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

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

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

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

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

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

     They should be able to give you a detailed list.

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

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

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

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

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

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

     

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

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

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

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

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

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

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

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

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

Example: 

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

Banks Receives: $85,000 Guaranteed Portion

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

$     850 Servicing Fee of 1%, Annually

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

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

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

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

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

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

Example:

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

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

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

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

  

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

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

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

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

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

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

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

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

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

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

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

Simple Company Example:

Sales        $100,000

– COGS       $500

Net Sales       $500

= Net Income       $200

Net Income       $200

+ Depreciation $25

Cash Flow       $270

Debt Service – Annual      $200

Debt Service Coverage Ratio is $270 / 200 =  1.35

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

Simple Rental Property Example:

Rental Income $100,000

– Vacancy (10%)   $10,000

– Rental Expenses   $15,000

   Prop Tax & Maint.

Rental Income $ 75,000

Debt Service $56,250

Debt Service Coverage Ratio is 1.33

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

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

 

  

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

Simple Company Example:

Sales        $100,000

– COGS       $500

Net Sales       $500

= Net Income       $200

Net Income       $200

+ Depreciation $25

Cash Flow       $270

Debt Service – Annual      $200

Debt Service Coverage Ratio is $270 / 200 =  1.35

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

Simple Rental Property Example:

Rental Income $100,000

– Vacancy (10%)   $10,000

– Rental Expenses   $15,000

   Prop Tax & Maint.

Rental Income $ 75,000

Debt Service $56,250

Debt Service Coverage Ratio is 1.33

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

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

  

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

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

Example: 

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

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

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

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

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

Banks and SBA have many of the same concerns when funding Real Estate Loans for Commercial Purposes. Sometimes you think the SBA is in Cahoots with the Bank. This is not the case when dealing with the issue of Environmental Policies and Procedures.

Many Times, Banks will not worry about the Environmental Issues unless the facility is an industry where the Environmental Contamination is more likely. These Industries are Gasoline Stations, Auto Repair, Mining or Processing of Minerals, and Dry Cleaning. Many Banks will not Require any Environmental Documentation but most will at least ask for a Questionnaire to be filled out. This Questionnaire will ask questions about the Current and Prior Use as well as the Neighboring Sites and their Current and Prior Use. SBA on the Other hand will want a Questionnaire to be filled out but if the industry is one of fifty three (53) that the SBA considers Environmentally Sensitive Industries then the SBA will want much more Environmental Information. 

I will list here the steps that most Lenders take in dealing with Environmental Issues First:

1) An Environmental Questionnaire is the first thing to obtain in any Environmental Procedures. The

    answers on this document will determine if further investigating is warranted. ( If the property is

    considered to the lender to be an Environmentally Sensitive Industry then you will start with a

    phase 1 Report that has to be done be a Environmental Company.

2) Phase 1 ESA Report – this Report is done be an Environmental Professional. He or She must

    physically Examine the property to determine if any environmental Issues Exist. They will make a

   decision as to whether further Investigation is Required. This further Investigation is a Phase 2

   ESA Report.

3) Phase 2 ESA Report – This Report is also done by an Environmental Professional. The

    Professional must drill or take Dirt Core Samples and have them Analyzed for Contamination.

4) This Step would be if Contamination was Found and Remediation (Getting Rid of the

    Contamination) or monitoring is Warranted. If Remediation is needed then the Department of

    Natural Resources must give a No Further Action Letter on the property. 

The SBA will take the following Steps but remember this is a general guideline and not a detailed course of Action. The actual SBA Guidelines may be found in the SBA SOP:

1) The SBA will want the Borrower to Identify the NAICS Code for the property and compare

    this number with the SBA’s List of Sensitive Industries. If the Property is listed a Sensitive

    Industry then the Borrower will have to start with a Phase 1 ESA Report (SBA has more

   detailed instructions for a Gas Station) The SBA will want the Borrower to Fill Out a

   Environmental Questionnaire. For Loans of Up to and including $150,000 the Environmental

   Investigation may begin with an Environmental Questionnaire. If the Amount of the Loan is more

   than $150,000 then the Environmental Investigation must begin with an Environmental

   Questionnaire and Records Search with Risk Assessment. 

2) The Environmental Questionnaire:  if the results are Low Risk from the Questionnaire and if the

     project is $150,000 or less then the Lender can see if the SBA concurs with no further action. If

     the Loan is above $150,000 then the Questionnaire must also have a Records Search (checking

     Federal Records for contamination at all known sites) and a Risk Assessment by the

     Environmental Professional.

3) If the Environmental Questionnaire shows Problems with the Site then a Phase 1 ESA Report

    will probably have to be done. the Phase 1 ESA may be all that is needed if the professional

   decides that no further action is required. The SBA will have to Concur with that Request. If the

   Environmental Professional decides that further investigation is needed then the property will have

   to have a phase 2 ESA Report done.

4) The Phase 2 ESA Report will provide Core Drilling Results of the Analysis of the Ground and if

    needed the property will have to have some sort of Remediation or Monitoring on the Site.

This is the point where, things get murky as to what happens next, and if the Department of Natural Resources need to be brought in for their input. Once the Department of Natural Resources is brought in they must release the property with a No Further Action Letter. 

This has been an overview of the Environmental Policies and Procedures applied by Banks and SBA on Commercial Property that they may be lending on. This is a good guide to give you an overview but this is not the absolute Law of the Land. The Absolute Law of the Land will be given by the banks and the SBA (SBA has a SOP with more detailed Information). 

Please Email me any questions or comments at roger@rogerschlueter.com  I also have another website at schlueterfinancial.com    

 

 

Banks and the SBA have many forms that you will be filling out when applying for a Commercial Loan. One of those forms is the IRS Form 4506-T. This form is sent to the IRS to request a Transcript of Tax Returns for as many as four years. The form may be signed by an individual for a joint personal return or a member of a corporation or LLC for Company Filings. The Transcript is a summary of all pertinent information that was reported on the Tax Return sent to the IRS. Most people come into contact with this form when applying for a home mortgage.

The SBA (U.S. Small Business Administration) will have this form filled out on every SBA Loan that is originated. Banks may or may not use this form, to tell if you are telling the truth on your Tax Returns. The Reason for this form is that a person could concoct a phony Tax Return to show the bank in order to obtain a Business Loan. Again, SBA is adamant about getting this form filled out on every loan whereas the Banks are hit and miss on this form and hit and miss on verifying the Tax Returns as well.

The Form itself is very easy to fill out. First the form asks for the name and SSN (social security number) of the person or entity that is on the Tax Return. Then is asks for the joint name and SSN on the Tax Return if there is one. The form then asks for the Current Name, and Address and the Previous Address if different on the last return filed. The form then asks for the name, address and phone number of any third party requesting the form – this is usually the bank. The form then asks what forms are requested i.e. 1040 or 165, 1120 etc. and what kind of information. This information is usually a Return Transcript which will include all pertinent information on you last few years tax returns. The form will then ask what years are requested by Month/Day/Year and the last item on the form is your signature, date and telephone number. There is a place for a spouses signature but the spouses signature is not required.

The Form 4506-T – Request for Transcript of Tax Return is a fairly simple form which is faxed to the IRS and then returned by mail to the bank or third party requesting the information. Remember the reason for the form is very simple – to make sure the Tax Returns you provide to you lender are legitimate and not altered to help you get the loan. Borrowers that turn in altered or concocted financial Tax Returns and Personal Financial Statements can be Arrested under Conspiracy and given jail time by the courts. It pays to always tell the truth on financial Tax Returns. 

Please direct any questions to roger@rogerschlueter.com . I also have another website at schlueterfinancial.com .