Financing
The Five C’s of Credit Analysis for Getting a Loan for Buying a Business - Adeline Rem
If you are buying a business and plan to obtain financing from a lending institution, these five tips provided by Adeline Rem, Regional Vice President of Celtic Bank, will be helpful in getting your loan approved.
1. Capacity - The capacity of the borrower to repay is the most critical of the five factors. The prospective lender will want to know exactly how you intend to repay the loan. The lender will consider the cash flow from the business, the timing of the repayment, and the probability of successful repayment of the loan. Payment history on existing credit relationships — personal or commercial — is considered an indicator of future payment performance. Prospective lenders also will want to know about your contingent sources of repayment.
2. Capital – Capital is the money you personally have invested in the business and is an indication of how much you have at risk should the business fail. Prospective lenders and investors will expect you to have contributed from your own assets and to have undertaken personal financial risk to establish the business before asking them to commit any funding.
3. Collateral – Collateral, or guarantees, are additional forms of security you can provide the lender. Giving a lender collateral means that you pledge an asset you own, such as your home, to the lender with the agreement that it will be the repayment source in case you can’t repay the loan. A guarantee, on the other hand, is just that — someone else signs a guarantee document promising to repay the loan if you can’t. Some lenders may require such a guarantee in addition to collateral as security for a loan.
4. Conditions – Establish the focus and intended purpose of the loan. Will the money be used for working capital, additional equipment, or inventory? The lender also will consider the local economic climate and conditions both within your industry and in other industries that could affect your business.
5. Character – Character is the general impression you make on the potential lender or investor. The lender will form a subjective opinion as to whether or not you are sufficiently trustworthy to repay the loan or generate a return on funds invested in your company. Your educational background and experience in business and in your industry will be reviewed. The quality of your references and the background and experience levels of your employees also will be taken into consideration.
This article was authored by Adeline Rem, Regional Vice President of Celtic Bank, and published here with permission from the author. She can be reached at 512-215-2727
Commercial Real Estate Financing – Adeline Rem
Time to share the basics of Commercial Real Estate financing. I would like to share my personal experiences (these do not reflect the opinions of Celtic Bank).
1. Treat your lender with respect, especially these days. Not only will this be more likely to help you move forward, but also, most lenders in a location know each other, and you are more likely to be referred if you are easy to work with in the event that the lender you are speaking with doesn’t want to finance your deal.
2. Use the local (usually free) resources available to you. There are various city sponsored and non profits out there to help businesses. They teach you how to use accounting programs, write a business plan, do projections, marketing, sales, cash flow analysis, read your financial statements to name just a few.
3. Make sure that you can speak intellectually about your business, the competition, what sets you apart, the general market conditions that are effecting your industry and so forth. If you are not an expert in your business, then trust will erode rather quickly.
4. Be wary of how many people you call about your financing. As previously mentioned, most of the active lenders know each other well, and hearing about the same deal from several sources may cause your file to be dropped to the bottom of the pile.
5. Know your credit score BEFORE you apply for a loan. Go to http://www.annualcreditreport.com/ to get your free annual report. Make sure to get a report from all three agencies (TransUnion, Experian and Equifax) as well as the scores from all three. Be prepared to explain in detail, any blemishes that you have (and “I forgot to pay a bill” is not really an acceptable response). Also, if you have a criminal history, admit it immediately.
6. Get your paperwork in order as requested. Don’t try and cut corners as this will drag the funding out for months. Most lenders require the same documents. First, talk to them about the deal and make sure that they have an appetite for it. Then, fill out their application forms in full, and give them all of the financials etc that they have asked for. Decisions cannot be made on partial packages. Then lender WILL confirm the authenticity of the file, don’t try and be tricky.
7. Upon issuing a commitment letter (referred to often as a CAL, LOI or EOI), you will be expected to agree to the terms and conditions, sign it, and provide a cashier’s check (good faith deposit). This deposit is normally in the region of $10,000 to $30,000 depending on the lender and the deal. The money ensures that you are serious about closing your deal and will be used for third party expenses including, but not limited to Commercial Appraisal ($3,500 – $6,000), Survey ($2,000 – $30,000), Environmental ($500-$7000) and Title Insurance.
8. Then lender is going to require injection money from you in the deal. Yes, you will need to have your investment into the deal before a lender will give theirs. This is often referred to as “skin in the game”. If purchasing a property that the seller is willing to carry a second trust deed on (seller note), this doesn’t replace the need for your own equity in the deal. Lenders like to see your hard earned cash in the project to help ensure that you won’t walk away too fast if times get tough.
9. You WILL in this market, have to fully guarantee your loan. This is a personal guarantee which has to be offered by all partners who own more than 19% of a company. If there is a partner that owns <19% but is the partner with the industry experience and/or the partner with the injection money, that partner will be guaranteeing the loan. Think about this way, if you don’t trust yourself, why should the lender?
10. What are you giving as collateral? Find out what your lender is looking for. Is this a Commercial Real Estate transaction? Equipment financing? Inventory purchasing? What is going to secure this loan? If you are looking for “working capital”, be prepared to explain what that entails.
11. Be clear about your use of proceeds. Will this money help you grow? Will it help improve cash flow? What sort of term are you going to need to repay this loan?
12. Finally, and perhaps the most important. How are you going to pay this loan back? The per forma needs assumptions too. What matrix did you use to formulate the future earnings schedule? Do you have industry comparatives? Do you have history in this business? How do you know that you will generate these revenues? What is the evidence that you have collected?
Sometimes, deals are just not financeable. It takes many synchronized parts to get a deal done. Right client with the right lender. Market conditions. Industry. Collateral. Ability to repay with evidence. The borrowers character.
I am happy to share more with you, call me, Adeline Rem, 512 215 2727, Nationwide Conventional, USDA (B&I Loans) and SBA (Small Business Administration) lender.
This article was authored by Adeline Rem, Regional Vice President of Celtic Bank, and published here with permission from the author.