Monday, 30 March 2020 / Published in Uncategorized

Character = Reputation/Trust

Why Character Matters

For lenders, it all comes down to how the question: “Will I get my money back?” Lenders want to work with responsible, organized businesses that are likely to make their repayments on time.

Be Professional

Whether interacting with a banker in person or applying through an online lender, put your best foot forward. Always be professional and kind. Also show the lender that you are knowledgeable about the loan application process and familiar with how loans work. This shows that you are responsible and experienced in business as well as being personable.

Establish A Relationship With Your Lender

If you are seeking a business loan from a lender, establish a relationship with your Lender. If the lender likes you and is familiar with your business, they may be more willing to vouch for you when it comes to loan approval time.  Lenders bet on their clients success, they want to establish a long lasting and prosperous business relationship.  Lenders aren’t in the business of managing business/properties, they are in the collecting payment business to continue to lend.  

How Lenders Evaluate Character

When evaluating character, lenders look at:

  • Credit report
  • Credit scores
  • Personal qualities
  • References
  • Time in industry
  • Personal Background

To analyze your worthiness, lenders will often view your credit report more so than your credit score. Lenders take both your business credit and your personal credit into consideration. 

They tend to look at how long you’ve been in business as well. The longer you’ve been in business, the more stable you appear. For lenders, this again means less risk and increased likelihood that your business will be successful enough to cover loan repayments.

Sometimes, lenders also take a literal approach to the word “character” and analyze your attributes as a business owner.

They may conduct a personal interview or require references (some even go so far as looking at Yelp reviews of your business). Many online lenders make phone consultations a part of their application processes so that they can help you with any questions about the application while also getting a feel for you and your company.

How To Improve Character

If you’re looking to impress lenders with your personality or improve the character of your business, there are a 2 ways to do so. Here are fours tips for boosting character:

1. Explain and Document Your Credit History

Poor behavior can be a deal breaker when it comes to loan approval. Taking the extra time to raise your explain and document any pass issues with you credit before applying for loans can help increase your chances of qualifying for the loan you want.

2. Clean your act

3. Letters of Recommendation

Your clients and vendors are a great indication of your character.  By association we are judge, if your have happy vendors and satisfied clients, is a good indication that you are a strong business person.

Monday, 30 March 2020 / Published in Uncategorized

Collateral = Skin in the Game

Collateral is an asset (or assets) that are offered up as insurance against you paying back your loan fully and on time. If you default on your loan, lenders will seize the collateral in order to make up for their losses.

Why Collateral Matters

Much like owner’s capital, collateral means you have something to lose if you default on your loans. The hope for many lenders is that the collateral will encourage business owners to work hard to repay their loan.

However, if your business does go under, collateral assures lenders that they won’t lose all of their money if you default on a loan.

Every lender has different requirements when it comes to collateral. 

Some require specific assets to be offered up as collateral. Others require to cross collateralized assets (Real Estate and Equipment, Receivables and Inventory, any combination imaginable) meaning they have the right to go after your assets in case of a default. Others still require that the borrower personally guarantee the loan , meaning you the business owner will be held responsible in the event of a default.

Some examples of collateral include:

  • Property/ Real Estate
  • Vehicles (trucks, Vans, etc)
  • Equipment (heavy machine, medical, manufacturer, etc)
  • Invoices/Purchase Contracts

It’s important to carefully evaluate each lender’s policy and requirements regarding collateral. This way, you can know exactly what is expected of you. And, more importantly, you can decide if you’re comfortable with the required collateral or if you’d rather look for a different lender.

Loans without collateral are usually have short terms and high costs of funds, but all the risk is on the lender.  

How To know the value of you Asset/Collateral.

Lenders use a licensed 3rd party appraiser to be the eyes and ears and therefore provide an impartial “opinion” of value.    An assets must be compared with similar assets 

  • Equipment (make, model, year, miles/hours, etc)
  • Real Estate (similar use, market/location/distance, date of sale, etc)
  • Invoice/PO (Vendor’s credit)
  • Business (inventory, equipment, sales/profits, etc)

How to improve your collateral.

  • Best and highest use
  • Conditions
  • Acceleration/Manipulation of amortization table
Monday, 30 March 2020 / Published in Uncategorized

Conditions = use of the funds

Why Conditions Matters 

Conditions will tell the projections the borrower’s financial health. It goes for the individual business behavior and the industry as a whole. Conditions is the study of the highest and best use of the loan use and how that benefits your business. 

If you plan to use a loan to buy equipment or inventory, for instance, the lender may ask for an explanation of how that will advance the bottom line. If you are buying Real Estate, then Location/Location/Location (Primary markets/Secondary markets).

Market Conditions

Lenders can also look at how broader economic conditions or trends within your industry may affect your ability to repay a loan. 

  • Is your service/product so unique that it may be a risk?
  • Do you have a lot of competition that it may be hard to grow?
  • Do you need to sell in volume due to tight profit margins?
  • How often do you make a sale?
  • What is the size/age/visibility/ of your company?
Monday, 30 March 2020 / Published in Uncategorized

Capital = Savings

Capital shows the ability to accumulate savings for the purpose of investing, paying closing costs and reserves.   Lenders want to know what is the use of the funds that you are requesting to borrow and by looking at your ability to accumulate savings they can determine you skills as an investor/businessman.  Growth is always the best need for money as you can show that you know how to use a loan.

When considering capital, lenders want to see:

  • How much of the owner’s capital is invested in the business
  • How the owner’s capital is invested

Lenders primarily look at the amount of owner’s capital invested in the business. Not only do they evaluate how much money you have invested in the business, they also check to see where you’ve invested that money. If they see that you’ve made smart investment decisions in the past, they can take comfort in knowing that you will most likely invest a new loan wisely.

Lenders measure the dollar amount of the loan against the value of the asset (property, equipment, business, invoice, etc) best known Loan to Value (LTV).  At the time of financing an asset, the lender wants to make sure that in case of early payment default that can promptly sell the asset, even at a discounted amount and still can recover all of the loan back.  The lower the LTV (more down payment) the better the terms, rate and costs of the loan will be.

The higher the risk (asset may not be too interesting as it may old, bad location, single and unique use, etc), the more money will be needed.  

Additionally, cash will be needed for closing costs (bank fees, 3rd party fees, escrows like taxes and insurance) and carrying capital or reserves.

Samples of Capital

  • Money in the Business Bank Account
  • Equity in an Asset (real estate, A/R report, equipment, inventory, etc)
  • Personal investment in Business (shares)
Monday, 30 March 2020 / Published in Uncategorized

Capacity = Income

It shows the ability to generate income/revenue/profits/sales/cash-flow.  It is directly related your business can use to pay back the money that was borrowed.Lenders look at your financial health to make sure that their loan will be paid in a timely manner according to the amount, terms, rates and stipulations offered and agreed on.
Income evaluation:

  • Debt Service Cover Ration 
    • Measure the relationship between Revenue vs Expenses
      • 2-3 of Financials and YTD P&L/Balance Sheet
      • Add Backs (depreciation, rental paid, partner salary in a buy-out, etc)
  • Cash Flow
    • Measures the monthly behavior of how money comes and goes
      • 3-4 months of Bank Statements
      • 3-4 merchant statements
  • Rental Income
    • Measure the CRE ability to pay itself
    • Less Vacancy Factors
  • Salary Income (if applicable)

How to improve Capacity (ratios/numbers) 

  • Eliminate/Reduce expenses
  • Increase Revenues
  • Eliminate/Reduce Debt