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Entrepreneur _ Small Business Owner Guide

VIEWS: 34 PAGES: 30

									        Entrepreneur & Small Business Owner Guide 
Thank you for Downloading “Entrepreneur & Small Business Owner Guide”. This special
report has you in mind; providing overviews, strategies, analysis and information that will help
you understand and navigate the commercial loan industry.

C2S Finance & Investment (C2SFI) is a mortgage brokerage and servicing firm catering to the
lending needs of commercial professionals and real estate developers, who utilize mortgage
backed securities. The growing demand for small business loans affords an opportunity to forge
and establish partnerships with our clients while delivering on their individual financial needs.

We consider each loan to be unique and handle with a hand on approach rather than the one-size-
fits-all restrictions many common lenders approach to a typical loan. C2SFI ultimately provides
excellent value to its customers. Our approach is fundamentally different. Our fiduciary
obligation is to you, the borrower.

For prudent entrepreneurs & small business owners, firing your bank and your banker has
become both a more acceptable and necessary solution when your business is unable to obtain
sufficient working capital financing and business finance help. Commercial borrowers are
increasingly realizing that they must look out for their own best interests because it is unlikely
that their business banker is up to the task anymore.

The fact of the matter is that whatever your commercial loan or mortgage requirements are, there
is probably a lender looking to fill that specific need our aim is to help you find those lenders, get
the best possible rate by having them compete for your business and help you navigate the loan
process. Financing needs are influenced by a variety of factors and while 50% of the process is
similar, the individual lender requirements are often completely different or complex. C2SFI
helps you execute a well-planned strategy as a commercial mortgage expert.

Since we are not limited by our affiliation with any one bank, we are able to present your loan to
a broad spectrum of potential capital sources and secure the best terms and pricing that the
market can offer. Equally important, C2SFI remains very much involved in the transaction,
sharing the burden of collecting and processing information, coordinating third party reports and
driving towards a smooth and successful close. We have always felt a customer that is involved,
routinely informed and educated on the process ultimately creates the synergy needed to find the
best loan to help them accomplish their goals; after all, who knows your business better than you
do?

However, whether you choose to work with C2S Finance & Investment or secure funding on
your own, this report will help you enhance the process; helping you obtain the best possible
results.
         Entrepreneur & Small Business Owner Guide 

How Commercial Loan Processing Works 
When you submit your business loan application, it may seem like it disappears into a black hole.
However, understanding how the commercial loan processing system works can help reduce
your anxiety while you wait for approval.
Some lenders like to prequalify potential borrowers to determine how much they can afford. This
will also give you and your lender an opportunity to see which loan program would be most
appropriate for your needs. The lender will gather basic information, such as your income and
existing debts. To initiate the loan process, you must then complete and submit a loan
application.
Determining what type of loan your require is important; various loan types have specific
collateral, document and decision making criteria. We discuss the various loan types and their
criteria later on.
Upon submission of your application, a loan officer or processor will review your credit reports,
the amount of available collateral, and your income. Your loan officer will determine if any
additional documentation is required, such as personal financial statements. If you are purchasing
real estate, you may also need to submit preliminary environmental reports, area maps, title
reports, property appraisals, and lease summaries. If you are going through a broker, he or she
will package your loan request and work with you to put together any any additional
documentation requirments before submitting it to several lenders for approval.
Submitted loan packages are evaluated by the decision makers — either a loan committee or
underwriter — the processor will present you with a letter of intent or term sheet. This is a
formal document intended to ensure that all parties involved (the lender and borrower) are on the
same page. The letter of intent may include the names of involved parties, amount of financing,
type of security (collateral), and other key terms. A decision is received in as little as one day and
as long as one month, which is driven by the lender. During the underwriting process, you may
need to furnish additional documentation as required to meet the lenders requirements in the
form of due diligence requirments.
If you are using a broker, he or she should be helping you negotiate the best terms, fees, and
conditions from various lenders. The next step is choosing the most attractive offer, and signing
and returning the final letter of intent along with a check, if required to pay for third-party reports
and fees, such as appraisals.
After all third-party reports are successfully completed and underwriting conditions are satisfied,
the final loan package is resubmitted to the loan committee for final approval. At this point the
lender will issue a final full loan commitment. If your loan is approved, your closing agent, who
may be an attorney, a title company, or escrow company representative, will receive closing
documents. Your closing agent will record or file deed transfers and mortgages, order title
        Entrepreneur & Small Business Owner Guide 
insurance, coordinate the exchange of funds, and arrange for you to sign the loan documents.
Closing can take place within days of approval or underwriting. At the closing, the lender funds
the loan with a cashier’s check, draft, or electronic wire transfer.



Top 10 Mistakes Made When Applying for a Business Loan 
Whether you are applying for a business loan or a personal loan, there are common mistakes that
can hinder the process. Below are 10 of the most common mistakes made when applying for a
loan.

   1. Not knowing your credit rating. Before you apply for a loan, you need to know where
      you stand. Get copies of your credit scores from the three major credit bureaus so you
      will know if you're likely to get the loan approved.

   2. Not reading the terms carefully before signing. In your haste to get a loan, you may
      commit the common mistake of jumping the gun and signing without reading the details
      and terms of the loan. Not only should you take the time to read everything very
      carefully, but you should also ask questions about anything you do not fully understand.

   3. Not locking in a rate. Interest rates change. If you think you've found a good rate, lock it
      in before it goes up. Too often, people make the mistake of getting greedy and waiting for
      interest rates to drop farther.

   4. Not explaining what the loan is for. When applying for a business loan, you need to
      indicate how the money will be used. Lenders want to see that you know exactly what
      your needs are and how this loan will meet those needs.

   5. Making major changes. Just as you do not want to open and close various credit cards
      before applying for a personal loan, you do not want to make significant personnel or
      other changes to your ongoing business structure before applying for a business loan.
      Lenders want to be able to see stability in how you do business and with whom.

   6. Applying only to the most convenient lender. Although there are various lenders
      available, many people still head to their local bank first without shopping around. Credit
      unions and other sources are worth investigating. For example, if you are a small business
      owner, you should consider what the Small Business Administration can do through one
      of their loan programs.

   7. Not having your finances up-to-date. Whether you are seeking a personal or business
      loan, you shouldn't apply without having the proper financial documentation. This is an
      area where many people put the cart before the horse, and try to get a loan without
      making sure their financials are up-to-date.
        Entrepreneur & Small Business Owner Guide 

   8. Failing to have some equity in the project. Not unlike a down payment when buying a
      home, having some equity in a business project significantly enhances your chances of
      securing a business loan. If you're not invested in the project, or in the business itself, the
      lender will be less enthusiastic about taking on such a risk.

   9. Having no collateral. You need to provide some collateral, should there be a default in
      payment.

   10. Not having a business plan. If you're starting a business, you need to demonstrate how
       the business will operate and make money. A business plan is essential for a lender to see
       your goals and specifically, how you intend to reach them. You must include all
       applicable supporting data, including financials.



What Type of Commercial Loan Fits Your Business Need
Commercial lenders include commercial banks, mutual companies, private lending institutions,
hard moneylenders and other financial groups. In recent years, there have been some significant
advances. A good example is that credit unions engage in commercial lending with only minor
restrictions. These lenders typically have widely varying standards on which they base their loan
criteria and evaluate potential borrowers—often focused exclusively on the private market and
their commercial loan types fit into seven categories:
1‐Acquisition and Development Loans 
An acquisition and development loan (A&D Loan) two combined loans, which have very
specific funding requirements. General sold as a single loan to purchase and develop a property.
The total project cost would include the cost of the land, the hard costs for the horizontal
improvements, the soft costs (including an interest reserve and sales commissions) and a
contingency reserve. The minimum cash contribution of a developer on an A&D loan is usually
25% of the total land development project cost.
The acquisition loan portion is a loan where the proceeds are used to buy property when a
company wants to complete an acquisition for an asset but does not have enough liquid capital to
do so. Typically, the loan is only able to be used for a short window of time and only for specific
purposes and based upon the value of the property or asset. As a general rule, the minimum cash
down payment required for a land developer to purchase a piece of land is 30%. Please note that
while many hard money lenders will not exceed 25% to 50% loan-to-value when refinancing a
piece of land, many reasonable hard money lenders will finance up to 70% of the purchase price
of the land, if the developer is putting down 30% in cash.
        Entrepreneur & Small Business Owner Guide 
The land development loan portion is an advance of funds, secured by a mortgage, to finance the
making, installing, or constructing of the improvements necessary to convert raw land into
construction-ready building sites. In other words, a land development loan takes an unimproved
parcel and breaks it up into a number of smaller, improved parcels upon which homes or
commercial buildings will be constructed.
2‐Bridge Loans 
A bridge loan is interim financing until permanent or the next stage of financing can be obtained.
Money from the new financing is generally used to "take out" (i.e. to pay back) the bridge loan,
as well as other capitalization needs. Bridge loans take on two primary forms as either a
commercial bridge loan or a commercial property bridge loan.
       The commercial bridge loans are typically more expensive than conventional financing
       to compensate for the additional risk of the loan. Bridge loans typically have a higher
       interest rate, points and other costs that are amortized over a shorter period, and various
       fees and other "sweeteners" (such as equity participation by the lender in some loans).
       The lender also may require or allow cross-collateralization and a lower loan-to-value
       ratio and typically arranged quickly with relatively little documentation.
       The commercial property bridge loan is defined as a short-term real estate loan that gives
       the property owner time to complete some task - such as improving the property, finding
       a new tenant and/or selling the property. Bridge loans are more expensive than permanent
       loans. In a market where a commercial property borrower might be able to obtain a 6%
       permanent loan, he might have to pay LIBOR plus 3% to 4% (8.25% to 9.25%), plus a
       point or two, for a bridge loan from a commercial real estate opportunity fund.
Commercial property bridge loans are typically paid off when the owner places permanent
financing on the property, after the improvements are completed and the new tenant(s) move into
the property. Because of their short term nature, most bridge loans have no prepayment penalty.
3 –Construction Loans 
In the broadest sense of the term, a construction loan is any loan where the proceeds are used to
finance construction of some kind; however, the term is used to describe a genre of loans. These
loans contain features such as interest reserves and where repayment ability may be based on
something that only occours when the project is built. Thus the defining features of these loans
are special monitoring and guidelines above normal loan guidelines to ensure that the project is
completed so that repayment can begin to take place.
The loans genre is made up of and designed around to finance specific construction (or vertical
development) utilizing developed or raw land as the colleteral against the future consevative
value of the completed project. Construction loans are often extended to developers who are
seeking to build something but sell it immediately after building it. In this case, a special
appraisal is ordered to attempt to predict the future sales value of the project. Construction loans
        Entrepreneur & Small Business Owner Guide 
for owner-occupiers also meet the same requirements; however, upon completion of the project
the borrower is often required to arrange permant financing sufficient to take out the construction
loan as an exit strategy.
4 –Mezzanine Loans 
Mezzanine loans are similar to second mortgages, except a mezzanine loan is secured by the
stock of the company that owns the property, as opposed to the real estate. If the company fails
to make the payments, the mezzanine lender can foreclose on the stock versus a mortgage. If
you own the company that owns the property, you control the property.
Mezzanine loans are also big. It is hard too find a mezzanine lender who will slug through all of
the required paperwork for a loan of less than $2 million. In addition, mezzanine lenders
typically want big projects. If the property you are trying to finance is not worth close to $10
million, you may have a hard time attracting the interest of any mezzanine lenders.
The three typical uses for a mezzanine loan are:
       Equity financing- borrower wants to pull out equity but can not refinance 1st mortgage
       due to excessive fees or a lock-out clause.
       Conduit second mortgage for the purchase of property at its “As Is Value” based upon
       partially vacant commercial lease space would not support a sufficient 1st mortgage, but
       the area is rising in interest sufficiently to attract additional leases that can support a
       second mortgage.
       New construction bridging the gap between standard commercial funding and the
       project financial requirements; this is often used to free up borrower cash.
5 – Refinance Loans 
Refinancing refers to the replacement of an existing debt obligation with a debt obligation
bearing different terms. The most common commercial refinancing is for a realestate mortgage.
If the replacement of debt occurs under financial distress referred to as debt restructuring. The
broadest sense to undertake the refinancing of an existing commercial loan is to reduce interest
rate or costs (by refinancing at a lower rate), extend the repayment time, pay off other debt(s),
reduce one's periodic payment obligations (sometimes by taking a longer-term loan), reduce or
alter risk (such as by refinancing from a variable-rate to a fixed-rate loan) and/or to raise cash for
investment, consumption, or the payment of a dividend.

In essence, refinancing can alter the monthly payments owed on the loan either by changing the
loan's interest rate, or by altering the term to maturity of the loan. More favourable lending
conditions may reduce overall borrowing costs. Refinancing is used in most cases to improve
overall cash flow.
        Entrepreneur & Small Business Owner Guide 
 6‐Asset & Value Based Loans 
An asset-based loan is often short term and secured by a company's assets. Real estate
(including raw land), accounts receivable (A/R), inventory, and equipment are typical assets used
to back the loan as collateral. However, these loans also include inventory; credit receipts;
machinery and equipment; factoring receivable and exotic assets like the value of pharmacy
script files, a trademark, or whole assets of intellectual property.

The amounts of financing available various for lender and asset but the overall combine asset
usually secures 50 to 65 percent of its Net Present Value and are often a hybrid between
traditional lending and venture capital.

7‐ Exotic Lending & Unsecured Loans 
Exotic lending covers various funding practices such as venture capital, angel investors and
unsecured loans.

       Venture capital is a fund raising technique for companies who are willing to exchange
       equity in their company in return for money to grow or expand their business. It can be
       raised for all types of business, both technology and non-technology businesses. Venture
       Capital also invests across stages – from the early stage seed venture, to later stage
       mezzanine financing. Venture capital firms usually require a high rate of return on their
       investment (20%+ per annum) and finance provided to the business is typically in the
       range of $500,000 to many millions of dollars.

       An angel investor generally wants less control of your company and a slower return on
       investment; however, the criteria for investment are likely to be similar. Angel investor
       groups are great sources of private capital and frequently invest angel money into new
       companies.

It follows that both venture capitalists and angel investors are looking for capital growth and
revenue increases and evidence that your business can deliver continued growth over time, to
provide a return on


An unsecured loan is not backed by collateral and are also known as a signature loan or
personal loan. Unsecured loans are based solely upon the borrower's credit rating. As a result,
they are often much more difficult to get than a secured loan, which also factors in the borrower's
income.

There are three types of unsecured loans:
        Entrepreneur & Small Business Owner Guide 
      First, there is a personal unsecured loan, meaning a loan that you individually are
       responsible for the repayment of.
      Second is an unsecured business loan, which leaves the business responsible for the
       repayment.
      Finally, there is an unsecured business loan with a personal guarantee. With the latter,
       although the borrower is the business, you as an individual will be the payer of last resort
       if the business defaults on the loan



Common Problems with Small Business Loans   
The information given is an attempt to help small business owners that are struggling to secure
loans and entrepreneurs who are frustrated with the current lending industry. This is by no
means a complete guide to all small loan business problems for each specific issue listed or the
only method to resolve the issue. This information should be used as a guide to help the
entrepreneur and small business owner identify, analyze and understand their financial health as
lenders to help improve their business or model.


Financial Small Business Health 
Understanding your business needs goes beyond routine financial reporting, small business
owners today are often required to know accounting and payroll; marketing and research;
business and employment law; manufacturing and sales. Often little time is given to understand
the financial health of the business. After all, as long as there is money in your bank account to
cover your business debts do you really think about borrowing money? To most of us the answer
is no, but to those of us that understand the financial health of our business a fare amount of time
is spent understanding not only our current needs but our future needs as well. Small business
financial health starts by periodically reviewing and understanding your business plan and
financial goals.


Reexamine Your Current & Existing Commercial Loan  
Periodically reexamine your acquired and current commercial loans to insure that the best
financing value has been negotiated and still makes sense. It is an understatement to say that the
business world is dynamic and economic conditions are always evolving. Changes often occur
that might indicate the need for the reevaluation of a company or individual position with respect
to commercial loans. There are several important reasons that might cause one to consider
refinancing of a commercial loan. A few of these reasons are:

       1. Taking advantage of equity gains that may be realized which could enable the
       borrower to free up capital for other expenses or ventures. This option is often referred to
        Entrepreneur & Small Business Owner Guide 
       as "cashing out" and offers an opportunity to invest the equity that has accrued in a
       manner that offers a higher return.
       2. Interest rates may have declined or another commercial lender is offering a lower rate
       and it is prudent to take advantage of reduced payments. Reduced loan payments
       obviously affect cash flow and enhance one's financial position.
       3. Another acquisition may provide an opportunity to combine loans and recognize
       increased cash flow or take advantage of more favorable terms and conditions.
       Combining notes may offer the opportunity to take advantage of the equity that has built
       up in one note to obtain more favorable financing for another. It also offers an
       opportunity to strengthen a financial statement by closing out a note under favorable
       conditions.
       4. Taking advantage of an opportunity to lengthen the period of the loan and realize an
       increased cash flow as well as to take advantage of tax concessions.
       5. It may be appropriate to pay down some of the note and renegotiate terms and
       conditions to strengthen one's financial statement.

These potential reasons are just a few illustrative purposes, but there are other reasons that may
cause one to seek commercial loan refinancing. Each individual or company’s circumstance will
dictate differing responses. As with any decision, an evaluation of the advantages and
disadvantageous is necessary to insure that the effort is worth the reward. One needs to assess the
total impact of the decision with regard to tax implications, the advantages of cashing out equity,
the effect on one's present financial statement, the opportunities for additional investment and the
actual savings that may be available.

Whether financing or refinancing to meet your business goals it is important to note that a
detailed analysis, which thoroughly assesses the impact of potential refinancing. Loan covenants
may need to be revised or renegotiated and should be closely examined to insure that the
maximum business flexibility is maintained or enhanced. The bottom line that applies to
refinancing is to acquire a business advantage that might go unfulfilled without this refinancing
action. If financing is needed to meet your business goals the thorough analysis of your financial
health will help you navigate through a successful loan process.


How to Overcome the Most Common Financial Health Problems 
Overcoming the most common objections for declining loans requires implementing solutions
and often imposing methods that allows you to project sound fiscal judgement to potential
lenders similarly to how you market your product to end users.

Getting a small business loan closed in this market is tough, however far from impossible.
Throughout this report we give you the coaching and perspective you need to increase your
chances of overcoming your specific issues and close your small business loan.
        Entrepreneur & Small Business Owner Guide 
Over the next few sections, we are going to discuss solutions to overcome:

      Declining gross revenue (aka declining trends)
      Low business cash flow (aka low debt coverage ratios)
      High loan to value (aka being over leveraged)
      Bad personal credit scores
      Low Liquidity (low levels of cash relative to your requested loan amount)
      High personal debt (high personal expenses)
      Business debt consolidation loan problems with, and solutions to
        Entrepreneur & Small Business Owner Guide 
Declining Gross Sales 
One of the most common reasons for being turned down by a bank today, is because the small
business has had a decline in gross sales over the last two to three years (Your banker may have
described this as "declining trends").

Due to the economy, most businesses throughout the nation, have had a drop in sales in 2009 and
2008 compared to 2007 and 2006. For most lenders, a drop in gross revenue is an immediate red
flag and or a straight decline in financing. Most lenders only want to work with companies that
have stable or increasing gross sales. As you can imagine that is very rare right now!

This objection often angers and frustrates borrowers as bankers often dig deep into why their
businesses have had a drop in sales. For most borrowers this seems painfully obvious, however
borrowers need to sit down and think this out if they are going to be able to get over this
objection.

Solution to Declining Gross Sales 
This is one of the tougher problems to get over as you cannot just change your books. However,
you may have many more strengths within this issue than you realize. Here are the best solutions
to this specific issue:

   1. Despite a drop in gross sales is your business still profitable from a cash flow
      perspective? (i.e. with accounting fluff taken out, such as deprecation, capital
      improvements, loss carry over, or others such as rent paid to self, high distributions, etc )
      If so, this is a HUGE point to present to banks. It’s almost as if you are saying “who cares
      if our gross is down, we’re in business to make a profit. And we are still doing that.” If
      your cash flow is strong, you may have nothing to worry about, but just simply need to
      present your cash flow analysis emphasizing how strong your cash flow actually is. Shop
      around until you find a bank that sees your logic and is still doing deals.
   2. You sold off a division and or discontinued working in a particular area of your industry,
      on purpose (key words). There could be a number of reasons for this – like wanting to
      get out of lower margin type work, getting out of a highly competitive field, and or
      getting out of a business that requires a tremendous amount of capital to compete in (to
      reduce costs), etc. Regardless, your drop in gross revenue is because you got out of that
      business. Detail the objective in a business plan or financial footnote.
   3. You increased your prices, which have dropped your gross sales but have increased your
      margins/profitability. Bankers often like this answer.
   4. You have recently diversified into a new field and it is showing monthly increases in
      sales. You will likely want to put together a Trailing Twelve financial analysis on this
      specific division, so that you can highlight the growing revenue.
        Entrepreneur & Small Business Owner Guide 
   5. You launched a new product that is already selling well. Again, try to document it and
      provide a specific financial analysis of the operation.
   6. You launched a new marketing campaign that is already working and you can prove it
      (such as in direct marketing activities, that is easy to track and report).
   7. You brought on a new partner with more experience and or more cash/assets for the
      business. Banks will normally try to use those assets as additional collateral.
   8. You have actively reduced your operating costs; costs of goods sold and or created more
      efficiency within the business. A good example of this would be via technology and be
      prepared to show when the cost savings began, so that the banker can "Add These Back"
      on his analysis.
   9. That the proposed loan will help consolidate business debt and substantially increase cash
      flow. (Note you will still need to show that your sales have stabilized).
So the idea here is that you are showing signs of growth and or that you have made a deliberate
decision to let sections of your business go that were unprofitable and dragging your business
down.

The worst thing you can do is simply blame your declining trends on the economy. You are
giving nothing to the banker to work with. It also shows a lack of depth on the borrower’s part.
They want to hear that you understand what the nuances are of the problem(s) and that you have
real solutions to them.

If you are showing signs of increasing gross sales, Year to Date or within a section of your
business you should highlight it by producing a trailing twelve month financial report. This is
just a profit and loss statement broken down month by month over the last twelve months. It will
highlight your new growth nicely. Completing it with a chart showing the monthly increases is
also a great touch. You may also want to put together Projections, though these don’t carry a lot
of weight.

Keep in mind, that when you are discussing your numbers, bring up your solutions/strengths
immediately and often (i.e. despite your declining trends, you are in fact poised for the future).

For Example on an interview with a loan officer, say he asks you: "Why have your gross
revenues declined over the last three years?" Many borrowers would quickly (and often in a
irritated way) say "well, because of the economy."

That answer will seriously dim his enthusiasm for your loan request. There are several better
answers to this question. Like: "In 2008 we saw what was happening to our industry and made
        Entrepreneur & Small Business Owner Guide 
a decision to pull out of lower margin type work and focus on more profitable business. So yes,
our Gross Sales did decline, but by design, and our net profit is still strong relative to the
market." That is an answer that will keep your loan alive.

Another good answer to this question would be: "Yes our gross sales have declined, Joe, but
relative to our competition we are in a strong position and are very optimistic about the future.
We have lowered both our costs of goods sold, our fixed expenses and have diversified into
another closely related industry. We have grown in this market by over 30% in 2009 vs 2008.
We are proud of this."

 

Low Business Cash Flow aka Low Debt Coverage Ratio’s  
Of all the objections, not having positive cash flow is the hardest one to get over.

Cash flow is king as lenders demand to know how you are going to make their loan payments.
And when we say cash flow, we mean what you really make, with out accounting items such as
depletion, depreciation, prior year loss carry over’s, or other items such as rent paid to self,
interest on debts being refinanced, etc taken out.

Banks are being shut down across the nation as the FDIC regulates them, so they are even more
reluctant than ever, to take on businesses that are losing money. To make matters worse, virtual
no lenders will provide working capital to entrepreneurs to help carry them.


Debt Coverage Ratios – What it is and How it’s Calculated  
Debt Coverage Ratio (DCR or DSCR) are an underwriting tool that examines the borrowers total
available cash flow, which can be used to make the proposed loan payments. Therefore, banks
take the total annual cash flow that a business makes and divides it by the proposed annual
mortgage payments to come up with the ratio.

The typical minimum Debt Coverage Ratio is a 1.25.

In the chart below, the small business owner’s 2009 cash flow (referred to as “Total Cash
Available For Debt Service) is $131,958, divided by the proposed annual mortgage payments
(debt service) of $90,460. So his DCR ratio in 2009 is a 1.46. Again, $131,958/$90,460 =
1.46.
         Entrepreneur & Small Business Owner Guide 
                                    Debt Service Coverage Ratio Chart

                  Type of Financial Information         FTR              FTR              FTR         Year End
                  Date of Financial Information        2006             2007             2008        12/31/2009
                            Number of Months             12               12               12               12
Gross Revenues                                        890,449          806,694          784,427           784,549
                                                                                                           
  Cost of Goods                                       475,467          371,250          266,472           250,481
                                                                                                           
Gross Profit                                      $   414,982      $   435,444      $   517,955       $   534,068
  Expenses                                            436,908          380,440          421,048           418,721
                                                                                                           
  Other Income (Expense)                                       ‐                ‐                ‐
Net Profit After Tax                                 (21,926)
                                                  $                $    55,004      $    96,907      $   115,347

  Add Back/(Deductions)
(+) Depreciation                                        15,165
                                                                          
                                                                         15,604           18,672
                                                                                                            16,491
                                                                                                             
(+) Rent on Leases Replaced                             57,600
                                                                                ‐                ‐                 ‐
                                                                                                                    
(+) Interest on Debt Replaced                                  ‐                ‐                ‐                 ‐
                                                                                                                    
(+) Salary Add Back                                     30,000
                                                                          
                                                                         27,500           32,500
                                                                                                            30,000
                                                                                                             
(+) Amortization                                          1,167
                                                                           1,167
                                                                                            1,167
                                                                                                               1,167
(‐) Less Personal Needs                               (29,880)
                                                                       (29,880)
                                                                                        (29,880)
                                                                                                           (29,880)
(‐) Less Other                                                 ‐                ‐                ‐                 ‐
                                                                                                                    
(‐) Less Other                                                 ‐                ‐                ‐                 ‐
                                                                                                                    

  Total Cash Available for Debt Service           $    52,126      $    69,395        119,366
                                                                                    $                $   131,958

 Debt:
Bank/SBA Debt                                           90,460
                                                                          
                                                                         90,460           90,460
                                                                                                            90,460
                                                                                                             
Seller Carry Debt                                              ‐                ‐                ‐                 ‐
                                                                                                                    
Other SBA (504)Debt                                            ‐                ‐                ‐                 ‐
                                                                                                                    
Other Debt                                                     ‐                ‐                ‐                 ‐
                                                                                                                    

  Total Debt Requirements                         $    90,460      $    90,460      $    90,460            90,460
                                                                                                     $      

DSCR (Debt Service Coverage Ratio)                    0.58             0.77             1.32              1.46
Free Cash Flow                                       (38,334)
                                                  $                   (21,065)
                                                                   $                $    28,906            41,498
                                                                                                     $      



The best way to figure this out is by examining the chart. Note it is broken down over the last 4
years so that the bank employees can get a better feel for the historical cash flow of the business.
These numbers are taken off the borrowers tax returns in 2008, 2007 and 2006 (FTR) and off his
Year-end Profit & Loss Statement for 2009.
        Entrepreneur & Small Business Owner Guide 
Solutions to Low Cash Flow/ Low Debt Coverage Ratios  
In general, what you need to do is try to establish that either you have “Hit Bottom” with your
net income and are in a recovery type phase or that the proposed loan will put you in a very
strong position. Here are some specific solutions:

   1. Bring on a partner that has more cash, cash flow, assets and experience than you do. You
      can build an argument around that the new partner has or will help re establish your
      business.

           a. If you have not already brought the new partner on, you can structure the new
              loan based on his strengths and vision for the changes in your business. It can be
              structured almost like a projection type loan, which was pretty common. You
              will need to put together a detailed projection and assumptions (notes) on why
              this will work and immediately improve your cash flow.

           b. If the partner is already on board, you will have to show how and why this has
              helped your business to this point. Putting together a Profit and Loss statement
              broken down over the last 12 months is a great way to demonstrate a turn around.
              If your new partner has enough assets, you maybe able to just present those to the
              bank and you will be fine.

   2. Do everything in your power to pay down debt. Getting rid of business credit cards,
      lines, equipment loans, vendors, private notes will have an immediate effect on your cash
      flow and improve your Debt Coverage Ratio. Pay off all loans with the highest payments
      and lowest balances first. This may or may not include your highest interest rate loans as
      some maybe on short amortization schedules, etc. Do whatever you can to raise money,
      like collecting receivable, selling household goods (try eBay! Or Craig's List), tapping
      the cash value of your life insurance, bringing on partners/relatives/employees/ to have
      them pay down your balances, etc. Any and all of this will help reduce your monthly
      payments, thus improving your cash flow position.


   3. Find a more aggressive bank. There are still banks and lenders out there that will still go
      down to a 1.1 DCR. They are rare now, but still out there. Also some banks simply
      calculate cash flow differently.


   4. Consider a business debt consolidation loan. Often business owners have multiple types
      of loans that will have various amortization schedules, interest rates, equipment lease
      periods, etc. Often by refinancing all of this debt onto a commercial mortgage such as a
      SBA 7a loan, the cash flow savings can be tremendous. Restructuring debt can put a
        Entrepreneur & Small Business Owner Guide 
       business back in business over night and drastically improve DCR’s. Note however that
       getting these types of loans closed are not so easy.


   5. Make sure that you’re personal or business expenses are not being double reported by the
      underwriter/loan officer. Items such as business car payments or business credit cards
      will often show on your personal credit report (because you have personal guaranteed the
      loan). You want as much of this debt attributed to your business as possible, because
      business expenses are put on a more lenient underwriting calculation at a 1.25 ratio vs
      being doubled on the personal expense side. You definitely only want the debt counted
      once. Mistakes happen all the time. Therefore, you should take the time to explain to the
      loan officer that certain items on your credit report are actually business expenses and are
      already included on your business tax returns/year to date financials. As loan officers
      rush through deals, this is a common mistake.
Lack of cash flow is a difficult objection to get over. However, if you can demonstrate that your
business has stabilized and that the loan will further improve your cash flow position you should
be able to get the capital you are seeking.



High Loan to Value or Being Over Leveraged 
Many borrowers are over-leveraged due to the general national drop in property values. This is a
major problem and often a tough issue for the individual to get over. The challenge itself has
been compounded by:

      That virtually all banks have lowered their Loan To Value (LTV) standards and

      Property values have dropped across the nation…

 This has resulted in an almost over-leveraged “perfect storm.” Most banks in 2006 use to offer
80% loan to value financing on purchases and 75% on refinances, on conventional commercial
loans (meaning that they kept the loans in house and did not sell them or get a government
guarantee on the loan). Now, most banks have lowered their standards to 65% on purchases and
55% on refinances. At the same time, property values have declined (in virtually every market
in the US). Therefore, if your LTV was 70% two years ago, it might be at 95% today.

Another component of this is the quality and type of property itself. In other words, if the
property is reaching the end of its useful life, its value will be greatly reduced, proportionately,
by the funding bank and more so than usual. If the property is special purpose, such as a hotel,
gas station or restaurant, the value will be even more beat up.
        Entrepreneur & Small Business Owner Guide 
Definition: Loan to Value or LTV refers to the total loan amount as compared (or divided) by
the assets value. For example, if your property is worth $1,000,000 and your loan amount is
$700,000, your loan to value is 70%.

Why is LTV so important? It's a collateral issue. Banks look at Loan to Value with the
assumption that borrowers will default and that they will have to sell the property to get their
money back (and pay the costs to maintain and auction off the property). This is one of the most
important criteria for banks as they try to minimize their losses. They also have internal reserve
ratios that they have to maintain in order to avoid getting in trouble with the FDIC.

Solutions to Being Over Leveraged  
Below are the major solutions to high loan to value properties:

1) Go for government guaranteed type financing. Programs such as the SBA, USDA B & I,
   Fannie Mae or Freddie Mac will go up to 90%, 80%, 80% and 85% respectively. So if your
   local banks will only go up to 60%, find a lender that works with the government guaranteed
   programs and you might have found your solution. Note, with SBA financing you can at
   times go above 100% LTV, so if your business occupies your building, this should be your
   focus.
2) If you have already talked to a few SBA lenders (or any type of lender), and they have been
   cold to your request, often you just have to keep looking to find a more aggressive
   source. This is typically, where a broker becomes your best friend, since they often follow
   who is actually lending.
3) Cross collateralize to other assets you may own. You may have other real estate or
   equipment that can bring you into the required LTV standards. Nobody likes doing this, but
   it maybe your only option. Keep in mind you can often do this in second or third lien
   position.
4) Consider offering your inventory and receivables as additional collateral for a factoring loan.
5) Pay down loan balances with cash.
6) Bring on a partner that can either pay down balances or bring on other assets that you can use
   to cross collateralize too. Nobody likes this option either, but this is often the most realistic
   option out there; especially if you do not already have a lot os asset to work with.
7) Have the existing bank reduce the balance and refinance them out with a new loan. A few
   years ago this would have been laughable. Now however, we are seeing banks doing this. It
   is often because they themselves are in violation with the FDIC and have no choice but to get
   loans off their books. So do research on your existing bank to see if they are in trouble.
8) Here are a couple of other strategies with this.
        Entrepreneur & Small Business Owner Guide 
       i) You can have a third party buy your note from the existing bank (the buyer will want
          a reduction in the note balance) and you can create a new agreement with them on a
          reduced balance. So if you owe $1,000,000, have the note buyer purchase it from the
          existing bank at say $850,000 and rewrite it you for $900,000. If you can arrange the
          note purchase yourself, you could avoid the mark up.
       ii) If you have seller financing you may have a lot of flexibility with this. They maybe
           very willing to take a reduced payoff to get cash and or to sell the note to a 3rd party at
           a reduce amount. So you would line up a new loan and refinance them out for a
           reduced balance.
       iii) Just refinance the existing debt with a new bank loan with a reduced balance.
            Perhaps you can get a longer amortization schedule and lower interest rate as well.

9) Be willing to buy CD’s or open a savings account from the potential new bank. Though they
   will likely want to have control of the cash, it maybe a better solution than paying down the
   balance as you might be able to negotiate shorter release clauses and or make a better return
   on your money. Smaller banks will often increase their LTV standards if you have a decent
   amount of money tied in with them.
10) Rely on your other more general strengths as well. Do you have good trends, liquidity, cash
    flow, etc? If so these strengths, even though unrelated to your LTV position may help them
    get over this issue and offer you higher loan to value standards than normal.
11) Examine how the lenders attribute value. For example, on equipment many banks will use
    50% of the market value as the eligible collateral value; while others will only use the
    liquidation value or 10-20% of the value as the collateral... Also, look at the appraisals;
    mistakes happen all the time, like getting the square footage wrong, or not including
    additional property lots, etc.

If you get creative, you may just figure out a solid solution for your loan to value issues.



Dealing with Bad Credit and Still Securing Business Loans  
Banks use credit scores primarily as a tool for them to judge the “character” of borrowers. Of all
the underwriting components, this is the most subjective one, as well as one of the most
important criteria. They want to believe that the borrower has a self imposed, moral obligation
to pay them back.

On a day-to-day basis, loan officers at banks more commonly use the score as a “screening” tool
and use the report itself to understand the borrower’s personal expenses. Most bank
representative over depend on the actual score and don’t take the time to really review the
        Entrepreneur & Small Business Owner Guide 
payment history of the borrower. For most lenders, if your score is below a 680, they will not be
interested in talking with you, even if you have excellent payment history. Again, it is an
easy way for them to decline files so that they can move on to more borrowers that are
“attractive”.

As you already know, you have to do everything in your power to improve your score.
Bankruptcy, divorce, medical disaster and bad business decision happen. You need to do your
best to establish that whatever your issues were/are, that they are over and that you are in the
process of reestablishing your credit.

Solutions to Bad Credit Small Business Loans 
Get focused on repairing your credit yourself, or hire a reputable third party credit repair
company to help you. Law firms are more reputable than the more common generic credit repair
company. It has been reported that over 70% of all credit reports have mistakes on them, which
may include inaccurate late pays that have exceeded the 7 year reporting time frame which
should be removed.
Write your Letters of Explanation’s on the specific derogatory items, before you submit your
package to the lender. Have the letters be factual, with dates and without emotional stories.
Emphasize what happened, what you have done to fix the problem and that you have not been
late since. These letters should also be sent to the credit reporting agency to be included in your
file.
When you are going through the initial interview process, promote your general strengths to help
give the banker more “ammunition” for him help get over this particular weakness. Stress your
good trends, cash, experience, net income, etc.
Sometimes the credit bureaus scoring system is just off. You may have great payment history
but just happen to have a low score. This is great news for you. Stress this to the Loan Officer “I
have never been late; I have no idea why I do not have a 750.” Many banks can get over the low
score if you have solid payment history.
 Find more aggressive banks. There are still banks and lenders out there that will still go down to
a 600 score. They are rare now, but still out there.
Pay down balances on credit cards or other lines as much as possible. Try to get them to be
below 30% of the limit or gone all together. If you have multiple accounts pay off all the small
balances first. It’s better to have 3 open balances than ten, even if the total loan amount is the
same. Use whatever money you can come up with, like collecting receivable, selling household
goods (try eBay! Or Craig's List), tapping the cash value of your life insurance, bringing on
partners/relative to have them pay down your balances, etc. Any and all of this will help.
        Entrepreneur & Small Business Owner Guide 
On accounts you cannot pay off, focus on the higher payment loans first and do your best to pay
them down altogether. If you have to be late on payments, ie if you only have a set amount of
cash, make the minimum on as many as you can. In other words, if you have 3, $300 payments
and one at $950, pay the 3 - $300 bills. (except in cases of mortgages as this will hurt your score
proportionally more).
Also, check your credit report. You may find that many of your monthly bills do not get
reported on your credit report. Like private notes or utility bills. You will have less of a chance
getting late pays reported on these accounts.

In addition, the worst possible excuse/situation that you can provide is that you just didn’t
pay your obligations on time. This is viewed as a bad reflection of your character (i.e. they will
perceive it as negligence or just an unwillingness to pay your bills), which is exactly what the
banks want to avoid in the first place.

Again, you have to show the banks, through documentation, that your credit score issues were a
one time, past occurrence and that you have taken the appropriate actions to resolve the issues.



High Personal Expenses/Debt 
Personal expenses, also referred to as Personal Needs are one of the most common “deal killers”
out there and cause a lot of frustration with borrowers. A big part of the problem is how personal
expenses are calculated and underwritten. A lot of entrepreneurs are surprised to hear that
personal expenses are such a problem, as a common perception is, “Why does the bank care what
I have to pay in personal debt? This is a business loan.”

The problem is that they do care (a lot) - If the borrower cannot meet their monthly personal
obligations, the business loan will soon be in trouble (or so banks assume).

As just mentioned, another problem with personal expenses is how they are normally calculated.
Underwriters take all of the borrower’s monthly expenses that are reported on their personal
credit report, and DOUBLE that amount. So, if you have a $1,500 mortgage payment, $1,500 of
minimum credit cards and 2 car payments that total $1,000, your total monthly
personal obligations are $4,000.

Underwriters than take the $4,000 and DOUBLE it to $8,000 to represent the borrowers total
personal expenses… This $8,000 is than taken out of the businesses cash flow on their
underwriting analysis. See Debt Service Coverage Ratio chart.
        Entrepreneur & Small Business Owner Guide 
A huge point here is that they double personal expenses, while for business expenses they
only put a 25% ratio on them. So if the $1,500 a month of credit payments was attributed to the
business, your Personal Needs would drop from $8,000 per month ($96,000 annual) to $5,000
per month ($60,000 annual)...

Personal Needs Calculation

                              Type of Financial Information Year End             Year End
                              Date of Financial Information      2009                 2009
                                         Number of Months          12                   12
           Gross Revenues                                       908,357              908,357
             Cost of Goods                                      338,345              338,345
           Gross Profit                                     $   570,012          $   570,012
             Expenses                                           418,721              418,721
             Other Income (Expense)                                      ‐                    ‐
           Net Profit After Tax                             $   151,291          $   151,291

             Add Back/(Deductions)
           (+) Depreciation                                          16,491
                                                                                     16,491
                                                                                      
           (+) Rent on Leases Replaced                                                      ‐
           (+) Interest on Debt Replaced                                    ‐               ‐
           (+) Salary Add Back                                       30,000
                                                                                     30,000
                                                                                      
           (+) Amortization                                                 ‐               ‐
           (‐) Less Personal Needs                                 (60,000) VS      
                                                                                   (96,000)
           (‐) Less Other                                                   ‐               ‐
           (‐) Less Other                                                   ‐               ‐
             Total Cash Available for Debt Service             $   137,782     $   101,782

            Debt:
           Bank/SBA Debt                                             90,460
                                                                                       90,460
                                                                                        
           Seller Carry Debt                                                ‐                 ‐
           Other SBA (504)Debt                                              ‐                 ‐
           Other Debt                                                       ‐                 ‐
            Total Debt Requirements                            $    90,460       $    90,460

           DSCR (Debt Service Coverage Ratio)                       1.52             1.13
           Free Cash Flow                                       $    47,322      $    11,322
        Entrepreneur & Small Business Owner Guide 
That’s a huge difference on most small business loans that have “tight” cash flow as can be seen
on the chart. The first scenario, with the $60,000 of personal needs is a doable deal. However,
the second scenario with $96,000 of Personal Needs is NOT. The Debt Coverage ratio drops to a
1.13, which is below most banks minimum of 1.25.

Blended Personal and Business Expenses  
Many small business owners have combined personal loans with their business expenses.
Blending personal credit cards and home equity loans with business expenses are the most
common examples. Because the debt is in the borrower’s personal name, calculated on the
personal ratios described above. This is usually the case, even if the borrower can document that
the balances where used for business expenses. The result is that the expenses take out a lot
more of the businesses cash flow than need be, and kill a lot of small business loans.

Solutions to High Personal Debt  
In many cases, fixing this problem is actually one that you have more control over, than the other
problems discussed so far.

1) First, pull your credit report and analyze all of your monthly payments. Figure out which
   ones have the highest payments vs lowest balance owed. Do your own cash flow analysis,
   like on the chart above, and recalculate not only what your potential personal expenses will
   look like, but also how it will affect your business ratios as well. If the ratios work, get ready
   to pay these off.

   You may want to work hand in hand with you banker(s), lender or broker on this to make
   sure they are on board and agree with your analysis - before you start paying down debt. But
   once you think you have a solid plan, consider:
       i) Getting a residential loan to refinance as much as your personal debt as
          possible. (They are cheaper and easier to get)
       ii) Getting another unsecured loan that has a lower rate/payment and transferring the
           balance.
       iii) Bring on a partner, relative, friend to pay these off for you for a stake in your business
            or as a personal loan.
       iv) Ideally use your own cash, to pay them off.

2) If you have a substantial amount of equity in your property, ie if you are below 50% loan to
   value, consider a hard money loan. These are expensive options and hard to qualify for, but
   they have no Use of Proceeds or the ratio issues discussed above. This is often a solid
   solution to refinancing personal credit card debt.
        Entrepreneur & Small Business Owner Guide 
3) Considering using a factoring loan or credit card based type factoring loan (also know as
   Asset and Value Loans)
4) Keep looking for a more aggressive bank and or one that does not simply double personal
   expenses. Some banks do use a different ratio and or will use a set amount. For example,
   some lenders will just add a flat $20,000 on top of your personal annual payments. This can
   often make the numbers work.
5) Make sure that the your personal or business expenses are not being double reported. Items
   such as business car payments or business credit cards will often show on your personal
   credit report (because you have personal guaranteed the loan). You want as much of this
   debt to be attributed to your business as possible (because of the more lenient underwriting
   calculations mentioned) and definitely only counted once! Therefore, you should take the
   time to explain to the loan officer that certain items on your credit report are actually
   business expenses and are already included on your business tax returns/year to date
   financials. As loan officers rush through deals, this is a common mistake.
Start making the switch now to put as much of your debt into your businesses name as possible.
For example, you could have private notes be rewritten (consult with an attorney on this) to
include your business name or transfer balances on credit cards. It might not help a lot now in
terms of your actual payments, but in the future, you will be in a much better position to
refinance the debt and get the loan you need.



Business Debt Consolidation


It is no secret that by consolidating business debt, entrepreneurs can normally
significantly improve their cash flow. This is almost always because their existing debt is
amortized on shorter schedules and the new loan spreads out the debt repayment period over a
longer time. Here's a typically example of a small business wanting to do a business debt
consolidation type loan:

Existing Loans:

      $800,000 mortgage on a 20 year amortization schedule at 6% = $5,732 Monthly Payment
      $50,000 of business credit cards = $1,400 Monthly Payment
      $150,000 of equipment debt, on a 7 year schedule at 5.5% = $2,158 Monthly Payment
      TOTAL MONTHLY PAYMENTS ARE $9,290
        Entrepreneur & Small Business Owner Guide 
Prosposed Consolidation:

      New loan at $1,000,000 (total of above), on a 25 year schedule at 6% = $6,443 TOTAL
       MONTHLY PAYMENT
      This is a cash flow savings of $2,846 per month... Or $34,159 annual.

For most small business owners this would be attractive to say the least. Where else can you
find another $34,159 of cash flow from you existing operations?

Business Debt Consolidation, the Challenge

However, it has never been more difficult to pull this type of loan off. There are many reasons
for this as well as some potential solutions, which we will describe below. Here are the
problems which are all intertwined, 1. Use of Proceeds restrictions as set forth by the
FDIC/Banks/SBA (& others), 2. How personal expenses are calculated/cash flow issues and 3.
General lack of banks wanting to do any type of cash out refinance.

USE OF PROCEEDS

Use of Proceeds can be defined as how the proceeds of a loan are dispersed at funding. In the
case of a debt consolidation type loan, it means what types of debts are being paid off. In the
example above, the use of proceeds was to refinance an existing mortgage, business credit card
debt and an equipment loan.

Virtually all sources of capital now have restrictions on what they will allow to be rolled into a
loan. Here is what is still easy to consolidate into a a well collateralized (ie meaning that the
total loan to value is within the restrictions set by the funding source) small business commercial
real estate loan (Which includes conventional bank loans, SBA or USDA B & I loans. These 3
sources represent appr 95% of the commercial real estate/small business loan market, at this
time):

      Equipment Loans
      Partnership loans and or buyouts
      Existing commercial mortgage debt

Here is what is difficult or almost impossible to consolidate with a small business real estate
loan:

      Late taxes, whether they are income or real estate (only possible to refinance with hard
       money)
        Entrepreneur & Small Business Owner Guide 
      Personal credit card debt, even if the money was spent on the business... (only possible
       to refinance with hard money or a residential loan)
      Business credit card debt (see below)
      Lines of credit secured by the borrowers home, even if the money was spent on the
       business... (only possible to refinance with hard money or a residential loan)
      Unsecured business lines (see below)

HERE'S THE "RUB" - on refinancing business lines or business credit cards. For one, most loan
officers at banks don't want to get involved and will simply "pass" due to the complexity of
documenting the balances. So you have to first find a bank and a loan officer that is willing
to do it. Secondly, in order to refinance business credit card debt, the borrower will have to
provide receipts on every SINGLE purchase. No matter how long ago that particular purchase
was made. So if you bought a ream of paper 8 years ago on your credit card you will have to
provide the receipt of it... Or that amount of the balance will not allowed to be refinanced. And,
providing the credit card statement itself is not enough.

In addition, say you renovated the property and paid for the work via your unsecured business
line. You will have to provide the invoices AND receipts to prove it. They must all be properly
dated, legible and filled out.

This can become very cumbersome to say the least, especially for businesses that have mediocre
record keeping.

These restrictions are especially true with the SBA programs. And to make matters worse. Most
conventional sources will only go up to 55% loan to value on refinances, so most borrowers are
limited to the SBA because they can go up to 85% loan to value.

Personal Debt

Including personal credit cards or loan secured by your house (or other residentially zoned
property) are not normally allowed to be rolled into commercial loans. This is the case with
virtually all conventional banks as is true with 100% of the SBA lenders/banks. If you have a
personal credit card that you made business purchases on, you have a problem if you are trying
to refinance that debt with a commercial loan.

GENERAL SOLUTIONS TO THE USE OF PROCEEDS

      Get ready to "Play Ball" and comply with the banks requirements. Start digging up those
       receipts and be very organized.
        Entrepreneur & Small Business Owner Guide 
      Don't try to overly convince a loan officer at a bank to take on the project. Find a new
       one. Maybe even at the same bank. If he's not enthusiastic about the deal you will be on
       the bottom of his pile.
      See if you can refinance some of the debt on other programs. For example, residential
       loan are normally cheaper and easy to get. Hard money, or factoring loans maybe an
       option.
      If you have cash, consider paying off some of the harder debt to refinance.
      Bringing on a more liquid partner.

CASH FLOW

Here is the other major issue with personal debt in regards to how it negatively effects your
ability to consolidate business debt. It greatly reduces your cash flow as calculated by
underwriters. Bankers call your personal expenses your "Personal Needs". The formula is
to DOUBLE the personal expenses that show up on your credit report, AND SUBTRACT THAT
AMOUNT OUT OF YOUR NET BUSINESS INCOME.

Example, say your credit report reveals you have monthly payments that look like this:

      $2,000 home mortgage
      $600 equity loan (proceeds where used for business purposes)
      $800 of credit card debt in your personal name (but all of the debt was used for your
       business)
      $680 for 2 car payments
      $4,080 TOTAL MONTHLY PAYMENTS

Underwriters double this total amount to calculate your "Personal Needs." So they would say
your total monthly Personal Needs are $8,160 ($4,080 x 2)... They than take this amount and
subtract it out of your net business income. What is left over is "Cash Available For Debt
Service". Or the money left over to pay for the proposed debt consolidation loan.

The key point here is that personal expenses are doubled, while business expenses are calculated
off a 1.25 ratio... So you want as much debt to be attributed to the business as possible. For
example, the same $600 equity loan and the $800 of credit card debt payments, look like this on
a cash flow analysis:

      Personal calculation - $600 + $800 = $1,400 x 2 (ie doubled for underwriting) = $2,800
      Business calculation - Or $1,400 x 1.25 = $1,750
        Entrepreneur & Small Business Owner Guide 
Again, we are talking about the exact same debt here. On the personal side it eats up an
additional $1,050 ($2,800 - $1,750) of cash flow for underwriting. You want as much of your
debt to be attributed to the business as possible because the ratios/calculations are more forgiving
on the business side.

SOLUTIONS

      A lot of the potential solutions to this are repetitive to above. But look at other ways to
       refinance this personal debt.
      Hard money can be a solution here. You may consider refinance all of your debt with a
       hard money loan, than as soon as possible refinance that debt with a commercial
       mortgage. This is an expensive route but it gets over the use of proceeds issue.
      Make sure to point out to bankers that any business credit card debt that shows up on
       your credit report is in fact business debt; and that you can prove it. This is regarding the
       ratio issues we discussed above. You don't want them to simply double the payment!
      If you have enough cash flow try to get working capital and try to use that to consolidate
       some of that business debt that is in your personal name.

Cash Out Refinances

There's nothing to complicated here, but most banks have simply stopped wanting to do any type
of cash out refinance (Note that a business debt consolidation type loan is categorized as a cash
out refinance). Traditionally cash out refinance; meant that at closing the borrower would
receive a check for the difference between his previous balance and the new loan amount. Ex:

      $1,000,000 Old Loan
      $1,400,000 New Loan
      $400,000 Cash Out Proceeds, in the form of a check

Now, most banks will not consider this type of structure and or just handing the borrower a
check. They want control and want to know what exactly the borrower is going to do with the
money. So it goes back to the Use of Proceeds issues we discussed above. They want to know
exactly what the borrower is going to do with the money. Meaning that are going to approve it,
and document it.

The slight exception to this is working capital. Some banks, especially through the SBA are still
offering working capital loans. They normally are in conjunction with a larger loan amount,
though. So we are seeing deals get done that are structured as say, $1,000,000 refinance of real
estate debt and $100,000 of working capital. Total loan amount of $1,000,000. However, most
banks will still want to hold the working capital and release it upon request, which normally
        Entrepreneur & Small Business Owner Guide 
means that you will have to tell them what you are going to do with the money and provide
documentation.

SOLUTION

      Keep moving on until you find a source that is still doing cash out type refinances.
       Trying to persuade them is normally a waste of time for you.
      Likewise, on working capital loans, banks are either doing them or they are not. Keep
       looking until you find one that does.

We do SBA business loans and commercial real estate loans for small business owners,
nationwide. Our minimum loan amount is $400,000. Learn more about our commercial
mortgage consultant services here.

Overview of Commercial Loan Solutions - General

On this page we discuss what the general solutions are for declined commercial loans. Note that
some of the potential solutions are simply strengths in other areas of your small business. These
are typically referred to as Compensating Factors. For example, if your net cash flow on your
business is below a banks standards, you may have a high amount of cash that my compensate
for this issue. Or you may have recently diversified in another subsection of your industry and it
is growing nicely, etc.

The other sections of this report discuss specific solutions to your specific challenges - declining
trends, low cash flow, high loan to value, dealing with low credit scores, low liquidity, high
personal expenses, etc.


General Small Business Loan Solution - How to Overcome Being Declined Financing

Here are the general strengths to look for in your own situation. If you have any of these
promote them to bankers whenever you get a chance.

      Cash – High amount of liquidity as compared to your loan amount and relative to your
       monthly expenses.

      Finding a bank or lender that is really closing loans. Often borrowers are just dealing
       with banks that are not doing loans. Currently, this is very common.
        Entrepreneur & Small Business Owner Guide 
      Great experience – Over 5 years of management/ownership is the starting point.
       Showing how you have succeeded in other tough times, like in a turnaround situation, is
       also a great point to bring up.

      Low personal expenses – this show’s to the bank that you do not need to make a lot of
       money to cover your personal bills and that you take paying off loans seriously. High
       personal expenses are a major problem for many entrepreneurs.

      Credit Scores over 700. This shows that you have been responsible and have figured out
       how to meet your expenses in the past.

      Other sources of income – if you own another business or rental property(s) this income
       may be able to “carry” you.

      Bringing on a financially strong partner. You may not want to do this, but by bringing on
       a partner, that has either more experience or cash than you do, can be a business
       loan saver.

      Rolling in seller financing, on purchases. This reduces the loan to value for the bank,
       making it more attractive to them.

      Pointing out subsections of your business that may be growing. You may want to put
       together a profit and loss statement, broken down by the last 12 months, showing the
       growth on this division.

      Other assets like real estate or equipment that can be used to increase the banks collateral.
       This is a big one.

      New technologies that have made your business more efficient/more profitable.

      Cutting general costs and or increasing margins on your work.

      Debt consolidation that increase cash flow and would increase your overall profits.

      Among others. Think outside the box, of all the positive things that are going on with
       your business (even if you are struggling).

Most importantly, if you are having a difficult time securing small business financing, you need
to either convince the lender that your negative situation has already been resolved or that by
getting the loan your situation will be. For example, if you have low cash flow now, a debt
consolidation loan may significantly increase your cash flow position and resolve the problem.
        Entrepreneur & Small Business Owner Guide 
  Know your weakness and try to address them as well as your strengths and try to promote
them. You will meet opposition and often frustration, especially with these so called get
prequalified deals all over the Internet today, don’t get discouraged lenders are grappling in the
lending environment as well and the successful application isn’t always A-Plus Paper
(Financially Healthy Borrower) but the persistent small business owner who knows what is
wrong, how to fix it and has a formal plan to do it.

This information is by no means complete and often I get the occasional email or letter indicating
changes. This guide is meant as a starting point to help you find the information for yourself and
understand your needs before you go done the long and path of getting constantly denied or
worse getting a loan that doesn’t fit your business needs. Thank you for taking the time to read
this and I hope it helps you succeed.

We can help you identify the problems with your loan request today, and present you with
possible solutions to help you get the financing you need. We are confident you will find this
information extremely useful overcoming the most common objections most lenders have
approving small business loans.

								
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