SBA 504 Loan | Bank Loans for business – Omniscient

Documents Provided to The Bank for a Business Loan

Article by Roger Schlueter

There are many Documents that the bank will want to see when you apply for a Business Loan. This article covers most but, He who has the money will dictate the dance.

I Guarantee you will have all your info if you follow this list for getting a Commercial Business Bank Loan!

1) History of Company or Discussion of the Who, What, Where, Why, and How of the New Company.

2) Money needed and for what purposes. Estimates and Bids from providers of Future Purchases.

3) Resumes of All Owners.

4) Personal Financial Statement for all Owners with their Credit Score Listed.

5) Personal Tax Returns for three years.

6) Company Financial Statements for three years and/or Projected Company Financial Statements.

7) Existing Company – Company Tax Returns for three years.

8) Cash Flow Statement for First year on a monthly basis.

9) Cash Flow Statement for Three Years on a yearly basis.

10) Financial Analysis of all Past Financial Statements and Projected Financial Statements.

11) Listing and Discussion of Collateral that you are pledging for this loan.

12) Summary of Your Project that restates the reasons you need the loan and the benefit to your business.

*** Remember to Sign and Date all Financial Documents, especially the Personal Financial Statement and the Financial Statements and Tax Returns.

*** The Bank will run Credit on all potential borrowers.

This is a Good List but No One can tell you exactly what the bank will ask for because the Documents that are provided may lead to more information that the banker wants to see.

Please address any questions thru this blog or Email roger@rogerschlueter.com

Personal Guarantees on Business Loans

Article by Roger Schlueter

Personal Guarantees on Business Loans are as certain as Death and Taxes! I have talked about this before but many business people just don’t understand. Just because they have their company set up as a LLC or Corporation, the bank will still want their Personal Guarantee and their Spouses Guarantee.

Most Banks will get Guarantees from the Owners of the business and any other Businesses that the owners own. The Bank will also want the spouse to guarantee the loan unless the Borrower Applies as Personal Credit and Only Shows their Assets and Income to Pay Off the Loan. Usually the Bank will still want the Spouse and will insist on a Marital Waiver if the spouse is not on the loan. The Marital Waiver excludes the spouse from claiming a stake in the Value of the Business in case of a Divorce.

Banks do not care what level of ownership the individual owns, they usually want a Secured or Unsecured Unlimited Personal Guarantee. That said, sometimes banks will let a Minority Owner of less than 20% sign a Limited Personal Guarantee. This Limited Personal Guarantee is just that, limited to an amount of money. It can be a percent or an absolute dollar amount.

The U. S. Small Business Administration or SBA will always want a Personal Guarantee from the borrower and their spouse. They sometimes must be reminded of Regulation B (Federal Law which applies to the Federal Government as well as all of us) which states that they cannot arbitrarily demand a Personal Guarantee from a spouse. The Individual can apply for Credit on their Own Behalf but cannot put the spouse on their Personal Financial Statement. This Usually is a problem when the Spouses own Joint Assets like Real Estate. The Joint Asset, that is owned Jointly, will give the Bank or SBA the right to ask for a Spouse Guarantee. I have seen people use only their assets and income to apply and not have a spousal guarantee but this is usually when they have segregated assets.

Alternatives for Credit when you do not want the spouses personal guarantee are Unsecured Loans or Lines of Credit usually in the form of a Credit Card. They, of coarse will carry a higher interest rate of 14% to 24% rather than a Bank Interest Rate of 6% to 8% (this is the rate as of 5/24/2013). Usually unsecured debt will not be as structured as debt that is secured against assets.

I have seen companies try to get around this issue by having let’s say Ten or more owners that each have 10% or less ownership. The rule is 20% for a personal guarantee with SBA but SBA will ask for all under the above ownership situation. Under the above situation the Bank or SBA may give Limited Guarantees that may be limited to the borrowers ownership in the business. The Key Words here are MAY GIVE.

This has been an overview of the Business Loan Personal Guarantee that is obtained by Banks and SBA on Business Loans. Please respond though the blog with questions or comments. My Email is roger@rogerschlueter.com

Collateral for the Business Loan

Article by Roger Schlueter

Collateral for the Business Loan has always been a touchy subject with borrowers. The Borrowers Collateral usually does not add up to the same amount as the banks collateral amount. The first way out of any loan for the Banker is the Cash Flow of the Business. The business pays down the loan with interest and the bank makes money. The second way out for the Bank is to Liquidate or Sell the Collateral and pay down or pay off the loan.

The Banks lost money on many loans in the years of 2009 thru 2011, and do not want to repeat the losses on loans made this year. They have made money on loans this year and are more careful on the Second Way Out of Business Loans.

The Banks in years past and today will utilize the SBA Guarantee for shortfalls in many areas of a Business Loan. These Areas are Down Payment, Credit, Collateral. The banks must have Cash Flow on a Business Loan – the First Way Out. The Small Business Administration has been used to bolster the Collateral on many loans as well as the Credit of the Borrower and the Down Payment.

What I am seeing is that the bank is relying on a larger amount of Collateral even if they are using the SBA Guarantee Programs. The SBA will approve the use a Supplier of a Borrower as an appraiser of Machinery and Equipment. This is easy to get because the Supplier want to get more business in the future. Some Banks are using costly Equipment Appraisers even though they are going through the SBA Guarantee Programs. This Trend will lessen as the Economy Improves.

Always bring up the SBA Guarantee Programs if the bank is uncomfortable with the Collateral Value on your business loan. Many banks do not consider the SBA and look for a Quick Turn Down. This has been an overview of Collateral. I have a more detailed Collateral Article in this blog that covers Amounts of Collateral for different Asset Classes.

Please go thru the Blog for any Questions or Email roger@rogerschlueter.com or go to my website at schlueterfinancial.com

Spousal Guarantees under Regulation B in Business Loans

Article by Roger Schlueter

Business Loan Lenders are notorious for getting your spouse to sign on the loan and guarantee the debt. In the old days this was a common practice, no mater what the credit and collateral was like. Regulation B changed this practice. Under Regulation B the person who is applying for Credit must be looked at on their own merits. The bank or lender must first see if the applicant qualifies under the creditors Standards of Creditworthiness. The Lender may then require the Spouse get another person to sign to strengthen the credit but it does not have to be the spouse.

The main exception to this rule is when the borrower has assets that are owned by both Spouses on the Personal Financial Statement. The Personal Financial Statement must be the statement of the applicant, and as such, only have their Assets and Liabilities on the Statement. The other exception is when the Asset owned by both spouses is used as collateral for the loan.

Business Loan Applications need to have only the Applicants Financial Information included in the Application and Documents. This includes the Personal Financial Statement, Bank Application, and Income Verification. The Applicant needs to make it plain and clear that they are applying for Credit on their own account. Sometimes the bank will still ask about the spouse and when they do, they need to be reminded that you are applying for credit on you own account. This should do the Trick. I wouldn’t bring up Reg B, unless absolutely necessary. Banks do not like borrowers that bring up Federal Regulations. Only bring up Federal Regulations as a last resort.

Banks still expect the spouse to sign and guarantee the loan, so do not be surprised, if the bank asks for the spouses signature and guarantee. The Bank will still try to get the spouse to sign but this may be averted if the spouses keep their finances as separate as they can. Remember to report, on the Personal Financial Statement, only the Borrowers Assets and Liabilities and only use the income of the Borrower to apply for the loan. Remind the bank you are applying for credit on your own account.

Please respond with comments or questions though this blog at roger@rogerschlueter.com or for more contact information please go to my website at schlueterfinancial.com

Projection of Income

Projection of Income – (updated on 3-16-2013)
By Roger Schlueter, MBA

The Projection of Income or Earnings is a Projection (Educated Guess – based on Fact), that uses Sales and Expenses to arrive at the Net Income or Net Earnings for a period of Time. I usually do my Projection of Income and Expenses for three years. The Projection of Income and expenses should be done differently for a Start – Up Business than an existing (already in business) Business. Both the Start – Up Business and the Existing Business will project Sales and Expenses, and Provide Assumptions, that is explain how you came up with these numbers.

The Start – Up Business is harder to project because the Start – Up Business does not have any existing numbers for Sales and Expenses, so it will have to Project these numbers and include a basis (Assumptions) for the estimates. The Expenses are usually, what they are – they are easily estimated after checking with suppliers. Sales can be tricky – and lets face it, sometimes it is a sheer guess. The Bank and SBA would like that guess to be an educated guess. There are several easy ways to project Sales: 1) Ask several companies in the same industry, 2) Ask the Associations that the Companies are part of, 3) You can estimate by looking at Populations, Age Groups, or Companies that use your product and estimate what percent of market share that you think you can get.

The Existing Company has many Advantages in the projection of Sales and Expenses. They already have an amount of Sales and Expenses per reporting period. It is easier to say that you will increase the percentage if you already have a number. The Trick is to remember to explain and justify your numbers and how you came up with the numbers. The expenses are the easiest because you already have some numbers and they can be equated to Sales as a percentage of Sales. This works best if the past, Months or Years numbers are consistently a certain percent of Sales. RMA has a publication and online presence, where you can look at the averages of Expenses of Companies in your Industry or NAICS Code. This is good to see if your company is within the Average up or down for your particular industry. This publication can be found in most large Metro Libraries (the online version is not free).

The Projected Profit and Loss Statement. This is what the statement should look like. The Explanations should be listed on the same page as the Statement. Look at this example:

      Sales                            $100,000
   – COGS*                          $ 50,000
= Gross Profit                   $ 50,000                  $50,000

– Expenses

     Rent                              $12,000
     Electric                          $ 1,200
     Postage                         $    200
     Office Supplies             $    300
     Interest                          $    800
     Other                             $    500

Total Expenses                $15,000                 –  $15,000

                                                   Net Profit     $35,000

* COGS is Cost of Goods Sold, which is the cost of resold merchandise or the cost to do a service or build a product. The Assumption should really tell the reader what it is made up of. COGS is usually a variable cost and as such will vary with Sales.

Explanations of Sales and Expenses

    Sales – Research from other firms my size
    COGS – Actual cost estimate from suppliers
    Rent – Actual projected cost
    Electric – Estimate based on rented facility
    Postage – Estimate based on sales
    Office Supplies – Estimate based on sales
    Interest – Actual based on projected loan
    Other – Projected unexpected expense

This is a good example but it is only an example. Your expense will differ and if you have a service business, you probably will not have any Cost of Goods Sold – COGS.

Remember to base your Sales or Income on a fact or methodology. Sales are much harder to estimate than expenses. Your cash available to pay your banks debt service on your loan will depend on enough sales to cover expenses and hopefully have a profit at the end of the month or year. The Projected Income Statement is based on fact but may have much subjectivity on its creation and application.

Questions can be addressed to this blog or to roger@rogerschlueter.com There is more contact information at Rogers Website at www.schlueterfinancial.com

New Business Constructing an Opening Balance Sheet

Article by Roger Schlueter

Individuals that decide to Start a New Business sometimes forget to Project the Balance Sheet Statement. If you obtained funding from SBA then you, the borrower, will be forced to create a Projected Balance Sheet and a Projected Income Statement.

The reason the construction of the Balance Sheet seems so hard is because you need to know your Accounting Debits and Credits. This means that for every entry in Accounting there are corresponding entry’s for Debits and Credits. Lets look at this problem as if we had started a New Business. The following Balance Sheet will be created on our business, ” Rogers Whiskey Supplies”. Needless to say that Roger sells Whiskey Stills and the Related Supplies.

Roger has a hobby of making Wiskey and has never obtained a license or sold any of his Equipment or Recipes to anyone. He has about $50,000 in Equipment and another $10,000 in Supplies for sale in his business. He has decided to obtain a SBA Loan from his local banking institution that is owned by Mr. Ebenezer Scrooge. The loan will be in the amount of $150,000 and will be used for Equipment ,Inventory, Working Capital and Loan Fees. The Equipment will be $125,000 and the Inventory will be $20,000 and $2,000 in Working Capital, with the Guarantee fee of $2,499 and Bank closing Costs of $501.

The Bank has asked Roger to prepare a Projected Balance Sheet to go with his Projected Profit & Loss Statement (Earnings Statement). This is how Roger tackled this problem:

Balance Sheet

Assets Liabilities

Cash $ 2,000 Accounts Payable

Accounts Receivable

Inventory $ 30,000 Current Portion Loans $ 10,884

Other Assets $ 3,000 Other Liabilities

Total Current Assets $ 35,000 Total Current Liabilities

Equipment $175,000 Loans $139,116

Total Assets $210,000 Total Liabilities $150,000

Equity $ 60,000

Total Liab. & Equity $210,000

Let’s start with what we already have and that is $50,000 in Equipment and $10,000 in Supplies. We can do ahead and put those on the Balance Sheet as $50,000 in Equipment on the Assets Side and $10,000 in Inventory on the Assets Side also.

Ebenezer Scrooge actually approves our loan and goes though the SBA and has the loan Approved by SBA and is ready to close the loan and fund out project.

The loan amount is $150,000. This is broken out into the Current Liability that is due in the next year and the other part of the Loan that is due in the future. So $10,884 is a Current Liability and the remaining $139,116 is put under Loans. This money was used to purchase several things: we had Working Capital of $2,000 which is the same as Cash and is put under Cash. The Inventory is combined with Rogers Supplies and put under Inventory for a total of $30,000 in Inventory. The Equipment that was purchased was $125,000 and was combined with Rogers Equipment of $50,000 for a total of $175,000 in Equipment and put under Equipment. Now I’m done! Not! you say, what about the $3,000? That was Fees for the SBA Guarantee and Bank Closing Costs for a Total of $3,000 and put under Other Assets.

That’s It! Not too bad for Accounting stuff. Remember the Assets always Equal the Liabilities plus the Equity. The Equity just happens to be in this example the Starting Equipment and Inventory that Roger put into the project but it is not put directly into Equity, it is derived by taking the Assets and subtracting the Liabilities and that number is your Equity.

Please Address any questions to this Blog or to roger@rogerschlueter.com or get additional info and contact info at www.schlueterfinancial.com

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.

Checking Out IF SBA Will Finance Your Franchise

Audio for Franchise ApprovalArticle by Roger Schlueter

SBA, Small Business Administration will finance franchise businesses. The only requirement is that the Franchise agreement must have certain Language that SBA approves of, in case the SBA ends up owning the Collateral. The SBA has a List of Approved Franchises. The franchises on this list have an easy time being approved for a SBA Loan if they are buying or expanding a Franchise. The Franchise Registry provides a list of most of the Approved Franchises for SBA Financing. The Franchise Registry can be found at: http://www.franchiseregistry.com/registry/ .

Lenders and potential Franchises will have to sign in with their Email and create a password to search the registry. The Individual can search under Business Development after signing in with their created password. I searched for Domino’s Pizza and found that the franchise is SBA Eligible. This means that SBA has approved their franchise agreement. You can click on the Name of the Franchise and find out more info on the Franchise if the Franchise wants to give it to you.

Let’s say your franchise is not on the Franchise Registry. SBA states on their website that, “SBA Eligibility Reviews on the Registry means that the franchise agreement does not impose unacceptable control provisions on a franchisee or potential franchisee (which could result in affiliation with a franchisor). The lender and/or SBA must still consider and evaluate, with respect to each application for SBA financing, factors such as general eligibility, conflicts of interest, creditworthiness, use of proceeds, and discrimination. It is important to be aware that SBA does not finance operations covered by a development agreement, and no development agreement may be eligible through this process.”

SBA will reveiw changes that the Franchisor make to it’s Franchise Agreement to deem it eligible. I have done this and it is a painless process except for the fact that it must be approved by a SBA Attorney. The bank or SBA Packager that the bank may use can take care of this for you.

Please address any questions to this blog or to roger@rogerschlueter.com or to www.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

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.