As the lending environment starts to adapt and adopt to the new credit and lending parameters we are seeing more and more lenders actually refusing to do certain types of businesses.
Each lender / bank is thoroughly looking at all their past transactions and trying to determine any negative patterns. For example if all of a sudden bank A has an excessive amount of work outs and foreclosures on escrow companies they may immediately determine that they do not want any more escrow companys. This actually happened to me, we had a deal in final underwriting and at the loan committee, one director / officer had a credit problem with an escrow company they approved and they therefore denied my deal for that only reason.
This pattern is very prevalent today. Instead of receiving rate sheets and propaganda every day I am now getting prohibitive lists. Just yesterday one of my newer lenders that I am working with were very happy to provide me with a list of deals they will never look at. I asked them if there were any extenuating circumstances that would allow the lender to look at a particular transaction, and the answer was flat no.
So my advice this evening is before you submit a biz loan to a lender check first with their growing prohibitive transaction list.
For more of SBA Loans please visit loanforbiz.com.
Thursday, August 28, 2008
Wednesday, August 27, 2008
Daily Observations - Earn Outs
After last nights blog I have been asked more and more questions about the entire concept of Earn Outs. Over the next couple of days a very close friend of mine, Dr. Larry Lerner a specialist in business intermediary transactions has offered his expertise to our readers.
As I am not an expert on this area I will touch on it and wait for Dr. Lerner's expert commentary.
To whom does the Earn Out benefit?
The interesting answer to this is it depends.
It could benefit the seller if the seller is unable to get his purchase price and he has complete confidence in the value of his business. He must not be concerned about the new purchasers ability to run, maintain and build the business. If the seller is concerned that the new buyer will not build the business then the likelihood that the seller will accept the terms of the Earn Out are reduced substantially.
It could also benefit the buyer if the buyer is concerned that contracts that the seller has represented may not transfer to the new buyer. For example a buyer is counting on the continuation of purchase contracts from one particular customer. If the customer should happen to not renew the contract then the buyers expected cash flow will be significantly reduced. If there is an Earn Out then the purchase price of the business will be much less than if the cash flow supported the strike price.
The above are just two examples of how the Earn Out benefits both buyer and or seller.
As I am not an expert on this area I will touch on it and wait for Dr. Lerner's expert commentary.
To whom does the Earn Out benefit?
The interesting answer to this is it depends.
It could benefit the seller if the seller is unable to get his purchase price and he has complete confidence in the value of his business. He must not be concerned about the new purchasers ability to run, maintain and build the business. If the seller is concerned that the new buyer will not build the business then the likelihood that the seller will accept the terms of the Earn Out are reduced substantially.
It could also benefit the buyer if the buyer is concerned that contracts that the seller has represented may not transfer to the new buyer. For example a buyer is counting on the continuation of purchase contracts from one particular customer. If the customer should happen to not renew the contract then the buyers expected cash flow will be significantly reduced. If there is an Earn Out then the purchase price of the business will be much less than if the cash flow supported the strike price.
The above are just two examples of how the Earn Out benefits both buyer and or seller.
Tuesday, August 26, 2008
Daily Observations - What Am I To Do?
Tonight's observation asks the question what happens if the deal just does not cash flow, is it dead? My favorite answer to that question is of course It Depends!
While thinking outside of the box is our forte, some time all that creativity can really pay off. Here's an example that I want to share with you.
We were approached on an SBA Loan for the acquisition of a business. The business would not debt service at a greater amount than 1:1, which means that the lender, was not willing to lend the requested amount. The first thought of course is to have the seller carry paper with no payments for a period of time. Most of the covenants that I have read regarding seller carry-backs states that the seller cannot be paid off prior to the SBA Lender being paid off.
However, many of these covenants are not enforced as long as the loan is current, if however the loan goes into default the SBA will find out that the seller was getting paid back in violation of the loan covenants and that can present a serious problem. So I would not recommend this alternative.
Another idea is that of a separate agreement outside of escrow which can be a note between buyer and seller, but again that can create problems for the same reason as above.
The new twist is to structure an Earn Out. An Earn Out allows the seller to lower the price of the business and the buyer to borrow less money, therefore the cash flow would support the eventual sale in our first example. The borrower/buyer and seller agree to a strike price in earnings, and when that amount is earned, the seller starts to receive 50% or whatever amount was agreed to of all earnings in excess of the strike price.
The seller in essence gets a deferred increase in the price of his business that he sells. The buyer get a deferral on the amount he pays. In the end everyone wins as long as the new business does the projected amount of future cash flow.
For more on creative financing techniques visit loanforbiz.com.
While thinking outside of the box is our forte, some time all that creativity can really pay off. Here's an example that I want to share with you.
We were approached on an SBA Loan for the acquisition of a business. The business would not debt service at a greater amount than 1:1, which means that the lender, was not willing to lend the requested amount. The first thought of course is to have the seller carry paper with no payments for a period of time. Most of the covenants that I have read regarding seller carry-backs states that the seller cannot be paid off prior to the SBA Lender being paid off.
However, many of these covenants are not enforced as long as the loan is current, if however the loan goes into default the SBA will find out that the seller was getting paid back in violation of the loan covenants and that can present a serious problem. So I would not recommend this alternative.
Another idea is that of a separate agreement outside of escrow which can be a note between buyer and seller, but again that can create problems for the same reason as above.
The new twist is to structure an Earn Out. An Earn Out allows the seller to lower the price of the business and the buyer to borrow less money, therefore the cash flow would support the eventual sale in our first example. The borrower/buyer and seller agree to a strike price in earnings, and when that amount is earned, the seller starts to receive 50% or whatever amount was agreed to of all earnings in excess of the strike price.
The seller in essence gets a deferred increase in the price of his business that he sells. The buyer get a deferral on the amount he pays. In the end everyone wins as long as the new business does the projected amount of future cash flow.
For more on creative financing techniques visit loanforbiz.com.
Monday, August 25, 2008
Daily Observations - More Collateral Issues
I hope you are beginning to see the trend in these blogs. I am stressing what the lenders are stressing. I am trying to point out the issues that are preventing lenders from issuing "real" LOI's. By real, I mean that the deal has a reasonable chance of funding, and that a good portion of the underwriting has been accomplished.
Tonight I want to continue with the issue of rolling stock as a form of collateral. For those readers that are not familiar with rolling stock, it simply is assets that can be easily moved from one location to the next with minimum effort. Examples of rolling stock would be company's that have primarily vehicles, boats, buses, or any type of asset that can be mobile, hence the term "rolling".
The banks are simply not lending on rolling stock without any other form of collateral for security. Simply stated a "biz op" that is mostly made up of assets that are considered rolling stock will definitely have to have additional collateral, or the buyer must put down a substantial down payment. We heard today of one lender that was willing to finance the rolling stock but the borrower had direct experience, and was putting down over 50% of the purchase price.
I believe this again is a new trend that we all need to be aware of. If you have a client that is looking to fund rolling stock through the SBA program, you may want to look to an equipment financing company or leasing company rather than to a SBA Lender.
For more on SBA owner user financing programs visit loanforbiz.com today.
Tonight I want to continue with the issue of rolling stock as a form of collateral. For those readers that are not familiar with rolling stock, it simply is assets that can be easily moved from one location to the next with minimum effort. Examples of rolling stock would be company's that have primarily vehicles, boats, buses, or any type of asset that can be mobile, hence the term "rolling".
The banks are simply not lending on rolling stock without any other form of collateral for security. Simply stated a "biz op" that is mostly made up of assets that are considered rolling stock will definitely have to have additional collateral, or the buyer must put down a substantial down payment. We heard today of one lender that was willing to finance the rolling stock but the borrower had direct experience, and was putting down over 50% of the purchase price.
I believe this again is a new trend that we all need to be aware of. If you have a client that is looking to fund rolling stock through the SBA program, you may want to look to an equipment financing company or leasing company rather than to a SBA Lender.
For more on SBA owner user financing programs visit loanforbiz.com today.
Sunday, August 24, 2008
Daily Observations - Collateral Continued
If you recall on Thursday night I shared with you the calculations that a bank will use to determine available collateral. The reason I did this was for the average person to realize that what they believe they have in equity, they may not have. It is very important that any borrower who is planning on using real estate as collateral realize that the equity position that they thought they have may be very different after the bank does their calculations.
The above statement may sound very negative, but it's important to realize where you stand, while going for a loan. By knowing that collateral is an issue the borrower can offer other alternatives to the lender. There are even some lenders now that are strictly cash flow lenders and are not concerned with the collateral. However, even if the pledged Real Estate has no equity the lender may opt to secure their interest by putting a lien on the property.
Another source of collateral for a business purchase may be the actual equipment that the borrower is purchasing. For example, a manufacturer may have hundreds of thousands of dollars worth of equipment that can assist the borrower as pledged collateral. The only thing to remember is that the evaluation of the equipment must be as if it was sold at a force liquidation sale.
For more information on the different type of loans that loanforbiz offers please visit our website.Thursday, August 21, 2008
Daily Observations - Collateral Evaluation
Just a quick note and right to the point. There are many misinterpretations as to how a bank will evaluate collateral. The following is the calculation that most lenders apply to determine Equity in a piece of property.
Step One - Take your Best Opinion of Value, hopefully what a professional says the property is worth, sometimes called a BOV, or a Broker Opinion of Value.
Step Two - Discount that value by the amount of at least 20%, because most lender will only allow 80% value to the real estate collateral.
Step Three - Now subtract any and all liens / debts against that property, including any other liens that the property has been pledged to support.
The remaining amount is the collateral value that a bank will apply as security for the loan.
NOTE - Some lenders apply even more stringent calculations.
For more on investment property and collateral value visit loanforbiz.com .
Step One - Take your Best Opinion of Value, hopefully what a professional says the property is worth, sometimes called a BOV, or a Broker Opinion of Value.
Step Two - Discount that value by the amount of at least 20%, because most lender will only allow 80% value to the real estate collateral.
Step Three - Now subtract any and all liens / debts against that property, including any other liens that the property has been pledged to support.
The remaining amount is the collateral value that a bank will apply as security for the loan.
NOTE - Some lenders apply even more stringent calculations.
For more on investment property and collateral value visit loanforbiz.com .
Wednesday, August 20, 2008
Daily Observations - CAP Rates Revisited
Tonight's observation is almost a review of what's been happening in the marketplace. If you have been a regular reader of this blog you will remember what I stated that many investors are leaving California, and looking towards other states with higher CAP Rates.
As a quick review CAP Rates are the benchmark indicators if an investment will return a significant return on investment. There is an inverse relationship between a capitalization rate and the purchase price of a property as well as the net operating income. As the Rate goes up the property value goes down, and the net operating income as a percentage of the purchase price increases. What that means is a low a price property with a significant net operating income will yield a higher Rate; then a higher price property, would with that same significant net operating income.
The lender will analyze the net operating income as compared to the purchase price to determine the loan to value they are willing to lend on.
Therefore, as the Rate goes up, the loan to value also goes up, which in turn increases the capitalization rate. Because of the economy in California, and the fact that we are in a buyer's market, we are now seeing purchase prices of property decrease as the cash flow remains the same. This means that an investor now can get a better return on their money here in California, versus leaving the state.
I'm not saying at this point that the investors are returning to the market in droves, but I personally believe that as prices drop as they have been doing, the investors will start returning to California, and then market values will once again begin to increase.
Because of this anomaly that is occurring now it might be the best time to look at purchasing property as either an investor or an owner user. We have owner user financing at 90% loan to value and rates in the mid 6's.
For further information, contact us or visit our website loanforbiz.com.
Subscribe to:
Posts (Atom)
