
Having a hard time finding financing, compare your company against the 80-20 rule.
Thursday, February 11, 2010
I'm grateful
I've discovered that it's hard to be in a bad mood when you're grateful. My mother (and her mother) told me to be sure I count my blessings daily. I have moments of gratitude, but also moments of anxiety, worry and fear. Kids in college, elderly parents, funding retirement (will I retire?)
I started McDermott Financial Solutions in April 2009 to help business owners with banking issues. The banking landscape has never been more confusing. This is a time when most business owners need a banker more than ever. I titled this article "I'm grateful" because in 2009 I had the pleasure of serving 35 business owners with banking solution help. That's about 1 client every week. I was shocked at the number.
The past is over and 2009 is done. I have hope for the future. In 2010, I hope to serve 70 businesses, double the number in 2009. However, this is not the past or the future. I intend to enjoy this current moment with an attitude of gratitude.
I started McDermott Financial Solutions in April 2009 to help business owners with banking issues. The banking landscape has never been more confusing. This is a time when most business owners need a banker more than ever. I titled this article "I'm grateful" because in 2009 I had the pleasure of serving 35 business owners with banking solution help. That's about 1 client every week. I was shocked at the number.
The past is over and 2009 is done. I have hope for the future. In 2010, I hope to serve 70 businesses, double the number in 2009. However, this is not the past or the future. I intend to enjoy this current moment with an attitude of gratitude.
Thursday, January 28, 2010
A little humor for today...
The economy is so bad that: I got a pre-declined credit card in the mail. I ordered a burger at McDonald's and the kid behind the counter asked, "Can youafford fries with that?" CEO's are now playing miniature golf. If the bank returns your check marked “Insufficient Funds," you call them and ask if they meant you or them. Hot Wheels and Matchbox stocks are trading higher than GM. McDonald's is selling the 1/4 ouncer. Parents in A truckload of Americans was caught sneaking into Dick Cheney took his stockbroker hunting. Motel Six won't leave the light on anymore. The Mafia is laying off judges. Exxon-Mobil laid off 25 Congressmen. Congress says they are looking into this Bernard Madoff scandal. Oh Great!! The guy who made $50 Billion disappear is being investigated by the people who made $1.5 Trillion disappear! And, finally... I was so depressed last night thinking about the economy, wars, jobs, my savings, Social Security, retirement funds, etc. that I called the Suicide Lifeline. I got a call center in |
Monday, January 11, 2010
Building Rapport, more than just the words
Banker #2 also did a great job of building rapport with the client. What does that mean? You might be thinking. Did they go to the same college ?, have kids the same age etc.? No, actually only 7% of building rapport is verbal, which means 93% is not.
It's true. 55% of building rapport is body language. When people are talking there is an unconscious language being spoken that says "Yes, I'm connecting with you, you and I are on the same page" It's called neuro linguistic programming (NLP). Banker #2 and the prospect were mirroring body language (arms open, not crossed, sitting back in their chair, listening intently to each other. They were "in sync". People unconsciously have a difficult time building rapport when one is leaning forward and one is leaning back, when one has arms folded and one does not. They are not "in sync". 38% is tonality (voice volume and rate of speech. Banker #2 had the ability to match her prospect by pacing her rate of speech and volume with her prospect. These two factors unconsciously put Banker #2 ahead of her competitors and caused her to connect with her prospect at an unconscious level. Her prospect felt that they were on "the same page" and that she understood his business because she took time to do so.
The remainder of building rapport is the actual words you use. There are three primary ways of how all of us see the world. Some of us see the world visually as our dominant sense. Words are the medium to communicate of what we see in our heads. "That looks great", "Picture this" or "I like what I see" are phrases of a visual person.
The auditory person sees the world with sounds. They speak a little slower than the visual person because the auditory person hears the words in his/her head before they're spoken. Words like "sounds good" or "I like what I'm hearing" are the phrases of an auditory person.
The last person is a "feeling" person or kinesthetic as they are called. Kinesthetics feel their way through the world. They are also a little slower than visuals because they're trying to express feelings through words. Phrases like "I don't like how that feels" or "I have a good feeling about this" are the language of a kinesthetic person. The remaining 7% of building rapport occurs here. Did Banker #2 and her prospect speak the same language. Yes, they did.
So, how good are you at building rapport? It's a little more than what you might think. So, bankers and business owners, how good are you connecting with each other. Are you in sync? on the same page? If not, this may be a good place start.
It's true. 55% of building rapport is body language. When people are talking there is an unconscious language being spoken that says "Yes, I'm connecting with you, you and I are on the same page" It's called neuro linguistic programming (NLP). Banker #2 and the prospect were mirroring body language (arms open, not crossed, sitting back in their chair, listening intently to each other. They were "in sync". People unconsciously have a difficult time building rapport when one is leaning forward and one is leaning back, when one has arms folded and one does not. They are not "in sync". 38% is tonality (voice volume and rate of speech. Banker #2 had the ability to match her prospect by pacing her rate of speech and volume with her prospect. These two factors unconsciously put Banker #2 ahead of her competitors and caused her to connect with her prospect at an unconscious level. Her prospect felt that they were on "the same page" and that she understood his business because she took time to do so.
The remainder of building rapport is the actual words you use. There are three primary ways of how all of us see the world. Some of us see the world visually as our dominant sense. Words are the medium to communicate of what we see in our heads. "That looks great", "Picture this" or "I like what I see" are phrases of a visual person.
The auditory person sees the world with sounds. They speak a little slower than the visual person because the auditory person hears the words in his/her head before they're spoken. Words like "sounds good" or "I like what I'm hearing" are the phrases of an auditory person.
The last person is a "feeling" person or kinesthetic as they are called. Kinesthetics feel their way through the world. They are also a little slower than visuals because they're trying to express feelings through words. Phrases like "I don't like how that feels" or "I have a good feeling about this" are the language of a kinesthetic person. The remaining 7% of building rapport occurs here. Did Banker #2 and her prospect speak the same language. Yes, they did.
So, how good are you at building rapport? It's a little more than what you might think. So, bankers and business owners, how good are you connecting with each other. Are you in sync? on the same page? If not, this may be a good place start.
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