Financial Products: Full Disclosure
Typical Required Information:
- A complete and signed Credit Application.
- Two years of Audited or Reviewed annual statements.Two years of corporate tax returns are required only if the annual statements are not Audited or Reviewed. However, tax returns can help us better understand your company’s financial condition and we encourage you to include them regardless of how your statements are prepared.
- Current interim statement and an interim statement for the same date in the prior year can be helpful but is generally not necessary.
- A Debt Schedule for the most recent year end. (Debt Schedule forms are available in the FORMS section of this web site).
- Copies of the last three month’s summary pages for your major business checking accounts.
- A signed and dated Personal Financial Statement for each owner or principal with 20% equity or greater. (Personal Financial Statement forms are available in the FORMS Section of this web site).
- The most recent complete personal tax return for each owner or principal with 20% equity or greater.
- A complete description of the equipment being acquired and identification of the vendor that will be selling it.
- If you need assistance completing any of the information necessary or have any questions please call us and someone will guide you through the process.
Full Financial Disclosure is a traditional lending product and although the analytical and decision processes differ somewhat from one commercial lender to another the absolute core of approving all commercial loan requests is determining that the borrower has the ability and the willingness to repay the debt according to the terms granted. Some lenders will also consider the future value of the collateral when reviewing a commercial loan request but for the most part lenders want good credit and great cash flow regardless of what asset they finance.
Some lenders employ “reason to decline” and some will employ “reason to approve” philosophies as the predominant driver of their credit decisions. This is similar to “innocent until proven guilty” vs. “guilty until proven innocent”. The difference can be subtle in the finance world but the influence on the ultimate decision to approve or reject a lease/loan request can be profound and unless you are a seasoned commercial finance professional it might be impossible to detect especially when you only deal with a lender on rare occasions. Also the approve/decline focus of a commercial lender can change abruptly due to any number of outside influences.
The most important formula in determining the viability of a commercial loan is Cash Flow and most commercial lenders calculate that using a slightly different formula. Essentially this determines the businesses ability to honor their current term obligations plus the additional monthly payments for the proposed lease or loan. Many commercial lenders will also calculate “global cash flow” which incorporates the real income and real term obligations of the business, as described above, combined with those of the owners. In typical proprietary type businesses this can be helpful because it takes into consideration many of the ‘tax strategies’ of the owners, namely: minimize income and pay as little tax as possible. That works great when you’re talking with your accountant but not when you’re trying to get a loan.
QUICK & DIRTY CASH FLOW CALCULATION (NOT GLOBAL CASH FLOW)
Today most commercial loans are approved or declined based on a number of factors. Perhaps the most important factor is the lenders assessment of the customer’s ability to pay the monthly payments when they are due. This is referred to as a ‘cash flow calculation’. There are many different methods of calculating cash flow but the following formula is a quick and dirty calculation you can do yourself to determine how most lenders will view your company.
Simply stated Annual Cash Flow is determined by adding the total Net Income to the Depreciation & Amortization and dividing by the existing CPLTD plus the annual payments for the loan you are applying for. If the result is a ratio of 1.2/1.0 or higher (meaning that you have at least 120% of the cash needed to service your annual payments) you are deemed to have sufficient cash flow. If the result is less than 120% you’re probably not going to get a loan.
- Net Income is $250k and
- Depreciation & Amortization is $120k and
- CPLTD is $220k and
- Total annual payments for the new loan are $75k
$250k + $120k = $370k (this is your cash throw) divided by $220k + $75k = $295k (this is your debt service) and your Cash Flow ratio is 370 to 295 or 1.2/ 1.0.
Got questions? Just call us because we got answers.
The Accuracy & Quality of Financial Information
The quality of the financial information you provide is critical. If your businesses financial reports are not prepared (reviewed or audited not complied) by an independent accountant they will be viewed as self-serving by most credit analysts. Additionally the analyst will have no idea if any standard accounting principles (GAAP – Generally Accepted Accounting Principles) were used in preparation of the statements and therefore they will attribute much less credibility to the information. If an analyst discovers discrepancies or amounts that don’t make sense in the statements the analyst will be much less inclined to rely upon the information presented.
The accuracy of all financial information is important and personal financial statements are routinely scrutinized for accuracy (home values, income claims, and liquid assets). When preparing a personal financial statement most individuals tend to overestimate the value of their real estate, overestimate the value of their businesses, overestimate their provable earnings and overestimate the real value of publicly traded securities. When a lender sees this it’s normally chalked up to pride and ego which is not necessarily a good thing from an analyst’s perspective. We encourage you to be accurate when valuing these types of assets because an analyst will attribute more weight to the statement if they appear to be reasonable. When in doubt… go low.
Most commercial lenders are not interested in how much new income the new asset will generate but they might be interested in what expenses the new asset will reduce or eliminate. If the acquisition of an asset will eliminate or reduce specific expenses (such as payroll) a schedule of these items and the monthly saving associated with the new asset can be helpful in getting an approval.
Most commercial lenders will require the majority owners of a business to personally guaranty any corporate lease or loan. Unless your business has a long history of obtaining commercial credit without the owner’s personal guaranties or unless the financial condition of the business is extraordinary compared to the amount requested do not request a loan or lease without the personal guarantees of the owners. Lenders are sometimes offended by this request and see it as a clear statement that the owner of the business is not willing to stand behind his company even though they are asking the lender to do so.
Information is not negotiable. If you are not willing to provide a commercial lender with all of the information they require you’re wasting your time. Most commercial lenders will sell or borrow against your lease or loan and unless your lease or loan conforms to certain established minimum informational requirements your lender isn’t going to be able sell your loan and will have little interest in holding it for term.
Not all lenders will lend into every industry, not all lenders will finance all types of equipment, not all lenders will lend in every state and not all lenders will include financing of soft costs such as delivery, training, installation and shipping. Knowing which lender will do what can save you time, effort and expense. Show the lender a complete schedule of what you want to finance and what kind of structure you require so you can find out in advance if they will provide the type of borrowing you require. Very few things are as frustrating as being declined for a loan after two weeks for a reason the lender was aware of day one.
In some cases once a commercial credit officer has reviewed the financial information you have provided he or she will want to have a conversation with the owner or CFO of the business. In addition to addressing any questions he or she may have regarding financial matters they want to see how their questions are answered and if the borrower has a deep and comprehensive or superficial knowledge of their business. This is an opportunity for you to tell the credit officer things that might not be obvious from the traditional financial analysis or financial data and to convince them you know what you are doing.
Most commercial lenders are regulated by some governmental or regulatory agency and therefore are restricted to varying degrees with respect to what leases or loans they can approve. In addition, most commercial lenders will aggregate many similar loans into portfolios and sell or finance those portfolios in the commercial paper market based upon similar characteristics. In order to make these portfolios attractive to potential investors or buyers and to drive the prices up (selling) or the borrowing rates down (borrowing) it is essential that certain minimum credit and financial criteria are met or exceeded by each and every lease or loan in the portfolio. If your credit or financial profile does not fit the formula established for the current investment portfolio the lender will not approve your request or in some cases they may approve it but do so at a higher rate or with additional security because their available funding channels will be more costly.
NOT EVERY FINANCING REQUEST WILL BE APPROVED AND NOT EVERY APPROVAL WILL QUALIFY FOR THE “BEST RATE”.