Uncategorized | Bank Loans for business

Business Bank Lending

The Spreadsheet of Financial Statements

Article by Roger Schlueter

I have talked about Spreadsheets many times in this Blog but have not explained what they are or how to use them. All bankers will fill out a spreadsheet on your financials if you are applying for a business loan. All financial Analysts will also start with a spread for the analysis of your financial statements and sometimes for the projections.

A Spreadsheet, or Spread for short, is an Excel (you can use any other software for spreadsheets) Spreadsheet. The spreadsheet term is a generic term meaning a sort of accounting form that you can format with numbers and calculations. Our Spreadsheet or Spread, is a Form that will show the financial statements of a company or division etc., next to one another in sequential order by year, quarter, or month. It will show Trends in the upward or downward movement of the Company’s Sales, Costs, and Expenses. The Spread will also have the ratios that are most important listed by year. Good Spreads will also show percentages of most the expense and profit numbers as they relate to Sales. Most analyst or bankers will perform all the calculations whether the spread calculates the numbers for them or not. My spread did not have the percentages for Sales, Costs or Expenses and I would calculate these by hand and write them on a printed spread. This is not a class in financial analysis so you will have to look up some of the spreadsheet terms and calculations yourself but most will be self explanatory.

Spreadsheet Analysis
Company Name:
	Address :

	# of Months			12	12	12
	Date (Mo./Day/Yr.)			9/30/2012	12/31/2011	12/31/2010

	BALANCE SHEET

	Cash and Marketable Securities			$0	$0	$0
	Receivables			$0	$0	$0
	Inventory			$0	$0	$0
	Notes Receivables			$0	$0	$0
	Prepaid Expenses			$0	$0	$0
	Loans to Shareholders			$0	$0	$0
	Other Investments			$0	$0	$0
				$0	$0	$0
	CURRENT ASSETS			$0	$0	$0

	Net Fixed Assets			$0	$0	$0
	Intangibles				$0	$0
	Land			$0	$0	$0
	Leasehold Improvements			$0	$0	$0
	Accumulated Depr.			$0	$0	$0
	Other Assets			$0	$0	$0
	TOTAL ASSETS			$0	$0	$0

	Short Term N/P – Bank			$0	$0	$0
	Notes payable – Other			$0	$0	$0
	Accounts Payable			$0	$0	$0
	Accruals			$0	$0	$0
	Taxes (Income)			$0	$0	$0
	Current Portion LTD			$0	$0	$0
	Accounts Payable Misc			$0	$0	$0
	Cash Overdraft			$0	$0	$0
				$0	$0	$0
				$0	$0	$0
	CURRENT LIABILITIES			$0	$0	$0

	Long Term Debt			$0	$0	$0
	Subordinated Officer Debt			$0	$0	$0
				$0	$0	$0
	TOTAL LIABILITES			$0	$0	$0

	Common Stock			$0	$0	$0
	Capital Surplus			$0	$0	$0
	Retained Earnings			$0	$0	$0
	(Less) Treasury Stock			$0	$0	$0

	TOTAL NET WORTH			$0	$0	$0
	TOTAL LIABILITES & NW			$0	$0	$0

	PROFIT AND LOSS STATEMENT
		# OF MONTHS		12	12	12
		YEAR ENDING		9/30/2012	12/31/2011	12/31/2010
_________	_________	_________	_________		_________	_________

	SALES			$0	$0	$0
	– COGS			$0	$0	$0
	= GROSS PROFIT			$0	$0	$0
	– SGAE			$0	$0	$0
	= OPERATING PROFIT			$0	$0	$0

	-Officers Salary			$0	$0	$0
	-Depr. Expense			$0	$0	$0
	-Interest Expense			$0	$0	$0
	-Rent			$0	$0	$0
	+ Other Income			$0	$0	$0
	=Earning Before Tax – EBT			$0	$0	$0
	– Income Tax			0	$0	$0
	=Profit After Tax – PAT			$0	$0	$0


	OPERATING CYCLE
	+ Days Receivable			#DIV/0!	#DIV/0!	#DIV/0!
	+Days Inventory			#DIV/0!	#DIV/0!	#DIV/0!
	– Days Account Payable			#DIV/0!	#DIV/0!	#DIV/0!
	– Days Accruals			#DIV/0!	#DIV/0!	#DIV/0!
	= Operating Cycle			#DIV/0!	#DIV/0!	#DIV/0!


	RATIOS
	Percent of Sales Growth			#DIV/0!	#DIV/0!	#DIV/0!
	Profit as % of Sales (anualized)			#DIV/0!	#DIV/0!	#DIV/0!
	Debt to Equity Ratio			#DIV/0!	#DIV/0!	#DIV/0!
	Working Capital			0	0	0
	Current Ratio			#DIV/0!	#DIV/0!	#DIV/0!
	Quick Ratio			#DIV/0!	#DIV/0!	#DIV/0!


	RECONCILIATION OF NW
	Ending Net Worth			$0	$0	$0
	– Profit After Tax – PAT			$0	$0	$0
	– Beginning Net Worth			$0	$0	$0
	= New Equity			$0	$0	$0


	CAPITAL EXPENDITURES
	Ending Net Fixed Assets			$0	$0	$0
	+ Depreciation			$0	$0	$0
	– Beginning Net Fixed Assets			$0	$0	$0
	= Capital Expenditures			$0	$0	$0

www.schlueterfinancial.com

SBA Methods of Valuing a Business

Article by Roger Schlueter, MBA

These Business Valuation Methods were sent to me by the SBA (Small Business Administration), and supposably will be accepted by SBA in their evaluation of financing for a Business Buyout. I also ran into the exact same document on the internet at www.collin.edu/sbdc/docs/Business-Valuation-Methods.pdf , I think it is a SBDC Document but it is quoted from a book. There are many ways to measure the value of a business, and these are but a few of the methods. As for as I can tell, these are accepted by SBA for the evaluation of financing, for a business buyout.

“BUSINESS VALUATION METHODS

(All Valuations MUST BE based on Historical Data)

I. Adjusted Book Value

Take the Book Value of net worth

-assets not acquired

+liabilities not assumed

+fair market value of assets acquired

+any net worth adjustments

=Adjusted Book Value

____________________________________________________________

II. Capitalized Adjusted Earnings

First Step: Adjust Historical Earnings

Seller’s Discretionary Last

Cash Flow Year

Net Profit 50.0

+Officer’s salary +70.0

+Discretionary expenses +30.0

-New Owner salary -60.0

Adjusted Profit 90.0

Second Step: Get the adjusted profits for 5 years then do a Weighted Average of the

Adjusting Earnings

Year Earnings Weight Adjusted

95 $ 50 1 $ 50

96 $ 30 2 $ 60

97 $ 70 3 $ 210

98 $ 60 4 $ 240

99 $ 90 5 $ 450

Totals 15 $1,010

/15

Average $ 67 (rounded)

Third Step: Calculate a Discount Rate

Determine T-Bill Rate 5.0%

Determine Offset Risk Rate 12.0%

√ Establish rate of return based on risk

factors

√ Establish rate of return based on general

economy

Determine Offset Illiquidity Rate 3.0%

Total the Rates 20.0%

Fourth Step: Take the weighted average of the adjusted earnings and divide by the

discount rate.

Example:

$67/.20 = $335

___________________________________________________________________

III. Discounted Future Earnings

First Step: Adjust Historical Earnings

Last

Year

Net Profit 50.0

+Officer’s salary +70.0

+Discretionary expenses +30.0

-New Owner salary -60.0

Adjusted Profit 90.0

Second Step: Get the adjusted profits for 5 years then do a Weighted Average of the

Adjusting Earnings

Year Earnings Weight Adjusted

95 $ 50 1 $ 50

96 $ 30 2 $ 60

97 $ 70 3 $ 210

98 $ 60 4 $ 240

99 $ 90 5 $ 450

Totals 15 $1,010

/15

Average $ 67 (rounded)

Third Step: Determine the discount rate

Determine T-Bill Rate 7.0%

Determine Offset Risk Rate 12.0%

√ Establish rate of return based on

< div>risk factors

√ Establish rate of return based on

general economy

Determine Offset Illiquidity Rate 6.0%

Total the Rates 25.0%

Fourth Step: Estimate growth, both real and inflationary (for this example, we are estimating a 5%

growth rate).

Fifth Step: Multiply the estimated earnings for each year by the estimated growth rate until estimated earnings for the next ten years are determined.

Sixth Step: Multiply the adjusted, weighted earnings by the estimated growth (1 plus the growth rate) to determine the estimated earnings for the first year.

Seventh Step: Using the net present value table, multiply the estimated earnings for each year by the factor for the discount rate for each respective year to determine the discounted value of future earnings.

Eighth Step: Total the discounted earnings.

Ninth Step: Determine the residual value by subtracting the growth rate from the discount rate and

dividing the difference into the discounted earnings for year ten.

Tenth Step: Add the residual value to the total discounted earnings.

Year Previous Growth Adjusted Factor Net Present

Year (1+5%) Earnings (25%) Value

Earnings

1 67.0 1.05 70.4 0.80000 56.3

2 70.4 1.05 73.9 0.64000 47.3

3 73.9 1.05 77.6 0.51200 39.7

4 77.6 1.05 81.5 0.40960 33.4

5 81.5 1.05 85.6 0.32768 28.0

6 85.6 1.05 89.9 0.26214 23.6

7 89.9 1.05 94.4 0.20972 19.8

8 94.4 1.05 99.1 0.16777 16.6

9 99.1 1.05 104.1 0.13422 14.0

10 104.1 1.05 109.3 0.10737 11.7

Net Total 290.4

Residual 58.5

Total 348.9

________________________________________________________________

IV. Cash Flow Method

First Step: Identify Available cash for debt service via rule of thumb, sources/uses, or any other

acceptable method.

Last

Year

Net Profit 10.0

+ Depreciation 5.0

Adjusted Profit 15.0

Second Step: Choose a reasonable maturity and market interest rate for the financing requested.

Years

Fixed Asset Purchases 10

Working Capital 7

17 / 2 = 8.5

Average Maturity 8.5

Interest Rate 12%

Third Step: Reverse-compute the amount of total funds that the cash flow can support given the

maturity and interest rate chosen (using an amortization table or calculator).

Cash flow of $15,000 annually at 12% for 8.5 years is an an
nual debt service for the total amount of $79,696.69 (computed on a monthly payment basis) or $77,295.78 (computed on an annual payment basis).

Cash flow valuation establishes a range of $77,000 to $80,000.

________________________________________________________________________

V. Gross Revenue Multiplier

Please use the attached table (Top 30 Business by SIC Code) and the following:

• SDC or SDCF = Seller’s discretionary cash flow [same as Method II, step 1]

• EBIT = Earning before Interest and Taxes

• EBITDA = Earning before Interest, Taxes, Depreciation and Amortization

Example:

Last Year’s Sales * Multiplier

Top 30 Type of Business by SIC Code

(Counted from 10/98 to 8/02)

Rank # of SIC Description Rule of Thumb1 or Multiplier

Loans Code

1 1900 5812 Eating and Drinking Places 2X SDCF or 25 – 35% of annual sales

2 405 7231 Beauty Shops 1.5X SDCF or 4X mthly sales + inventory

3 337 7538 General Auto Repair Shops 35% of annual sales, 1.5X SDCF

4 325 5411 Grocery Stores 1 – 2X mthly sales or 11% of sales

5 260 8041 Off / Clinics of Chiropractors 20 – 70% of annual fees + FF & E

6 235 5999 Miscellaneous Retail Stores 25 – 50% annual sales + inventory

7 231 7389 Business Services 63% of annual sales

8 228 8351 Child Day Care Services 2X SDCF or $1500 – $3000/enrolled child

9 175 8011 Off / Clinics of Doc of Med 20 – 40% of annual fees or 1X SDC

10 165 7299 Misc Personal Services 70 –75% annual sales

11 165 5813 Drinking Places (Alcoholic) 40 – 45% annual sales + inventory

12 163 5947 Gift, Novelty, & Souv Shop 4X mthly sales + inventory or 1.5X SDCF

13 142 7991 Physical Fitness Facilities 1 year’s annual revenues

14 129 4212 Local Trucking W/O Storage 5X EBIT

15 127 7379 Computer Related Services 57% of annual revenue

16 124 5531 Auto & Home Supply Stores 35% of annual sales + inventory, FF & E

17 120 5461 Retail Bakeries 4X mthly sales + inventory, FF & E

18 117 0781 Landscape Couns & Planning 1 – 1.5X SDCF + FF & E

19 113 6411 Ins Agents, Brokers, & Ser 100% annual commissions

20 112 7999 Amus & Recreation Services 45-50% of annual sales

21 112 5992 Florists 34% of annual sales + inventory

22 108 1751 Carpentry Work 4 – 5X EBIT

23 105 5541 Gasoline Service Stations 3X EBITDA – business only

24 105 7349 Build Cleaning & Maint Serv 50% of annual revenue or 1.5X SDCF

25 105 8021 Offices & Clinics of Dentists 1 – 1.5X SDCF + FF & E, 50-70% Rev

26 105 4213 Trucking, Except Local 1 – 1.5X SDCF + FMV of fixed assets

27 103 5941 Sport Goods & Bicy Shops 4X mthly sales + inventory

28 99 7215 Coin-Oper Laun & Dry/clean 70 – 100% annual sales or 2.3 – 2.5X SDCF

29 94 7532 Auto Body & Uphols Rep 35% of annual sales or 1.75X SDCF

30 94 5399 Misc General Merch Stores 15 – 25% of annual sales + inventory

31 92 1799 Special Trade Contractors 45 – 55% annual sales

32 90 1711 Plumb, Heating, & Air-Cond 24% of annual revenues or 1.5X SDCF

33 88 5499 Miscellaneous Food Stores 4 – 5X SDCF

34 88 2752 Com Printing, Lithographic 50% of annual sales and inventory, FF & E

1 – 1.5X SDC

1 Source: The Business Reference Guide 2002 tenth edition, by Tom West, 2002.”

Summary – Like I said earlier, there are hundreds of ways to value a business and usually it is what the seller says he or she will sell it for. In that case you need to find a way to show the business is worth the amount you are paying or renegotiate, to lower the price of the business.

Please address any questions or comment thru the Blog or email me at roger@rogerschlueter.com or you can also find more contact info at my Website at www.schlueterfinancial.com

Public Programs Used to Augment Commercial Loans Take More Time for Approval

Article by Roger Schlueter

The Business that uses a Public Program (SBA or FHA) to help get approval of a Commercial Loan needs to set aside more time to process the loan. A direct Conventional Commercial Loan from a Bank can be closed soon after the bank gets their Real Estate Title Work, Appraisal and Environmental completed. Their Commercial Loan Department types up the loan papers and the loan officer goes over them and has the borrower sign the papers. The loan is done except for the filing of Documents like Deeds of Trusts and UCC’s. This process can take as little as one day on a simple loan with no real estate or other documents to file or approve. On the flip side the loan can take from One Week to up to Several Months on a large deal or a deal with Real Estate that will need an appraisal and environmental due diligence.

Public Programs usually need some entity to approve the project and this entity may be in another city or state. This entity may put conditions on the loan that were not in the original Loan Proposal. I am very familiar with the SBA Process so let’s take a look at a typical Loan Process from initiation to closing using the SBA 7a Loan Guarantee Program. This Example is with no delays.

Example:

Joe blow Borrower needs a loan to purchase a Building, Equipment and Working Capital for a new or existing business venture. He needs to borrow $300,000 broke down as follows: $200,000 for a building, $80,000 for Equipment, and $20,000 for Working Capital.

Step 1 (Week One) :

Borrower goes to his local bank after writing a loan proposal and having all the information that is needed by the loan officer. You can very seldom have all the info needed by the loan officer and the loan officer needs several items that the borrow gets to the banker within this Week One.

Step 2 (Week Two) :

Banker needs One Week to write the loan up per his banks specs and get approval from his Bank Board or Committee. The Bank Approves the loan but wants a SBA Guarantee on the loan through the Small Business Administrations SBA 7a Loan Program.

Step 3 (Week Three) :

Borrower, Bank or Consultant needs to Write Up the SBA 7a Application and Prepare the Loan Package to be sent to the SBA Loan Center in Sacramento California. Borrower hires a loan packager by the name of Roger Schlueter to Package the SBA 7a Loan and fill out all forms and documents. He promises one week for a Turn-Key Loan Package ready for Signatures.

Step 4 (Week Four) :

Loan Packager schedules a day (three days out) when the Borrower, Bank and Packager can meet to sign the loan documents. The bank then looks over the loan package and the next day Mails the Package Overnight or Emails the Package to SBA.

Step 5 (Week Five) :

SBA Received the Loan Package and goes over the Package with a Fine Tooth Comb, and finds some small problems or questions that they need answered. The letter is dated and is emailed two days after the letter is written.

Step 6 (Week Six) :

Bank Receives the SBA Letter with several questions which are very easy to answer and the bank and consultant write up the answers the next day and email them to the SBA analyst who is working on the project.

Step 7 (Week Seven) :

SBA Sends the Authorization to the Bank. This Authorization is the document that details the Terms and Conditions of the Loan Approval and the Loan Closing. The bank looks over the Authorization for any problems or misunderstandings and starts closing process.

Step 8 (Week Eight) :

Bank complies with the details of the Authorization and has the documents prepared to close the loan. This closing will happen the next week and will need the Borrower and the Banker to Execute all documents and initiate all filings and recordings.

The Process from start to finish took Over Eight Weeks or Two Months and this is considered a fairly quick close for a SBA Guaranteed Loan from the Small Business Administration. The process can take longer if Appraisals and Environmental Reports are not ordered until the Bank receives the SBA Approval thru the Authorization. This may be done because the Borrower pays for the Appraisal and Environmental Reports and sometimes wants to make sure the bank and SBA Approvals are set before paying for the Documents.

Remember to schedule extra time for any Loan that is associated with a Public Program like the Small Business Administration of the FHA. Always seek to add Loan and Purchase contingencies for Financing, Due Diligence (appraisals and environmentals), and closing for any Real Estate or Purchase Contracts that you are signing. There could be severe penalties for getting the Real Estate or Purchase Agreement Extended or Amended.

Please address any questions or comments to this Blog or to roger@rogerschlueter.com or visit my Website at www.schlueterfinancial.com

Beware of the New Age Bankers who are Salesman and do not Know Financial Analysis

Article by Roger Schlueter

THE LARGE BANK

The bankers that work for the large banks usually have very little to do with getting a loan approved. They are Salesman, and as such will tell you what you want to hear until the loan is approved or declined. Have you ever met someone that was you very best friend, your best BFF until they Viciously Stab You in the Back, and Rip out Your Lungs, while smiling and grinning all the time? That is what a large bank, commercial loan officer will do to you without as much as a whimper. They have goals to meet to obtain Bonuses or to just Keep their Job. You are a piece of meat for the slaughter, a chicken in the coup, with no where to run, no where to hid!

They do not approve the loan, they have Underwriters that take your information and see if it fits inside their box. the Underwriter is like a Ninja, a Spy, you will never see him or her, they are only spoke of in the third person, The Underwriter. If it fits in the box of standards then you are given the loan, but sometimes not with the exact terms that you had talked about, but you will have your loan. These Boxes, so to speak, can be expanded and contracted to suite the profits and losses of the bank. I Guarantee, you will never know what those coveted standards represent. The loan underwriters probably do not even know if a company will obtain a loan until the process is complete and the Score is computed from information he put in the Box.

The next person you will encounter is the loan processor. This is a person who only knows what legal and company rules will be followed in order for you to obtain the loan. The processor will usually not know what language is inside their Note or Guarantee but they will know what the Banks Internal rules say you have to provide or sign to get you loan money. They are usually unwavering in their quest for the information or signatures or forms, that they absolutely have to have, in order to close your loan.

THE SMALL BANK

The bankers that work for the small banks are usually the ones writing up the Loan and Financial Analysis themselves. They can usually talk to you and look over your financial statements and have a pretty good idea if you will obtain a business loan at their bank. They will almost always be straight forward in how they see the loan because they do not want to waste their time or your time working on a loan proposal that will not be approved.

The banker will usually have to show the loan proposal to someone or to some committee to get the loan approved. Most have financial analysis skills to evaluate a prospective business but not always. Usually if the banker has MBA behind his name, he has at least been trained to evaluate a company and their financial well being.

This banker will also work with a Loan Processor to Print the Loan Documents and make sure all the documents are printed and are legal. Some bankers have power over the loan processor and some are enslaved by them. Either way the banker will always close the loan and usually is prepared to answer questions about why documents are needed and what information they contain.

I have seen bankers with Small Banks actually help a person qualify for a loan that was denied by their loan committee. The banker will usually attend these meetings and will know why the loan was denied and how to rectify the situation. The opposite is true when the Loan Officer does not know exactly why the loan was denied. Most banks will say that the Collateral was not sufficient or that the Credit Score does not meet their standards. Very rarely will the Banker know exactly why the loan was denied without being part of the process of evaluating the loan. Maybe the Collateral was short by a small amount or a SBA Guarantee could have been used to shore it up. Maybe the Credit Score was off by a few points and the borrower could find a Co-Maker or change some things to raise his score.

Summary: try to look behind the Smile and the Handshake to find out if the Banker is a Salesman or a Bonafide Banker with some Credit Analysis Experience to Aid his Analysis of your Loan Situation.

Please send any questions through this Blog or to roger@rogerschlueter.com Also see my Webpage for additional contact information at www.schlueterfinancial.com

No Grants for Small Business Wanting or Needing Money

Article by Roger Schlueter

I receive about two (2) calls a week from people, who own a business or want to start a business, that are asking about getting a Grant (Free Money) for an Existing or New Business. I don’t know of any Free Money. If you know of any Free Money, AKA Grants, Please Call Me and I will put the information on my Blog and My Website and give you full credit for finding Money more elusive than the Lockness Monster. Sometimes you hear of Competitive Programs like the SBIR (Small Business Innovation and Research) Program. This is a competitive Grant that is for “Innovation and Research, usually “High Tech” Products or Processes. They do not want an application from the Day Care, Bar, Restaurant or Machine Shop down the street. The SBA Administers this program and if you want more information on this program contact SBA at www.sba.gov

Loans are the only way to Obtain Capital without asking your Relatives, Friends or Finding an Investor that will trade you Money for a Majority Stake (51%) in your business. Grants are usually reserved for Not-For-Profit types of Organizations. They are usually given either on a competitive basis or by meeting some guidelines that are detailed in an application. Grants are usually given by Groups or Organizations that are usually Not-For-Profit. There is a special process in putting together a Grant. It usually helps to hire a Grant Writer that has experience in Writing Grants.

Summary: For Profit Businesses should look for a Business Loan not a Grant. Most Grants will have some sort of Strings Attached and will usually be for a portion of a project. Banks make loans for all types of business. I feel there are loans for all businesses but it may take some time to find the right loan or the right lender. Never check one lender at a time. I look at up to five lenders when I am presenting a Business Loan Proposal to a Bank. This is usually done in one afternoon.

Don’t waste your time looking for Grants unless you have time to kill. If you know of Grants to For-Profit Businesses please contact me.

Please email me at roger@rogerschlueter with questions or comments or use the blog. You can find additional contact information on my website at www.schlueterfinancial.com

How to make sure you get a fair shake at the Bank

Article by Roger Schlueter, MBA

The best way to get a fair shake at the bank is to be packen! Wearing the gun outside of your pants in a holster! I am kidding of coarse, but you are at their mercy: they are in their environment, and in control of the information, and the timing.

The Best Way to Get a Fair Shake at the Bank is to be a Boy Scout and be Prepared! This can be done in several ways. The best way is to get a list of the documents the banker will need before you have an appointment with him. You can meet with someone like me and he will guide you through what the bank needs and doesn’t need along with the best way to present yourself. The two things you want to have at your first bank meeting is all the information and all the questions answered before they are asked at the first meeting. The first meeting is not the time to get that, “Deer in the Headlights” look after being asked a question that may or may not be important to the Loan Request.

When I meet with a Borrower preferably before the borrower meets with the Banker, I go over all the documents that will be required along with why they are needed. The documents are then examined for accurateness and analysis. These documents with usually bring up many questions that will be answered and discussed. My goal is to know everything about this Loan Proposal, the company and the individual before meeting with a banker. This will give the borrower confidence in knowing all the information and questions, that will be asked by the bank, as well as the right answers.

The second thing I will do is to put together a detailed Loan Proposal that is tailored after a typical Bank Write Up. This does two things, it gives the bank all the information he needs to approve the loan request and it also gives him the information in a format that he can use to get the loan approved without writing the Loan Proposal from scratch. This saves the Banker up to four hours of work in writing the loan request up in the format that is requested by his bank.

Lastly, always go over the Loan Proposal prior to meeting with the banker. This can be done an hour before the bank meeting or in the same week. This will bring up anything the borrower does not understand or if the information is not entirely accurate. You definitely want this to come up before the Real Meeting with the Banker. You may not be able to fix the problem but at least you can bring them up and explain them prior to the bank discovering the error.

Summary: Be a Boy Scout! Be Prepared! Do not make it up as you go, and always know the Bankers questions that will be asked, before they are asked!

Please address any questions or comments to this blog or at roger@rogerschlueter.com and please visit my webpage at www.schlueterfinancial.com for additional contact information.

Company Credit Report

Article by Roger Schlueter, MBA

Everyone knows about the Personal Credit Report but SBA and some banks are now running a Company Credit Report. The regular Personal Credit Report, reports on your credit with what you pay currently on your accounts that report to the major credit agencies. These agencies are TransUnion, Equifax and Experian. Banks do not have to report, but if they do, they must agree to certain standards of recording and transferring information. Banks report Personal Credit and do not report Business Credit. Now if you are a Sole Proprietorship and you “are” the business then they will report all of your loans. It really depends – is it in a personal name or a business name?This is another reason to get the business to have its own entity so to speak, like a LLC or a Corporation or Partnership, that has it’s own Tax I.D. Number or TIN. If you are using you name and your Social Security Number then they will report your loans on the Personal Credit Report.

Your probably thinking, if the bank does not report the business credit then what is the report for anyway? Most bankers do not run a Business Credit Report because of that very reason. The Business Credit Report will pick up Bankruptcies, Liens, and Judgements. The Business Credit Reporting Agency will say they monitor the suppliers of the companies but most of this info is obtained from the company they are reporting on, such as the company’s suppliers. Most company’s will not give a name of a supplier, that they do not pay promptly. Dun and Bradstreet use to be a good source of info but most bankers used it to see the background of the company, which was usually reliable. Most bankers did not trust the trade information or any credit scores given by the credit company reporting on a business.

This is the Computer Age and if you do not show up on a Google Search, you do not exist! These Business Credit Reporting Agencies constantly troll the Government Informational sites that report Bankruptcies, Liens and Judgements. This information if fairly easy to obtain and it is usually accurate to a degree. The last one I looked at had negative information from a Tax Lien filed several years ago and also showed that the lien was released, but the company still had a very negative Credit Score.

In summary, take Liens and Judgements very seriously and get them dismissed or released before they cause major problems. Most banks do not run a company credit report but SBA does run one on any company using their loan programs. Remember the Company Credit Report only picks up Bankruptcies, Liens, and Judgements. They can use supplier information but those referrals are given to the reporting agency by the company being reported on. Most banks do not worry about Liens and Judgements as long as they are Released or Dismissed. Tax Liens can take precedence over company assets and Banks do not like loosing collateral to the government.

This is a brief overview of the Company Credit Report. Please email me if you have any questions or comments at roger@rogerschlueter.com and please also see my website at www.schlueterfinancial.com for more contact information.

Valuing a Business

Article by Roger Schlueter

You have worked for a business for many years and the owners decide to leave the business or leave the area and you have a chance to buy the business for a song. You need to show the lender or investor what the business is really worth, unless you can pay Cash! If you can pay cash, you don’t need to read the rest of this article.

Valuing a Business is part science and part art. There are more ways to value a business than Carter has Pills! Sorry, Old Analogy, but there are many ways to value a business depending on what kind of business and what are the sales and profits generated by the business.

There are essentially three Good Avenues to follow to value a business and they are discussed below:

1) The Value of the Business Assets. What does the Business Own? You need to add these Assets together to arrive at a Final Value of the Business.

What is the Dollar Value of the Real Estate?

What is the Dollar Value of the Equipment?

What is the Dollar Value of the Furniture and Fixtures?

What is the Dollar Value of the Inventory?

What is the Dollar Value of the Intellectual Property (Trademarks and Patents)?

What is the Dollar Value of the Employees?

– and any other Asset the Company Owns that you think has Value.

2) Value of a Stream of Cash. What are the Revenues and Profits worth to you?

Investor Real Estate will usually use the Capitalization Method. This method is a Projected Rate of Return if the Buyer Pays all Cash. The Cap Rate is determined by taking the Net Operating Income of the Property and dividing it by the Cost of the Property which Equals the Rate of Return. The Rate of Return should be equal to the Return other Investors are receiving in the Market Place. This Cap Rate could also be compared to the Rate of Long Term Treasury Notes plus a Risk Factor. Long Term Treasury Notes are usually 10 year Government Notes with no Risk. You need to Add a Risk Factor to the Treasury Notes to Equal a Normal Rate for an Average Investment. You can also get the Cap Rate by Asking a Commercial Real Estate Realtor.

Service, Retail, Manufacturing, or Wholesale Business will use methods other than the Capitalization Rate. You want to Asses the Value of a Steam of Cash either by using Sales or Earnings/Profit numbers. Most Industries have a Multiplier of Sales or Earnings that the Business is worth or that most business of that type could be bought. An Example is the Hair Salon business. An article in Forbes Magazine by Tom Taull on 7-15-09 referred to another article by Tom West, The Business Reference Guide. This article gave a method of valuing a Hair Salon by using a Multiple of Earnings plus Inventory and another method of using a Percentage of Sales plus Inventory to Value a Hair Salon Business.

Usually there are method for using Sales and Earnings Multiples or Percentages to Value many businesses in many different Industries. The trick is to find out this method for that particular industry that business is using in that industry.

3) Discounted Cash Flow Methods which include Net Present Value (NPV) of an Income Stream and the Internal Rate of Return (IRR) of an Income Stream. The following Definitions and Uses are taken Directly from Wikipedia, the online Encyclopedia.

Net Present Value (NPV) – “NPV is an indicator of how much value an investment or project adds to the firm.” Can be used to state the value to a firm of single or competing projects that have a series of Cash Flows over a period of time.

Internal Rate of Return (IRR) – IRR”is a rate of return used in capital budgeting to measure and compare the profitability of investments”.How to use the IRR, it”must be greater than an established minimum acceptable rate of return or cost of capital.”

Example: the following example was calculated on a HP 12C financial Calculator.

Owners of a Hair Salon were selling the business to a long term employee who was the manager for the last Six (6) years. The purchase price was $50,000 and the borrower had 20% to put down on the purchase and had talked to a bank about financing the remaining 80% or $40,000. The bank was using the SBA 7a program to finance the deal and needed to provide the SBA with a Business Valuation.

The Consultant working for the bank to organize the SBA 7a Package needed to Perform a Business Valuation of the Business. The Consultant used the following three methods to place a Value on the Business:

1) The Value of the Business

The Furniture and Equipment were worth approximately $32,655

The Inventory was worth approximately $53,457

Total Value of the Assets of the Business $86,112

2) Value of a stream of Cash – What are the Sales and Profits worth to you?

This formula was taken from the Forbes Article written by Tom Taull on 7-15-2009, and

Mr. Taull quoted The formulas of Tom West who wrote, “The Business Reference Guide”.

a) Valued as a Multiple of 2 to 3 Times Pretax Income Plus Inventory – the Hair Salon had a &nb
sp; Pretax Income of $30,000, and an Inventory of $53,000.

$30,000 x 2 = $60,000 + $53.000 = $113,000

$30,000 x 3 = $90,000 + $53,000 = $143,000

b) Valued as a 25% to 35%, Percentage of Total Revenue plus Inventory – the Hair Salon has a Total Revenue of $580,000, and Inventory of $53,000.

25% x $580,000 = $145,000 + $53,000 = $198,000

35% x $580,000 = $203,000 + $53,000 = $256,000

Average of these two methods is $177,500

3) The Discounted Cash Flow Analysis Valuing a Project Using the Time Value of Money as a

Guide. The methods we will use are the Net Present Value (NPV) and the Internal Rate

of Return (IRR). We will use the Wikipedia definition and use for both of these methods.

a) The Net Present Value (NPV) – the “NPV is an indicator of how much value an investment or project adds to the firm”.

NPV = $181,652

b) The Internal Rate of Return (IRR) – the IRR “is a rate of return used in capital budgeting to measure and compare the profitability of investments”. How it is used, the rate “must be greater than an established minimum acceptable rate of return or cost of capital.

IRR = 59.40%

Summary: The value of the Hair Salon is much greater than the $50,000 that the buyer paid for the Business. This is the exact reason that you want to perform a Business Valuation. We valued the Business at $180,000. Using the following methods to guide us:

Value of the Assets = $ 86,112

Value of the Average of Income and Sales Methods = $177,500

Value of the Net Present Value = $181,652

Value of IRR = 59.40% this is a very high rate of return and confirms that the price is undervalued.

Please address any questions or comments to roger@rogerschlueter.com or visit my website at www.schlueterfinancial.com for additional contact information and additional financial information.

Loan Information Banks want to See to Approve a Business Loan

Article by Roger Schlueter

This is a long Title for a very short list of items needed to apply for a business loan from a bank. Believe me! Your banker does not want to see a one hundred page business plan! What he does want to see are the items or documents he uses to make a business loan decision. This will also help you if you want to or need to apply for a SBA Loan. The SBA is very good putting together the information they and the bank want to see. The SBA Application is a short business plan and most of the items they ask for are the same items the bank asked for when you apply for a business loan at the Bank. I could make this a huge article because of all the factors that depend on different information or outcomes. This is meant to be a short list of items the bank wants to see without most of the detailed Why, What and How of each item and the offshoots that can take you info to a different direction.

ROGERS LIST OF NECESSARY DOCUMENTS TO APPLY FOR A BUSINESS LOAN

1) HISTORY OF COMPANY OR WHAT THE COMPANY WILL DO

This is a short paragraph or two telling the banker what business your company is in and how

you do what you do. Who you sell to and how you will make money in the business.

2) MANAGEMENT OR PERSONAL BACKGROUND

This is also a short paragraph or two on how you or your management team are qualified to

manage and operate this business.

3) HOW MUCH MONEY DO YOU NEED AND FOR WHAT PURPOSE

Again a short paragraph or two on the amount of money you need and what you will so with the

money.

4) OWNERS PERSONAL FINANCIAL INFORMATION AND CREDIT SCORE

Narrative of the owners Personal Financial Statement and Credit Score.

5) EXISTING BUSINESS – HISTORY OF COMPANY FINANCIALS

This can be a spreadsheet of you Profit and Loss Statements and if needed Balance Sheets.

6) PROJECTION OF INCOME – THREE YEARS

Projection of the next three years Profit and Loss Statement ( Income Statement).

7) CASH FLOW STATEMENT – CAN BE MONTHLY FOR 1ST YEAR OR YEARLY

Thumb Print Cash Flow that Banker will understand will show income before Interest, Owners

Salary, and Depreciation. Relate Cash Flow to Debt Service that you will have with loan.

8) COLLATERAL

The collateral that you will have to support the loan if you cannot pay the loan back. This will be,

of course, any assets you buy with the loan and any other asset you want to let the banker have

a lien on. Could be additional equipment, real estate, or inventory.

9) SUMMARY OF YOUR PROPOSAL SHOWING WHY YOU THINK YOU PROPOSAL

WILL MAKE MONEY AND PAYOFF THE LOAN.

This should be two to three paragraphs to sell your proposal and wrap things up.

This is a short list and does not go into detail on all aspects of the loan documents or the loan processes. If you follow this guide the bank will be happy and will get back to you sooner.

Please write me with any questions or comments at roger@rogerschlueter.com or go to my website for additional contact info at September 2, 2012UncategorizedLeave a comment