Take Charge of Your Business Borrowing Future

By Kenneth P. Easton, Jr.

Part I (see side bar) of the “Six Rules” article, which was published in the December 2009 issue of Home Business® Magazine, presented the first three rules (see the digital edition). The article conceded that absolute “rules” for business borrowing, while interesting concepts, may be rather impractical. “Rules” are however, in this case, proven exercises that produce preferred results!

Of course, there are always flexibilities. Disregarding essential principles puts business borrowers in jeopardy or, at the least, in an unfavorable position dealing with existing or future borrowing relationships.

Your business may only be numbers, ratios, risk ratings, and a return on investment to some lenders — hopefully not yours. We know many lenders are under pressure to restructure loan portfolios, maximize earnings, and minimize risks. Lenders understand that the business borrower is the income and — at, the same time, their risk! Lenders seek to survive — but so must you! By taking charge of your existing or future borrowing relationships you can preserve your business, your fortune, and your peace of mind.
Let’s now consider Rules # 4, 5, and 6 of our Six Rules of Business Borrowing. Within each we highlight important action points.

Rule #4: RECOGNIZE THE DANGER SIGNALS

Inexperienced Lenders: Inexperienced lending officers simply do not yet have the expertise to develop innovative, outside-the-box, solutions addressing specific needs. Inexperience may limit them to consider only internal “policies and procedures”. As they have little clout with a credit committee, loan approval odds are further compromised. The seasoned, senior lenders are frequently assigned to the larger or more lucrative commercial accounts or serve as group leaders. This is not your level playing field — you must level it!

Insist on a full Vice President, with at least five year’s experience in commercial lending, to work with you. How do you initiate a change? See Rule #5.

Unreasonable Expectations: Often lenders fail to recognize burdens placed upon borrowers through unreasonable reporting requirements, performance expectations, or covenant constraints. Reporting requirements may include the types of year-end or interim financial statements, cash flows, and collateral analyses, but also various submission frequencies.

When considering the types of statements, preparation and fee costs may represent financial hardships. Some lenders do not appreciate or relate to such problems. Make your case for types of financial statements to be provided and reduce submission frequencies. Modifications requests are frequently approved.

     Lender’s performance expectations should be supported by borrower’s history, financial statements, and forecasts. In preparing to support upcoming needs, borrowers should consider quarterly lender reporting rather than waiting for year-end. See the suggested caveat, within Part I, to be placed on recurring forecasts. Regarding covenant constraints, see the benchmarking techniques within Part I to relax, or altogether eliminate, restrictive or unreasonable loan covenants.

Risk Ratings: Business lending relationships are assigned Risk Ratings. Similar to consumer credit scores, they rank a business’s credit risk. Ratings may be 1-10; the lower the better. Ratings affect borrowing profiles (loan limits, rates, and fees). Learn your Risk Rating, what it means — how to improve it. When positive things happen within the business, its performance or collateral, seek rating modifications.

Additional Collateral: When lenders request or insist on additional collateral, it may be a danger signal. Your lender may feel insecure. He may be attempting to enhance existing collateral or reduce collateral advance rates or eligibilities. Absolutely resist assignment of your personal residence as “additional” collateral — negotiate solutions.

Approval Authorities: Know who can say “yes” or “no” to your borrowing needs, and be personally recognizable. When conditions or events permit, obtain introductions to senior lenders — putting them on the list for your company newsletter and performance updates. Invite them to company functions or recognition dinners.

When your important requests may be down-played by junior officers, consider “copying to” senior lenders up the chain. After all, you now know them — don’t you?

Requests for Additional Appraisals or Inspections: Appraisals, environmental site assessments and equipment inspections are routinely conducted at the beginning of a borrowing relationship. If periodic “re-evaluations” are not within your loan agreements, something is brewing. Is your lender becoming uncomfortable with your supporting collateral valuations? Has a down economy impacted values? Lenders have the option of deeming themselves insecure. If you must comply, negotiate only for “updates” and not new appraisals — much less costly and quicker.

#5: TAKE CHARGE:

Is it time for you to consider a new lender? Such a decision may not be your choice but rather dictated by your current lender. Are new lenders readily obtainable? Can one be attracted to your unique situation? A new or replacement lender is almost always obtainable and, within a managed selection process and utilization of either traditional and alternative lenders (or a combo), your final deal may be even better than the one you have now!

Needs Worksheet: So that’s new? Not necessarily — but your all-inclusive Needs Worksheet evaluates current and future borrowing requirements, supporting collateral resources, new borrowing availabilities, pay-offs, fees, costs, net funds generated, and funding uses (two page format). This is a borrower’s internal working document and should not be presented to potential lenders. This information will be your base for the borrower’s prepared Terms & Conditions Sheet.

Your Term & Conditions Sheet (“T&C”): This is not the T&C prepared by a lender and presented to the borrower for acceptance. This T&C is prepared by you and given to prospective lenders — telling them what you want. By substantially agreeing with your specific T&C, a lender may obtain your relationship. Back and forth negotiations are normal.
Your format is similar to those used by lenders. You reflect required loans, amounts of loans or credit lines, collateral pledged, required lending formulas, advance rates, repayment schedules, loan timing, and pricing. Your format includes interest rates, fees, and expenses (agreeing to pay these at closing or adding to loan balance).

Also show your proposed loan guarantors (if any), loan covenants, and your special conditions. Your T&C has a favorable impact on lender considerations. They know exactly what you want and may actually improve on your specifications. Your accountant may assist you in T&C preparation.*

Your Next Two Lenders: Always work toward a business loan closing with two lenders. This tactic may prevent an 11th hour closing breakdown. If new or unfavorable terms are suddenly introduced by the initial lender (it happens), you will already have a second approval and a timely alternative secondary closing. This is especially important when creditors are expecting payments following a closing. This need not be an overly expensive tactic, as most fees are deferred to closing (a closing that may not happen), and borrower deposits are frequently refunded. Lenders are not generally informed that you are progressing towards dual loan approvals or closings.*

Change of Loan Officers: Sometimes officers right out of credit training are assigned to manage relationships. However, seasoned lenders have earned “in the trenches” insights into borrower’s many problems and needs. You need a senior loan officer. Seniors may come up with practical, time-tested solutions and sometimes immediate resolutions. The credit committee respects their decisions. So — insist on a full Vice President, with at least five year’s experience in commercial lending, to work with you.

If verbal concerns are not addressed, write a letter to the lending department head (copy the loan officer) citing concerns without recriminations. Make it clear that, from your perspective, this is an unsatisfactory situation. Mention you do seek to preserve the borrowing relationship.

#6: HAVE CREDIBILITY:

Your business and your personal profile must reflect integrity. During the loan application process, all prior “situations” should be revealed. Concealing income, debts, collateral values, or loan purposes will jeopardize loan opportunities. Lenders check public records, personal and business credit, and backgrounds. If not truthful, your application goes no further. If currently a borrower, the businesses risk rating plummets and, worst case scenario, your loan is “called” immediately.

*Legal Counsel Note: When considering implementation of actions described within this article, always consult your attorney, accountant, or other professional advisors. HBM

Ken Easton has over 40 years of business finance experience. He is a business finance consultant to both businesses and commercial lenders. As the author of $urviving Your Business Debt (order through Amazon or web site), his award-winning book instructs large and small businesses how to survive everyday financial challenges as well as the most difficult of financial scenarios. He is the principal of The Easton Group, LLC (Hooksett, NH) and a keynote speaker. Visit the web site www.SurvivingYourBusinessDebt.com. E-mail Ken at eastongroupllc@comcast.net or call direct (603) 533-1935.

Previously published in the February 2010 issue of HOME BUSINESS® Magazine, an international publication for the growing and dynamic home-based market. Available on newsstands, in bookstores and chain stores, and via subscriptions ($19.00 for 1 year, six issues). Visit www.homebusinessmag.com

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