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Lending

Personal Finances: How They Impact Your Business Financing Requests

Starting Your Business

As you start your business, many will focus on the initial resources to start the business, continue the business, and then grow the business.  An entrepreneur addresses a multitude of items to start their business, any of them can tell you, time and resources are limited. The impact is, some aspects of growing the business may be overlooked.

When the time comes to obtain financing, , for your business, whether it be equipment, real estate, or a line of credit many owners will not take into consideration that not only do you need to have the business finances in order but the personal finances as well.

Applying

Most lenders will look to the business finances for the cash flow to support the new debt being requested.  After the lender has determined that the business has the cash flow to support the request, they will look to the business owners to ensure they have the liquidity to step in, if the business is ever unable meet its obligations.  Over the years I had to decline requests not so much because of the business but because of the individual. The individual, if strong enough, can push an application across the finish line from decline to approval, it is less likely the reverse will occur. An approval is rare with an individual that is not strong.  In my time as a lender, I have had to revoke lines of credit because we lost a strong member of ownership.  We approved the line of credit because of the strong individual, underwriting determined the business did not fully support the request.  I also have had a start up restaurant approved because of the strength ad experience of the individual. An example of how a strong individual can support and otherwise weak request.

As with business finances, an individual cannot correct personal finances overnight.  It takes years to build up liquidity and pay down personal debt.  Cash is king when it comes to credit, the lower your personal debt to income and the large your cash liquidity, the better your odds.  A note regarding liquidity, as you look at your own financial situation. Retirement accounts typically will not count towards your liquidity. We all acknowledge that retirement accounts have great importance, but lenders will not always take them into consideration when looking at your liquidity.  They want to see cash that is easily accessible, without tax implications and penalties. 

In Conclusion

As you are growing your business, be mindful of your personal finances.  Your ability to obtain credit hinges not just on the cash flow of the business but the stability of your own personal finances.

David Coletta has 15 years in the banking industry and most recently has worked with businesses earning between $5-$50M a year in revenue.   If you are looking to learn more please reach out. 

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Lending

Managing Your Business Line of Credit

After working with businesses for 7 years and watching how some managed their line of credit (LOC) I thought it was important to cover this topic and provide some perspective. 

First let’s understand the LOC.  They can be secured and unsecured.  Many times, the secured LOC will have a lower interest rate and has more upside as far as available limits.  The secured versions are typically secured by real estate (although not the most common option), accounts receivable, inventory, a combination of both or a UCC lien that secures all business assets.  Unsecured will usually be a smaller availability and have a higher interest rate. Unsecured are exactly that, unsecured.

A typical line of credit will usually renew annually, depending on the bank, may require updated financials at the time of renewal.  Most lines of credit will have a payment structure that is a minimum monthly payment and then the total outstanding due at renewal/termination.  There may be variations by bank, but that monthly minimum could consist of interest only or interest only and a fixed amount of principal.  If the monthly minimum payment is being made there are usually not too many issues.  That is where businesses may start to get into trouble. 

Most banks look at a line of credit as short-term working capital facility, in many cases to bridge the gap between payables and receivables.  The expectation a bank will have is that there will be large swings in the balances of the line.  When the payables come due, you draw down on the line to make those payments.  When the AR comes in a significant portion if not all of balance is paid down on the line of credit.  A properly used line of credit should see its balances constantly moving up and down.

Where things go wrong is when, it is assumed, that because the monthly payments are being made the line is in good order.  That may be the case for a year maybe even 2-3 years.  When that line is mostly or fully drawn for several years, the bank is going to get concerned about how it is being used.  Sometimes without looking at financials they may conclude the line of credit is no longer short-term working capital.  When a line is fully drawn a bank will review the facility and say those funds should have been provided as a loan and not a line.  In turn what may end up happening the bank will take the outstanding funds on the line and convert them into a term loan that will be due back over a period of no more than 5 years.  Now in fairness to the bank, if they are holding up their end of the deal, someone should be telling the business owner what is coming.  I always let clients know we were not thrilled with the line management, and they always had at least a year to get it under control, if not longer.  

But this kind of term out scenario could hurt your business cash flow.  Imagine having a monthly payment of $100 and then from one month to the next you now have a payment of $500.  I use those numbers as examples, but you would have a much higher payment amount if not careful.  So be mindful when applying for the line, how you will use and manage it.  It can be a great tool while a business is growing but it could constrain your cash flow if you do not manage it properly.

About Still Water Solutions: Still Water Solutions was founded by David Coletta in 2020 with the goal of helping small businesses.  David has spent the last 15 years in banking and prior to that, 7 years working in non-profits and manufacturing.  Bringing a unique set of experiences to the table Still Water Solutions is well positioned to assist clients in this unique time.  We will always do what is in the best interest of our clients and work to help you succeed. We can assist with credit needs ranging from reviewing financials, preparing for loan applications and loan brokerage services.  Our partners can assist with independent services on R&D tax credits, cost segregation analysis on your commercial real estate, life insurance, merchant services and payroll and more.

Categories
Lending

Commercial vs Residential: A Comparison Between The Transactions

I frequently run across individuals new to the commercial real estate space and their initial comparison is to residential real estate. When they start asking about terms, rates and fees it is clear the base line knowledge is residential. That would be expected, many individuals if they have not gone through with a residential transaction themselves, either know someone who has or at minimum know the basics of the 30 year mortgage or hear what current rates are in the news. Let’s break down some of the basic differences between the two.

Terms

Typically what you see in residential mortgages is the 30 year mortgage, if not the 30 year then a 20 or 15 year. Majority of the time, it will not vary to far beyond that. There are ARM’s but those are not nearly as popular as their fixed counterparts. Regardless of bank or lending institution those the terms will be fairly typical.

In commercial real estate, you frequently have terms with balloon payments and this will vary by institution. The most common is the 5/20, a 5 year term with an amortization of 20 years. The amortization of 20 years, provides a monthly payment, as if the mortgage was being paid off over a 20 year period. After that 5 year term, you can pay the mortgage off or what most people do is refinance into another 5/20. Residential lenders have fairly standard terms on mortgages, that will not always be the case with lenders on commercial real estate. Some banks prefer to offer a 25 or 30 amortization on a 5 year term. Other banks might want to offer a 15/15 term and amortization. Much of what terms offered will be based on a lenders credit risk appetite and business cash flow to support the mortgage.

Rates

Residential mortgage rates will vary from lender to lender and will be subject to risk factors but in many cases market forces will set the initial base line. External forces moving rates would be the bond market, inflation, other Fed monetary policy. Internal forces that could affect the rate and ones the borrower can control would be, debt to income ratio, credit score and loan to value.

Rates on commercial mortgages will traditionally be higher than residential mortgages. You will see a higher level of competition on rates as well. If a bank wants to win a deal they will be more flexible with the rate offered. In a similar manner there are external forces that will determine the rate on commercial mortgages. They could range from Fed rates, bond markets, lender risk appetite, commercial real estate market and property type. Internal forces impacting the rates, will be business cash flow, business debt, LTV, collateral and personal liquidity. The greater your ability to lower the risk profile on your loan the greater your opportunity to impact rates and terms.

LTV

Most residential mortgages will allow for a pretty low down payment and their are a variety of programs out there that can assist. You can easily have a 95% LTV mortgage on residential real estate and it would not unheard of. PMI also allows for a buyer to come in with a lower down payment.

In commercial real estate, there are opportunities to put less down, but 25% down is industry average. When putting less than 25% down, it will stem from either the borrower using an SBA loan, where you can go as low as 10% down, or the lender is comfortable going with less than the 25%. There is no PMI for commercial mortgages and so the down payment is likely to be a hard and fast starting point.

Fees

Fees on residential real estate can be nominal compared to the overall mortgage transaction. Between appraisal, title, inspections and any other closing fees, you can look at closing cost below $5,000. It should be noted that some of those fees are going to be contingent on the sale prices of the house and thereby the large the purchase or mortgage the higher the fees. Commercial fees will be much higher. A clear comparison are the appraisal fees. Residential appraisal will probably not be much higher than $500. Commercial appraisals are not likely be start less than $2,000. Very quickly you will see fees on commercial real estate start to move about that $5,000 mark.

Pre-Approvals

Pre-approvals are very common in residential real estate transactions, not nearly as common in commercial real estate. They are out there but you are more likely see “term sheets” as opposed to a pre-approval. A term sheet will indicate that the lender is open to the transaction and if it were to move ahead, what the terms of the deal would be.

There are so many factors that determine a commercial real estate deal, we did not even touch on investment real estate, environmental aspects and more. The key is to ensure you educate yourself before going into a commercial transaction. The nuances are many and the deals can very greatly by lender.

About David

David Coletta has 15 years in the banking industry and most recently has worked with businesses earning between $5-$50M a year in revenue.   If you are looking to learn more about how David can assist you and your business please reach out via the contact section.

Categories
Fraud

Risks of Fraud To Your Business

Fraud against business has been steadily climbing year after year. We have seen it from the large corporate hacks to many unseen instances to smaller businesses. Below we detail what types of fraud are happening out there and what options you have to prevent it.

Types of Fraud

  1. In 2019 61% of all fraud cases were “business email compromise” (BEC), 58% were outside individuals ( forged checks, stolen card) and 26% third party (vendor, professional services provider)
  2. 81% of business organizations were targets of payment fraud attacks in 2019
  3. 2019 methods of fraud by percentage:
    1. Checks: 74%
    2. Wires: 40%
    3. Corporate/Commercial cards: 34%
    4. ACH debits: 33%
    5. ACH credits: 22%
  4. 42% of B2B transactions are made by check
  5. 60% of organizations have a fraud policy in place

How to Protect the business

Most banks offer some level of fraud protection services (typically Positive Pay and ACH fraud filters) for their clients.  Positive Pay is a system that allows for a daily or weekly upload, of checks that you have written, to your bank. Checks that are not included in that upload are flagged and you are usually given the option to approve or deny that check. ACH filters are a pre-approved list of companies that can debit your account. Another option typically offered by banks, at no cost is dual control. This allows one individual to initiate a wire or ACH and another individual in the company to review and approve the transaction.

When I had discussions about fraud and how to protect the business, one of the common objections I heard was the cost of the services.  The best way to approach those services is to view them as an insurance plan.  It is money out of pocket and you hope you never need to use it. 

Who is responsible when fraud occurs?

A misconception out there in the business world is that FDIC or the bank will cover any losses due to fraud.  That is not true.  In many conversations clients would refer to fraud on a credit or debit card, as an example.  When credit or debit card fraud occurs, typically those losses are covered by Visa, Mastercard or Amex and not the bank.  The bank is not covering those losses.  When a business incurs losses, due to fraud on a bank account, those are going to be a loss to the business.  The bank will not automatically replace the lost funds but will do its best to work with any corresponding banks to recover whatever funds they can.

One of my good clients who refused the fraud services and was a victim of #1 listed above, a case of business email compromise.  The “owner” of the company sent an email to the finance manager asking to send out two wires, for approximately $130,000.  Both wires were sent, as this is their typically procedure.  In a passing conversation later that day about the wires, it was discovered the owners email was hacked and the business was a victim of fraud.  The bank was able to recover about $30,000 but the business took a loss on the other $100,000.  Not many businesses can sustain that kind of loss.  This client, fortunately, was able too. 

When looking at your options, look at any services the banks is offering as an insurance policy.  This instance of fraud could have been avoided by simply by the business using dual control. One will never know the costs of fraud until the money is already gone and your business at risk. 

If you want to review what bank services you have or what your bank is offering, reach out, let’s talk.  We are happy to have a conversation and provide guidance.

Source: https://www.afponline.org/publications-data-tools/reports/survey-research-economic-data/Details/payments-fraud-2019/

Categories
Lending Merchant Cash Advances

Merchant Cash Advances

Merchant Cash Advances (MCA) have been an available form of financing for years now.  They are not your typical bank financing but can provide valuable cash flow to a business quickly and on a short-term basis.  In this environment of COVID, banks have become more conservative and retail store locations are under more scrutiny, this form of financing can prove to be a difference maker.  In many instances, to apply for an MCA, a 1-page application is required, verification of 2-3 months of bank statements and a most recent merchant statement are all that is needed to start the process.

MCA’s are not a loan but an advance lump sum payment in exchange for future credit/debit sales.  The lender will request bank statements to evaluate the business cash flow, determine the funding amount and a repayment plan.  Typically funding on this type of financing can be completed in 48-72 hours.  Repayment plans are a daily debit to the business account for a specific dollar amount, for a set number of days/months.  The language associated with MCA’s is not what you would see in traditional bank lending either.  Instead of interest rates you will likely see buy and sell rates or factor rates.  An example would be as follows: you may receive a factor rate of 1.4, which would translate to every $1 received by the business would pay back an additional $0.40 for the use of the funds. 

What has driven the popularity of MCA’s is larger banks have started to shift away from these smaller loans.  An unfortunate consequence of the 2010 Dodd-Frank Act was that small business lending became less profitable for banks.   Traditional bank lending is going to evaluate business cash flow, credit scores and collateral.  That process could take a month or more and requires a significant level of effort to get there.  When options for small businesses are limited, like they are today, all options should be on the table. 

The key for any business is the level of trust you have for those you are working with.  Still Water Solutions has the experience and the network that we trust to help you.  We are always available for a conversation to discuss what your needs are and the appropriate path.  Having worked with business owners for years now we know your time is valuable, and we want to help you make determinations as quickly as possible. 

Please do not hesitate to reach out for a conversation.  We want to be an asset to you and your business. 

If you would like to apply for a financing request please visit here.

Categories
COVID -19

Dining, Return to Normal – The Morning Consult

The Morning Consult is providing weekly tracking on key issues/sectors related to COVID-19. As vaccines start to roll out, businesses start bringing people back to the office we will slowly see a return to normal. Below is a link of their weekly report related to dining. There are some positives here, 35% of all respondents said they would be comfortable going back to dining in the next month. As reopenings slowly begin, warm weather rolls back around and the restaurants start to tap into the second round of PPP, there is hope on the horizon.

If you are a business that may need financing and need to buy time over these next few months, let’s have a conversation. Still Water Solutions is here to have a conversation, determine what your path forward is and will walk with you through the process. With 15 years in banking, there is a wealth of knowledge to provide and avenues to explore.

Tracking the Return to Normal: Dining – Morning Consult

Categories
COVID -19

A Return to Normalcy…..

As we start the process of rolling out vaccines and look for ways to get back to normal, this is an interesting new set of data tracking by the Morning Consult for work place sentiment. What are your employees saying?

Tracking the Return to Normal: Work & Offices – Morning Consult

Categories
Lending

Business Loan Applications – The Basics

Anyone that has ever applied for a business loan or line knows it can be a long and cumbersome process.  The key to shortening the process and smoothing it out, really goes to how you start the process.  A complete and concise financial package will go a long way.  Much of the back and forth between borrower and lender, that slows the process down, is related to needing additional information, specific documents not being completed and the bank not wavering on anything, because they need to meet all their regulatory standards.  When pulling a financial package together there are some standard items that are nearly always asked for.  Here are a few of those items:

  1. Personal tax returns
  2. Business tax returns
  3. Personal financial statement
  4. Aging AR/AP’S
  5. YTD Balance Sheet and Income statements
  6. Business Debt Schedule

Depending on your request, whether it be a loan, line, real estate or business acquisition there will be some documents specific to that request.   Disclosing potential issues also assists in keeping the process moving ahead.  Bankruptcy, other ownership interests, certain financial transactions can cause additional questions and also bring into doubt the potential borrower’s character as well, if not disclosed early on.  

The most effective way to start the application process is to ensure you have a complete package, have all the documents completed fully and disclose anything that might be questioned during underwriting and respond quickly to bank inquires. 

If you are starting this process or new to it, reach out for a conversation. With 15 years in banking, I am familiar with the banks, how they operate and can assist in the process. 

Categories
COVID -19

PPP – Round 2 Resources

In an effort to simplify the process and help business owners gather information about the new round of PPP in 2021 we will be providing links to training resources and other information as it becomes available.

Update 2/11: Round 2 of PPP is off to a slow start but here are the top national lenders by net dollars lent thru 1/31/21, according to the SBA website. Below is an article detailing some additional information on Round 2 of the PPP.

https://publc.com/content/Businesses-arent-flocking-to-this-round-of-PPP-loans.20856141

Additional notes for this Second Round of PPP, per information gathered from www.SBA.gov:

  1. The maximum loan amount for Second Draw PPP is 2.5x average monthly 2019 or 2020 payroll costs up to $2 million. For Accommodation and Food Services, the max Second Draw PPP is 3.5x average monthly 2019 or 2020 payroll costs up to $2 million
  2. To qualify you also need to demonstrate a reduction of gross receipts of at least 25% between comparable quarters in 2019 and 2020.
  3. The First Round usage will have used or will use the full amount for authorized usages.
  4. Must have less than 300 employees.

Looking for Lenders is a tool provided by the SBA: https://www.sba.gov/funding-programs/loans/lender-match

Update 1/26: SBA is having issues around accepting applications from banks. Patience while going through the process.

Banks press Treasury, SBA to fix ‘systemic’ small business loan glitches – POLITICO

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