What is important in this statement? The word “need” because that word has to be put on a balancing scale.

Last month we talked about the “Five C’s” of lending: Character, Cash Flow, Collateral, Capitalization, and Conditions. A business owner should know these and if they are wise, they access the services of a good CPA or business advisor, minimally, to discuss a plan to fulfill these categories. Applying for a loan then becomes a ‘shoe in’ vs. a crap shoot.

Another suggestion: Sit down with a commercial loan officer at a bank and ask them, “What do I need to do to get myself bankable?” Nine times out of ten I ask business owners approaching me for help, “Did you discuss what you need to do to qualify for the loan?” the same answer rings loud and clear: “No. They just turned me down.”

My friends: How does one fix something if you don’t take the time to find out what is broken? Please know too that some things are just obvious (i.e. you’re losing money or your sales are just plain drying up, etc.). These are no brainers. However, it’s not always a no brainer situation.

That said: Have this conversation! A loan officer wants you to build a working relationship with their bank, rather than seeing you leave. It’s ‘FREE’ and it’s right from the horse’s mouth so take advantage of it.

Your best option? Know why you are being turned down and if you can find someone to direct you to the right source, do it. If you don’t then I can promise you that you are in for nothing but frustration and the loss of the one thing you cannot replace: Time. If you get caught in this loop then hope that you don’t run out of money!

Although we hear of successes coming about, “…because I talked to the wrong bank first,” the number of people that don’t get financed far out numbers those that do. So, be smart and talk with the professionals available to you.

Three of the “Five C’s” were way short of the chart:

• Character (NOTE: This does not mean that the borrower is not a good person!): i.e. credit was challenged because the buyer, in business less than two years, had struggled paying their bills on time and their credit reflected that.
• Cash flow: Inconsistent until they started factoring, which solved part of the character problem and kept the bills paid as they grew BUT we still needed some history.
• Capitalization: Speaks for itself because we were running on a shoestring, to put it nicely. Therefore, there was little to no money for the buyer to bring into the deal.

Now this company, sadly, stood to lose out on a great opportunity…but when a motivated seller, a motivated buyer and a sharp alternative funding source come together, success is right around the corner. What was unique here was that the seller had the resources and opportunity and the buyer had the management ability. So, if they teamed up, this would work wonderfully for both.

Discussing the situation with the seller, the funding source laid out a payment mechanism that allowed the seller to receive the cash in hand that they wanted, created a deferred tax plan for future monies received and even set up an employment contract that allowed the seller to keep his fingers in the pie for as long as he wanted…and the deal moved to be closed.

This ‘method’ brought into being some sensitive negotiations as well as a creative agreement, but they work and work nicely. We’ve used this model and method with the acquisition of service companies as well as manufacturers and wholesalers.

Once these acquisitions occur, it’s time to bring in what we’ve discussed throughout this and our last issue: Get this business on track to become bankable.

The March 1^st 2010 “Shoptalk” section of the Worcester Business Journal interviewed Ed Shea, Market President with bank of America:

Banks always look for a stable and predictable primary source of payment and operating cash flow from a business. And then we’re going to look for a secondary source of repayment whether that’s an adequate collateral position and/or the strength of the guarantor …. Stability and predictability of cash flow has been and always will continue to be what the banks primarily look for.

The above is pretty simple so how do you do that?

1. Ensure your business’ cash flows and pays its bills … on time!
2. Do as much as you can to build up collateral assets.
3. Document what your business is doing and create predictability. Showing a history of fulfilling projections is very powerful!
4. Protect your personal credit and your business credit.
5. Show and demonstrate good control measures because your management skills are a major contributing factor for success in accessing financing…sometimes even more so than your collateral and operating history.

In summary: Review the information above. It’s pretty simple but it’s very complicated too. We’ve all been faced with and frustrated by the challenges of the five “C” elements of positioning our business for a loan, but it is what it is.

Remember: If you’re not bankable, it’s easy for someone to simply say, “Do the things that will position you to become bankable.” Let’s face it though: It’s tough!

Some other reminders to help you on the road to success:

• Be cautious whom you sell to.
• Control your terms and conditions when you sell.
• “Don’t take chances.” If you have to in order to survive (and this does happen) be sure that you have weighed every possible thing that could go wrong and do as much as you can to ensure that your actions are to your advantage.
• Be patient and be predictable: Your future depends on it!

Key objectives to putting your business on track is to show that your management ability can expand sales, grow a collateral base and/or show a profit history and is reputable in paying its bills. Always (and I mean always) remember that there are no shortcuts. The sooner you get yourself on track and into a ‘groove’, the better.

Let us know your thoughts…we’d love to hear them…or contact us if we can help!

Ideal Circumstance: You have open terms with your supplier and possibly a bank line to support covering labor, etc. Hopefully the customer pays before the bank line is drained and/or the supplier’s open terms run out with you. Otherwise, your credit and availability for the next contract can be jeopardized!

Collateral or Credit Backed: You have assets or excellent credit that can be leveraged or transformed into cash so that you can fulfill the need and complete the contract. What types of collateral are used here?
- Credit History is solid and can sign for a loan
- Property is owned that has a low LTV
- Equipment is owned that is not encumbered by a loan
- Account Receivables are available that are current and there is no loan in place

Non-Collateral Backed Circumstance: In this situation you lack all of the pieces to access cash or working capital. HOWEVER, you have the contract or purchase order in hand. What is important here?
- The customer is very credit worthy
- Your company has no liens and/or encumbrances
- The product does not need a significant amount of alteration to be delivered
- The order is contracted to be uncancellable if delivered within terms

Consider the above, particularly before you make a commitment. The clock starts ticking once you make a commitment – if you are not prepared to fulfill your contract, you are in trouble.

Here are the two “F Words” of banking: FDIC and the “Five C’s”

What is FDIC?

Federal Depositors Insurance Corporation (www.fdic.gov). Simply put, it is you and I as taxpayers that oversee and guarantee the backing of our federal banks.

This corporation monitors (or is supposed to) our banks to make sure they are not doing anything foolish that could cause situations such as the bail out. The FDIC in turn, creates the foundation for market and/or lending criteria that the banks adhere to.  If they step outside of the FDIC regulations, it’s not pretty.  The tighter the FDIC is on the banks then the tighter the lending criteria are on us as borrowers.

What affects this?  The “Five C’s.”  This begins with Conditions: Employment (or lack thereof).  As do other large scale economic indicators drive this and then it trickles down to the application information of the borrower.  When lending, the bank wants to ensure how they will get paid back.  It’s not complicated.  This is what the “Five C’s” are about.

The “Five C’s” are:

• Character: Credit, History, and Management (especially relevant experience in the market!)
• Cash Flow: Can you show that you can pay the loan back?
• Collateral: If paying the loan back fails are there adequate assets to be liquidated (Yes! Read that and weep!) to pay back the loan?
• Capitalization: Can the owner show enough liquid equity to balance out the equation?
• Conditions: Competition, market trends, and other factors that can sway this one way or another.

More often than not, people can’t understand why getting a retail operation financed is so tough. Think about it: What do you have left over if (worst case) it fails? Typically it’s racks of inventory that you couldn’t sell the first time around so, why is it going to sell now?

What if it’s a restaurant? What is left other than some food, chairs, and cooking equipment? Think along these lines when you are approaching a bank because they want to help you but it has to make sense if they are going to.

The reality is that our banks are a resource to be utilized and paid attention to. They see what the economy is doing and they are tremendous indicators of shaky ground. All in all, if your need passes musters with a bank then the odds are that it is pretty solid.  Although, failed loans are not uncommon. Why?

Making a loan is a ‘snap shot’ in time.  If things change once that snap shot is taken, then it’s anyone’s guess what the future will bring.

And if a bank says no please, call us: We’re here for you at: www.finance-manager.com.

We’d love your feedback.  Please let us know what you think!

His return call prompted us to meet with his bank and showing the bank that we could sustain the banks collateral protection, pay down the credit line, and allow this business to fulfill its contracts the bank became all ears. From this conversation we set up what is known as an “Inter Creditor Agreement” with the bank.

In this agreement the bank kept their existing collateral, which backed and ensured the loan, and allowed us to collateralize ONLY the new contract invoices to allow the business to cash flow and fulfill the contracts. As a part of this we set up an agreement where a calculated percentage of what we funded went to paying down the credit line which continuously improved the bank’s position and let the business grow. The result? The business is taking on more contracts … aggressively … and not selling off equity in their company.

If you’d like more information on this contact me at ebrown@finance-manager.com and again we’d love to invite you to provide us your comments via your own blog!

(If you know of someone that overcame similar issues please share situations that you might know of with a blog of your own!)

With his only asset being a piece of raw land, we created a working capital line of credit against the property. He also fulfilled the contract on time and without missing any deadlines.

What made this complicated? Who would lend on raw land when nearly no one was building?

Considered a ‘hard money loan’, this loan was placed in a first position lien/UCC1 on the property and was completed in a rather short amount of time. The important part was the contractor had access to the funds he needed to buy materials and meet payroll through to his first draws from the State … and the timing worked well!

Working with the contractor, we reviewed his contracts and history of fulfillment, establishing a comfort level that allowed us to move forward. With our services, he was able to do what he needed on time while paying the money back without issue.

If you have questions about Hard Money contact me directly @ ebrown@finance-manager.com or feel free to enter your own blog here as we would love to hear your comments!

This story continues. With his loan set up with what is called a ‘balloon payment’ (this means that at the end of a period of time – in this case six months – all of the loaned money plus interest is due or the loan defaults!) the deadline passed.

Originally asking for a three month term, we had the foresight to write the loan for six months with the ability to extend it to one year via a simple request. All through the loan origination process the borrower’s words were, “I won’t need it.” … but he did.

Selling the out of state property was already in process however an obstacle arose: The new buyers wanted some corrections made to the condo and once these were completed the new buyers needed to be approved by the respective condo association. It wasn’t until after the corrections were made and all was settled (four months into the process!) that it was discovered that approving the new buyers would take no less than three months as they now had to go through a rigorous screening process put in place by condo association after 9-11.

NOTE: When ever you are borrowing money always play ‘what can possibly go wrong’ with your situation because if you don’t and something does go wrong if your lender/funder is not willing to work with you then you could lose a valuable piece of property or hit into some very high expenses trying to protect and/or recover what is already yours.

If you’d like more information on this contact me at ebrown@finance-manager.com and again we’d love to invite you to provide us your comments via your own blog!

If you’ve had this happen please share what you did via our blogs as we are sure others would like to know!

Of note: This was the first of eight $90,000 shipments to a large customer and there would be more business to follow … unless these goods didn’t ship and ship on time.

To make this even more complicated this was occurring right before the Christmas Holiday and the receiving customer would be shutting down for two weeks so this shipment had to go and had to go on time. The loss of a day wouldn’t cost a day: It would cost over two weeks because of the shutdown!

That said: We were called and after working through the weekend and communicating with the supplier’s office all day Saturday by the Monday morning we had negotiated with the supplier a way to get the supplier comfortable and the product released in time to avoid late delivery penalties. How?

First off we tried to understand why this was happening but could not so we needed to deal with the issues and sort out the facts later.

Enter the Letter of Credit: A Conditional Letter of Credit that is. How does this work?

A funder/lender deposits money to cover a requirement and so long as the supplier completes the work and meets the terms and conditions defined in the Letter of Credit then the money is theirs and there is nothing the buyer can do. It’s not ‘Cash Up Front’ … but it’s close. What this does is eliminate a buyer from playing any games … and too the supplier in most cases.

If you know of this having happened please share it with other here on this blog?

An invoice factoring relationship needs to look at the whole picture otherwise an account that will result in misery for everyone and sadly the only one that will benefit is the factor which is not what a proper factoring relationship is about.

What should be done when a factor, or any other lender for that matter, sees a problem? Ethically shouldn’t the factoring company at least make the problem known? In our case we typically stay with the applicant in an advisory capacity to help them resolve and/or correct their situation so that they will be able to position their business successfully. Isn’t this what serving a client is all about?

NOTE: In the above situation there were two other factoring companies involved yet we were the only factoring source to point out to the client that they were heading for possible ruin. In addition we worked with the client to analyze their cash flow and profit margins and based on the amount of time that these customers would delay in paying this new staffing company had the applicant moved forward she would have been supporting those contracts at a loss to her company. Keep in mind: Even when this happens a factor is still going to get paid!

As hard as it was for her to accept that turning these contracts down was the best thing she could do: We also showed her ways to support some of these ‘slow pay’ customers by utilizing her fast paying clients … something that no one else did for her.

Often times the factoring industry as a whole gets a ‘bad wrap’ because other factors don’t go the extra mile in providing service. We lose, or I prefer to call it invest, a lot of time helping applicants by going the extra mile with information that allows them to better position their companies to grow without hitting more road blocks.

If you’d like more information on this contact us directly @ ebrown@finance-manager.com and please know that we’d appreciate your comments via our blog.

First off: If you know of a situation such as the above please share it via a blog with others as we would truly like to make this information readily available to all!

That said: When a bank lends money to a business it most always files a UCC1 on all of the assets of the company. A UCC1 (Uniform Commercial Code) is the same as a mortgage company placing a lien on a house when the mortgage company provides a mortgage. This action ‘secures’ the business assets for a lender or funder as their collateral and can be done as an all asset lien and/or it can segregate the assets such as when a leasing company files a UCC1 only on the piece of equipment it sets the lease up for; or when a factoring company files a lien only on the accounts receivables; and/or when an inventory financier would file a UCC1 only on the inventory.

When a lender, such as a bank, loans money most always the loan maximizes the amount of money the bank is willing to make available based on the value of the company assets and/or personal assets and cash flow (i.e. the company or personal assets become the bank’s collateral).  So, if the bank allows another funder to be involved, this dilutes or reduces the bank’s ability to recover its investment creating a potential risk for the bank.

If two funders/lenders work together, as in the above action, this creates what is called an ‘inter creditor agreement’.  When the bank allows this to happen, it is giving up some collateral to gain some collateral (more sales – more accounts receivables – more cash flow).   This is a commendable action on the part of the bank.

In this case, the clothing manufacturer was going to increase their sales. So, the collateral (mostly the accounts receivable) would increase.  The bank we had the privilege of working with had enough foresight to understand that allowing us to increase the ability of the client to cash flow and enabling the client to grow, would actually put the bank in a better position.

Of note: With all due respect for these situations, it’s very generous for a bank to restructure a loan to facilitate an inter creditor agreement as there are expenses associated with doing this.  For instance, involving their legal departments and credit committees all of which need to be understood by a borrower.

That said: If you have any questions feel free to contact me at ebrown@finance-manager.com and always remember that we’d love to hear your feedback in our blogs!