Author: RogerP

You have a Great Idea for a Retail Store. You believe that it will make you Boo-coo Bucks but you need a loan to Open the Store. You need Inventory and Working Capital to open the Store, and you decide to apply for a Commercial Business Loan to launch your business venture. One of the first things out of your Bankers mouth is, “did you do a Projected Income Statement?”.

The Projected Income Statement for a Retail Store is fairly easy if you have Good Sales Figures that are based on Realistic Assumptions and Based on Real Numbers of Some Sort. You Say, “What are Real Assumptions and Real Numbers?”. Well the best Assumptions and Real Numbers are just that, Sales Numbers that are based on a Real Store or the Numbers for Sales of Stores in that industry. You can assume you can sell to many people but the proof is in the pudding. The Best Way to get the Sales Numbers is to find a store in another market area that is not in competition with you and ask them what the Sales Numbers are and if there are any correlations, like Sales per Population or Sales per Type of Customer, Etc.

The Second Best Way to Find Real Numbers is to ask that businesses Association what are the Sales Numbers for a Store of your size in your area and if the Association knows of any Correlations in the Industry that can foretell Sales.

The Third Best Way to Find Real Numbers is to make them up but try to base the Projection on something you know, like the Population of a certain area, the Traffic Count on the road you are located on, or the number of professional people in an area that use your product. Sometimes these Correlations can mean something to the Banker if he believes the Correlation. 

The Sales figure is the hardest number in your Income Statement. The next number you need in your Income Statement is the Cost of Goods Sold. This number should be easy to get. It is the Cost of the Items you are going to sell. You  probably have a supplier that is providing you with these Items to sell at a wholesale cost so you can in turn sell the items at the Retail Price and make money after you deduct your expenses.

The Sales minus the Cost of Goods Sold or COGS is the Gross Profit. This is the number that has to be Big Enough to absorb you expenses and have some money left over for Profit so you can stay in business. 

The Expenses are your expenses of operating and running your business. These are your Rent or Mortgage Payment, Your Electric Cost, Your Insurance of the Inventory and Business Continuation Insurance, any Marketing Cost/Advertising Cost, Accounting and Legal, Supplies, Trash Pick up, and any other Expense of Running your Business. Do not include Depreciation because it is a non-cash charge).

Expenses can be the Real Expenses that you are going to have from the Vendors or you can look these numbers up on a Group that Aggregates the Financial Statements of Businesses in your Industry and Quotes them as Percentages. You just use the Percentage of Sales for your particular industry. This is of Course not as accurate as the real thing but is has worked for some business proposals. S&P has these numbers as well as RMA. 

Example:

Sales

= Gross Profit

-Rent

-Employee Wages

-Advertising and Marketing Expenses

-Electric and/or Gas

-Supplies

-Accounting and Legal 

= Net Income Before Taxes

What you have done is create an Income Statement that can also double as a Business Loan Bank Cash Flow Statement. The Bank is not as interested in the Income Statement as the bank is the Cash Flow Necessary to Pay Debt Service and Provide Capital for the Continuation of the Business. 

You can use this Format for many Businesses but remember most Service Businesses do not have a Cost of Goods Sold number.

Remember: what the bank is looking for is a Good Representation of the Real Financial Statement. He will usually want this Projected form for three years. The Increase from year to year is up to you but make sure to make it believable. A believable number is 5% to 20%, depending on your Assumptions and Knowledge of the Industry and the Market for your Product in the Future.

Please email me at roger@rogerschlueter.com if you have any questions or comments or go thru the Blog. My Website also has some Business Info you may use at schlueterfinancial.com  Thanks, Roger  

  

Credit Scoring for Business Loans by Banks can mean different things to different people. Some Banks just take the Personal Credit Score of the Owner and look at their Score on their Credit Report. This Credit Report gives a Credit Score on one of Three Credit Reporting Agencies. The three agencies do not report the same – Trans Union uses a system called Vantage Score and Evaluates scores between 501 (the worst) and 990 (the best). Esperian uses the Vantage Score also but the Equifax System uses the Equifax Credit Score which has a range of 280 (the worst) to 850 (the best). These three ranges came of the Reporting Agencies Web Sites on May 29, 2012. It still seems that if you have an above 700 score then you will qualify for most loans. The 600’s become murky because the cutoff used to be 630 pre 2008 but they have raised them to a cutoff of more like 670 to 680 in these more conservative times. 

The make things more confusing the banks can interpret these numbers anyway they see fit as long as they interpret them consistently to all borrowers. In Credit Scoring the bank may use these numbers only to tell them if they will extend you or your company credit. Some banks will create an elaborate system that will incorporate the Agency Credit Score but may have many more numbers that go into there proprietary score. This may give you a number for How Long You Have Been in Business, Your Debt to Equity Ratio, Current Ratio and Quick Ratio, and many other conditions that they feel will foretell the future of Business Borrowing. These conditions are then incorporated into the total score by any means they see fit as long as the consistently apply the Scoring Process to all borrowers in the same way. Most big banks use a Scoring System. You can look at it as a Box of Conditions and if you business fits into the Box, you will get your loan.  

In Short the Credit Scoring by the Financial Institution can be anything they want it to be and as long as they apply the Score consistently, they are fine with the regulators. Please remember the regulators don’t care if you get a loan, they only care about the bank and the risk levels of the bank, that they are examining. They care about the bank not the borrower.

Some entities like SBA seem to think that there is a value in getting a Credit Score on a business. These are pretty much worthless. The only valuable things that the Credit Score for the business will pick up are Bankruptcies, Judgements, and Tax Liens. This is because banks do not report a business loan to a credit agency unless the loan is to an individual.

I’m sorry is this seems confusing but it is confusing. There are no formal rules or processes for the lenders to run a formal Credit Scoring Process. The only constant in the Credit Scoring Process is the Individuals Credit Score from one or all of the three Credit Reporting Agencies, Trans Union, Esperian, and Equifax. 

Additional Info can be found on my website at www.schlueterfinancial.com and you can Email me at roger@rogerschlueter.com   

Dealing with Reputable Banks should be your Number One Priority! A Reputable Bank is a Bank with Your Interest and Welfare as Their Number One Priority! Most Banks look at their Banks Interest as their Number One Priority. 

It is very hard to find out if your bank is reputable. Usually you can ask other business people what they think of their bank. Ask Them: Does Your Bank Put Your Interest First? Do They Look for Ways to Help You Get Your Commercial Loan? Are They Genuinely Interested in You and Your Problems? Your Loan Officer can be of Great Help but Nice People Work for Bad Companies. You need to ask the Bank that you are thinking of using to get your Commercial Loan if you can have the Names, Company, Address and Phone of Ten Commercial Loans that were approved in the last six months. Then ask for the Ten People that were turned down in the last six months – you will definitely not get these names, but if the Bank gives you the names of people that were turned down – this is a big plus and a big Buy Signal For You. No one would give out the names of people who were turned down for a commercial Loan unless they though they treated them fairly – and that is what you want to be treated fairly!

These are questions or situations that are Red Flags for a Bank when getting a Commercial Loan:

1) Can You Talk to a Commercial Loan Officer within one or two days?

    You should be able to Talk to a bona fide Loan Officer.

2) Can the Bank give you a list of all the Documents you need to bring to the bank to be approved for your commercial loan?

     They should be able to give you a detailed list.

3) How long will it take to get an approval of your commercial loan (if you have all the documents)?

    The Loan Approval Process should take no more that two weeks. If they cannot promise an approval in two weeks you could be in for a long haul.

4) Banks have written Loan Policies that they must follow are get sited by their regulator.
Ask the Bank what their Loan Policies are for Commercial Loans of your type.
If they give you this information then they get a Big Plus.

Banks that shoe horn you into one product even though you qualify for several products should be avoided. Some banks only do one type of loan product because that product is good from them but maybe not good for you.

Example: Your Business qualifies for a certain type of Real Estate Loan provided by SBA and your bank, not only, does not tell you about that loan but tells you that another type of SBA Loan, which is not as good for you, is the only one that they will do.
– they even spin the facts to deceive you into thinking the inferior loan is better that the Real Estate loan you inquired about.

Always do your home work or consult an expert in the field to get the true facts. Make sure you “do the Math” on the loan to see what the real cost of this loan will be. Look out and be wary of banks that will only let you borrow the money using a certain program or only letting you borrow the money in a certain way – there are always several ways to do the same type of loan.
 
Please address any questions or comments to roger@rogerschlueter.com and see my website at schlueterfinancial.com     

     

Always be open to Bankers Cues (Suggestions or Ideas Given). He is telling you how he wants to finance this deal. Usually the more good things that are in a borrowers favor like: Equity, Cash Flow, Collateral, Longevity, Etc. the more interested the Banker will act. The Banker wants Commercial Loans that he can get approved. He does not want to take the time to put together a project and then have a boss or Committee tell him that this loan should be Declined because it does not fit the Banks Credit Criteria or does not fit the Risk Tolerance of the Bank.

Banks can in reality Decline a Commercial Business Loan for almost any Reason except for Red Lining (not doing loans in a particular area). These loans are not regulated by the same set of regulations that a Home Mortgage is subjected. Banks can decline a Business Loan for almost any reason like: they don’t like the business model, they don’t think you can achieve the projected Sales or Earnings, the borrower does not have enough experience, lacks collateral or is not trustworthy. 

Reasons I have run into include the bank did not like the Dirty Trucks of the business. The Bank thought the Cap Rate given by the Appraiser was too high. The Bank did not Know Enough about the Urgent Care business even though the facility was several blocks from a major branch of the bank. A Home Mortgage Lender in St. Louis (Ray Vincent) used to advertise and say the bank would not approve your loan because of the way you combed your hair. Banks really would not use this reason but Commercial Lenders can use very subjective ways to Decline Your Loan. Commercial Lending is not covered by the same rules as the Residential Market.

I recently had a client that wanted an $80,000 Loan to buy a business. The owner of the Business she was buying was going to take bake a note for the remaining $60,000 for a total purchase price of $140,000. The collateral was low ($80,000 of Equipment) and we figured the bank would ask us to finance the project with a SBA 7a Guaranteed Loan. We knew they would probably want an SBA Guarantee Loan before we talked to him, but in talking about Collateral, the banker stated that their bank would lend 70% on Equipment. We had $80,000 worth of equipment so he stated he could only give us credit for $56,000 for Collateral Value and then use the SBA for the remainder. 

The Cue was the Lending on 70% of Equipment. I asked, would you lend us $56,000 on the equipment without the SBA Loan? The answer was a pretty confident, Yes. We decided to ask him for the $56,000 secured by $80,000 of Equipment. We felt we could get the seller to increase his amount for a total Seller Loan of $84,000. He needed some value info for the Equipment but we moved that way only because of the Cue he gave us in our meeting about lending on 70% of Equipment Value.

The lesson is to listen to the Lender about what he can and can’t do. He sometimes will tell you how the bank looks at deals such as yours and will usually give Cues as to How to Get the Deal Done at his Bank. Remember Banks can use almost any reason to decline a business loan but will usually tell you what they can do, and if you are listening, you can pick up valuable information about how this bank will look at your business loan. 

Please contact me at roger@rogerschlueter.com or go to my website for additional information at schlueterfinancial.com     

Banks do not tell you if they are planning to sell the guaranteed portion of your SBA Guaranteed Loan. Usually we are talking about the SBA 7a Program but any Guaranteed Loan can be sold off if it has the Full Faith and Credit of the United States backing their Guarantee. The Sale is a seamless process and the Bank will remain as the service provider of the loan so the borrower will not know the loan has been sold. The Bank gets more liquidity because it gets the Guaranteed portion back to re-lend whether that amount is 75% or 85%. 

The Secondary Market for SBA Guaranteed Loans is very active and quite liquid. The Bank sells the Guaranteed Portion of the SBA Loan and gets that amount back to re-lend. The Bank also gets a premium for selling the Note which is usually up to 10%. The bank also gets a servicing fee of 1% because they retain the servicing on the loan. The unguaranteed portion of 15% to 25% will remain with the bank and the bank will continue to collect interest on this portion at approximately prime + 2.75%.

Example: 

Bank’s Loan is $100,000 at 6% interest for 25 years. The Guaranteed Portion is 85% (because the loan is $150,000 or less ). The Bank will sell off the 85% Guaranteed Portion or $85,000 to a Broker who will have investors that will Competitively Bid on the Deal. So the Bank will get back the $85,000 plus the bank will receive a Premium of up to 10% of the Guaranteed Portion or $8,500. The bank will also receive a 1% Servicing Fee of $850 and will still receive the Interest on the Unguaranteed Portion of $15,000, the interest will be $900 a year.

Banks Receives: $85,000 Guaranteed Portion

$  8,500 Premium ( up to 10%), One Time

$     850 Servicing Fee of 1%, Annually

Total Dollars $95,250 Total Received First Year of Sale

There are many ways to look at the Return that this sale provides but the $95,250 is 12.06% increase from the $85,000. Not a bad Return on your money.

After the Bank Sells Your Loan there will be a Prepayment Penalty for the first thee years because of the Sale. 

Please send any questions to roger@schlueterfinancial.com or rps_bus_loans@yahoo.com and please look at my website at schlueterfinancial.com  

The Negative Pledge of Assets in Commercial Lending is a sometimes hard concept to understand. It is actually a very easy concept. The Negative Pledge is used in situations where the Borrower has Assets that are Unencumbered and that are Not Being Used as Collateral for that Particular Loan. The Bank is making a Loan on other Assets and wants these Assets to remain unencumbered – meaning the bank does not want the borrower to get a loan and use the assets as collateral for any loan.

So the Negative Pledge is saying that the Borrower will not Pledge this Asset to any Loan – the Asset will remain Unencumbered. The Bank usually uses this for a Customer that is in very good financial shape and that does not want to tie up all their assets on one or more loans.

Example:

Business has Total Assets of $3,100,000 in the following Assets: Cash $100,000, Accounts Receivable of $500,000, Inventory of $1,000,000, and Real Estate of $1,500,000. This Business has Total Liabilities of $700,000 made up of Accounts Payable of $200,000, and a Real Estate Loan of $500,000. Net Worth is approximately $2,400,000.

The Business wants to buy a new Plant and plans to borrow $1,000,000 to finance the new building/Manufacturing Plant that will appraise at $1,200,000. The Bank has No Problem making the loan but does not want the Business to Borrow any more money without consulting with the Bank first. The Bank may require a Negative Pledge on the Business Accounts Receivable and the Business Inventory. This will give the Bank the Comfort and Security the Bank needs to make the New Real Estate Loan with very little if anything down as a down payment on the New Loan.

There are many different ways to work this but the main thing to remember is that the Bank wants the business to have a relatively large amount of Equity in their business and not be able to borrow more from the Assets unless the Bank is consulted and agrees to the new debt. The Negative Pledge on the Accounts Receivable and the Inventory will assure that the Business cannot borrow against their Accounts Receivable and Inventory unless they get an O.K from the Bank First.

Please address and questions to roger@rogerschlueter.com and please visit my website at schlueterfinancial.com

  

The SBA 504 Loan Simultaneous Close is suppose to be the closing of the Bank Portion of the SBA 504 Loan and The Closing of the CDC (SBA) Portion of the SBA 504 Loan at the Same Time thus the Term – Simultaneous Closing. This is very Misleading and in actuality a Blatant Lie and a Misdirection of the Borrower. 

The SBA 504 Loan is a Loan where the Bank makes the Interim Loan of 80% to 90% of the loan and the SBA Lends up to 40% of the Loan by Taking out Part of the Banks interim Loan in an amount of 40% of the Interim Loan. This by SBA Rules can only happen after the Bank has lent their portion. The SBA Closing Process takes anywhere from one month to one and a half months to complete. There is NO WAY The BANK CAN DO The BANK and The SBA Portions of the SBA 504 Loan Simultaneously! 

What the Bank does is having some or all of the Borrowers CDC/SBA Documents signed when the Bank Closes their Loan. There is No Closing of the SBA Portion of this loan only a Dark-Moral Sense that since the Borrower has signed some of the SBA’s Closing Documents that they have to Close The SBA Portion. This is Not True! The CDC closes the loan with the SBA and would not close if the borrower decided to withdraw. 

The Bank also wants the CDC to Execute their Deed of Trust and Get Title Insurance when the bank closes their loan even though the CDC/SBA does not have a loan yet! This is borderline Illegal. Liens on Real Estate are suppose to be for Real Estate loans or Contractors Payment. 

The SBA 504 Loan Simultaneous Close is a game of smoke and mirrors designed by the banks to lock in the Borrower and the CDC before the information is arrived at or decided upon. The Borrower and the CDC are signing blank documents or documents that are suppose to document certain events being done or accomplished which are not done or Accomplished at the time of signing. This game benefits the Bank. The Bank will argue that Signing the SBA Closing Documents before some of the information is decided upon befits the borrower because the Bank is Saving the Borrower Time and Money. The Time the Bank is Saving would be approximately 15 minutes at the most to Sign Several Documents (The CDC Usually goes to the Borrower so the Borrower is not having to go anywhere to Sign the SBA Forms.) The Money is that they are saving you money by using one Title Company to Do Title Work but the CDC usually uses the same Title Company as the Bank for the same Savings. It is hard to benefit someone who is signing blank documents. The SBA must be turning their eyes to this form of Blackmail and if the Letter of the SBA Law was Followed this type of Closing would not be Approved By SBA.

Supposedly the CDC and the bank can do a simultaneous close but it involves Escrow Money and a willingness to avoid any Attorney Problems that may occur. 

Shame on the Banks for bullying the CDC/SBA and the Borrower, and Shame on the SBA for letting this happen by Turning a Blind Eye to the Event!

Banks have always looked at the Debt Coverage Ratio for a Commercial Loan. They look at this ratio sometimes in different ways but it all boils down to this question: Does the Borrower Have the Cash to Pay the Debt Service on Your Loan and is there a Cushion of Cash to Cushion Your Risk? Many of the banks customers have Commercial Loans that may be linked to their personal assets or cash flow. They are linked in different ways so it becomes a challenge to figure out if your borrower has the cash to pay his loans and what will happen if his cash is reduced or if the interest goes up on his loans? The fact that some of his loans may be at different banks only confuses the issue. 

The answer to this dilemma is the Global Debt Coverage Ratio. The Global Debt Coverage Ratio looks at the borrowers Business Debt Coverage Ratio and also his or her Personal Debt Ratio. Some banks just user the same Debt Coverage Ratio to look at the Business and then extend that ratio to include the income and debt of the individual. They basically take all the income and divide it by all the debt service in business and personal use. This ratio can mislead many a banker and a bank. 

The actual way to look at the Global Debt Coverage Ratio is using two different ratios. The Debt Coverage Ratio for the Commercial Debt and the Debt to Income Ratio for the Personal Debt.

The Business Credit Debt Coverage Ratio is a very simple ratio to calculate. The basic ratio is the Available cash flow, divided by the Total Debt Service. Available cash flow means, Cash Flow, that is left to pay the Total Debt Service. Cash Flow is Net Income plus Depreciation (and other non-cash charges). The Ratio is used in Commercial Lending but mainly in Real Estate Commercial Lending.

Simple Company Example:

Sales        $100,000

– COGS       $500

Net Sales       $500

= Net Income       $200

Net Income       $200

+ Depreciation $25

Cash Flow       $270

Debt Service – Annual      $200

Debt Service Coverage Ratio is $270 / 200 =  1.35

Of Course you want this ratio to be over one (this will cover the Debt Service) but most banks would like to see it at 1.25 to 1.30 as a minimum. They feel that gives enough of a cushion to weather any increases in interest rates or decreases in income. 

Simple Rental Property Example:

Rental Income $100,000

– Vacancy (10%)   $10,000

– Rental Expenses   $15,000

   Prop Tax & Maint.

Rental Income $ 75,000

Debt Service $56,250

Debt Service Coverage Ratio is 1.33

The Big Deal with Rental or Commercial Property is the Vacancy Number. The Vacancy rate can be higher if there is only one tenant and lower if there are more that one tenant. 

Now we could extend this ratio to the Personal Debt and Income but this ratio does not represent the analysis of the Persons Personal Debt and Income as well as the Debt to Income Does. You need both.

 

  

The Business Credit Debt Coverage Ratio is a very simple ratio to calculate. The basic ratio is the Available cash flow, divided by the Total Debt Service. Available cash flow means, Cash Flow, that is left to pay the Total Debt Service. Cash Flow is Net Income plus Depreciation (and other non-cash charges). The Ratio is used in Commercial Lending but mainly in Real Estate Commercial Lending.

Simple Company Example:

Sales        $100,000

– COGS       $500

Net Sales       $500

= Net Income       $200

Net Income       $200

+ Depreciation $25

Cash Flow       $270

Debt Service – Annual      $200

Debt Service Coverage Ratio is $270 / 200 =  1.35

Of Course you want this ratio to be over one (this will cover the Debt Service) but most banks would like to see it at 1.25 to 1.30 as a minimum. They feel that gives enough of a cushion to weather any increases in interest rates or decreases in income. 

Simple Rental Property Example:

Rental Income $100,000

– Vacancy (10%)   $10,000

– Rental Expenses   $15,000

   Prop Tax & Maint.

Rental Income $ 75,000

Debt Service $56,250

Debt Service Coverage Ratio is 1.33

The Big Deal with Rental or Commercial Property is the Vacancy Number. The Vacancy rate can be higher if there is only one tenant and lower if there are more that one tenant. 

This has been a very brief overview of how to calculate the Business Credit Debt Coverage Ratio, there are many other situations that can influence the outcome so only use this as a guide. Please Email me at roger@rogerschlueter.com or see my website at schlueterfinancial.com

  

Personal Credit: Debt to Income is used by banks when an individual is borrowing on a personal basis. This money can be used for business but the person is borrowing personally for usually a car, boat, ATV, house or vacation property. House lending has so many federal regulations and regulations of the underwriters of the loan, that it is a discussion all by itself. What I will cover is a thumbnail of house loans and then more extensively all other consumer lending credit issues. 

The Rule of thumb for Debt to Income for personal lending is a ratio. This ratio is obtained by taking the Total Debt (this amount may or may not include the new debt but it usually does include the new debt.) and dividing it by the Total Income of the individual or married couple. The Debt is the Payment per month or Year that an individual has and divide that by the Total Income of the Individual per month or year. 

Example: 

Joe has a mortgage payment of $1,000. He has a car loan with a payment of $300 as well as several credit cards with a combined payment of $500. Joe’s Total Monthly Debt Payments are $1,800. Joe’s Income per Month is approximately $5,000. His Debt to Income would be 36%. The bank would like the Debt to Income to be 40% or less including the Mortgage and 30% or less without a home mortgage. 

Joe has a little room, approximately 4% of his income or $200 of which he can increase his Debt per month and be within the banks ratio of Debt to Income of 40%. 

Now if Joe did not own his home and did not have a home mortgage then the ratio would be $800 divided by $5,000 or 16% and have approximately 14% of room to be within the banks 30% guidelines. 

Most banks look at these as just that, a guideline. There can always be room for movement one way or the other. This is just a general guideline and banks may be higher or lower in the percentage of Debt to Income.

Please Email me with any questions or comments at roger@rogerschlueter.com or visit another of my websites at schlueterfinancial.com