What is a DSCR and Why does it have to be higher than 1.20x????

Bankers speak their own language and expect us to understand it! One ratio that is very important to them when considering approving a loan is the Debt Service Coverage Ratio - or DSCR . This ratio simple measures the net cash flow of the real estate or business against the annual interest and principal payments on the debt (Debt Service).

Bankers love cushions - no, not the ones they sit on - but a buffer of net or free cash flow over and above the debt service requirements. This ratio begins to be acceptable to banks at 1.20x. So if you have annual debt service requirements of $100,000, then your net cash flow must be at or above $120,000 ($120,000/100,000 = 1.20x).

Certain banker's will go below 1.20x, but be prepared to see that increased risk in the interest rate charged on your loan. Look at it this way, your interest's and the bank's are together in this, because you would also want an acceptable cushion or protection against a loan default - especially if you signed a personal gurantee!

How close should I keep my banker about my business.

To answer that question, it is helpful to understand what your loan officer has to deal with in his or her everyday life.

Did you know how many people look and touch your loan!
In most banks your loan officer has two to three direct and indirect bosses that are repsonsible for loan growth. They are also a watch dog charged to minimize losses on loans. Each boss has ever increasing span of control over loan officers and the sizez of the loan portfolio. Depending on the size of your loan or its current status (past due or current), changes - such as increases or extensions - to the loan agreement could go up to the highest levels of the bank! So for example, if you call your loan officer on Thursday to let him know that you can't meet payroll for your 50 employees on Friday, that problem would make its way up to the top levels of the bank. Well, we all know that scrap (put the right word in there) rolls down hill well the same applies to banks. Your loan officer will probably get a call from the EVP at the bank wanting to know what in blazes is going on with your company. Why, because this issue probably is sympton of something larger - perhaps a loan write-off. The decision/outcome on this problem will come from above, and a lot of pain and embarrsasment will flow down to the loan officer.

It doesn't stop there, there is another side of the bank - a side that you will never see, but has as much impact on your loan as your loan officer and his or her boss does. That dark, secret side of the bank is the credit administrative function of the bank. At least on a quarterly basis (and sometimes monthly depending upon the size and serious nature of the loan problem), your loan officer has to communicate to these unknown giants about the status of your company and the propsects of your ability to repay the loan.

Well, needless to say, I recommend meeting with your loan officer at least once a month alternating the location between the bank and your office. Its important that when visiting the bank you at least say hi to your loan officer's superiors. A human touch goest a long way in the event things go south. So think of your loan officer as the head bowling pin in bowling lane. He or she is the first pen, but there are nine other pins behind that make decisions on your loan. To bowl a strike it starts with the loan officer.

When you sit down with your banker tell him or her about what's going on in your business and industry. Note challenges and opportunities. Many bankers are interested to know that there might be future business down the road. Ask your banker if there are any new products to help improve your business: cash managemnet, foreign exchange, treasury, etc. These brief - limit then to an hour - help cement your relationship and buy you goodwill that you may need to cash in down the road. Remember, your bank is the largest vendor relationship your probably have, and while not an equity partner - they have the ability to make dramatic changes to how and who runs your business. A lunch here and there could make all the difference in the world.

I can't understand Bankers!!!! Here are 10 Ways to Creat A Smooth Loan Process.

Does this look like you during your last loan negotiation? Well it doesn't have to be. It is true that bankers have their own language - a language that sounds greek to most of us. What is an LTV? What is LIBOR and what happend to the Prime Rate? What are negative and affirmative covenants? AGHHH! Wow, I just wanted to borrow money for five years to add a key new machine that will allow me to grow my business over 5% over the next few years. Is all of this worth it?

Be patient, here are a few helpful hints to smooth the process and get to that loan closing and the new machine you wanted.

1. Be fully prepared when you approach your bank for a loan. Here are things you should bring with you to give to your banker: A Cash Sources and Uses table (in other words what will the money be used for), A cash flow projection showing how the loan will be paid back, A copy of your financial statements and/or tax returns on your business for the past three years, and have three business references for your lender to call (this is not required if you already have a relationship with a Bank).
2. Be specific as to your timing expectations, but also be realistic. Banks - by design - typically do not act quickly. Don't walk into a bank and tell the banker that you need the money in two days - its just won't happen. To frame your timing expectations, communicate to the banker that you intend to present this opportunity to several banks, and that among other items meeting your timing is an important factor in your selection process.
3. Hire a lawyer that has completed several commercial finance transactions. I can't stress this enough. The protections provided to consumer borrowers doesn't flow to the commercial borrower - as the regulatory bodies assume that the borrower is sophisticated enough and has hired the appropriate counsel to enter into the transaction. Why a commercial finance attorney? Well they understand the ins and outs of a loan agreement that could literally be over 100 pages. If you aren't careful, you could easily be facing a not so nice consequences as a result of not having another set of eyes looking at your loan aggreement.
4. Know that everything is negotiable. It's not just price and term of the loan, but pretty much everthing in the loan agreement can be and must be negotiated up front. The bank is entitled to get its money back, however, setting and understanding the behavior in certain situations of both the borrower and the bank upfront is key. Nothing ever goes as planned. So default rates, grace periods, use of insurance proceeds, events of default are all things that should be hammered out prior to signing the loan agreement.
5. Control the transaction fees. It is completely appropriate to get caps on the bank's fee for legal counsel, and other miscellanous fees. Also, use the competitve nature of commercial lending to your benefit by entertaining multiple loan proposals.
6. Understand and control the "Conditions Precedent to Funding" language in your loan proposal. Bank issue proposal and commitment letters subject to certain conditions being met. This can range from obtaining a real estate appraisal to enviromental due diligence. These items could take weeks to a month to complete, and once completed each bank has internal specialist to review these reports which adds to the time. Use the proposal letter stage to eliminate any contingencies, that way you move quickly from a commitment letter to loan documents.
7. If things go sideways get the Bank's decision maker in the same room with you. Generally, loan officers report to superiors who have increasing loan authority to make changes or get the loan back on track. So if things go sideways and your tired of the daily "I'll have to get that approved by my boss", call the loan officer's boss and settle this quickly. The loan officer's boss want's the loan volume, and doesn't have a lot of time to deal with these situations prompting quick, decisive decisions to be made. The loan officer isn't intemidated because you helped him or her move the loan through the bank's beauracracy.
8. I know you have to run a business, but always put the ball back in the Bank's court. Set aside daily time to answer any questions the banker might have, and quickly get any additional reports, financial statements or other information back to the banker. Email is a great time saver here. There comes a point, however, whereby you get overwhelmed about the amount of additional pieces of information being requested. This is a sign that the bank isn't to sure it can get the loan done, and doesn't understand your business. If you get to this point then go to Point #7 for guidance.
9. Check out the Bank's reputation, by talking with other business owners. You might gain insight into a bank's behavior and quirks. Also, you make the final choice on the lender, but consult with your lawyer about the reputation of the bank you are selecting. There are banks out there that will submit a proposal letter to seal the business without regard to understanding the business. They think that they will figure it out during the loan process. Accepting a proposal letter from a bank like this guarantees a lengthy frustrating, costly loan process.
10. It's never to late to switch horses! The numbers are still in your favor, there are more banks chasing a low amount of loan requests. The worst thing you can do is to give into process by entering into a long term agreement (read partner) with a bank just because they have beaten you down. Despite time and costs involved in switching, the cost of entering a potentially bad relationship is more costly. Another bank can be brought in at any time, and would even make concessions on upfront costs to get your business.