Virtually every business and individual borrows money at some point. Although there are many different loan types available, some universal concerns apply to every loan. Borrowers need to understand these issues and know that they may be able to limit their risk through negotiating their loan documents.

“Borrowers don’t always fully appreciate the risks they are taking when borrowing,” says Catherine A. Marriott, a member at Semanoff Ormsby Greenberg & Torchia, LLC. “Often, a default which could have been avoided can result in acceleration of a loan, putting personal and business assets at risk.”

Smart Business spoke with Marriott about what provisions counsel should review, whether or not he or she participates in the negotiations.

What are issues borrowers should consider?

Often, borrowers extend lines of credit via a simple modification document, without reviewing the documents signed when the loan was first obtained. In doing so, they run the risk of violating representations and warranties that were true when the loan was first made, but are not necessarily true when the loan is modified. Further, borrowers may not be aware of operating and financial covenants that apply to their business, and often think that because they have not had any issues in the past, there is no need for concern now. While that may be true, reviewing the initial documents is critical in avoiding defaults going forward, as circumstances and goals may have changed.

For new and existing loans, borrowers must be sure that they understand:

  • All business terms, such as the monthly payment obligation, interest rate, amortization term, prepayment penalty, and operating and financial covenants.

  • What collateral is pledged for the loan, including security interests in equipment, inventory and accounts receivable, and, most importantly, personal guarantees.

  • The remedies that the lender has upon a default, including confession of judgment for money or possession of real property, and what effect enforcement of these remedies could have on business and personal assets.

What should be considered regarding personal guarantees?

Many borrowers form entities to keep business and personal assets and liabilities separate. Notwithstanding this goal, principals of small and midsize businesses are almost always required to personally guarantee business loans, resulting in risk to personal assets. Although these individuals are aware of their personal liability, the extent of their exposure may not truly be appreciated.

How does confession of judgment work to increase borrower risk?

Confession of judgment is a powerful remedy available to commercial lenders in Pennsylvania. It allows a lender to immediately obtain a judgment against a borrower or guarantor (or both) for money or possession of mortgaged property. The money judgment will include the accelerated amount of the balance of the loan, plus interest, late fees, attorney’s fees and costs of collection. A borrower or guarantor will have the opportunity to open the judgment only after it is entered, rather than defend the matter before it becomes a judgment. An attorney can advise of the risks and consequences of confession of judgment.

When should counsel be reviewing the loan documents?

Certain loan provisions are legal in nature, so borrowers should consult with an attorney to understand the legal risks. By doing so at the outset, counsel can advise not only on whether borrowers are receiving market terms, but also can assist with modifying or eliminating provisions that are negotiable. Counsel can make sure that borrowers understand their obligations, and that the loan terms adequately address the borrowers’ needs and business goals. The later counsel gets involved, the more difficult it becomes to improve the loan terms.

Even if a borrower has never had problems with its loans or lender, things can happen. Considering what is at stake, all borrowers should strive to minimize their risk. Spending a little time and money now to protect business and personal assets in the future is invaluable.

Catherine A. Marriott is a member at Semanoff Ormsby Greenberg & Torchia, LLC. Reach her at (215) 887-0200 or cmarriott@sogtlaw.com.

Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC

 

Published in National

When business owners decide to borrow funds from a bank, one of their major decisions is whether to take a fixed rate or a variable rate of interest.

“There really is no correct answer, whether to choose a fixed rate or a variable rate when borrowing,” says Alfred DeFlaviis, chief lending officer and senior vice president and Gabe Makhlouf, first vice president of commercial lending, both at First State Bank.

Studies have found the borrower is likely to pay less interest overall with a variable rate loan versus a fixed rate loan. But, that doesn’t take into account that the longer the amortization period of a loan, the greater the impact a change in interest rates will have on payments. However, by asking a few questions, borrowers can make their final decision easier.

Smart Business spoke with DeFlaviis and Makhlouf about what you should take into account when deciding on a fixed or variable rate of interest.

What is the purpose of the loan?

Companies borrow for many different reasons, but the funds can be classified into two categories — short-term or long-term financing.

Short-term loans can be for, but are not limited to, payroll and accounts payables. Borrowers typically use a line of credit and repay the funds advanced as they collect their accounts receivable. Because you borrow the funds short term, borrowers typically elect a variable rate of interest. The variable rate is less than a fixed rate. Borrowers also repay the funds quickly so there’s a lower risk of interest rate fluctuations.

Examples of long-term borrowing could include equipment purchases, plant/office expansions, real estate purchases and business acquisitions. Borrowers typically need a loan term of three to 10 years or a real estate mortgage loan, usually amortized over 15 to 20 years. In this scenario, the funds are based on a longer repayment program, so you usually choose a fixed rate of interest. The repayment comes from cash flow generated from business operations. So, a fixed principal and interest payment amount factors into your company’s budget, and therefore is not subject to interest rate variations.

What is the current and projected interest rate environment?

When deciding between fixed and variable interest rates, you should take the current and projected interest rate environment into consideration.

For example, if interest rates are currently low and projected to stay that way for 12 to 24 months and you are considering a three- to five-year loan, a variable rate of interest could work. In this case, the fixed rate of interest offered will be higher initially so the variable rate option would be better. And should rates rise, if your cash flow allows, you can always accelerate the repayment by making additional principal payments to reduce the risk and the principal outstanding.

However, if interest rates are projected to rise, you might want to borrow on a fixed rate because you will have the security of a fixed monthly payment, whether rates rise or not.

Keep in mind that virtually all fixed rate loans come with a ‘prepayment penalty,’ which is enforced if the loan is paid off early.

What is your current financial position?

As with any obligation, borrowers must consider their ability to repay loans should interest rates rise dramatically, or even slightly.

If you have the financial ability to weather a spike in interest rates over the course of the loan, a variable rate might be the best option. Again, the initial rate of a variable interest rate will be less than a fixed rate and, therefore, the borrower will incur less interest cost.

If you have projected the repayment of the loan based on future revenues, rather than current, a fixed rate loan would be a better option. This reduces the risk of rates rising, which allows business owners to always know exactly what they will be billed monthly.

There really is no correct answer whether to choose a fixed rate or a variable rate when borrowing. The decision is based on so many variables that there is no fixed solution.

Alfred DeFlaviis is a chief lending officer and senior vice president at First State Bank. Reach him at (586) 775-5000 or Adeflaviis@thefsb.com.

Gabe Makhlouf is a first vice president, commercial lending, at First State Bank. Reach him at (586) 445-4856 or Gmakhlouf@thefsb.com.

 

Website: To compare business loans at First State Bank, visit www.thefsb.com/businessloans.

 

Insights Banking & Finance is brought to you by First State Bank

 

Published in Detroit

The recent uptick in sales is like a breath of fresh air for beleaguered business owners — unless they don’t have enough cash to meet rising expenses while they wait out a typical invoicing cycle.

A conventional line of credit may seem like the prefect solution, but since an owner’s personal and business finances are intertwined, those who fell behind on mortgage payments or bills during the recession may not qualify.

“Owners need short-term funding to carry receivables and hire staff now that the economy is improving,” says Paul Herman, small business lending manager at California Bank & Trust. “Their best bet is a short-term line of credit (SLC) since bankers primarily focus on a company’s cash flow cycle during the underwriting process.”

Smart Business spoke with Herman about the opportunities to grow your business by tapping a short-term line of credit.

What is an SLC and when are they advantageous?

Essentially, an SLC is bridge financing. Savvy executives tap the line to pay expenses between the time revenue is generated and receivables are collected. For example, they may need cash to purchase supplies or inventory to handle seasonal spikes or new contracts before the goods are finished, delivered and paid for. Contractors frequently use an SLC to pay bonding and insurance premiums so they can bid on new projects, and veteran attorneys and doctors often use the funds for operating expenses when they launch a new practice.

You can draw on the line as needed and repay the funds at will as long as you meet the terms of your agreement and attend periodic reviews with your bank.

How does an SLC differ from other loans?

It’s assumed that owners will pay down a short-term line as cash is received, so bankers are primarily concerned with how quickly a company converts receivables into cash when they consider an SLC request.

Long-term debt is typically used to purchase equipment, buildings or other fixed assets, so bankers must consider depreciation as well as a company’s profitability to assess its ability to service the loan. In fact, stable but slow growth is often a key indicator of a company’s ability to service debt over the long term, while an SLC is the perfect solution for cash flow shortages resulting from a growth spurt.

Are there risks associated with an SLC?

No loan is risk free. However, prudent owners can avoid default or cash shortfalls by following these best practices:

  • Accurate forecasting — Some owners are so afraid of taking on debt that they run out of cash because they don’t ask for a large enough line. This won’t happen if you accurately forecast your company’s growth and cash conversion cycle. In fact, it’s better to ask for the maximum limit since you have the option of drawing the funds as needed.

  • Be disciplined — Only use the funds to close short-term cash flow gaps. Otherwise, you may run out of money and have to liquidate assets to pay bills or meet payroll.

  • Be responsible — Bad debt, delinquent customers or risky business practices can leave well-intentioned owners holding the bag. Are you ready, willing and able to accept responsibility for managing your company’s credit, cash flow and an unmonitored credit line?

How can a business maintain the quality of its assets and increase borrowing capacity?

Owners often emphasize sales, but what good is top-line growth if the margins are bad or you can’t collect your hard-earned money? Even tenured customers may encounter a cash crunch as the economy rebounds, especially if they wait too long to secure short-term financing. Be disciplined about verifying a customer’s credit worthiness, keep an eye on receivables and don’t forget to make timely collections calls.

Finally, don’t ignore your balance sheet because a business can’t survive with high debt and little equity. Grow assets as well as revenue, and make sure your balance sheet reflects the norms for your industry.

What do bankers consider when evaluating a request for an SLC?

In addition to reviewing traditional underwriting criteria like business and personal credit scores, bankers want to know whether you have the means and ability to manage and repay a line of credit.

They’ll look at your industry experience, the viability and diversification of your customer base, along with the ebb and flow of your company’s cash flow during previous cycles. Will your customers pay on time? Can your business survive if one customer defaults? Do you have enough personal assets or sources of secondary support to pay your bills while you wait for an invoicing cycle to conclude?

Bankers may be able to use government guarantees to overcome minor risks, and you could qualify for a conventional line of credit down the road if you use an SLC as a stepping stone to build your credit score and your company.

Member FDIC

Paul Herman is the small business lending manager at  California Bank & Trust. Reach him at Paul.Herman@calbt.com.

Insights Banking & Finance is brought to you by California Bank & Trust

Published in Los Angeles

When a company gets into a position of missing payments on a loan, the loan originator could possibly sell your debt to a third party. Once your commercial loan is sold, the velocity of both money and information becomes critical.

“Don’t panic,” says Brian R. Forbes, a member with Dykema Gossett PLLC. Instead, he suggests being proactive.

“The more proactive and transparent you are, the more likely the asset manager responsible for your loan will internally advocate options that may allow opportunities for a mutually acceptable restructure,” he says.

As a borrower, you have the chance to start your lending relationship over because there is no previous history with your new lender. Forbes says there is a possibility that you can restructure your debt on terms more favorable than offered by your original lender.

Smart Business spoke with Forbes about how to handle your distressed debt after it changes hands.

How do you define distressed debt?

Distressed debt would be any debt or credit that has one or more missing payments, either partially or in whole, or is in imminent danger of missing one or more payments without the ability to cure. If you are a borrower who has reached this critical point, there is a possibility your debt will be sold to a third party.

At what point does debt get sold?

Distressed debt can be sold at any given time. The third party that buys debt often has a different objective than the original lender because they are seeking to maximize their investment returns in a shorter time frame. Since the distressed loan frequently is purchased at a discount, an opportunity exists to negotiate terms more favorable to the borrower. The new lender could potentially offer more creative workouts, such as allowing the borrower more time to refinance, extending payments, stretching amortization or allowing a discounted payoff. A new lender is not always negative for the borrower.

How would you know your debt has been sold?

Most loan sale agreements require a borrower be notified immediately upon the closing of the loan sale. The loan buyer will contact the borrower quickly to ensure all payments due under the loan are going to the buyer and not to the seller. If the debt is in distress and there is a default, a workout specialist or asset manager will contact the borrower for updated information. In the best-case scenario, the borrower’s financial statements are complete and easily reviewed and verified, which enables the asset manager to quickly assess the situation and recommend a course of action.

The anticipation from an asset manager’s perspective is that information flows between parties within a month of closing. If the debt involves real estate, such as an office or apartment building, the asset manager will want to see rent rolls, pro forma financial statements and detailed budgets. The less information the asset manager receives, the more difficulty the asset manager has evaluating the credit and recommending a mutually favorable solution.

What’s at risk once it has reached this point?

The velocity of money and information is critical to the third-party debt purchaser. The new lender is making a decision as to whether there is a workable solution between it and the borrower. Many third-party buyers prefer to work quickly to resolve the asset with the borrower in either a full or, if justifiable, discounted payoff. In order to do this, the asset manager needs accurate information quickly to pursue the most cost-efficient action.

The remedies third-party buyers often exercise if they are forced to operate without the requested information include foreclosure, but generally third-party buyers do not want to own the property. Third-party buyers can enforce other remedies under any guarantees of the loan and pursue their rights against the guarantors and the underlying collateral. Third-party buyers will pursue a general workout strategy if it makes sense for both parties.

What should a company do when its commercial loan gets sold to a third party?

If a third-party buyer purchases your debt, anticipate that the new lender will be proactive in exercising its remedies under the loan documents in an effort to resolve the credit and that you should provide the new lender such information required under the loan documents. Remember, many debt buyers contractually respond to investors and lenders in the same manner as the borrower responds to the lender under the loan documents. It is advisable to have your asset manager well informed of your credit and circumstances in order to facilitate the best solution. Without sufficient information, new lenders often immediately exercise remedies.

Be forthcoming. Obtain counsel and with his or her advice gather and give your accounting information to your new lender who can evaluate and understand your credit as quickly.

What are the best-case outcomes once a company has reached this point?

The best scenario is the borrower obtains the opportunity to keep its business going, resolves a current credit that by its size may be limiting opportunities for the borrower, obtains for any guarantor a release from his or her guaranty for consideration, and either purchases the debt or refinances the debt at a price discount that corresponds to the current fair-market value of the asset serving as collateral or the value of the business. Do not panic. Everyone is interested in finding the best solution, which often means the borrower refinancing the debt with another lender.

Should a borrower get counsel involved?

Retain an expert representing borrowers in this context immediately to determine whether restructuring is viable and the best option. Counsel can help structure the best solution given the facts and circumstances of the underlying credit, while identifying and minimizing potential adverse tax consequences.

Brian R. Forbes is a member with Dykema Gossett PLLC. Reach him at (214) 462-6403 or bforbes@dykema.com.

Insights Legal Affairs is brought to you by Dykema Gossett PLLC

Published in Dallas

There are many ways that small and medium-sized businesses can find themselves facing financial difficulties that lead to trouble in their commercial lending relationship. When this happens, many times business owners become paralyzed, shutting down and failing to communicate with their lender. While that is understandable, it is the wrong thing to do, says David M. Hunter, chair of the Real Estate Practice Group for Brouse McDowell.

“When a business anticipates that it is entering a period of financial challenge, one of the first things it should do is get competent legal counsel,” says Hunter.

Often, business owners only do this as a last resort. However, retaining knowledgeable counsel early on allows you to obtain practical pointers when there is often greater flexibility to negotiate an agreeable outcome, he says.

“Once a lawsuit is pending, things become much more difficult to negotiate, even with a lawyer involved,” he says.

Smart Business spoke with Hunter about how to work with your bank to preserve good relations during difficult financial times.

When a company realizes it may be headed for financial difficulties, what should it do first?

Small and medium-sized businesses typically have a large file that contains the underlying governing documentation when the business took out the credit facility. In the event that your business is slipping into financial turbulence, locate that file and review the terms and conditions of your loan.

However, most businesspeople are overwhelmed by the paperwork. This is a good reason to get counsel involved early. Your counsel will determine the secured or unsecured position of your lender. If your loan is secured, what are the assets that secure it and what are the current valuations of those assets? Is the loan in default? If not, what is the time period you project you could make the required payments and otherwise adhere to the terms of the loan agreement?

How can an attorney help?

A good attorney either has knowledge to assist a borrower facing a potential loan default or is with a firm with others who have knowledge of the federal bankruptcy law protections or other approaches that would aid a borrower facing an approaching problem.

Once you have secured counsel and discussed the issues, the next step is to contact your lender. Bankers appreciate knowing that a borrower is alert to the problem and wants to collaborate with the bank to address it or explore what remedial options are available.

Business owners often believe that banks want to seize a borrower’s property or shut down a borrower’s business. No bank really wants to do that. If it is reasonably achievable, banks want to rehabilitate nonperforming loans and transform them back into performing loans that pay as agreed. They want to lend money to borrowers that use loan proceeds effectively and to create an improved economic performance for the borrower, which will allow the borrower to repay the loan.

Are there risks in alerting a bank of a potential missed payment?

Some businesses, regardless of efforts taken to head off financial difficulties, can face a situation in which the next loan payment might be missed. No bank will think unkindly of a call from a borrower saying an upcoming payment might not be paid timely. Some borrowers might worry that if a bank finds out about a potential missed payment, an awful consequence will be triggered. But if that is the impulsive reaction you receive from the bank, you are likely dealing with the wrong bank.

However, after 90 days of delinquency, the loan will likely go into a nonaccrual status — a consequence which immediately and negatively impacts the bank’s earnings. This is a more serious situation. If you alert your bank early enough, it will likely work with you to find a solution. But it gets more difficult to take these steps the longer a borrower waits.

At what point does this become a legal issue?

There are legal issues every step of the way. But these become more acute when the evolving facts empower a lender to take steps that can disrupt a borrower’s business. Many loans contain a cognovit provision, a tool a bank can use if a loan is in default. This authorizes a bank to obtain an expedited judgment against a borrower. This expedited judgment can quickly empower the bank to attach the bank accounts or levy upon the assets of its debtor.

It’s important to communicate with your bank before such a provision is implemented in an effort to find a way to augment the terms and conditions of the loan to give the borrower a window of opportunity to make payments. This often leads to the creation of a forbearance agreement — a mutually agreeable written understanding between the bank and its borrower as to how the parties will treat this troubled loan. Forbearance agreements customarily provide that as long as the borrower adheres to the agreement, the bank will refrain from pursuing certain remedies, such as obtaining or enforcing a cognovit judgment.

Preservation of value should be paramount for both the borrower and the bank. Under potential default circumstances, borrowers and banks can do things that can negatively impact a business’s value, and banks know that. If a bank acts aggressively to prompt a forced sale of assets, often the value realized when the assets are sold will be reduced.

Before a borrower gets to that point, the borrower would be well advised to work with a lawyer and devise a strategy to deal with the situation. Often, the owner and lawyer can come up with a plan of payment and present it to the lender. If the plan is reasonable, many times the lender will be receptive.

What are some other potential resolutions?

There is often relief available in bankruptcy. But its practical effectiveness hinges on the size of the company, as the pursuit of such a remedy can often be cost prohibitive. Chapter 11 cases, for example, can come at a high cost and be labor intensive. But a Chapter 11 filing can make sense in certain circumstances.

David M. Hunter is chair of the Real Estate Practice Group for Brouse McDowell. Reach him at (330) 535-5711, ext. 262, or dmh@brouse.com.

Insights Legal Affairs is brought to you by Brouse McDowell

Published in Akron/Canton

Finding the necessary financing to thrive — or just survive — can be difficult for small businesses. But there are resources available to help startups and entrepreneurs compete in this market.

“SBA loans are designed for borrowers that might not qualify for conventional financing due to a number of different reasons,” says Romona J. Davis, Vice President of SBA lending with FirstMerit Bank.

Smart Business spoke with Davis about how to determine whether an SBA loan could help your business, and how to get started with the process.

What are the differences between SBA loans and conventional loans?

The main difference is that SBA loans are backed by the United States government, which provides a guarantee to the bank. SBA loans are for borrowers that might not qualify for conventional financing due to a variety of reasons, such as:

  • Insufficient collateral

  • A startup business or one that’s only been in existence for a short period of time

  • The company is looking for a longer term on its owner-occupied commercial real estate purchase

  • The borrower is in a ‘high-risk’ industry

  • The borrower only wants to inject a minimum down payment

  • Impending or current ownership changes with the business

  • Inconsistent financial performance over the past few years

How does a lender determine if an industry is high risk?

It varies by bank. Most banks consider the restaurant industry as one that has a lot of risk associated with it. Also, when the economy changed and building contractors were negatively impacted, they became high risk.

However, being part of a high-risk industry doesn’t mean a conventional loan is impossible.

What can SBA loans be used for?

SBA loans can be used to:

  • Purchase owner-occupied commercial real estate

  • Buy out a business partner

  • Buy a business

  • Purchase machinery and equipment

  • Buy a franchise

  • Construct a building (the business must occupy 60 percent of the space)

  • Cover working capital needs

  • Refinance existing business debt

What types of businesses are eligible for SBA loans?

To qualify for SBA financing, the entity must be designated ‘for-profit.’ In addition, the business must meet certain SBA size standards, demonstrate good character, have a positive payment history on previous federal debt (no prior defaults on federal debt), possess U.S. or Legal Permanent Resident status, and show reasonable expectation of repayment.

What are the required size standards?

The SBA has developed size standards for different types of industries. Companies must meet either a maximum number of employees, maximum revenue amount or an alternative size standard to qualify as a small business.

How is ‘good character’ determined?

First, the SBA looks at the company’s credit, tax liens and any prior delinquencies with the government.

Also, the SBA always wants to know if a borrower has any criminal background, has been under indictment, is currently on probation, has ever been on probation, or has ever been charged with or arrested for any criminal offense, other than a minor motor vehicle violation.

The two ways to assess character, from the SBA’s perspective, are through personal credit and personal background.

Why might a business opt for an SBA loan instead of a conventional loan?

Businesses might opt for an SBA loan versus a conventional loan if they:

  • Want a longer term on their owner-occupied commercial real estate or equipment loan

  • Want a straight term and amortization versus a balloon note

  • Prefer a lower down payment on their transaction

  • Have a collateral shortfall

  • Want to consolidate business debt into one loan that could offer a longer repayment period

  • Want to buy out their business partner with a minimum equity injection

  • Want to purchase a business but there’s insufficient collateral

  • Desire cash flow savings due to a longer term and amortization

How can businesses get started with the loan process?

If a business is interested in an SBA loan, the first step is to contact a bank that participates in the SBA program. The banker will need to make certain that the company is eligible as indicated above. Assuming the business is eligible, the borrower would need to provide a financing package to the bank for SBA consideration.

Disclosure: All opinions expressed in this article are that of the authors or sources and do not necessarily reflect the views of FirstMerit Bank or FirstMerit Corp.

 

Romona J. Davis is Vice President of SBA lending for FirstMerit Bank. Reach her at (330) 996-6242 or romona.davis@firstmerit.com.

Insights Banking & Finance is brought to you by FirstMerit Bank

Published in Akron/Canton

In Sept. 2008, the lending world shut down. In 2011, it started to claw its way back.

Toward the end of 2011 and the beginning of 2012, money began to flow more freely.

“There are clearly loans that are happening from multiple lenders at rate and loan values that are as good as if not better than they were before,” says Terry Coyne, SIOR, CCIM, an executive vice president with Grubb & Ellis. “The ability to get money is real and you can get great interest rates and terms.”

Smart Business spoke with Coyne about how the lending market has changed and how to secure financing for a real estate deal.

What does today’s lending market look like?

Large national banks are still at the stage in which they are dipping a toe in the pool, but the local banks, which lend to the people they know in their communities, are making loans.

Not only are they making loans, but you are seeing interest rates of less than 5 percent and amortizations of 20 years if not 25. The key is there are multiple banks bidding on deals.

Why does having multiple banks bidding change the picture?

Leasing is a form of financing, and so the leasing market for real estate was very hot because you couldn’t get loans to make purchases. Typically our market is 60 percent owner-occupied, user buildings and 40 percent leasing. That ratio flip-flopped over the last two or three years where 70 percent of deals were leases and 30 percent were purchases.

One bright spot through this period: President Obama did make the U.S. Small Business Administration give loans. The SBA used to have a limit of $1 million per loan; the new limit has been raised to $5 million. Most loans that have happened in the past two or three years are SBA, government-backed loans. You are still seeing SBA loans, but you are also seeing lenders keep the whole loan on their balance sheet and assume all of the risk. The government involvement was a good bridge for a year or two, because, while the leasing market was great, the sales market was horrible. Now with loans being made, the sales market is coming back in a hurry.

With interest rates low, this should be a great time to buy. You now can get loans to buy in a market where buying has been so slow for the last few years.

What should potential buyers do to maximize their chances of getting financing?

The local banks in your area would be the first logical call. Don’t be afraid to approach your lender and ask for a loan. In the past, ‘loan’ was a four-letter word. Some people have been so worried about loans they’ve stopped thinking about it all together.

Why are local banks better bets for financing than large national banks?

The local banks didn’t have the exposure to the broader market like some of the national banks did. These local banks stuck to what they do: make loans to local businesses that they know. A lot of the larger banks were making loans on larger portfolios in markets that they didn’t know.

Banks that didn’t do that are doing well.

Right now, banks need to get money out the door. Deposits are a liability to banks, not an asset. They take your $10,000 deposit and pay you 0.5 percent. Then they have to loan it out to someone else at a number higher than that. Because deposit rates are low, interest rates on loans are very low. I’ve seen interest rates in the 4 percent range for investor-owned industrial buildings. It’s not just the owner/user market; investors are able to get loans as well.

How has the lending environment affected the real estate market?

In the past two years it made it hard to sell properties because buyers had trouble getting loans. It was a good time to be a landlord, because there was more action for leasing than there was for selling. Now, I’m seeing a great deal of pent-up demand from the last two years. You’re seeing this pent-up demand being released at the same time that loans are easier to get. Together those two things are creating a situation where there are a lot of buildings going off market and being sold.

From 2008 to 2011, the number of sales has gone up every year — from $452 million in sales in 2008 for an eight-county region to $724 million in 2011. That’s an increase of more than 60 percent.

Will there be any changes in the future?

What you will see at the end of 2012 and the beginning of 2013 is a normalized lending environment. Right now, it is a novelty and people are excited about it. Soon, it will be back to normal.

You need loans; they are the oxygen of business. When lending stops it becomes hard for these companies to breathe.

If you are looking to buy and use it yourself, don’t wait. The market still favors the buyer, but it won’t for long. If you wait you will see price increases, and it will become a seller’s market shortly. It’s not there yet, but it’s getting there.

Terry Coyne, SIOR, CCIM, is an executive vice president with Grubb & Ellis. Reach him at terry.coyne@grubb-ellis.com or (216) 453-3001.

Published in Akron/Canton

Companies with large capital needs often employ a commercial banking relationship that includes a syndicated bank loan — a commercial loan that is provided by multiple banks (a bank group), where one bank acts as the lead arranger and administrative agent for the bank group. A company’s bank group can be as small as two or three banks, or, depending on the size of its credit facilities, can be much larger to include dozens of banks.  Over the last 15 years, syndicated bank loans have become the dominant way for companies to finance their capital needs.

“Despite what you hear about banks not lending, 2011 was a record year for syndicated multi-bank loan financing, topping $1.8 trillion,” says Ron Majka, senior vice president and manager of loan syndications for FirstMerit Bank. “The syndicated loan market is very healthy and active, and local banks in Northeast Ohio are hungry to support healthy growing companies.”

Smart Business learned more from Majka about multi-bank loan syndications and how to tell if it could benefit your company.

What types of companies could benefit from considering a multi-bank loan syndication?

The need for a syndicated bank loan is often event-driven. Frequent triggering events include the financing of mergers and acquisitions (M&A), new construction associated with corporate expansions, large equipment purchases, or dividends to owners (referred to as leveraged recapitalizations). In addition to event-driven situations, the need for a syndicated bank loan sometimes can be more evolutionary. As companies reach a certain size, they may outgrow a singular relationship with one bank. Moving to a larger, syndicated multi-bank credit facility is a natural next step for these companies.

Why are loan syndications becoming so popular?

Multi-bank syndicated loans are popular because they are the most flexible and economic financing alternative available to companies.  Other methods of raising large amounts of capital include going public through the sale of stock, issuing bonds, or attracting investors through a private placement. Each of these options is much more expensive, and not nearly as standardized and flexible as bank loans. From a banking perspective, nearly every bank that is active in commercial lending is involved in some level of providing syndicated loans. Together, these factors contribute to the amount of multi-bank syndicated loans issued -— now exceeding $1 trillion per year.

How can loan syndication benefit a company?

Having an optimal credit facility is a crucial component to the long-term success of a company. A syndicated loan sets the platform for a company’s growth. A simple two-bank syndicated loan facility can be very easily expanded to accommodate increased loan amounts and additional banks, to complement a company’s growth needs. Another benefit of loan syndication is that a company can tailor a bank group that fits its specific corporate strategy and needs. For example, a Northeast Ohio company that is engaged in international business may choose a strong local agent bank that provides stable, trusted leadership. That agent bank might then add an international bank to the bank group to help provide overseas trade and banking needs for that company. Also, competition is always a good thing. Having multiple banks involved in competition is a way to make sure the client is always getting the best execution, and that its banking terms and structure are most favorable.

How can a company choose the right agent bank to lead the loan syndication?

It’s important to put a lot of thought into whom you are entrusting as your agent bank. Bigger isn’t always better, nor is it wise to adopt a cookie-cutter approach. You want an agent who understands your business, takes the time to fully comprehend your company’s strategy and growth plans, and then crafts a financing arrangement that helps you achieve those goals. Choose a bank where you will have an experienced group that is solely dedicated to structuring, leading, and administering multi-bank syndicated loans. Lastly, any successful relationship is a two-way street.  Make sure you are comfortable with your agent bank’s culture, strategy, leadership, health and stability. This relationship is very important.

How does the process of issuing a syndicated loan work?

It is typically a five- to eight-week process from start to finish. First, it involves choosing the right agent bank. Next, the company works with the agent bank to craft the right strategy to produce the kind of bank group it wants to achieve. For instance, you may have a number of questions to consider. Do you want international or local banks as part of your bank group?  Are you interested in banks that are active in or have expertise in your industry?  Should you just include those banks you are familiar with? Or, are there banks that you do not know that can add value to your bank group? Once you determine your optimal bank group, the agent bank will use its knowledge of the marketplace to approach and attract the right partners.

The process also includes the agent bank and the company working together to create materials that fully describe the company’s business, philosophy, industry and corporate plans. That package of material, called a confidential information memorandum, is a 25- to 100-page document that includes a complete assessment of the company and its operations. Once everything is set, the opportunity is launched to the bank market and the agent bank works with the targeted banks and the company to answer questions and move those banks through their credit approvals. This process ultimately culminates in a successful closing and funding of the company’s multi-bank syndicated credit facility.

Ron Majka is a senior vice president and manager, loan syndications for FirstMerit Bank. Reach him at (330) 996-6446 or ron.majka@firstmerit.com.

Published in Akron/Canton

Finding the necessary financing to thrive — or just survive — can be difficult for small businesses. But there are resources available to help startups and entrepreneurs compete in this market.

“SBA loans are designed for borrowers that might not qualify for conventional financing due to a number of different reasons,” says Romona J. Davis, Vice President of SBA lending with FirstMerit Bank.

Smart Business spoke with Davis about how to determine whether an SBA loan could help your business, and how to get started with the process.

What are the differences between SBA loans and conventional loans?

The main difference is that SBA loans are backed by the United States government, which provides a guarantee to the bank. SBA loans are for borrowers that might not qualify for conventional financing due to a variety of reasons, such as:

  • Insufficient collateral
  • A startup business or one that’s only been in existence for a short period of time
  • The company is looking for a longer term on its owner-occupied commercial real estate purchase
  • The borrower is in a ‘high-risk’ industry
  • The borrower only wants to inject a minimum down payment
  • Impending or current ownership changes with the business
  • Inconsistent financial performance over the past few years

How does a lender determine if an industry is high risk?

It varies by bank. Most banks consider the restaurant industry as one that has a lot of risk associated with it. Also, when the economy changed and building contractors were negatively impacted, they became high risk.

However, being part of a high-risk industry doesn’t mean a conventional loan is impossible.

What can SBA loans be used for?

SBA loans can be used to:

  • Purchase owner-occupied commercial real estate
  • Buy out a business partner
  • Buy a business
  • Purchase machinery and equipment
  • Buy a franchise
  • Construct a building (the business must occupy 60 percent of the space)
  • Cover working capital needs
  • Refinance existing business debt

What types of businesses are eligible for SBA loans?

To qualify for SBA financing, the entity must be designated ‘for-profit.’ In addition, the business must meet certain SBA size standards, demonstrate good character, have a positive payment history on previous federal debt (no prior defaults on federal debt), possess U.S. or Legal Permanent Resident status, and show reasonable expectation of repayment.

What are the required size standards?

The SBA has developed size standards for different types of industries. Companies must meet either a maximum number of employees or maximum revenue amount to qualify as a small business. For example, in the manufacturing industry a small business must have fewer than 500 employees to be considered for an SBA loan. The bank will check to make sure the company is within standards. Some industries have a revenue amount; some have a required number of employees. Rarely do we find a company that doesn’t fit, but occasionally a company is too big to be considered a small business. Also, the SBA loan limit is $5 million per borrower.

How is ‘good character’ determined?

First, the SBA looks at the company’s credit, tax liens and any prior delinquencies with the government.

Also, the SBA always wants to know if a borrower has any criminal background, has been under indictment, is currently on probation, has ever been on probation, or has ever been charged with or arrested for any criminal offense, other than a minor motor vehicle violation.

The two ways to assess character, from the SBA’s perspective, are through personal credit and personal background.

Why might a business opt for an SBA loan instead of a conventional loan?

Businesses might opt for an SBA loan versus a conventional loan if they:

  • Want a longer term on their owner-occupied commercial real estate or equipment loan
  • Want a straight term and amortization versus a balloon note
  • Prefer a lower down payment on their transaction
  • Have a collateral shortfall
  • Want to consolidate business debt into one loan that could offer a longer repayment period
  • Want to buy out their business partner with a minimum equity injection
  • Want to purchase a business but there’s insufficient collateral
  • Desire cash flow savings due to a longer term and amortization

How can businesses get started with the loan process?

If a business is interested in an SBA loan, the first step is to contact a bank that participates in the SBA Program. The banker will need to make certain that the company is eligible as indicated above. Assuming the business is eligible, the borrower would need to provide a financing package to the bank for SBA consideration.

Disclosure: All opinions expressed in this article are that of the authors or sources and do not necessarily reflect the views of FirstMerit Bank or FirstMerit Corp.

Romona J. Davis is Vice President of SBA lending for FirstMerit Bank. Reach her at (330) 996-6242 or romona.davis@firstmerit.com.

Published in Akron/Canton

Applying for a loan can be confusing for a small business owner or aspiring entrepreneur, especially if you’ve never been through the process. In addition to being asked to provide a significant amount of information, you also may encounter unfamiliar terms when seeking financing for your business.

Smart Business spoke to Jim Terrell and Donna Mittendorf of Comerica Bank about understanding financial jargon you may come across when applying for a loan.

What are some common terms I should be familiar with?

Terrell: A few of the common terms that you may come across include the following:

  • Assets. This refers to what the business owns. Current assets are those that can generally be converted to cash within one year like cash, accounts receivable and inventory. Long-term or fixed assets include equipment and real estate.
  • Balance sheet. This is a financial statement that shows assets, liabilities and net worth. Total assets will always equal total liabilities plus net worth.
  • Cash flow. This term refers to the capacity of a firm to repay its debt. A company’s net earnings + taxes + depreciation and amortization expense should exceed its total debt service (current maturities of long-term debt + interest expense).
  • Liabilities. These are what a business owes. Current liabilities are those that are due within the next year like accounts payable, line of credit and current maturities. Long-term liabilities are anything that is due beyond one year.
  • Net worth. Also known as equity, an owner’s equity is determined by subtracting a company’s liabilities from its assets.

What is the aging of accounts payable/accounts receivable?

Mittendorf: ‘Aging’ is an analytical tool that lists the vendors to whom you owe money (accounts payable) or the customers who owe you money (accounts receivable), amount of money owed and due dates. The information is organized by due date or invoice date.

What is the difference between amortization and depreciation?

Terrell: Amortization is the process of paying off a debt over time through a series of payments. The amortization term of a loan is the number of years it will take to reduce the balance to zero. Depreciation is an accounting entry in which the cost of a long-term asset is expensed over its useful life. The accumulated depreciation is reflected as an offset to the cost of the asset on the balance sheet. The remaining value of the asset is its ‘book value.’

Is there a difference between collateral and leverage?

Mittendorf: Yes, collateral is an asset pledged against a loan in the event the borrower cannot repay the loan. Typically the asset financed is the collateral. In the event the borrower defaults on the loan, the bank could take possession of and sell the asset, minimizing its loss. Leverage is the amount of a firm’s debt compared to its net worth. This is typically reflected as a ratio. A low leverage position is indicative of strong capitalization relative to the company’s total debt.

Are there other common terms I may come across?

Terrell: While there are many terms you may come across in the loan process, a few more common ones include the following:

  • Current maturities. This refers to the principal portion of long-term debt that is due within the next 12 months.
  • Income statement. This is a statement detailing a firm’s revenue and its expenses. After subtracting expenses from income, the firm will show either a profit or a loss.
  • Line of credit. A line of credit is a type of short-term financing that allows a borrower to access funds as needed up to a specified amount. It is commonly used to finance a firm’s day-to-day operations.
  • Working capital. This term refers to the difference between current assets and current liabilities. A positive working capital number indicates that a company can pay off its current obligations by converting its short-term assets to cash.

JIM TERRELL and DONNA MITTENDORF are senior vice presidents for Comerica’s Texas Business Banking Division. Comerica Bank is the commercial banking subsidiary of Comerica Inc. (NYSE: CMA), the largest U.S. banking company headquartered in Texas, and strategically aligned by three business segments: The Business Bank, The Retail Bank and Wealth & Institutional Management. Comerica focuses on relationships, and helping people and businesses be successful. In addition to Dallas, Houston and Austin, Texas, Comerica Bank locations can be found in Arizona, California, Florida and Michigan, with select businesses operating in several other states, as well as in Canada and Mexico. Comerica reported total assets of $55 billion at March 31, 2011. To receive e-mail alerts of breaking Comerica news, go to www.comerica.com/newsalerts.

Published in Dallas
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