Posted by Bill McDermott on Tue, Aug 31, 2010 @ 12:44 PM
I had a very interesting week last week. The predominant theme of the week was business owners asking me where to find financing. Two clients were looking to change banks because the bank was changing the terms of their deal. These banks were trying to decrease loans due to capital adequacy issues they had. One business owner just didn't want to take time away from his company. One was totally frustrated after talking to several banks only to hear "no", from each one. They needed business banking advice. Here are the five things to consider when looking for financing.
1. Start with the bank where you currently have your business accounts. Ask to speak to a business banker or someone who is experienced in dealing with business owners. It is much easier to expand a relationship with bank (banker) that you have a relationship with versus making a change. Exhaust that option before you move on.
2. Before meeting with your current bank/banker, go to FDIC.gov and check out their financials to be sure they're not having any issues that would preclude them from lending to you. If banks are having capital adequacy, liquidity or loan quality issues, they will be reflected in their financial statements. If you have difficulty reading those financials, click on the "Ask a Banking Question" icon on my blog and I'll be happy to help. Before you go thru the loan application process with any bank, make sure they're healthy.
3. If you've decided to make a banking change, ask your CPA or attorney for an introduction. The old adage "It's not what you know, it's who you know is still true. Banking is still a relationship business and those introductions can go a long way to help. LinkedIn can be a great resource for those introductions also.
4. If you're interested in obtaining an SBA guaranteed loan from a bank, look for a bank that has the PLP designation. The SBA designates certain lenders as participants in their Preferred Lender Program (PLP). A PLP lender has the proxy of the SBA so they can give simultaneous approvals for the bank and the SBA which can be a time saver. There is a list of PLP lenders on the SBA website.
5. Have a comprehensive loan package that contains all the pertinent documents that the banks needs to properly underwrite the loan. This package is the bank's first impression of how thorough you and how well you pay attention to detail. You never get a second chance to make a first impression. If you'd like to know what to include click on the "Commercial Loan Checklist" icon and I'll send you the checklist.
One client I was talking to last week, start singing the song, "Looking for love in all the wrong places..." summing up his experience in looking for banking in all the wrong places. Use these five things to fast track your banking situation and maximize the chances of your banker saying "yes" to your loan request.
Posted by Bill McDermott on Tue, Aug 24, 2010 @ 06:55 AM
Each year the Georgia Society of CPA's hosts the Southeast Accounting Show. I had the privilege of presenting a case study on banking relationships offerring business banking advice to CPA's who in turn can help their clients.
The case study took three banking relationships of clients I've worked with and determined some best practices in each situation that made it successful.
Believe it or not, a start up company can obtain financing from a bank. I told my audience that the business plan prepared by the CPA really help this client obtain bank financing. Also, the bank was an experienced SBA lender. So, this client was able to obtain financing with the help of an SBA lending program.
The second case was a company that lost money in 2008 and was transferred to Special Assets (can anybody out there relate?) Management did an outstanding of turning the company around, but the bank still wanted the company out. The loss really leveraged the balance sheet which made it difficult to find another bank. The two things that helped us find financing was we were able to tell the new bank a good story of how management turned the company around and how that was sustainable. The other factor was that we had equity in additional collateral that could be pledged to offset the leverage. When your bank tells you your company is undercapitalized, they are either looking for you to contribute additional capital or pledge additional collateral. In this case, my client had equity in his company building that was accepted and we closed the deal.
I saved the best for last. The third case was a company that lost money for the last three years, the bank transferred the company to Special Assets and my client was asked to sign a forbearance agreement. The lesson learned here was that we were able to move the company line of credit with the help of a banker that had moved to a new bank and wanted to take this client with her. In addition, we were successful at negotiating the remaining loans in the forbearance agreement by reading the fine print and being to negotiate the details. You don't always have to sign the agreement as is. We were also successful at getting the bank to waive the forbearance fee which was a savings of $14,000 for my client.
I was told after the presentations that lessons learned were 1) the importance of a business plan for a start up 2) pledging additional collateral can offset leverage and 3) clients can negotiate forbearance agreements and get fees waived. Be willing to read the fine print and negotiate the details.
Posted by Bill McDermott on Mon, Aug 09, 2010 @ 08:21 AM
I can't tell you how many business owners have come to me stating their line of credit has matured and they're looking for business banking advice. Banking for small businesses is trickier than it has been in the past due to the changes in the banking industry and economy. A good business banking consultant can be helpful in times like these. There are 5 things you should do when you line of credit is about to mature. I hope these are helpful.
- Go to www.FDIC.gov and check out your bank's financials. Many banks are having liquidity or capital adequacy issues and just aren't renewing lines of credit for these reasons. It's better to know that as quickly as possible before your line has matured and you're in crisis management mode.
- Get your year end financials together for the bank and an interim financial statement that compares the same period this year against last year (ex July 2010 vs. July 2009) Ask for a meeting with your banker to go over these financials and ask them if they see any difficulty in renewing your line of credit.
- Prior to that meeting, review your commitment letter to be sure you have complied with all the terms and conditions of the commitment. Did you meet the 30 day annual payout? Did you violate any covenants in the commitment? Covenant violations potentially give the bank a reason not to renew the line. So, be prepared to discuss why it happened and why it won't happen this year.
- Know when it's time to get a second opinion. If you're experiencing significant delay in response time, if you feel the relationship has changed or has become one-sided in the bank's favor, it may be time to get a second opinion.
- If you've had a change in bankers and you find yourself in a group called Special Assets or Problem Loan Administration, your bank is signaling to you they want out of the relationship. It is likely your rates and fees will increase and loan amounts and loan maturities will decrease.
I've seen many businesses look for alternative answers to handle their working capital needs. Several business owners are turning to asset based lending or factoring as an alternative source for bank financing. This kind of financing does provide an advance rate of between 75% to 85% of accounts receivable less than 90 days. However, the cost of capital can be as high as 25-30% on an annualized basis. For many businesses, this is higher than their gross margin which begs the question why sell the product if all of your margin goes to financing cost? Asset based lending or factoring may be the only way to go.
I hope this article has been helpful. If you have further questions, please send them to me on the "Ask A Banking Question?" button on this page.
Posted by Bill McDermott on Wed, Aug 04, 2010 @ 02:26 PM
photo by gadget virtuoso
Bankerse, a foreign language only spoken by bankers. Have you ever had the experience where you had a hard time understanding what your banker was saying to you. Jokingly, I had a client ask me if that was one of the business consulting services on banking that I offer. He told me "I don't understand my banker, everything I thought was good, he thought was bad and vice versa"
Well, yes I speak bankerese. So, I could interpret for my client. However, I thought there might be a short list of terms that bankers often use that may be confusing. So, here goes:
1) Leverage-when used by a banker, he/she is referring to the amount of debt used in proportion to equity used to finance your business. Remember the 80-20 rule here. Bankers are comfortable with 80% of assets financed with debt and 20% financed with equity. More than that is high leverage, less than that is low or modest leverage
2) Liquidity-When used by a banker it can actually mean a couple of things. On your personal financial statement, it can mean the amount of liquid assets you own (non retirement) personally. Cash, marketable securities and cash value life insurance. For your company, it can mean the same thing or it can mean the amount of current assets in excess of current liabilities. This is also the definition of working capital, another banker measure of liquidity.
3) Cash flow- this usually means the amount cash generated by the business in excess of it's expenses. Sometimes a banker can mean just profit. But, cash flow can also mean terms like EBT (earnings before taxes), EBIT (earnings before interest and taxes) and EBITDA (earnings before interest, taxes, depreciation and amortization)
4) Receivables, Payables or Inventory turn-this is the number of times these assets or liabilities turnover in a year. It can be expressed in a turn or it can be expressed in days. If you collect your receivables in 35 days, your turn would be 10.28 (360 days in a year/35 day collection period = 10.28 receivables turn)
5) Loan covenants-a covenant is a mutual promise by both parties. For a banker, loan covenants can be non financial and financial. An example of non financial is a covenant where both parties that there will be no change of company ownership or management during the loan. An example of a financial covenant is a cash flow or leverage covenant. Most banks want cash flow to exceed loan payments by 25%. So, you will see a cash flow covenant of 1.25x meaning cash flow/loan payments=1.25 or greater. The leverage covenant is typically debt/shareholder equity=4 to 1 or less.
Bankerese can be a foreign language, but hopefully this will give you a few common terms to get you started and on your way to becoming fluent.
Posted by Bill McDermott on Tue, Jul 27, 2010 @ 11:20 AM
I've had several clients engage me to help them with their commercial real estate projects. Many real estate owners are looking for business banking advice regarding short sales and deeds in lieu of foreclosure. While I'm not an attorney, there are some practical points that we can discuss.
Some real estate owners are facing foreclosure because the economics of their projects have changed dramatically. Since they can no longer afford to own the project, they are considering a short sale or a deed in lieu of foreclosure. These options allow you to potentially walk away from your property without incurring liability for a deficiency.
In a short sale, you get permission from the lender to sell the property for an amount that will not cover the loan. (The sale price falls "short" of the amount you owe the lender). In most instances, you have signed a personal guaranty that states you will cover the lender for any deficiency that results from the sale of the property. So, this strategy only works if the lender will release you from the personal guaranty. The main benefit of a short sale is that you get out from under your mortgage without liability for the deficiency. You also avoid having a foreclosure or a bankruptcy on your credit record. The main drawback in a short sale is that you have an offer from a willing buyer before you know if the lender is willing to go along with it. In this case, you won't know what the lender might be willing to settle for.
Also, beware of the tax consequences of a short sale. A short sale may create taxable income. The IRS treats debt forgiveness as taxable income. So, the deficiency between the sales price and the loan balance is considered debt forgiveness therefore taxable income to you. However, there are some exceptions so consult your CPA for further information.
With a deed in lieu of foreclosure, you give your property to the lender in exchange for the lender canceling the loan, suspending any foreclosure proceedings and agreeing not to pursue a deficiency. You would want this agreement with the lender in writing. Many believe that a deed in lieu looks better on your credit report than does a foreclosure or a bankruptcy. Also, sometimes the lender will take responsibility for selling the property rather than you selling it.
It may be difficult to get your lender to accept a deed in lieu especially in this market. Many lenders have taken so many properties that they will only take cash instead of real estate. Also, a deed in lieu could generate debt forgiveness like the short sale. You would want to consult with your CPA on the specifics.
Before you begin negotiations with your bank, you may want to consult with your attorney on all the aspects of these two scenarios.
Posted by Bill McDermott on Thu, Jul 22, 2010 @ 03:18 PM
Robin Hensley is returning as our guest blogger today. Robin has built a legacy of success in the business community. She now serves as a business development coach for CPA's and attorneys who are at the top of their game in maximizing their rainmaking skills. She recently wrote a book "Raising the Bar" that I would recommend reading. Her Linked In profile is: http://www.linkedin.com/in/robinhensley. Thanks, Robin.
The best rainmakers know how to Net Weave with their connections to develop a powerful referral engine. This is especially true when it comes to working with their trusted advisors.
Who is a trusted advisor? Anyone you, your client or potential client relies on in business. If you are a corporate lawyer, for example, one trusted advisor might be a corporate CPA or perhaps an auditor—someone you work with who also works with or comes in contact with your ideal client. Investing these trusted advisors in your success starts with you investing in their success. That’s where NetWeaving comes in.
NetWeaving is a concept introduced by my friend, Bob Littell (http://www.netweaving.com/) through his book, The Heart and Art of NetWeaving, (http://www.amazon.com/NetWeaving-Building-Meaningful-Relationships-Connection/dp/156352726X) Bob gives a framework in his book for repositioning relationship building to a pay-it-forward model.
He explains that there are two key elements to NetWeaving.
1. Learn to become a Strategic Connector of others. That is, putting people together in win-win relationships.
2. Learn how to position yourself as a Strategic Resource for others, literally becoming the go-to person for making things happen. (Being known as someone who wants more for others is a powerful magnet back to you!)
Now that you’ve got the basic idea, there’s no time like right now to get into action. Here’s your assignment for next time.
• Think of a trusted advisor you rely on in your practice.
• Arrange to meet with that person for the purpose of learning more about the type of client that person is looking for.
• Ask who would be a good referral from among the people you know.
• Arrange an introduction, if possible or practical.
• Be prepared to say who is an ideal client for you and who among your trusted advisor’s connections would make a good introduction for you.
• Set a timeframe for action and follow through!
Not sure who is a trusted advisor? Email me at rhensley@raisingthebar.com and I’ll send you a Trusted Advisors Inventory to help you get started.
LinkedIn is also a great way to track down the people you want to connect with. I’m doing a very special seminar on LinkedIn for practicing lawyers and CPAs. LinkedIn Secrets for Lawyers, CPAs and Other Professionals is August 18th in Atlanta. Email me at rhensley@raisingthebar.com for more information.
Posted by Bill McDermott on Wed, Jul 07, 2010 @ 03:37 PM
Friday, I took a break from business banking advice and our family flew to Washington DC to visit our daughter who is interning there for the summer. It is a rare privilege to celebrate the 234th anniversary of our independence in the Nation's capital.
Thanks to Alan Blinder, our family visited the White House on Saturday. As I was walking from the China Room to the Red Room to the Green Room, I was thinking about all the people and circumstances that had occurred in this house over the past 200 years approximately. It was amazing!
We then went to the National Archives to see the Declaration of Independence and Constitution which were on display there. On the 4th, we found our spot on the lawn just below the Lincoln Memorial and watched the fireworks shot from the Capitol over the Washington Monument. It was a special time and one I will never forget.
Yesterday, we toured the US Capitol.
I didn't know that each state recognizes 2 leaders and sends a statue to the Capitol to honor those leaders. One of the statues that the state of Georgia has sent is of Crawford Long. I didn't see the other one. Does anybody know who it is? The video that preceded our tour of the Capitol reminded of one of the terms that is on our coins and currency. "E plurubus unum", Out of many, one.
This motto originally suggested that out of many colonies or states emerge a single nation, in recent years it has come to suggest that out of many peoples, races, religions and ancestries has emerged a single people and nation. Let's celebrate America and Americans for liberty and diversity!
Posted by Bill McDermott on Tue, Jun 29, 2010 @ 09:00 AM
photo by Patrick Smith
I'd like to introduce our guest blogger today, Robin Hensley. Robin has built a legacy of success in the business community. She now serves as a business development coach for CPA's and attorneys who are at the top of their game in maximizing their rainmaking skills. She recently wrote a book "Raising the Bar" that I would recommend reading. Her LinkedIn profile is
http://www.linkedin.com/in/robinhensley. Thanks, Robin.
Does Your Firm Have A Listing In The LinkedIn Company Directory?
We all know that a personal listing on LinkedIn is the gateway to building connections but did you know that your firm can also be listed?
Firm listings are important because they add more dimension to search capabilities. For example, if a potential client is looking for a firm that specializes in employment law or forensic accounting, that individual can search for firms based on specialty, location, size and even 1st and 2nd degree of connection by selecting "Companies" from the drop-down menu in the Search Box and following the prompts.
When I did a search using the keyword, "Employment Law" in the industry, "Law Practice" located in my zip code with only 1st and 2nd degree connections, I found an impressive list of firms that include Constangy, Brooks & Smith, LLP, Fisher & Phillips, Morris, Manning & Martin, LLP and Bondurant, Mixon & Elmore. Clicking on the link to each firm's listing gives me an overview of the firm's practice, a listing of lawyers with individual profiles and how I may be connected to those individuals--making it easier for me (if I needed to) reach out to my connections for an honest evaluation of that firm's capabilities. If yours is small practice or a solo, listing your firm on LinkedIn is a simple and easy way to increase your chances for new business when others are searching for your practice specialty.
Posted by Bill McDermott on Mon, Jun 21, 2010 @ 06:06 PM
As I mentioned in my last post, my client came to me for business banking advice on his real estate loan. He has an investment property that he purchased for $5 million and borrowed $4 million. With the decline in the market, the property based on the income approach to value (see my last article) is worth $3 million.
My client has an opportunity to lease about 25% of the property to a tenant which will generated $90,000 annually including CAM (common area maintenance). However, the cost to build out the space for this tenant is between $250,000 and $300,000. My client is reluctant to come out of pocket for the build out and would like the bank to finance it. The bank is reluctant to loan additional money because they have a loan to value on the property of 130% and this loan would only increase that. Despite the issues facing both parties, this is still a good investment for each.
A $90,000 increase in rental income capitalized at 9% increases the value of the property by approximately $1 million. This tenant will increase the value of the property to both parties by 1/3. The owner comes $1 million closer to his original cost and the lender decreases their loan to value. So what options exist?
If the owner/borrower really does not have the cash to put in to the property, it may be in the best interest of the bank to finance the increase. The bank may ask the borrower for additional collateral. But, even if they don't have it, it might make sense for the bank to put up the money.
The owner may also want to find a minority partner and sell a partial interest. In the case where additional debt either can't or won't work, find an investor that likes the project and ask them to invest. A third option might be to ask the tenant to finance their own build out. While this option may be the least desirable, it still might make sense for the long term value for the property. The tenant will probably try to inflate the price of the build out or strike a deal for free rent. However, after the initial term, the value is enhanced because the space is occupied.
There is an old saying, "necessity is the mother of invention". Difficult circumstances create innovation for all parties. Be willing to meet with your banker, confront the circumstances and see if there is an "out of the box" solution where both sides benefit. Don't eliminate options just because you don't think your banker will go for it.
Posted by Bill McDermott on Mon, Jun 14, 2010 @ 10:33 AM
I was hired by a business owner recently looking for business banking advice on his real estate loan. He has a multi tenant commercial property in a good location.
First, my client bought the real estate in 2003 for $5 million. He put down 20% and the bank financed the remainder. The property has been 70-75% leased and my client has been unable to pay back principal on the loan because of the vacancy. He is paying interest only until October of this year. The bank has notified us that they will be placing the loan on a 20 year amortization at maturity. Based on current income that will create significant negative cash flow for my client.
To complicate matters further, the bank has an appraisal of $4 million. But, the property is currently valued at more like $3 million based on the income approach to value. (I'll explain in a moment) This leaves a loan to value exception for the bank between 100% and 133% based on which value you use. The bank would like to be at 80%.
In the appraisal, there are three approaches, sales approach, cost approach and income approach. Because there are hardly any new buildings being built, the cost approach is out. Many of the sales are short sales or foreclosures, which eliminates the sales approach. Many banks believe that the only reasonable approach is the income approach. To determine the value of your building using the income approach, take the rent your property generates and subtract all operating expenses (taxes, insurance, utilities, maintenance etc). The remainder is the NOI (net operating income). The lender will use a cap rate (capitalization rate) to determine the current value. If you take an NOI of $400,000 and a cap rate of 9% you will come up with a current market value of $4.4 million ($400,000/.09). In my case, the property I'm working with has a $270,000 NOI.
Cap rates can differ based on property type, an office building may have a different cap rate versus a hotel or a shopping center. Typically, a higher cap rate will be assigned to a property that has more implied risk (harder to lease, harder to sell etc).
If your mortgage loan is maturing in the near future and you have a concern about what your property is worth in today's market. You may want to take your NOI and apply the appropriate cap rate to determine it's value. My client has an opportunity to rent the remaining space in the property but wants the bank to finance the build out. Stay tuned for recent developments in this story.