Wish you could get a loan for your business without providing a personal guarantee? Join the club! Most business owners prefer not to put their personal assets on the line in this way. Banks, on the other hand, only want to lend when they’re 100% comfortable that they will be able to get their money back—and a personal guarantee helps provide that reassurance.
Although it can be next to impossible for new companies to get loans without personal guarantees, established companies sometimes can. From what I’ve seen, here’s what it takes:
• Longevity – Minimum of five years in business, but probably more than 10.
• Profitability – A track record of profitability and a demonstrated commitment to using these profits to grow the financial strength of your company.
• Strong balance sheet – Including:
• Quick Ratio (cash plus accounts receivables, divided by current liabilities) of 2:1 or better
• Debt to Equity Ratio of less than 1.0:1
• Collateral – This must be in excess of what you wish to borrow, with the bulk being liquid, such as cash or receivables. Lenders might also be interested in the real tangible value of inventory, machinery and equipment in a liquidation scenario.
• Ability to repay – Lenders want to see a realistic business forecast for the term of the loan showing that your business can easily meet the loan’s debt service requirements.
• Past loans – A history of satisfying past loan obligations in a timely manner, and remaining in full compliance with the loan covenants until the loans are repaid.
• Prompt accounts payables – Demonstrated history of paying your bills in a timely manner, as supported by consistent accounts payable aging with no past due balances.
• Strong management – A solid and consistent management team that doesn’t change from year to year.
• Long-term relationships – Banks want to see that you cultivate and value long-term business relationships, that you’re not changing banks, insurance brokers, CPAs or other professional service providers every year.
Finally, lenders want to know why you don’t want to provide the personal guarantee. After all, if you’re not comfortable providing this, why should they be comfortable putting their money into your business? A good first step might be to seek a reduced personal guarantee based upon mutually-agreed-upon metrics between you and the bank.
Need help getting your loan package ready?
Give me a call! As your part-time CFO, this is one of the many services I can provide.
Whether your company is in growth mode or trying to deal with flat or diminishing sales, there’s a good chance you depend on credit from your bank to help you pay the bills. Which is why I’m always surprised to see how many companies do things that ruin their banking relationship!
Bankers are generally very cautious people. They need to feel completely confident that the money they loan to you will indeed be paid back. Do one of the following actions, and run the risk ruining your banking relationship:
• Provide misinformation or no information. The quickest way to lose your credit is to surprise your bankers. The worst way is to lie to them. If your company is struggling, the best time to tell your banker that there’s a problem is as soon as you become aware of it.
• Add to your debt. In most cases, borrowing money from other sources (outside of trade payables) without your banker’s approval or consent will violate your loan covenants.
• Break the law. Your banker will not be happy if you incur a significant regulatory violation by failing to comply with a law, such as not reporting or properly resolving a hazardous spill, or getting slapped with a class action lawsuit because you didn’t comply with labor laws.
• Miss your previously reported earnings projections. Say your bank has raised a concern about your repeated failure to hit your leverage ratio, and you have assured them that this quarter you’ll hit the numbers. If you don’t, they might get “lender’s fatigue” and give up on you.
• Use corporate assets to buy luxury items. If your banker sees that, while you’re seeking to continue to expand your loan base, you’re using corporate funds to buy luxury boats, planes or cars, they’ll think twice about approving another loan.
• Miss reporting deadlines. It is vitally important that you provide accurate and timely financial statements, and be proactive about telling your banker if something is amiss.Most of the things on this list are typically covenant violations. Always keep in mind that your banker has the right to call your loan—and demand immediate payment—for any covenant violation, regardless of its magnitude. When that happens, I can tell you that it’s really not a pleasant position to be in.
Need help proactively managing your banking relationship? Give me a call. As your part-time CFO, this is one of the things I can do for you.
Hoping to get a loan? As I said in a previous article, “Is Your Loan Package Ready for the Spotlight ,” lenders only fund loans when they’re comfortable that you’ll be able to pay them back. Having an excellent loan package is critical for convincing them that you’re credit-worthy, and one of the key elements of a successful loan package is the business plan. Your business plan shows where your company has been and where it is going in terms of sales growth, business opportunities and more. Here’s what that plan needs to include:
• Business description – A few paragraphs that explain what you do, including a brief description of your key products and services, an overview of your industry, and a sentence or two about each of the key members of your management team.
• Historical financials – Three years of historical financials (Profit & Loss Statement, Balance Sheet and Statement of Cash Flow).
• High-level sales/marketing plan – This needs to include a detailed 3- to 5-year sales forecast by major product lines that shows projected sales units, average sales price, average costs, and average gross profit per unit sold...and narrative that explains how you’ll make it happen.
How does your projected growth compare to your industry’s projected growth? How will you achieve your projected sales growth? For example, do you plan to introduce new products, find new markets for existing products, implement new processes that will improve profitability, or what?
What actions will you take to support the projected sales volume? How will this sales volume impact your working capital requirements, staffing, production capacity, vendor relationships and other infrastructure issues?
Projected financials – Three to five years (depending on the desired loan length) of projected financials based on this sales/marketing plan, all presented on a quarterly basis for each year. In addition to the Profit & Loss Statement and Balance Sheet, this includes:
• Operating expenses with labor build-ups by department. If you’re saying that you’ll have four years of 8% year-over-year growth, they’ll want to see what type of staffing you’ll need to support it.
• Debt and debt payments needed to support this growth.
• Capital expense budget outlining projected capital expenditures by year.
• Statement of Cash Flow that ties all of this together.
Need help putting together a business plan that includes everything investors and bankers want to see? Give me a call! As your part-time CFO this is one of the many services I provide.
I was recently reading a list of famous quotes from Ben Franklin when I was struck by how timeless much of his advice is. While the business world has changed tremendously, these truths about business success have not.
“If you would know the value of money, go and try to borrow some.”
Borrowing money for your business is not easy. For example, according to Biz2Credit’s October 2016 Small Business Lending Index, in October 2016 big banks approved just 23.5% of small business’ loan requests, small banks approved 48.7%, alternative lenders approved 59.5% and institutional lenders approved 63.1%. In other words, 37 to 76% of applicants got turned down.
As I’ve written about before in “Is Your Loan Package Ready for the Spotlight ,” lenders are quite picky about what loans they’ll approve. Managing your cash flow is therefore vital. Making the most of the cash you have minimizes your dependency on lenders.
“Remember that credit is money.”
Maintaining a strong credit rating is like having cash in the bank. Businesses extend credit to those who pay their bills on time. If you can prove your creditworthiness, vendors will be more likely to give you favorable terms, and lenders will be more likely to approve your loan requests.
Of course, you also need to be aware of the flip side of this issue. Do something to wreck your credit worthiness, and you can quickly find yourself unable to access the money you need to run your business.
“Beware of little expenses; A small leak will sink a great ship.”
On one level, this advice gets back to the need to have a budget and financial controls in place. But on another level, this is about managing the mentality and culture.
For example, one area that’s often out of control is office supplies. There’s a storeroom stocked with a nine-month supply of paper and pens. Employees are allowed to “redecorate” their desks with designer in-baskets, and soon everyone wants to personalize their workspace in this way. You get the picture.
While excess spending on office supplies probably won’t sink the ship, this “no limits” attitude will quickly spread to much bigger expenses...and before you know it, your bottom line really is affected.
Want to augment Ben Franklin’s advice with the advice and counsel of an experienced CFO? Give me a call! As a part-time CFO, I’m here for you.
It’s a fact: Lenders only fund loans when they’re comfortable that they’ll be able to collect both the principal they lend and the interest they charge. The degree of comfort they feel dictates how much they’ll lend and the interest rate they’ll charge. Your loan package must convince them that your request meets their criteria. Which is why getting it right is so crucial!
The Key Elements of a Successful Loan Package
If you can provide the following items in a way that will make the lender agree the loan makes sense, you’ll be able to secure the loan at a reasonable interest rate, with payment terms and loan covenants that you can safely satisfy. But if you’re missing any of these elements, or if they don’t point to your ability to repay the loan, then you’re not likely to have much luck obtaining funding at all.
• Business plan & projected financials – You can help yourself get the best loan by having a solid business plan that forecasts revenue and expenses for the desired loan period. This plan must show where your company has been and where it is going in terms of sales growth, business opportunities and more.
Your projected Profit & Loss Statement, Balance Sheet and Statement of Cash Flow provide the numbers that support your plan. Each of these financial statements should be presented on a quarterly basis for each quarter of the desired loan period.
• Current financials – In addition to the projections, lenders also want to see your current year’s financials, which serve as a benchmark.
• Narrative – Your loan package must clearly show why you need the money, and when and how it will be paid back. While the numbers should do much of the “talking,” if you don’t already have a relationship with the lender it’s best to include a page or two that lays out the assumptions and provides a top-level view of your company and plans.
• Extra explanations – In addition, be sure to provide more information for anything that might be a potential red flag. For example, if you’re projecting 25% revenue growth in an industry that’s flat, you need to explain how you will make this happen.
Need help with any of this? With over 30 years of experience, I know what lenders are looking for when they’re considering loaning money to companies like yours. Give me a call. As your part-time CFO, I’m here for you!