Category: Credit

Personal Financial Statement Used in Business Lending

Audio PFSThe Personal Financial Statement – What It Is and How to Use It to Obtain Your Business Loan


Article by Roger Schlueter, MBA


(This Article was updated on 2-6-2013)

 

All Financial Institutions ask Borrowers for a Personal Financial Statement. This is a Balance Sheet (Assets = Liabilities +Equity) of their Personal Assets & Liabilities. Most Banks and Financial Institutions take this document for its face value. Therefore it is a very important document for Business Loan Borrowers.

 

Let’s breakout what is, a Personal Financial Statement. A Personal Financial Statement (sometimes abbreviated PFS) is a Snapshot Photo of the value of the stuff you own, the value of what you owe other people and what value is left after you subtract your debt (what you owe other people) from your Assets (the value of stuff you own) and what you are left with is the equity, which is the true value of what you own.

 

There are many types of Personal Financial statements. Banks and Financial Institutions all have varied forms of the Statement. The Personal Financial Statement I will use in this article is the one used by the U.S. Small Business Administration. This is their Form 413 and has an expiration date of 8/31/2011. A copy can be obtained at the following web adresshttp:     www.sba.gov/sites/default/files/SBA%20413_0.pdf       , for your convenience in following along. 

 

The U.S. Small Business Administration wants this statement filled out by anyone owning 20% or more in the business or anyone guaranteeing the loan. Banks will usually want all owners and all guarantors and all spouses to fill this form out. That is spouses with a marital interest which will include all spouses unless the bank agrees to a legal marital waiver – most banks will not agree to the marital waiver. SBA will usually insist on a spouse signing a Personal Guarantee.

 

The top of the form on the right is the Date of the Statement. This is followed by the Personal Info of name, address, phone – business and personal, and the business name of the borrower if there is a current business name.

 

The listing of Assets and Liabilities are the next section. The Assets are listed on the left and the Liabilities are listed on the right. We will look at the Assets Section first. Most People do not fully value what they own. The assets section of a personal Financial Statement is broken up into categories. These categories are listed from assets that are Most Like Cash to assets that are Least Like Cash.  

 

The first category is obviously Cash – Cash on Hand and in Banks, then Savings Accounts and IRA and other Retirement Accounts. No banker wants to hear this but these are the most fudgable categories on the Asset Side of the Personal Financial Statement. A bank or financial institution will rarely ask for proof of these assets but on the flip side they may want you to use part of your cash in the total financial package. IRA or Other Retirement Accounts are listed here because they may be cash or near cash like stocks and bonds. Retirement Accounts Cannot Be Used as Collateral for Your Loan.

 

The next line item is Accounts & Notes Receivable which is also rarely questioned on your statement. This is anyone who owes you money – whether you have a legal document representing the item or not.

 

Life Insurance and the remaining Line Items under Assets will have their amount and they will also have a Number of a Subsection to be completed. These Subsections are a further explanation of that item. Life Insurance Cash Surrender Value Only – this means that you put down the amount of Cash Value that the policy has accrued and not the Face Value of the Policy. Usually the Policy will be a whole Life Policy to have a Cash Value but there are variations of the Whole Life Policy. Variable Life usually does not have a Cash Value.  The subsection under the Life Insurance says (Complete Section 8). This Section is at the top of the third page of the statement and wants you to write down the Face Value of the Policy, the Cash Surrender Value (Cash Value), as well as the Name of the Insurance Company and the Beneficiaries of the policies.

 

Stocks and Bonds are the next section. These are the value of all the stocks and bonds you might own that are not included in your IRA or Other Retirement Accounts. You further describe these in the subsection called Section 3, which is located, toward the top of page two of the statement. The breakdown is pretty self explanatory. They want the Number of Shares, the Name of the Security, the Cost of the Security, the Market Value Quotation per Share, the Date of the Quotation and the Total Cost.

 

Real Estate is the next section. This includes all the Real Estate that you own. Your residence is included if you own your home as well as any other property you own (including property that you are paying for over time). This real estate is described further in the subsection called Section 4.  This Subsection is also pretty self explanatory and is located in the middle of page two. There is space for three properties and if more space is needed, just copy page two for three more properties. The Type of Property is usually Residential for your home and then either Commercial or Commercial / Rental, Vacation Home etc. The other information needed is the Address of the Property, the Date Purchased, the Original Cost, the Present Market Value (Value Now), Name and Address of any Mortgage Holder, the Mortgage Account Number, the Mortgage Balance, the Amount of Payment per Month/Year, and the Status of your Mortgage. This is whether the loan is Current or Delinquent, the bank or financial institution wants the loan to be Current.

 

The next section is the Automobile Section. This is the Current Market Value (Value Now) of your vehicle or vehicles. Also describe in Section 5 which is located toward the end of page two on the Statement.

 

The Other Personal Property is the next section and this is all of your personal belongings. Do not forget to include any Collections, Antiques, or Equipment owned by you. This will be described in the subsection called Section 5, which is Toward the end of page two on the statement.

 

The last section in Assets is the Other Assets section and you describe it in the subsection called Section 5, also. This section is any asset that is not accounted for in the other sections and usually includes Equity or Value in a company that you own or something that you own that does not fit in the Other Personal Property section.


Remember to total the Assets Section.

 

Liabilities are the next section of the Statement. This section is on the right side of the first page of the financial. The liabilities are also listed from Most Cash to Least Cash for the lender or borrower viewpoint. Most of these items can be verified by the bank or financial Institution by running a credit report on you personally. What you need to do is get a current credit report from one or all three of the credit Bureaus. Trans Union is used by banks in the Midwest but the other two bureues are Equifax and Experian . You want to make sure that you include all liabilities that are listed on your credit report. Any Liability that is not listed on your credit report usually cannot be verified.

 

Accounts Payables are the first section in the liabilities section of the Personal financial statement. This can be any account that you have under your name that you don’t have a note – like credit cards.

 

Notes Payable to Banks and Others is the next section and includes any Note that you have with Banks or Financial Institutions which are not your Auto and Home because they have their own section. These are also Described in Section 2, which is located at the top of page two. This section two, wants to know the Name and Address of Noteholders, the Original Balance, the Current Balance, the Payment Amount, the Frequency (monthly, etc.), and How Secured or Endorsed – the type of Collateral.

 

The next section is the Installment Account (Auto), and they want the amount of the total liability for Autos and the monthly payments.

 

The Installment Account (Other) is where many people put credit Card debt but it is really for any Installment debt that has not been accounted for in other sections.

 

The loan on Life Insurance section is just that, any loans on the Cash Value of life insurance.

 

Mortgages on Real Estate are the debt that you have on your Real Estate that you listed in Section 4.

 

The Unpaid Taxes section is self explanatory and lists and unpaid Taxes that you owe. These are usually Income Tax Items. They are further described in section 6 which is located at the bottom of page two.

 

The last Liability section is Other Liabilities and includes anything you owe that has not been covered in a previous section. This is Described in section 7 which is located at the bottom of page two.

 

Total Liabilities is just that, the total of what is listed above and includes all money owned.

 

The net worth section is the Total Assets minus the Total Liabilities Equals your Net Worth. This calculation can be negative if the liabilities are greater than the Assets.

 

The Total Liabilities plus the Net Worth are totaled after the net worth section. This number will equal the Assets if you calculated the sections correctly. Assets equals Liabilities plus Net Worth and visa versa.

 

The Sections are numbered from one (1) to eight (8) and start just under the Assets and Liabilities Sections. The first is the Source of Income and Contingent Liabilities Sections. The source of income section is pretty self explanatory and states Salary if employed, Net Investment Income from investments like Stocks and Bonds or Cash Funds, Real Estate Income from rental real estate, and Other Income (Describe Below)* (Alimony and child support payments need not be disclosed in “Other Income” unless it is desired to have such payments counted toward total income).

 

Contingent Liabilities are liabilities that are not yet levied or owed by you but may become liabilities in the future. An example is that you act as co maker or endorser on someone else’s note and they do not pay – you will be liable and billed for this debt. Legal claims or judgments that are not yet due. Any Known Possible future liability. This section is seldom filled out.

 

We discussed the rest of the sections two (2) though eight (8) earlier in the article. The top of page three of the statement is a place for the signature of the borrower or borrowers. This can be an individual or Husband and Wife. Be sure to sign and date and put down your Social Security Number.
 

We are hoping the bank or financial institution can make sense of the statement and will look upon it with favor.

Remember to see my webpage at WWW.schlueterfinancial.com for addtional information.

SBA Refuses to Give a Line of Credit to Any New Company

Audio for Working Capital for New CompanyArticle by Roger Schlueter

There are several Lines of Credit that SBA offers in the SBA 7a Guaranteed Loans. These are the SBA 7(a) Loans CAPLines. There are four types of CAPLines and They are:
1) Working Capital – Unique Eligibility Requirements are: the company must sell on credit and create accounts receivable, not notes receivable.
2) Contract – Unique Eligibility Requirements are: Contract must permit lender to obtain an assignment of proceeds. Some Exceptions may apply (see ch. 7 of this subpart).
3) Seasonal – Unique Eligibility Requirements are: 30-day zero balance each year is required.
4) Builders – Unique Eligibility Requirements are: Borrower must have previous building experience of the same type. Speculative building but with documentation to support likelihood of sale.
On page 85 the SBA’s SOP 50 10 5(E) has a section IV “Various Specialized Programs”, the SOP (Standard Operating Proceedures) this is suppose to be the SBA’s Bible of the rules of SBA Lending. This section has a section entitled “7(a) LOANS CAPLines and gives the Attributes of all four of the CAPLines – Lines of Credit in Detail. There is no mention of any 12 month operations in this description on Pages 86 & 87.
Eligibility Requirements are discussed on page 130 & 131 under Section M. Additional Eligibility Requirements for CAPLines. This section states that a Seasonal CAPLine has to be in business 12 months but does not mention ” in business 12 months in the other CAPLines. The Working Capital CAPLine under M. 4. States that “To be eligible for a Working Capital CAPLine, the applicant must qualify under the standard 7(a) requirements and generate accounts receivable (not notes receivable).”, (top of page 131).
The only mention of 12 months business operation is in the Eligibility Questionnaire. This form is highly recommended that you fill out but is not required for 7a. This form states in the CAPLines Addendum H in the General Requirements for all loans that,
“1. The Applicant has been in business for at least 1 year or developed an adequate track record to assess its short-term working capital needs.” The Key Here is the word ” or “. 
Really, I’m not nitpicken but the SBA really needs to update it’s BIBLE so that others may see the light! In short – there will be not Lines of Credit for new businesses. Now, they could reinterpret the SOP or Redo the Eligibility in the future. Small Business deserves a Better Bible of SBA Rules and Eligibility.
Please send any questions or comments to this blog or to roger@rogerschlueter.com or go to the Website at schlueterfinancial.com  for additional contact information.
 

Cash Flow – The Key to Obtaining Your Business Loan

Audio for Cash FlowArticle by Roger Schlueter

Cash Flow, I must have mentioned those two words many times in the bowels of this blog. All Lenders are is essence Cash Flow Lenders. The Bankers want the Cash from the business to pay the Debt Service on the project and have Cash left over to Cushion the Deal. This is the First Way Out for the Bank. The Second Way Out is the Liquidation of Assets including collection of Guarantees. 
Cash Flow is the Cash Generated by the business. This is not money that the business is owed nor is it money that is invested in Inventory or Other Assets that the business owns. Cash is Cash. Cash is King, and the company with the most cash Wins!
A typical Profit and Loss Statement, (Earnings Statement or Income Statement), will show Sales and then subtract the Cost of Goods Sold, (COGS is the Cost of Goods that are Resold as in Retail Stores). The Statement then subtracts all other expenses that may be included in the Selling, General & Administrative Expense or SG&A. Most of these Costs are Paid in Cash but Depreciation and Amortization are cost that are levied on a business Assets that are not paid in Cash but used to subtract potential Obsolescence. Most assets do not last forever, like a Machine or a Vehicle. The Statements will sometimes Segregate other Items like Rent (Especially when paid to the Business Owner), Interest that is paid on loans the business has already incurred and Owners Salaries (Especially when salaries seem especially large).    
Cash Flow will be The Earnings or Net Income added to the Depreciation and Amortization. Other absolute Additions will be Interest but there are a few Additions that will be Subjective in Nature and these are Rent and Officers Salaries. The Rent that is paid to the Owners is Cash Available to Pay Debt Service. Officers Salaries that are particularly large or that the new owners will not need may be Added Back to Cash Flow. 
Once Cash Flow has been established then the Banker will want to look at how much Cash Flow there is to cover the Debt Service. The More Cash Flow there is the better the project looks to the Banker. What the Banker is looking for is a Ratio of Cash Flow to Debt Service. The higher this ratio the better. One to One, would be One Dollar of Cash Flow for every One Dollar of Debt Service. This is One to One, but what the banker wants to see is One to One and a Quarter, or One to One and a Half. The sky is the limit as far as this ratio goes. This Ratio is called the Cash Flow Coverage Ratio but may go by other names.
Example:
CASH FLOW
Net Income $500
Interest $100
Depreciation $100
Rent $200
Total $900 
Debt Service $600
All Loans
Debt Coverage Ratio = $900 (Cash Flow) / 600 (Debt Service) =  1.5 to 1
Means there is 1.5 Dollars of Cash Flow for Every 1 Dollar of Debt Service. 
Good is usually 1.30 and higher.
Almost All Lenders are Cash Flow Lenders – At Least All Bank Lenders are Cash Flow Lenders.
Please address any questions or comments to this blog or to roger@rogerschlueter.com or to my Website at schlueterfinancial.com

Rules on Prepayment of a SBA 7a Loan

Article by Roger Schlueter

The rules on prepayment of a SBA 7a Loan are fairly simple. For loans with maturities less than 15 years there is No Prepayment on a SBA 7a Loan. For Loans with maturities of 15 years or longer the Prepayment is due when the Borrower Prepays the Loan 25% or more in any one year, in years one, two, or three of the loan.
The Fee is 5% of the Prepayment Amount during the first year, 3% the second year, and 1% in the third year. This is only if the prepayment is considered Voluntary. The SBA will determine whether the Prepayment is Voluntary or Not Voluntary.
That is it! very simple! Oh, the Prepayment is not called a Prepayment Fee. The Fee is called a Subsidy Recoupment Fee. Go Figure!
Questions can be emailed to roger@rogerschlueter.com or made thru the Blog. More contact info is available at schlueterfinancial.com  

Banker Confidentiality does not apply to information shared with banks

Article by Roger Schlueter

Bankers for the most part do not share information about your business unless it is with a bank. They have a confidentiality toward other businesses, individuals and organizations but this does not apply to their bank and other banks that they may deal with. There are many situations that come up with bankers, and one of the most important, is that many of the bankers have worked with one another over the years. This creates a sort of Good Old Boy system as to, who knows who, in the banking industry. Most Bankers are also extremely loyal to their banks and the Banking Industry in General. It is sort of like when you are interviewed for a job, anything you say or refer to is used in the evaluation of your business and business management. 
Many Businesses will create a bond with their Business Loan Banker but remember who is paying his salary, it is not you. Even though you may contribute income that may lead to paying the bankers salary. People know that an interview situation is very strict, anything you say may be used for you or against you. This is the same when talking to your banker. You and him may be good buddies but remember, he works for the bank and is loyal to the bank. The bank is loyal to you as long as they think you can pay your loan payments in a timely manor, and you are a good risk for future borrowing. If either of these change, then you, may be out the door.
There are bankers that will try to move companies with them if they move to another bank. The banker should still be loyal to his bank. Bankers that are more loyal to the business than to the bank they work for, may not rise as high in relation to their position at the bank as they would like to rise. Banks like company men and if you are a renegade they either think of you as a liability or as a loose cannon or both.
The best way to gauge this relationship is to remember who is paying the bankers salary or commission. If your  company is paying the banker by his commission that he makes on you loans they that is great. I will say it takes a larger amount of loans to pay the salary of a Business Banker who may be making up to six figures and this figure does not include Benefits that could be up to half of his salary.
Most bankers are good guys and will be looking out for you. Just remember, it is just like in an interview, what you say can be used to benefit you or to Harm you, in the eyes of the Banker and his Bank. Good Economic Times usually are very beneficial to the borrower but in Bad Economic Times companies are booted out of banks every day!
Please address any questions to this Blog or my email at roger@rogerschlueter.com , or go to my webpage at schlueterfinancial.com for additional contact information.  
  

Handling Multiple Companies in a Financial Analysis

Article by Roger Schlueter, MBA

Companies looking for Financing have many problems that they need to overcome. Some of these problems are common and some problems need a little creating problem solving to overcome them. Most good financial people and banks will always start the analysis of a financial need with a Financial Analysis of the companies financial statements. 
The financial analysis is always started with a Spread of the companies financial statements. This is pure grunt work and is usually accomplished in a few minutes or hours depending on the complexity of the financial statements, the number of years analyzed and any changes made to the format of the financials themselves. This is mind numbing enough if the analysis is one company and three years financial statements. Sometimes the analysis is five years and then the individual or company has other companies which are related or connected in some way. Then the analysis can be a combination of Watching the Grass Grow or the Paint Dry and the most boring three hour lecture that you ever had in college. 
The way I start the spread of a company that will take many hours of pure grunt work is to buy a six pack of tallboys and a bag of  Snyders Sourdough Nibblers and Hunker Down for a long protracted engagement. 
The whole idea of the Spread Sheet of the financial statements is to do three things:
1) Spot Trends in Sales, Earnings, or Expenses
2) Check Ratios – Cash Ratios, Debt Ratios, and Expenditure Ratios
3) Analyze Cash Flow and end up with a Coverage Ratio for your debt
I will always spread each company on its own for three to five years. The spreadsheet is a good tool to create the sales and expense projections that will also be needed. The projections and cash flow statements need to be done for each company before putting them together to create the End Result of the combined entity that will pay the debt service of your loan from the bank. 
When you have several companies owned by the same person or entity, they may all be run out of the same physical location and managed by the same people. Decisions are probably made by the same people and when getting a loan for Assets that can benefit several companies, it is wise to put the spreadsheets together for that purpose. This is because, on their own they probably do not have the wherewithal to buy the building or equipment, but together they have ample cash flow and capacity to make the deal happen.
Lets start with an Example:
I’m working with a individual that has a total of four companies. Two of the companies are slow growth companies and had problems during the 2008-2010 Recession. they may still may make money but it would be unwise to put all your assets into an entity that may become obsolete or could go out of business in a few years. One of the companies has had exceptional growth and profits over the last three years. They owners have also started a forth company that is related to the high growth company but was only recently created and has only three months of operating financials. 
The owners want to buy a building that would house all four companies but the main reason for the new location is so the High Growth Company and the Newly Created Company can operate more efficiently and grow to their true potential. 
The spreadsheet is done on all four companies, really three with the newly created company not having any years to spread. Giving all four spreads to the banker caused problems because he may not understand the situation the way you want him to understand it. We decided to combine the High Growth company and the Newly Created company to show the new direction of the Owners. The Slow Growth companies were also combined to show a slower entity that still created cash flow but was not the focus of the New Direction the Owners wanted to go. 
The two spreadsheets were both given to the banker and it showed the new direction with Growing Sales and Earnings and the Slow Growth entities that still had earnings. If we had combined all four spreads it would show an entity that was deteriorated and weakened by the Slower Growth Entities. Our Cash Flow was done with the High Growth and the Slow growth but also combined to show the Cash Flow available to pay debt service by all entities. 
The bank has a spread and cash flow that shows the true potential of the High Growth company but also has a spread and a combined Cash Flow that shows the value added by the Slow Growth companies to the Cash Flow. The End Result of the combined Statement is enough Cash Flow to cover the Debt Service and a Coverage Ratio which impressed the banker. The banker could now see the direction of the company and the true Cash Flow Available to Pay Debt Service and was not bogged down or diluted by the Slow Growth companies.
Please address any questions to the Blog or email me at roger@rogerschlueter.com  You can also get more contact info at my Website at www.schlueterfinancial.com