Author: RogerP

Article by Roger Schlueter, MBA

I have said this in previous posts: the bank will almost always run a Credit Report when you apply for a business loan, especially if you are a small business or an individual.

If you know that you have less than stellar credit, it is a good idea to inform the Banker. They have seen it all and you would think that they would find out all the sorted details after reading the Credit Report. The problem for you is that the banker will usually not get past the quoted Score on the Credit Report. If the Score is lower than the banks standards, the banker will usually stop there and turn the loan down. By informing the banker of potential problems with your credit, he will usually stop and read the the Credit Report.

The Banker will be looking for two things as he reads your Credit Report:

1) What is it that you were late paying?

2) How many months were you late and is this a reoccurring condition?

Why you were late paying? He looks at this to see exactly what it was that you didn’t pay on time. If this was a health provider for a total of $49.00 and you didn’t pay on the principal that you didn’t think you owned them any additional money, would be different that a Credit Card for $4,000 that you didn’t pay for three months because you were spending the money on other things. 

Bankers are regular people and they sometimes would like, not to pay, that fifty dollar charge that they think they do not owe, but they will probably pay it anyway. The banker will probably look more favorable on the loan request if the items that are making your credit bad are just bad judgement on your part or something that you didn’t think would cause you so much heartache. Always explain why the bad credit item is on the report or what you think happened.
 
Sometimes the item is on the Credit Report because you were Contesting the amount or the Charge with the Credit Provider.  Always pay small amounts if you can and if the amount is too large and you cannot pay it because you feel you don’t owe it then you can have the Credit Reporting Agency Add A Line or Two On The Credit Report That Explains The Situation.

The second thing the banker will look at is How Many Months that you were late with this creditor. Is this the only time you were late or is this a reoccurring situation. Sometimes there is a specific occurrence that can make you late like you were in the hospital and could not work or in an accident of some sort. Always try to explain just what happened and why, even though you made bad judgement. 

Summary: always try to talk to the loan officer about your credit even though it is not as good as you would like. He will probably be more sympathetic than you think. Always get a copy of your Credit Report and pay for the Score to be on the Report. Read the Report and be prepared to discuss any bad reports on the Credit Report with your Banker when applying for a business loan.
 
For Contact Information please see my Webpage at www.schlueterfinancial.com .  

Article by Roger Schlueter, MBA

What is a Loan Stress Test? The loan stress test can take many forms to address the risk inherent in any banks loan portfolio. This risk can be by company, industry or portfolio and can address all issues related to Risk the bank will face from many events or situations. The loan stress test we are addressing is, as it relates to a borrowers loans. The Stress Test  for the borrowers loans is essentially adding an increased interest component to your loan or your loans in order to see if the borrower can Cash Flow (pay the loan interest and principle) the loan over the next year or several years. This test can be as simple as increasing the interest rate by one or more points or basis points (100 basis points equals one point in interest rate). The test can be expanded to add a stepped interest rate over the next year or a stepped interest rate over the next several years.

Many Banks will add a Stress Test to the loan when they present the loan on the Credit Memo or Loan Proposal. This Stress Test will be a simple interest rate increase to assess whether the borrower can Pay the Loan Interest Rate and Principle on the loan with all other factors held steady. The factors to be held steady are the Earnings and Cash Flow numbers. It is a measure to say that if everything remains the same and our interest rate goes up, will the borrower have the resources to pay the loan over the next year or several years. Some banks use this test on every Credit Memo and Loan Proposal that is presented by the loan officer. Other banks do not include this measure. Your loan officer would know if he will use this test on your loan write up to the credit committee.

The Bank Regulators do not care as much about a single loan but they do care about a borrower who has a number of loans with a particular bank or  a borrower that has a number of loans and the bank has a portion of these loans. The regulator will look at all the loans that the borrower has on his books. They will usually look at the financial statement for Commercial Loans and at the Credit Report if the loans are in the individuals name. The bank will then ask the borrower to give information on these loans like:
1) current balance
2) monthly payment
3) Interest rate including Fixed or Floating Rates.
4) Term and maturity date

Of course the bank will know what loans the borrower has with their bank but most borrowers that have several loans may have many loans with several institutions.
 
The Bank Regulators will want the bank to do a Step Stress Test which will look at all the loans that the borrower currently has. These loans will be looked at and put on a spreadsheet to see what the impact of increasing interest rates have on these borrowers. This in itself may not be bad but these tests are done with all earnings and Cash Flow of the borrower at a stagnated amount, and this may not be an accurate way to look at a projection. The borrowers business under an increasing interest rate environment may be able to increase their Earnings or Cash Flow. This is not looked at and if the business is cutting the Cash Flow close, as for as debt service is concerned, may have some problems with their current lender with the availability of future loans and future accessability to credit.

If your business is asked to do a Stress Test you may want to know how the loans will be evaluated and do your own stress test to know if you should be worried about your borrowing future. There may be some changes you can make so that your Bank Stress Test has a more favorable outcome for your business and your future loan availability.

Please see my website at www.schlueterfinancial.com for any contact information.

Bank Collateral
Article by Roger Schlueter, MBA

Banks have some of the same rules regarding collateral and one rule is that, There is no such thing as too much collateral. Most of the rules of minimum amounts of collateral are listed under the banks Loan Policy.

There are no absolute rules but the usual way the bank looks at Assets and their collateral value is as follows:

1) Real Estate – Most banks feel comfortable lending up to 80% of the Real Estates Value. Some banks will lend up to 85%, and 90% to 100% with an SBA Guarantee on the loan but the SBA usually wants at least 10% put into the deal as equity by the borrower. Since 2008 many bank want up to 30% equity in real estate purchases, especially if you are buying Commercial Real Estate. That means that they will lend up to 70%. 

2) Equipment including automobiles will usually command 80% or less. If the products are new and being purchased, then a bank may lend 100% but this will be equipment that is being purchased new. The used equipment will only be worth what the bank feels it is worth unless an appraisal is performed on the assets. The value of the equipment is a matter of subjectivity and the bank will only lend a percentage of the value up to the perceived amount.

3) Accounts Receivable – Banks will usually lend up to 70% to 80% of the eligible Accounts Receivable. Eligible Accounts Receivable are Accounts that are not over 90 days past due. This number is a rule of thumb and can be 30 days or 60 days.  

4) Inventory – Banks look at the perceived value of the inventory. Usually 50% or less of the value, but it really depends on the banks value of the inventory. Example of this would be if you sold Retail Goods then the bank could go to distributors and find a value of the goods and this would have a bearing on the value they would lend against. The more value that the inventory retains the higher percent the bank would lend on the inventory.

5) Customer Lists Etc. – Banks would look upon this asset as one with no value.

6) Stocks – most banks only lend on stocks listed on a major market like the NYSE or NASD. They lend up to 70 to 80% of the value of the stock on an ongoing basis. This means that if you have a stock that is valued at $50 a Share and you have 100 shares then the value is $5,000. They will lend 80% of that value or $4,000. The problem comes when the stock value drops to $30 a share then the value is $3,000 and the maximum value that can be borrowed is $2,400. If you had borrowed $4,000 then you would have to pay the loan down to the $2,400 value. This would mean you would have to pay the loan down by $1,600 immediately .

The real trick to remember is that banks want as much collateral that they can get and also remember that a bank will rarely release collateral until the loan is paid off.

Please visit my website at www.schlueterfinancial.com for more lending information.

Points Paid on a Loan – How to pay with Points or Interest

Most lenders when pricing a Real Estate Loan and sometimes with any loan that they price, charge the borrower a percent of the loan as a loan fee. This is very common when you are looking a Commercial Loan for Investor Real Estate or for any commercial purpose. Sometimes this fee can be tied to risk. This percent fee amount would depend on the perceived risk of the lender.

The Point or Points would be one percent of the loan for every point. So for a $100,000 loan, the point (if the lender was charging one point), would be 1% or $1,000. This amount may be hard to come up with, especially if the points are higher like at 2% or 3%.

One way to make the loan without any points is to have the lender raise the interest on the loan by one third of a percent (1/3% or 0.33%). Let’s look at the $100,000 Loan at 6% for 20 years. If we increase the interest rate to 6.33% then the lender will recoup his $1,000 in roughly four years and every year after the four is extra income to the bank. Of course the bank will usually only fix the rate for three to five years so it works well with a bank to get their points in interest over the loan. This can be sweetened by increasing the loan by one half percent and the bank will recoup their money in two years with another $1,000 made in the next two years.

Sometimes banks are inflexible but this can be used with banks that are looking at the return on the investment and not the cash up front on an investment or loan.

Note: Sometimes the Loan Officer is rewarded for how much money he or she brings into the bank in fees. These fees are usually worth more to the bank if they are generated now rather than later.

Note 2: The time for the bank to recoup the interest rate on a 10 year loan (amortized for 10 years) will be about 5 years to recoup the 1% point by increasing the interest rate by 1/3% or 0.33%.
 
Note 3: The bank can just increase the loan for the points and take out their points at closing. The loan would be for $101,000 and the bank would give the borrower $100,000 and the bank would take out for itself the $1,000 in points. This is how most small banks do it.

Remember to also check my website at www.schlueterfinancial.com for other info.

    The one thing you want to remember if you ever borrow money from a Bank for a Commercial Loan – Banks Do Not Risk Their Money On Your Loan, Period. Banks are always acused of lending money to people who have money and not lending money to people who do not have money. Their is a lot of truth to that idea. That is why, I’m sure you have heard people say the bank would make the loan but it wanted twice to three times the collateral to make the loan. Again, Banks Do Not Risk Their Money On Any Loan.

    Banks look for two ways to get the loan paid off. They look to you the borrower to make monthly payments of Principle and Interest until the loan is paid in full. This is the first way the bank gets out of a loan. The Second way out of a loan is that the Banker takes possession of the Collateral (anything of value, from cash to equipment to vehicals to real estate) and the Bank sells the Collateral to pay off the loan. The funny thing is that after the Bank gets possession of the Assets (Collateral) the value that someone will pay the bank for the Real Estate, Car, Equipment or furniture, usually goes way down from what the Asset was originally valued. Most people expect the Bank to sell the Asset very cheaply – human nature, I guess. That is why the bank puts a very high value on Cash. The value is less but still high for Bonds and Stocks but goes really low for Equipment and Furniture and Fixtures. Real Estate can hold it’s value but not in the downturn of 2008-2009. 
 
    Example # 1
    
    A person started an Imprint Business. They imprinted T-Shirts, Coffee Cups, Golf Balls etc. They originally paid $96,000 of all of the equipment and supplies to go into business and they bought into a franchise which is less risky than many other business forms. 

    They went out of business after the first three years and could not make their payments to the Bank. The bank sold their equipment and supplies to another business for $15,000. The loan principle was $75,557 which leaves a $60,557 shortfall. This is why the bank asks for additional collateral for almost any loan. The bank actually had a home with some equity and an SBA Guarantee of 80% (this guarantee is 80% of the loss after liquidation of all assets). The Bank actually lost approximately $10,000. 

    Example # 2
   
 Three persons bought an investment business  property for $1,700,000 and the property was appraised for $1,900,000. They put 20% down and financed the remaining 80% or $1,360,000 with the bank. Durring their first year they did some reovations in the office and they seemed to by making the business work. The first year was approximately 6 months and they seemed to do alright but in the last quarter of the second year they could not make their payments. The business downturn of 2008-2009 had hurt their sales. They turned the property over to the bank. The bank ended up selling the property for much less than they thought it was worth. They ended up selling the property for approximately $1,060,000 and lost $300,000 on the deal.
 

    Conclusion

    Banks do not like to loose money on any Business Loan. They will go to great lengths to get the money back for their stockholders – they do not risk money. Most banks will try to get money from any Guarantees that were pledged on the Loan and will sue the owners and guarantors to get their money back. There are many people that think banks should risk money to a business that is starting a business. Banks will get enough down payment and/or collateral on a business loan to assure that the loan will get paid back by the first way out or the second way out. Banks Do Not Risk Money on Business Loans, Period.


    

The SBA 504 Program Loan is the best loan for a business that is not renting the assets that are being purchased. The loan is for owner occupied (real estate) or owner used (equipment). The SBA 504 Loan is for Fixed Assets Only – meaning Real Estate, Equipment, Furniture & Fixtures. The SBA 504 Loan can be used for start-up business but was originally intended for existing business (business open for two years or more)

    Loan Guarantees are very common on commercial loans that are provided by banks or financial institutions. A Guarantee is a pledge by a borrower to pay the loan of another entity, (company, Corporation, LLC, Individual), when that entity is delinquent (does not pay payments), on the loan payments. Guarantees are a necessary evil in the application of a business loan in a name other than your own name. 

    The bank or financial institution will ask (insist) on your Personal Guarantee if you are not on the Loan Note. The bank will also insist on your spouse signing a personal guarantee also. They will say she has a marital interest in your assets. Federal Regulation B states that Marital Status cannot be used as a reason to sign a personal guarantee. This is true if your personal financial includes only your assets. Meaning that any assets or liabilities that are jointly owned have to be divided out on the personal financial statement. I have seen several instances where the individual stated, only their assets and liabilities, on their personal financial statement and the bank could not make to spouse sign a personal guarantee. Sometime stating Regulation B is needed to enforce the issue. You may also have the spouse sign a Marital Waiver which states that the spouse has no interest in the Assets. This sometimes if fine for Rental Real Estate but usually the bank or financial institution wants the spouse to make payments if the entity on the note does not make those payments and the bank or financial institution does not care if they have a financial interest or not. 

    The Small Business Administration – SBA will not only insist on the spousal guarantee but they will also secure that guarantee with the Borrowers home. The bank will also ask for the lien on the home but separate from the guarantee.  

    The Guarantee is very common and the only business that are not asked for a personal guarantee, or get it waived, are larger companies that have a very large net worth. Debt to Worth of at least one to one or lower than one to one. It is rare for a small business to get the guarantee waived but it would be a very noble and worthwhile goal of any business when pursuing a business loan.

    Please Email me if you have any questions or need any help with a loan application or loan renewal at roger@schlueterfinancial.com  or my website at www.schlueterfinancial.com .

    The Credit Report is a wondrous and potentially dangerous document. The bank or financial institution will run a credit report on every new request for a loan. They will do this for two reasons, one – they will want to screen out (turn down) any unwanted loan applications, and two – they will want to know if you have an adequate credit score that the banker and his bank can live with. When I say banker I mean the individual banker, who represents the Loan Committee of the bank, the bank Board of Directors, and the Regulators of the bank in that order.
 
    A good credit score is a moving target in the long term but you can say that if you have a score of over 700 then you have a good credit score. An adequate credit score before 2008 was a score of 630 or more. This has changed since the Great Credit Meltdown of 2008/2009 and now we are looking at a score of 680 or above to be adequate. Smaller banks usually look at the total picture when incorporating the credit score into the decision to make, or not to make, a loan. The large banks may use a minimum and not make any loans if the borrower has a credit score below a certain level. 

    Information on the credit report is individual in nature and is listed for you alone unless you own accounts with another individual and then you will be impacted by the joint payment record. I have seen people with good credit payments and not so good credit scores, and conversely I have seen people with bad credit payment and a pretty good score. The score is a proprietary number that take in consideration a large number of factors in order to come up with a final score. One item that people forget about is whether they have used most of their credit because this can adversely impact their credit. The credit reporting agency likes them to have room in their accounts and not to be fully drawn on their credit accounts. 

    The banker looks at NO CREDIT SCORE OR NO CREDIT REPORTING as being worse than no credit at all. This seems ridicules but they feel that if the person has had no credit in the past, then they do not know if they will pay their bills or not. 

    The banker can forgive certain Accounts with a bad credit record. They banker has in the past looked past items of health debt that had a bad record of payment because health is beyond control of the borrower and the insurance companies usually do not pay on a timely basis. Another item that banker have overlooked is Cell Phone Bills, because the cell phone companies have been notorious for not telling the borrower all of the details of a plan that can come back to haunt the borrower. 

    RUN YOUR OWN CREDIT AND PAY FOR THE SCORE. this is a absolute necessity because you need to know what your score is and you need to know what is on your credit report. You may find information that is inadequate or information that can be explained to the banker and subsequently overlooked by the bank. A banker will look more favorably on a borrower who can explain a bad payment than a borrower who has the Deer in the Headlights Look, when asked about the item on his credit report.

    Please Email me if you have any questions on Loan Applications or Questions on any loan related item at roger@schlueterfinancial.com or at my website at www.schlueterfinancial.com

    Banks are a necessary evil. They are in business to make money by lending money to business and individuals. They are also in charge of protecting the bank from losses due to the loans that they make. Sometimes these two activities are in conflict with one another and when they are the banker  will always protect the bank. The small business needs to remember this because his existence depends on remembering it. Banks are also regulated and sometimes the regulators can be more terrifying to the banker than the banker is to the borrower. 

    This said, all small and large business need to go to banks for their short and long term financing needs. The small business cannot go to the Market and issue stock to be listed on the exchanges like the Microsofts and General Electric’s of the world. The small business must remember that no matter how well he or she is treated they are an asset and thus can be valued or discarded at will by the bank or financial institution. 

    The bank will initially want to see the financial parts of any business plan first. This means that you need to have your Personal Financial Statement up to date and properly filled out with a signature and date. Have a History of the Company – Description of the business and need for the loan, along with a Source and Use of Proceeds for the money needed. The bank will need to see Financials and/or Projected Financials of the business with a future Cash Flow Statement showing you can pay for the loan over time. 

    Next the Bank will go over these Financials and proceed to run your personal credit. Only after he does this will he or she actually look at any Marketing or Product materials that you have worked so hard on. The old saying is partially true: If you have money the bank will lend you money, If you do not have money the bank will be reluctant to lend to your business. The key here is to give the banker what he or she wants on the first visit so they will not loose interest in you or your project. Go over the previously mentioned documents before the bank sees them to work out and problems or to think of any answers to questions that will come up because of the financial information or the credit report. 
    
    I guarantee you that you will have the Loan Battle half won if you adhere to the above recommendations and have you information inspected by someone who will be able to improve it or to find flaws in the information before you get before the banker. remember the banker is your friend but he is friendlier to his board of directors, his regulators and his projected profits to the bank.

    You can get help with any business loan application or question on any loan situation by Emailing roger@schlueterfinancial.com or going to my website at www.schlueterfinancial.com