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.

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.