No More Mister Nice Guy!!!

Times have changed. Gone are the days were on the second hole of golf with your Banker you casually mention that your company might miss its debt service covenant due to a delay in shipping a big order. "No Problem", your banker says as he crushes a drive down the middle of the fairway. Good laughs, good times.

Now, your Banker would lose the grip of his club sending his new titanium driver 50 yards down the fairway. Not only that, his boss in the next golf cart is already thinking about how this is going to play at credit committee.

How will it play? Well, not good. Whether its high profile real estate projects experiencing slight delays (read today's Wall Street Journal below the fold), or a business whose quarterly tax payment by the owner tripped a covenant, your banker doesn't care.

Loan portfolio problems persist everywhere and they affect you as a borrower - whether you are applying for credit or adjusting your existing credit agreement. Comforting factors such as the length of the banking relationship, being on the Bank's advisory board, donating to the Bank's charity of choice are butkus. You are in trouble.

The word I'm hearing is that Bank's have itchy trigger fingers resulting in pro-bank loan restructuring or even worse good companies or real estate deals being put in work-out. Loan restructuring usually means higher interest rates, higher fees, and tighter covenants - not to mention the legal costs to change the agreement.

Worse, Most if not all Banks are in the retrenchment mode when it comes to financing capital expenditure investments - especially to those companies that have tweaked the credit agreement. Short pay-back periods, production cost reductions, competitive advantage are reasons to invest in capital expenditures, however, those justifications are falling on deaf ears.

One local borrower - who wants to remain anonymous - mentioned in frustration: "We're just not getting any help from our Bank?".

What can you do? Unfortunately, the only way to make a Bank move on your request is to threaten to leave the Bank. Suddenly, everything makes sense to them - short payback periods, cost reductions leading to increased cash flow. Its sad that it takes that kind of threat given your perceived relationship between you and your Bank.

To accomplish this and to make the threat real, you should always keep other Bank loan officers at your beckon call. Also, you should prepare a financing package way in advance. Time is of the essence. Don't worry about crying wolf regarding threatening to leave or bringing another bank down the prim rose path because many bankers are like the caged mouse eating cheese only to be electrocuted. They keep coming back for more. My gut would time to choose the one banker that actually calls your bluff because he or she is truly has good business sense.

Submit your monthly, quarterly, annual financial information on time - meaning under the allotted time in your credit agreement. While seeming insignificant, being one day late submitting your financial statements is a technical default, immediately bringing your Banker to the restructuring table.

These are trying times for borrowers. Your Bank has become very transactional, versus, relationship driven. Meaning that you can throw away the past 15 years of on-time payments. If your having trouble, I would suggest also getting your attorney up to speed on your current issues. Then read the definition of the "Default Rate of Interest" in your credit agreement. Its not unusual to see your rate increase by 4% over night.

Good Luck.

Easy Bake Commercial Loan Dictionary!!

EASY BAKE COMMERCIAL LOAN DICTIONARY

When its time to go talk to the bank do bad memories or nightmares come to mind. They asked you questions with words and terms that sound from a far, far away land. Well, I’ve compiled a list of the most important and interesting terms for the next time you talk to a bank or more importantly to help better you understand before signing that loan!

Advance Rates: This rate expressed as a percentage determines how much the Bank will lend on certain assets. For example, accounts receivable typically carries an 80% advance rate. So if your company had $100,000 in account receivable, the bank would lend you $80,000. Machinery and equipment and inventory are typically margined by advance rates. Real Property typically is valued at 80% of the appraised value.

Affirmative Covenants: Affirmative covenants are the contractual provisions in a loan that the company and its management agree to fulfill after the loan is complete. In other words, this is what you PROMISE TO MAINTAIN OR DUE POST CLOSING. Common affirmative covenants include:
· Access to records. The company will give the investor or bank and its representative’s reasonable access to company records and personnel.
· Financial reports. The company will furnish the bank with regular financial reports on the status of the company. Balance sheets, profit and loss statements, and cash flow statements are usually provided monthly, quarterly, and annually. Audited annual statements are often required. Sometimes a short "state of the company" statement is also required from the company president on a monthly basis.
· Budgets. The company will prepare annual budgets which must be approved by the board of directors.
· Existence and maintenance of property. The company will preserve its corporate existence and all rights necessary to conducts its business and own its properties. The company will keep its properties in good repair.
· Insurance. The company will maintain adequate insurance. Often, the company also agrees to purchase key man insurance on the lives of management.
· Payment of debts and taxes. The company will pay its debts and taxes in accordance with normal terms.
· Compliance with laws and agreements. The company will comply with all laws applicable to it and perform its obligations under its agreements.
· Litigation and other notices. The bank will be promptly notified of any lawsuit, default under a major agreement, or other event that could have a material adverse effect on the company or its operations.
· Proprietary rights protection. The company will take reasonable steps to protect its patents, trade secrets and copyrights. These steps may include securing secrecy or non-competition agreements from company employees.
· Use of proceeds. The company will use the funds provided by the investor or in the manner described typically in the loan application.
· Accounting system. The company will maintain its current accounting system.

Borrowing Base: A borrowing base typically a monthly calculation that is attached to a line of credit or revolver. The borrowing base is the total amount of lendable assets – after the application of an advance rate. This number represents the total amount a bank will lend you for that month. If your borrowing base falls below the amount borrowed the bank will seek a reduction on the line of credit balance to below the new borrowing base.

Capitalization Rate or Cap Rate:
The capitalization rate is a measure of a property’s performance without considering any mortgage financing. If you paid all cash for the investment, how much money would it make? What’s the return on your cash outlay? Cap rate is a standard used industry wide.

Cap Rate = net operating income / sales price

Since a cap rate measures the property’s profitability it can also help you determine the appropriate sales price for the property. For example, let’s say you want to earn at least 10% on your property investments. The property you are currently evaluating is listed at $2,750,000 and has a $250,000 NOI. Well for you to earn 10% on your money, you would want to negotiate a purchase price of $2,500,000 ($250,000 / 10%).

Cash-on cash Return:

The cash-on-cash return measures how long it takes for your down payment to come back to you. For example, if your down payment was $20,000 on a property how soon would your monthly cash flow (NOI – Debt Payments) takes to add up to $20,000. General real estate guidelines suggest that a 10% or greater cash-on-cash return is preferred.


Defaults or Events of Default: This is here as a reminder that you and your attorney need to understand what triggers a default in your loan. A default can result in higher fees, higher interest rate, and even an acceleration of the loan – meaning the bank wants the entire loan paid back today. Other defined terms in this dictionary are triggers for default such as affirmative and negative covenants.


LIBOR Rate: LIBOR stands for the London Interbank Offering Rate. It is the basic short-term rate of interest in the Eurodollar market and the rate to which many Eurodollar loans and deposits are tied. The LIBOR is similar in concept to that of the prime rate in the United States except that it is less subject to individual bank management.


Loan to Value: The ratio of money borrowed on a property to the property's fair market value. On a purchase contract, the bank will use the lesser of the appraised value or the purchase price of the property. Most commercial banks advance 80% on the appraised value of the property.

Interest Rate Swap: A deal between banks or companies where borrowers switch floating-rate loans for fixed rate loans. These can be either the same or different currencies. The advantage to this is that one company may have access to lower fixed rates and another company may have access to lower floating rates... so they trade.

Prime Rate: The interest rate that commercial banks charge their most credit-worthy customers. Generally a bank's best customers consist of large corporations. Default risk is the main determiner of the interest rate a bank will charge a borrower. Because a bank's best customers have little chance of defaulting, the bank can charge them a rate that is lower than the rate that would be charged to a customer who has a higher likelihood of defaulting on a loan.

Material Adverse Change: While this might seem obvious, but this provision in a loan agreement can give the bank substantial room to call a loan. Essentially, this provision protects the bank in the event a negative event happens to the borrower that would impair the borrower’s ability to pay back the loan. Examples might include the loss of a big customer, a substantial lawsuit, loss of a key owner/manager. Many borrowers don’t try to limit the range of this provision – What is Material? If its not changed then the definition is defined by how the bank wants to define it. Make sure you and your lawyer look at this provision and are comfortable with its range.

Negative Covenants:
Think of a negative covenant as a promise not to do something. Usually, negative covenants limit the amount of dividends a firm can pay to shareholders and restrict the ability of the firm to issue additional debt. Generally, the more negative covenants exist in a loan, the lower the interest rate on the debt will be since the restrictive covenants make the loan safer in the eyes of bank. This is very important aspect of the loan agreement. For example, let's say you bought a property for its net monthly cash flow. If your loan agreemetn prevents dividends or distriubtions then any payment of the net monthly cash flow would be a violation of the loan agreement.

Net Operating Income:
The net operating income or NOI is the dollar amount that’s left over after you collect all your income (rent) and pay out you operating expenses. This amount is what is used to pay the mortgage, and what’s left after the mortgage payment goes into your pocket! Here is the equation:

Net Operating Income = effective gross income – operating expenses

What is effective gross income? Your effective gross income is the net amount of income after vacancies with the property.
What are operating expenses? Your operating expenses of the property include taxes, insurance, utilities, management fees, payroll, landscaping, maintenance, supplies, and repairs.

Storm Clouds Surrounding the Commercial Loan Market!!

"No, as of March 1st, we are no longer offering commercial mortgages with Loan to Values (LTV's) in excess of 85%". That's the message I got yesterday from a commercial lender who prior to March 1st was aggressively offering 95% LTV's. What happened at midnight February 29th? Did the extra day (leap year) in February cause most lenders to change so abruptly?

Here are some of the ingredients prompting the change: This past week, the Wall Street Journal dedicated several columns suggesting that the commercial market was on its way down. To summarize, the Wall Street Journal showed that nonresidential construction was down 1.7% in January versus the prior month, office space sales declined 42% in the fourth quarter of 2007 right as the credit tightening began, and that The International Council of Shopping Centers announced that U.S. store closures could reach 5,770 up from 4,603 last year.

More storm clouds are on the horizon according to another article quoted in the Wall Street Journal. The article suggested that U.S.'s community banks are sitting on a commercial loan time bomb. Community banks have migrated to underwriting more commercial loans as they've been pushed out of the residential mortgage market by Wall Street money. "Small and midsized banks, with less than $10 billion in assets, have a total of $323 billion outstanding loans", the article stated. This represents approximately 285% of the remaining banks' capital.

Let's speculate that approximately 1% of those loans referenced above were written off by the community banks - for a total of $3 billion write off. Not only would that result in several community closing, but it would also reduce the lending capacity of those institutions by at least $32 billion (using a 10x factor due to the leverage employed by most banks). That means $32 billion in potential loans to you and me to buy real estate would evaporate.

Is the sky falling? No, not exactly.

Commercial loan delinquencies are still low at 1.94% in the forth quarter of 2007 (it did rise modestly over the prior year). In the 1990's the commercial loan delinquencies reached 10%, so we still have a long way to go. Many experts suggest the most weakness in the retail segment, which is most susceptible to the downward movement in the national economy. So what does all this mean to you and me, who deal in the small balance commercial loan market? Here's what I think:

• Higher equity requirements. A contraction in the loan to value ratio means higher equity contributions by the owner/investor. Solution: If the cash isn't available to increase the equity contribution to complete the deal, approach the seller about a seller second mortgage. Your primary financing institution will look at the seller second as quasi-equity due to their 1st priority in the transaction.


• As properties come under increased scrutiny, the borrower's underlying credit will become increasingly important. So having a healthy credit score backed by personal liquidity will help you get that deal completed.


• Find other creative ways to finance the deal. For example, you could arrange a master lease agreement with an option to buy (at the current market value) with the owner. Under the master lease agreement you pay the owner a monthly lease payment but you run the property including collecting rent and paying expenses. Your goal is to then increase the value of the property and cash flow during the term of the lease (usually three to five years). Remember your option is based on the value today, not the value your going to create during the lease term. You could also negotiate that a portion of your lease payment go towards the option price.


• Buy on option on the property today for a small upfront fee. This locks up the property while you find a solution to the financing arrangement. Make sure that the upfront option price goes towards the purchase price.

Keep looking at the horizon for those storm clouds and I'll be happy to be your real estate weatherman!! Remember good deals get done!

Top Ten Red Flags your lender doesn't want to see and hear!

Today, I'm going to focus on post loan closing aspects of your relationship with your lender - that's right you still have to deal with your lender after the money is in your account. This post might be more pointent to a business loan, but some red flags are not exclusive to only business loans and apply to real estate loans. Here are the top ten Red Flags your lender never wants to see our hear!!!

1. Late Payments. While one or so per year might not raise the hair on the back of your loan officer, a series of late payments will prompt a phone call by your lender to you asking if everything is ok. Why? Usually after a payment is five days late, the late payment shows up on your loan officer's boss's desk!! Remember everything falls downhill.
2. Overdrafts. There are two types of overdrafts a lender sees when he drinks his coffee in the morning. Uncollected Funds or just a plain old overdraft where there is not money in the account and no deposit in the system. Uncollected funds are deposits made to your company's DDA and are in the process of being cleared (this can take 3 to 7 business days). Uncollected funds overdraft are still bad, but not as significant as a bare naked overdraft. A banker will probably pay on the presented checks in a uncollected funds situation, but not on a true overdraft. A series of overdrafts are a serious problem that will need to be addresses by the Bank and you. An overdraft report and the number of days the acount has been overdrawn can go to the highest level of the bank.
3. Late Financial Statements. Late finanacial statemetns can be an alarm to the bank that there might be serious problems at your company. Loan agreements provide a period of time to get financial statements completed and submitted to the bank. Many borrowers don't even know that they owe the bank information, because at closing they are mostly worried that the rate and term is correct on the note. Create a tracking list of all documents required by the bank, seperated by monthly items, quarterly and annually. This may sound crazy but late statements is a default of your loan agreement and the Bank could call the loan.
4. No Communication with the Bank - No Returned Phone Calls. A series of phone calls not returned to your banker sends up a red flag that something is going on. The bank debt on your balance sheet is probably over 90% of your total funded liabilities. So this important creditor needs to keep in constant communication. Silence is worrisome for a banker. The banker could be thinking that your losing money, lost a key customer, or what ever else might pop up in their mind.
5. Frequent covenant defaults. Records are meant to be broken, but not loan covenants. A loan officer has to get waivers approved internally and face hundreds of questions about the state of your company and frankly your lack of respect to the loan agreement signed at the closing table.
6. Rumors. This one is harder to control but you must be aware of the impact of rumors about your company getting to your bank. Your bank might lend to your competitor, customers, and might even know your accountant and lawyer. A comment like "Hey, Tim Banker you might want to get over to Joe's Machine Shop ASAP! from your accountant might create a red flag.
7. Borrowing Base Over Advances. For those with lines of credit tied to borrowing bases - an overadvance sitiuation is an immediate alarm to a banker. An overadvance occurrs when you revolver balance exceeds the assets used to collaterialize your line of credit. If it can be cleared up quickly (days) then its not so bad, but if its a long term issues then there will be problems. See if your line balance, which should rise and fall with your current assets, exeeds you current assets, then most likely your losing money or the quality of your assets might be question - accounts receivable collectability for example.
8. That new beach house and Mercedes that you just bought. Believe it or not a dramatic change in your lifestyle would peak the interest of your banker. Your banker would begin to question you commitment to the business, would wonder if the loan proceeds when to buy the car and beach house, and if any other debt was issues to the owner to acquire such cool things.
9. The loss of a key employee, partner, or customer. This is an obvious one, but one aspect of this might lose your bankers trust. If you delay in telling your banker and worse your banker finds out from someone else would be disastorous.
10. We don't have money to fund payroll! This is one of the most debilitating call a banker can receive from a company - short of a call to let your banker your filing for bankcruptcy. Payroll is the most sensitive expenses a company faces each week or every other week. It also quickly sends a message that things are not right at your company. You also forced your banker into a corner - which no loan officer wants to be in. Avoid this one at all costs.

The Connecticut Development Authority ("CDA") Is Your Friend!!!

The CDA is chalk full of good loan programs for Connecticut Companies. The CDA plays a very important role in the Connecticut banking landscape. Not only does it promote job growth or job retention in the State, it also provides a buffer with the wide swings in credit availability supplied by the Banks.

Now, you might think that with any quasi-government program comes with a mountain of red-tape - not with the CDA. The CDA has provided a streamlined, well publicised application process that reduces the time and frustrations felt by borrowers in the State. The application can be downloaded from its web site: CDA Application. But wait, there are very helpful CDA loan professionals ready to assist you with your situation. The CDA suggests calling the CDA loan offices prior to filling out the application (CDA Contact Info).

Before we go into some of the specific loan programs, here are some do's and don'ts with the CDA.

1. Which came first the chicken or the egg, or in this case the CDA or the Bank. Well, its a bit confusing with the CDA as well. The CDA's customers are the participating banks and lenders in the State, and not necessarily or directly the borrower. If you've been turned down by a bank or your astute enough to know that your loan request might cause your lender stress, then study the CDA programs and speak with a CDA loan officer. Get a green light (not a commitment, but an indication from the CDA that your request is in the realm of possibilities) from the CDA loan officer. Then start speaking with your existing lender or any prospective lenders about your loan request and the CDA. Having this knowledge would also so your bank that you mean business.
2. Have an understanding of the timing of the CDA and your lender. The CDA's Board of Directors meet once a month, usually on the 15th if that falls on a weekday. Applications usually have to be approved by the CDA management the last week of the prior month (at the latest). So if you have a tight time frame associated with your loan, then missing a key date might mean waiting another month before your get the funds.
3. Be confident on your projections in particular your employment projections. Remember, the CDA bases its support on your current and projected employment - among other things such as cash flow and collateral. Historically, the CDA has lent or guaranteed $10,000 to $20,000 per employee. The CDA will conduct annual audits on your employment levels, and any shortfalls that aren't easily explainable or extraordinary may result in penalties.
4. Provide the CDA the same information package that you provided your lender and remember your Lender has to fill out an application and provide certain information to the CDA as well. The lender has to fill out an application supporting its request for the CDA support and also has to provide the CDA its loan approval memo prior to the CDA going to its Board for final approval. So keeping tabs on your lender is important. Ask your loan officer if the CDA has the Bank's loan approval document. If he or she doesn't then you might be waiting another month.

The CDA is a great organization and its loan officers are experienced former bank lenders. So communication is important, and they are a good source of information and help. I'd like to now highlight one of the many lending programs offered by the CDA: The Participating Loan Program.

The Participating Loan Program essentially allows the CDA to participate with your lender in the loan structure provided to you - usually on the term or mortgage structure of your loan request. You continue to work with the lender and make your payments. The lender then distributes the CDA's piece of the payments to them. You are still working with one entity - your lender. There are no outside fees required as the CDA will participate with the lender's fees which you signed up for when you signed the commitment letter.

So its a marriage made in heaven - hopefully. The lender receives support to provide the needed loan to the customer (you), while not compromising its loan standards. The customer gets the money required to complete his or her business plan. The CDA provides support to the lender and thereby supports employment growth by the borrower. How does the CDA participation help the lender? The CDA participation is junior to the lender, which means that the CDA essentially has a second lien and the lender a first lien on the assets of the company.

If you find yourself looking for help to get the required money to grow your business and employee base, then the CDA is a great option to consider. If your banker doesn't mention it, then mention it to your banker. For more CDA programs, click here. Good Luck!!

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.