Author: RogerP

Environmental Concerns with Commercial Real Estate Loans

Article by Roger Schlueter

Banks and SBA have many of the same concerns when funding Real Estate Loans for Commercial Purposes. Sometimes you think the SBA is in Cahoots with the Bank. This is not the case when dealing with the issue of Environmental Policies and Procedures.
Many Times, Banks will not worry about the Environmental Issues unless the facility is an industry where the Environmental Contamination is more likely. These Industries are Gasoline Stations, Auto Repair, Mining or Processing of Minerals, and Dry Cleaning. Many Banks will not Require any Environmental Documentation but most will at least ask for a Questionnaire to be filled out. This Questionnaire will ask questions about the Current and Prior Use as well as the Neighboring Sites and their Current and Prior Use. SBA on the Other hand will want a Questionnaire to be filled out but if the industry is one of fifty three (53) that the SBA considers Environmentally Sensitive Industries then the SBA will want much more Environmental Information. 
I will list here the steps that most Lenders take in dealing with Environmental Issues First:
1) An Environmental Questionnaire is the first thing to obtain in any Environmental Procedures. The
    answers on this document will determine if further investigating is warranted. ( If the property is
    considered to the lender to be an Environmentally Sensitive Industry then you will start with a
    phase 1 Report that has to be done be a Environmental Company.
2) Phase 1 ESA Report – this Report is done be an Environmental Professional. He or She must
    physically Examine the property to determine if any environmental Issues Exist. They will make a
   decision as to whether further Investigation is Required. This further Investigation is a Phase 2
   ESA Report.
3) Phase 2 ESA Report – This Report is also done by an Environmental Professional. The
    Professional must drill or take Dirt Core Samples and have them Analyzed for Contamination.
4) This Step would be if Contamination was Found and Remediation (Getting Rid of the
    Contamination) or monitoring is Warranted. If Remediation is needed then the Department of
    Natural Resources must give a No Further Action Letter on the property. 
The SBA will take the following Steps but remember this is a general guideline and not a detailed course of Action. The actual SBA Guidelines may be found in the SBA SOP:
1) The SBA will want the Borrower to Identify the NAICS Code for the property and compare
    this number with the SBA’s List of Sensitive Industries. If the Property is listed a Sensitive
    Industry then the Borrower will have to start with a Phase 1 ESA Report (SBA has more
   detailed instructions for a Gas Station) The SBA will want the Borrower to Fill Out a
   Environmental Questionnaire. For Loans of Up to and including $150,000 the Environmental
   Investigation may begin with an Environmental Questionnaire. If the Amount of the Loan is more
   than $150,000 then the Environmental Investigation must begin with an Environmental
   Questionnaire and Records Search with Risk Assessment. 
2) The Environmental Questionnaire:  if the results are Low Risk from the Questionnaire and if the
     project is $150,000 or less then the Lender can see if the SBA concurs with no further action. If
     the Loan is above $150,000 then the Questionnaire must also have a Records Search (checking
     Federal Records for contamination at all known sites) and a Risk Assessment by the
     Environmental Professional.
3) If the Environmental Questionnaire shows Problems with the Site then a Phase 1 ESA Report
    will probably have to be done. the Phase 1 ESA may be all that is needed if the professional
   decides that no further action is required. The SBA will have to Concur with that Request. If the
   Environmental Professional decides that further investigation is needed then the property will have
   to have a phase 2 ESA Report done.
4) The Phase 2 ESA Report will provide Core Drilling Results of the Analysis of the Ground and if
    needed the property will have to have some sort of Remediation or Monitoring on the Site.
This is the point where, things get murky as to what happens next, and if the Department of Natural Resources need to be brought in for their input. Once the Department of Natural Resources is brought in they must release the property with a No Further Action Letter. 
This has been an overview of the Environmental Policies and Procedures applied by Banks and SBA on Commercial Property that they may be lending on. This is a good guide to give you an overview but this is not the absolute Law of the Land. The Absolute Law of the Land will be given by the banks and the SBA (SBA has a SOP with more detailed Information). 
Please Email me any questions or comments at roger@rogerschlueter.com  I also have another website at schlueterfinancial.com    
 
 

IRS Tax Transcript (Form 4506-T) – Verification of Tax Returns in Commercial Loans

Article by Roger Schlueter

Banks and the SBA have many forms that you will be filling out when applying for a Commercial Loan. One of those forms is the IRS Form 4506-T. This form is sent to the IRS to request a Transcript of Tax Returns for as many as four years. The form may be signed by an individual for a joint personal return or a member of a corporation or LLC for Company Filings. The Transcript is a summary of all pertinent information that was reported on the Tax Return sent to the IRS. Most people come into contact with this form when applying for a home mortgage.
The SBA (U.S. Small Business Administration) will have this form filled out on every SBA Loan that is originated. Banks may or may not use this form, to tell if you are telling the truth on your Tax Returns. The Reason for this form is that a person could concoct a phony Tax Return to show the bank in order to obtain a Business Loan. Again, SBA is adamant about getting this form filled out on every loan whereas the Banks are hit and miss on this form and hit and miss on verifying the Tax Returns as well.
The Form itself is very easy to fill out. First the form asks for the name and SSN (social security number) of the person or entity that is on the Tax Return. Then is asks for the joint name and SSN on the Tax Return if there is one. The form then asks for the Current Name, and Address and the Previous Address if different on the last return filed. The form then asks for the name, address and phone number of any third party requesting the form – this is usually the bank. The form then asks what forms are requested i.e. 1040 or 165, 1120 etc. and what kind of information. This information is usually a Return Transcript which will include all pertinent information on you last few years tax returns. The form will then ask what years are requested by Month/Day/Year and the last item on the form is your signature, date and telephone number. There is a place for a spouses signature but the spouses signature is not required.
The Form 4506-T – Request for Transcript of Tax Return is a fairly simple form which is faxed to the IRS and then returned by mail to the bank or third party requesting the information. Remember the reason for the form is very simple – to make sure the Tax Returns you provide to you lender are legitimate and not altered to help you get the loan. Borrowers that turn in altered or concocted financial Tax Returns and Personal Financial Statements can be Arrested under Conspiracy and given jail time by the courts. It pays to always tell the truth on financial Tax Returns. 
Please direct any questions to roger@rogerschlueter.com . I also have another website at schlueterfinancial.com .    
  

Franchise Business & SBA Lending

Article by Roger Schlueter, MBA

Franchise Businesses are a big part of Small Business today. From some of the first successful Franchise Businesses like McDonalds to newer Franchise Businesses like St. Louis Bread Co. or Jimmy Johns, Franchise Business is Big Business. Franchises are also a way to purchase a proven system of making money.  
The SBA has a listing of all Franchise Businesses that are endorsed or approved by the SBA (Small Business Administration) for lending purposes. This listing is called the Franchise Registry. The Franchise Registry can be found at www.franchiseregistry.com .  The Franchise Registry has listed all the Franchises, where the SBA has approved that franchises particular Franchise Agreement. The Registry also states the years that the Franchise Agreement has been approved. The particular franchise still has to give the borrower a Certification of No Material Change in order to be eligible for SBA Financing. This just certifies that the Franchise Agreement has not changed since the SBA gave it’s approval.  
Many of the Franchises that are in existence are not on the Registry. These Franchises will have to have the SBA review their Franchise Agreement to determine it’s eligibility. The SBA attorney will review the Franchise Agreement Document and determine if it is acceptable to SBA. If the Franchise Agreement Document is not acceptable it is usually because the Franchisor imposes too much control over the Franchisee which they feel results in Affiliation. This is usually fixed by the Franchisor adding appropriate SBA language into the Franchise Agreement.
The main thing to remember is to start the process early to make sure you are eligible to borrow so you can get your loan is a timely fashion. Your bank should know something about this process but if they don’t they can look it up in more detail using the SBA’s SOP (Standard Operating Procedure).
Questions or Comment can be addressed to roger@rogerschlueter.com or at my website at schlueterfinancial.com .   

Insurance Needed for Business Loans

Article by Roger Schlueter

Insurance may be Needed by the Bank or Financial Institution on your Business Loan. 
The Insurance we are talking about is Hazard & Liability Insurance and Flood Insurance on Real Estate, Insurance on the Equipment and Contents of you Business, Workmens Comp, and Life Insurance on the Key Person of the Business. Some banks and the SBA will also want Environmental Reports on any Real Estate that you are buying with the Business Loan. Most of these Insurance Products will be purchased just before closing of your new Business Loan. A little planning can save you much time and effort in your business loan process. I will cover each Insurance and Environmental Product individually below listed under the Asset being purchased:
1)  Real Estate – banks and financial institutions will want you to have several types of insurance on
     any real estate being purchased with a business loan.
Hazard & Liability Insurance – The Hazard Insurance is needed in case of Fire, or Weather
        Related Losses. The Liability Insurance is needed in case someone gets hurt on your
        property. 
Flood Insurance – The business will be required to have flood insurance if the property is in a
        Flood Plain as determined by the National Flood Maps. The Bank or Financial Institution will
        run a Flood Determination from a company that specializes in determining flood areas. Flood
        Insurance can be a little pricey if you never use it, but is cheap if your area floods.
Environmental Reports are absolutely needed on properties that have been home to a
        company that was a gas station or car repair facility. Environmental Reports are also needed
        on many Manufacturers, Farms and other companies that use chemicals and pesticides.
The Property may only need a Questionnaire but the next steps are a Phase I and a
                Phase II  and may necessitate cleanup if it is determined to contaminated.
2) Equipment – Banks and Financial Institutions will also want you to have Insurance on the
    Equipment you are buying and any Furniture and Fixtures in your building and property. Usually
    what is needed is just an Insurance Policy covering the Equipment, Furniture and Fixtures.
3) Workmens Compensation – This Insurance is if you have employees and is only expensive in
     industries that have claims or companies that have claims. Most states have a statewide pool
     that covers all companies that buy the insurance.
4) Life Insurance – Companies that have to get Life Insurance on the owners are usually run by one
    Key Person. This insurance is also called Key Man or Woman Insurance. Banks and SBA will
    Require Life Insurance on the Owner if there is a chance the company will cease if the owner
    would die. SBA (U.S. Small Business Administration) Requires this insurance on almost all of it’s
    Guarantee Loans. Usually accommidation is made to individuals that cannot get Life Insurance
    due to their Health or a Health Issue. Amounts of the insurance will run from the loan amount or
    any portion of that amount.
Please email me at roger@rogerschlueter.com with any questions or comments. I also have a website at schlueterfinancial.com        

Ratios for Business Loans

Article by Roger Schlueter, MBA

My Favorite Ratios are all you need but they are  widely used Ratios. Most of these ratios are used for financial analysis and therefore should be used together. Most good banks will put your financial statements on a Spread Sheet which lines the financials up next to each other and usually makes many of the calculations we will show you here automatically on the Spread Sheet.


This Spread Sheet will be looked at and some calculations will be made like: 
A) Percent of increase or decrease in Sales, COGS, and other costs over the periods – years, months etc. This will identify trends of Sales and Costs involved with the business. The Ratios will also be looked at over time periods – years, months etc.

My Favorite Ratios:
1) Debt to Equity = Measure of Financial Risk. It is the Number of Dollars of Debt Owned for Every Dollar of
     Equity.
 
Example
You have Debt of $40,000 and Equity or Net Worth of $10,000. You would have a Debt to Equity Ratio of
        4.0
Debt / Equity = Debt to Equity Ratio

The lower the Ratio, the lower the Perceived Risk. A Ratio of 4 to 1 is about average and the lower it is,
the less risk and the higher the ratio the higher the risk to the Bank.

2) Current Ratio = Measure of Solvency. It is the Number of Dollars of Current Assets (Cash, Accounts
     Receivable, Inventory, other Current Assets) for Every Dollar of Current Liabilities (Notes Payable-Current
     Portion, Accounts Payable, Other Current Liabilities).  

Example
You have Current Assets of $40,000 and Current Liabilities of $20,000. You would have a Current Ratio of
        2 to 1.
Current Assets / Current Liabilities = Current Ratio

The Higher the Ratio the better. A Ratio of 2 to 1 is about the norm but Higher is preferable and Lower is
        dangerous because the bank will feel that there are not enough assets to cover the liabilities over the
        next year.

3) Quick Ratio = Measures Liquidity. It is the Number of Dollars of Cash and Accounts Receivable for Every
     Dollar of Current Liabilities (Notes Payable-Current Portion, Accounts Payable, Other Current Liabilities).

Example
You have Cash of $10,000 and Accounts Receivable of $10,000. You would have a Current Ratio of 1 to
        1.
Cash + Accounts Receivable / Current Liabilities

The Higher the Ratio the Better. A Ratio of 1 to 1 is the norm but Higher is preferable and lower is
        dangerous because the bank will feel that there is not enough Cash and Coming Cash (Accounts
        Receivable) to pay the Bills over the next year. 

4) Days Accounts Receivable = Measures the Days that it takes to collect Account Receivables ( Money owed
     to you). This can be done two ways and I will show you the easiest and quickest way to get the Days
     Accounts Receivable. The Number of Dollars of Accounts Receivable divided by Sales and then multiplied
     by 360.

Example
You have $168,000 of Accounts Receivable and $930,000 of Sales. You would have a Days Receivable of
        65 days.
Accounts Receivable / Sales * 360

This is the quickest way to get the Days Receivable. The Days in themselves do not mean much but the
        trends over the years, months, etc. it will show if your customers are paying on time and if these trends
        are getting better or worse.

The other way is to get the Turnover Rate first, Sales / Accounts Receivable = A/R Turnover Rate. Then to
        Divide the days in the year – 360 by the Turnover Rate. you can do the same with the Days Accounts
        Payable and Days Inventory.

5) Days Accounts Payable = Measures the Days that it takes before you pay your bills. The Number of Dollars
     of Accounts Payable divided by the Cost of Goods Sold and then multiplied by 360.

Example
You have $30,000 in Accounts Payable and $323,000 in Cost of Goods Sold. You would have a Days
        Payable of 33 days.
Accounts Payable / COGS * 360

This means that you pay in 33 days. If that is the time period that is allotted then you are paying your bills
        then that is fine. This would be different if you needed to pay in 30 days and your Days Payable was 60
        days – your paying late. If the days payable is very low the company could be on COD which is not good
        either.  Again these mean less taken by themselves and are looked at over a period of years, months
        etc.

6) Days Inventory = Measures the Days of Inventory that you have on hand to fill orders. The Number of
     Dollars of Inventory divided by the Cost of Goods Sold and then multiplied by 360.

Example
You have $100,000 in Inventory and $323,000 in Cost of Goods Sold. You would have a Days Inventory of
        111 days.
Inventory / COGS * 360

This means that you have 111 Days of Inventory. Sound like a lot but it depends on the industry. Again it
        needs to be looked at over a period of years, months, etc.


You need to Know What These Ratios and Calculations Are before going the the bank. You do not want to give that, “Deer in the Headlights” Look when discussing your Financials and the loan that you need for your business. Bankers will put your Financials on a Spreadsheet and Analyze them for Advantages and Weaknesses, You need to do the Same.

Please email me at roger@rogerschlueter.com for any questions or comments on this blog. I also have a website at schlueterfinancial.com 

 
 





Accounts Receivable Financing using Factor Financing

Article by Roger Schlueter, MBA

This method of financing is a little more expensive and is usually not a businesses first choice. Factoring Accounts Receivable has been around forever. This method of financing is probably easier than many of the other forms but may cost you dearly. 


The Factoring Company pays you an amount of money for your Accounts Receivable and they collect that receivable. They buy $100,000 of account receivable from you for $80,000 cash. You have just reduced your accounts receivable by $20,000. This means that you paid a one time payment of 20% to get your money faster than the normal 30 to 60 days that it usually takes you customers to pay you. This payment was given as an example and could be more or less depending on the Receivable that they are buying. They will tell you that the Amount you paid to receive the Receivable early is deductable as a  business expense and they are right but so is interest. 

The Receivable is analyzed as to it’s collectability. The more substantial the company the more likely that it will be paid on a timely manner. The number of days the Receivable is past the day of sale is also a determining factor in the analysis. The older the Receivable, the more undesirable the Receivable becomes.

An example of a substantial company is IBM or Microsoft. The desirable age of the receivable is 30 to 90 days. Receivables older than 90 days become stale and the purchaser may think any receivable over 90 days is uncollectable unless the agreement with this customer states a longer than 90 day period before payment is due. 

There are many derivatives of this type of financing and it may fit many businesses. This has been a very brief description of the method. The bottom line is that you usually will pay a higher price to finance using Factor Financing. There are many ways to borrow and a company should look at all avenues. Sometimes all avenues will be closed and you may only have one option but remember that all banks use different criteria to analyze a company and just because you were turned down by one bank you may be surprised that another bank may approve your loan request using the same information.

Please Email me if you have any questions at roger@rogerschlueter.com or see my simple website at www.schlueterfinancial.com 
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Non Bank Lending Sources

Article by Roger Schlueter

There are many Non-Bank Lending Sources that many Business Borrowers need to be aware. Some of them you may not want to use but you must at least know of them. Some people say that Credit Unions are non bank lending but they operate just like banks these days and their loan officers and heads of lending all come from banks. You are suppose to be a member but they just make you open an account, with up to $25 in it, to meet the requirement.  

The First and the most overlooked is your Life Insurance Policy. It’s all George Bailey had when he was in financial trouble on “It’s a Wonderful Life”. Mr. Potter looked at his policy and said, “How much cash is built up”? After getting the answer he looked at the face value of the Policy and stated, ” Why your worth more dead than alive, George Bailey”! Oh coarse, then George met Clarence and everything worked out. 

The Life Insurance Policy you would have to have is one that accumulates Cash Value. Policies that accumulate cash value are of coarse Cash Value Policies, and most variable life policies. Term Life Policies usually do not accumulate a cash value and because of this you cannot borrow against them. If you have a cash Value Policy and want to borrow against your cash value the interest rate is usually pretty good. Some insurers make you pay the interest in advance and will deduct the first years interest from the amount you borrow.

Established Business can try to use their suppliers. The people that they purchase Products or Supplies from make excellent lenders but only usually for their products. They can give you short term extensions of Credit for the purchase of Products or Supplies. This is usually not a good long term solution.

Asset Based Lending or Factoring can help but only if you have assets like Accounts Receivable from reputable firms or inventory that has a predictable value. The Asset Based Lender makes a living off lending on your Accounts Receivable which they buy or lend on. They will also usually lend on Inventory if it has a predictable value like Lumber, Steel, etc., anything with a value to other firms.

Venture Capital or Angel Investors are about the same. They will put equity into your firm but will take an ownership in your company. This ownership is usually a Controlling Interest because they want to be able to protect their investment. Read all the fine print in all the documents at signing because you might not like the conditions and terms of the agreement. 

Credit Cards can be used for Business Financing but is comes at a high price and you first need some very high limits to access the cash. For someone with Good Credit and High Borrowing Limits this can be a short term solution.   

Family and Friends are of coarse not your first choice but under the right circumstances can be useful as creditors. These days the banks are not paying any interest to speak of and rates, on cash in the bank, will be lucky to be paying one to two percent. The way to approach family and friends is to appeal to their sense of greed. The could lend to you with a real note and collateral if you choose and get rates of upwards of 8 to 12% and, if needed, more than that. The only way the IRS gets riled is if the non-bank lender charges a below market rate and then the lender could pay tax on phantom interest – Phantom Interest is the difference of the market rate and the below market rate they charged you. I think  they will charge you a higher rate if they know about Phantom Interest. They could even charge you points on your loan for an even higher rate. Points are a percent of the loan paid up front but usually deducted from the proceeds. They can make loads of money off of you!

There is a lender called a Hard Money Lender. This lender is a high rate lender who wants his money back within a specified time period. this time period is usually not more than a year, and usually is much less. Hard Money Lenders charge high rates and severe penalties if the borrower misses the payoff or payments. These lender came into light in the go go real estate days of the 90’s and 2000’s. Most rehabbers would borrow to buy the house and / or the fix-up money and felt they could sell the house within the time frame of usually 6 to 12 months. Woo is the rehabber that did not meet the deadline, they paid dearly.

Title Loans or Short Term holders of your check. Title Loans are base on the value of you Car Title and the amount is limited to the collateral or value of the vehicle. Those “Check into Cash”, people have you right a check and they keep that check. If you do not pay they cash the check and depending on your State and County you could be arrested of Writing Bad Checks. Always check what the end result will be if, God Forbid, you cannot fulfill your obligation in paying off the loan or advance, they make to you.

Pawn Shops are another way to go but you need to have something worth something to be able to borrow from a Pawn Shop. If you do not pay the fees and or interest in time you forfeit the item of value. They usually also buy merchandize from people. You can also sell your own stuff on Ebay or Craigs List but there is alot of work involved in packaging or meeting people at your house.

401K plans can also be borrowed against and it really depends on your employer or the company that holds the 401K plan. If you are buying a business or starting a business there is a way that you can use your retirement money to start the business and not incur any penalty from Uncle Sam. Most good Accountants know of this way to borrow since it is related to the Tax Code.

The Indians from India and the Far East countries have used a Family Financing Mechanism. This is where the family or several families pool their money. They then lend the money to one of the family members to start a business and when the money is paid back they lend to another family member. Woo is the poor son or cousin who fails in their business with no money to pay the family back!

These are several ways to finance a business without a Bank. If you think of any more send them to me and I will include your information.  I’m not the know all of Non-Bank Financing, but I’m sure, that I have got you thinking of other ways to obtain funds for business loans.

Visit my website for contact information or more information at  www.schlueterfinancial.com or email me at roger@rogerschlueter.com      


Refinancing with the SBA Guarantee Loan

Article by Roger Schlueter, MBA

This article uses information from the SBA SOP which was revised in October of 2011. 

This is a recap for all the Banks and Borrowers that do not realize that you can refinance bank loans, credit cards (used for Business), and even SBA Loans at your institution or at another bank with the SBA 7a Guarantee Program. 

The original purpose of the loan being refinanced must have been eligible at it’s origination. The debt to be refinanced must be in the business name unless the debt is Credit Card debt in the personal name but used for the business.

Any debt can be refinanced if the lender believes it no longer meets the needs of the small business applicant. Applications under this subparagraph may only be processed though standard 7a procedures. The following types of business debt that are identified below may be refinanced with SBA Guaranteed Loans.
– Debt (short or long term) structured with a demand note or balloon payment.
– Debt with an interest rate that exceeds the SBA maximum interest rate for the processing method being
  used.
– Credit Card obligations used for business-related purposes
– Debt that is over collateralized based on SBA’s Collateral Requirements
– Revolving lines of Credit where the original lender is unwilling to renew the line or the applicant is
  restructuring it’s financing in order to obtain a lower interest rate or longer term
– Debt with a maturity that was not appropriate for the purpose of the financing ( 3 yr term for equipment that 
   will last 15 years.
– Debt used to finance a change of ownership of a business may be refinanced if it meets these criteria:
    a) The lender obtains a current business evaluation that meets SBA requirements.
    b) Intangible assets on the borrowers most resent financial statement exceeds $500,000 and and the
        applicant does not have at least 25% equity – the application must be processed in Sacramento
        Processing Center.
    c) Lender may refinance Seller Take Back Financing but the loan must be in place for 24 months prior
        to this application and must be current for the 24 months. must also meet Refi Requirements 1 and 2
        below.
– 1) Other than Lines of Credit the savings to the borrower of the refinance must be 10% or more.
– 2) Loan Officer must address the following issues in a Written Analysis when refinancing debt.
        1) Why was the debt incurred?
        2) Has over-obligated or imprudent borrowing necessitated a major restructuring of the debt?
        3) Is the debt being refinanced currently on reasonable terms?
        4) Will the new loan improve the financial condition of the Small Business Applicant?
        5) Does the refinancing include payments to creditors (Borrower) in a position to sustain a loss,
             for Example, the applicant has an inadequate collateral position, low or deficit net worth, or the loan is
             in default?                                                                                                                                                                              6) Would the lender  / SBA be likely to sustain part or all of the same loss by refinancing the debt or
             will additional collateral or altered terms protect the interest of the taxpayer?     
        7) What portion ofthe total loan does the refinancing constitute?  
        8) If credit card debt will be refinanced, the borrower must certify that the credit card debt being
            refinanced was incurred exclusively for business purposes.   
           (a) If Credit Card is in name of Business the lender must confirm the Credit Card is in the name  
                of Business and have the business certify that the Credit Card Debt being refinanced was
                incurred for the business. Borrower must subtract any Personal Use from the refinanced amount.
                The SBA will not refinance personal expenses.  
          (b) If Credit Card is in the name of the individual the lender must document the debt was incurred
                for the business and the borrower must certify that the loan proceeds were only used for business.
                the borrower must also include copies of credit card statements and receipts for any expense
                in excess of $100.

– Refinancing with same institution debt, the lender must include a Loan Payment Transcript showing due dates and when payment were received as part of its analysis and recommendation. Lender must also explain late payments and late charges within the last 36 months. SBA will not refinance same institution debt to shift loss to SBA from the bank. 

– Lender can refinance a SBA Guaranteed Loan but it must contact the bank holding the loan and verify that the current lender would not extend additional credit to the borrower and /l or unable to modify the loan terms. The bank must also document the date, time and person the bank had talked, with a short summary of the conversation. Bank can refinance one
of it’s own SBA Guaranteed Loans only if the secondary market investor does not agree to modify the terms of the existing loan. 

There can be other conditions for the other specialized loan programs of the SBA. 

Please see my website for contact or other information at www.schlueterfinancial.com  or email me at roger@rogerschlueter.com

 

  




Accounts Receivable and Inventory Financing from Bank

Article by Roger Schlueter, MBA

Banks will do Accounts Receivable and Inventory financing but these are done a little differently than the regular business loan. Banks look at Accounts Receivable and Inventory financing as being much more Risky than Real Estate or Equipment Loans. Risk is dependent on several factors that I will discuss with each asset. 


Accounts Receivable are considered a better risk when they come from a solid and respected company that has been around forever like IBM or Proctor & Gamble. The Receivables are valued pretty much from the company that they come from, on a scale of IBM to Joe’s Barber Shop. The industry of the company that the Receivables come from is also a risk factor. The industry could be a risky industry at all times like a restaurant or a declining industry like a Letter Mail service. They are also less risky when they are as current as possible. The receivable that is within 30 days is valued much higher that a receivable that is 90 days old or God Forbid!, an over 90 day receivable.

Inventory is considered less risky when the inventory is something that has salable value as it sits. This is something like Raw Metal, or other component of the manufacturing process that can be used by other companies in their manufacturing process. Goods purchased for resale have probably the highest resale value because there is no change in the product itself. The lowest resale in inventory, is inventory that is in the process of being changed and thus limiting the use of this product by other companies.

Accounts Receivable are financed using a formula. This formula is based on the age of the Accounts Receivable and related to its collectability by the bank in case of default.  Accounts Receivable are listed as to their age. The standard listing of Accounts Receivable is 30, 60, and 90 days. The account can be up to 90 days old and be used in the formula but usually everything over 90 days is excluded from financing (I say usually because if the bank feels that the company will pay this receivable then that receivable could be counted). Our basis for financing the Accounts Receivable is All Accounts Receivable up to 90 days old. This is the base amount that is Eligible for financing. The Bank will finance a percentage of Eligible Receivables. This percentage is up the Bank to decide but it is usually approximately 70 to 80 percent of Eligible Receivables. The bank will usually finance up to 80% of your company’s Eligible Receivables. Banks sometimes worry about the Borrower Paying Down the Loan as the Receivables are paid back to the Borrower. They can demand a Lock Box or some variation of the Lock Box. This is where the Receivables are paid to the Bank and the Bank Pays Down the Loan. Obviously this is Not Wanted by the Borrower.

Example:

Total Receivables is $100,000 and $50,000 are within 30 days, $20,000 are within 60 days, and $10,000 are within 90 days. The remaining $20,000 in account receivables are over 90 days and thus are not Eligible for financing. ELIGIBLE ACCOUNTS RECEIVABLE ARE $80,000. 

The Bank has decided above all other risks like industry and companies owed, that it will finance up to 80% of Eligible Accounts Receivable for your company. The bank will finance 80% of $80,000 which is $64,000. 

The Formula is:  $100,000 (Total Acct Rec) – $20,000 (Acct Rec over 90 days) = $80,000 of Eligible Receivables.

Bank Financing is 80% of Eligible Acct Receivables or 80% of $80,000 or $80,000 x 0.80 = $64,000
  
The Bank will finance $64,000 of Accounts Receivable but only if the Eligible Accounts Receivable Stay at $80,000. The Bank will ask for a Monthly Aging of Accounts Receivable and adjust their total amount of financing accordingly. If the Eligible Amount falls then the financing amount will also fall and you will have to pay the loan down to the new level. Looking at the opposite – if the amount of Eligible Account Receivables goes up then the amount of financing should also go up unless there is a Cap on The Total Amount of Financing. 


Inventory is a little more straight forward. The Bank will usually finance a percentage of Inventory. This percentage will depend upon the Quality of the Inventory as discussed previously. The percentage will be approximately 50 percent. The percentage can be higher or lower depending on the Banks perceived Risk of financing this type of Inventory. 

Example:

Total Inventory is $200,000. The Bank will finance 50% of Inventory or $200,000 x 0.50 = $100,000.

The Bank will also ask for a monthly Listing of Inventory and adjust the amount of financing according to the amounts of inventory that is Reported on the Listing. This amount of financing can be increased or decreased depending on the amount of Inventory Reported Monthly. 


The In
terest Rate for Accounts Receivable or Inventory Financing will always be on a variable basis. That is the Interest Rate will be a certain percent above the Base Rate. The Base Rate is usually the Prime Rate but can be tied to other indexes. The final rate will be the base rate plus an additional amount of interest and vary with the up or down of the base rates movements. Prime rate (base rate) is 3.25% and the Spread or additional amount added to the base rate is 3% then the Rate is 6.25% and the rate will usually vary with the movements of the base rate and will be adjusted at every Adjustment Period. The Adjustment Period can be daily, monthly, quarterly or yearly, dependent upon the bank and the banks perceived risk. 

Financing Accounts Receivable or Inventory is accomplished everyday by banks and finance companies. The main thing to remember is that the amount can vary according to the amount of Eligible Accounts Receivable or the Amount of Inventory. These Loans are financed like a Line of Credit and usually can be drawn up on or paid down as monies are available by the company. Your security is usually the Account Receivable or Inventory but the bank can ask for and get additional security or collateral if the bank feels the additional Collateral is necessary to cover the Risk they hold while providing the financing.  

Please see my website for contact and additional information at www.schlueterfinancial.com  or Email me at roger@rogerschlueter.com 

How the Bank Looks at your Personal Financial Statement

Article by Roger Schlueter, MBA

Your Bank will look at your Personal Financial Statement for every loan you try to qualify to obtain. The type of loan may matter somewhat but for commercial business loans there is definitely, a methodology and a purpose in the Banks analysis of your Personal Financial Statement or PFS.
First we will look at why the bank wants to look at your Personal Financial Statement or PFS. When the Bank makes any loan but especially Business Loans, the Bank wants to be paid back in full with interest which is the first way to get paid off by the loan for a Bank. The Bank will then try to liquidate any collateral that is pledged to the loan, which is the second way out. The third way out of the loan for a Bank would be to collect on any Personal Guarantees that the borrower gave when getting the loan. This is actually the second way out but is a corollary to the second way out because the bank first looks to the pledged assets and then to any Personal Guarantees that were pledged by the borrower. These Personal Guarantees say to the Bank, “please look at my stuff of value and see what you can sell to satisfy my loan balance due”. That is were the Personal Financial Statement or PFS comes into play. 
The Personal Financial Statement is split into Assets and Liabilities. The Liabilities are checked by the bank by running your Credit Report and matching the stated Debts and Payments listed on the Credit Report to the Loans and Payments listed on your Personal Financial Statement’s Liabilities. The thing to remember is that if the Liability is not on your Credit Report it doesn’t exist to the bank unless you put it on your Personal Financial Statement (PFS). This behoves you to run your Credit Report before going to the bank to see what is on it and to see if it is reported correctly. 
The Assets are a different story. The Assets are what you put on and there is a fairly large amount of fudging that can be done on the Asset Side of the PFS. The Cash is what you have in Cash on that day and since your account statement only prints once each month it is impossible to tell how much cash you have at any point in time. Oh course if you have a bundle of cash, the bank may want you to put the cash into the deal or use it as collateral. Any Accounts Receivable is the also hard to track unless you give the bank a name and phone number to call and find out. 
Real Estate is pretty easy in today’s age to check on, especially if your county has a computerized look-up on the web. They still do not know how much debt but that is obtained through the Credit Report. 
Automobiles, Household Goods, Collections of Art or coins etc. , Antiques, Business Assets, and any other goods that you own that have value to someone else. These are Valued by You and most banks do not ask you to verify the value unless things seem out of line in the value of the Asset. Most of the Asset Categories will be explained on the reverse side of the PFS in more detail. 
Income Tax Returns will verify your income and some of your sources of income like Earnings, Interest and  Dividends or income from ownership in companies. Living Expenses are a category on most Personal Financial Statements but most people ignore that part because the bank has your Tax Return.
Signing the Personal Financial Statement and your Tax Return will pretty much lock you in as far as tuning them into a legal document. Mail Fraud is any Scheme to Defraud and is less likely to really be a “Mail – Postal” Scheme. More than likely any “Concocted Documents” will be thought of more liberal in the mail part of the Mail Fraud – meaning the Tax Returns were mailed to the IRS and therefore were relied upon. People have gone to jail for Blatantly lying on a PFS or Tax Return but there is a Large Grey Area for the Valuing of Assets unless you are an Appraiser of some sort.
Most Bankers will look at a Personal Financial Statement with an eye on the Assets that they can attach and value like your home or other real estate, Cash, Stocks, or Cash Value of Life Insurance Etc. Most good bankers will try to check on the value of some assets if they are relying upon them for collateral. Banks and Bankers in general will look more favorably on a loan if the owner has a Good Personal Financial Statement, even if the assets are not pledged. What a Bank means by a  Good PFS is one that has a high Asset Value and a Low Debt Value, Giving the Borrower  a High Net Worth. Bankers Love High Net Worth Individuals even if they do not have any claim to those Assets.  
Hopefully I haven’t totally confused you. Hopefully you are better informed than you were before reading this article. 
Please go to my website for contact information or other information at www.schlueterfinancial.com  or Email me at roger@rogerschlueter.com