Preparing a Winning Loan Package

02/05/12 20.56

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Preparing a Winning Loan Package

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Preparing a Winning Loan Package

By Elizabeth Wasserman, August 03, 2010 After sales fell in 2009 during the economic slump, Engenuity Systems, a Chandler, Arizona, energy control products distributor and reseller, asked its bank for a loan. The answer was no. So executives went to another bank. Same answer. In all, Engenuity approached eight banks and was rejected eight times. The reaction was pretty much uniform, says Tracy Markie, Engenuitys founder and CEO. He says banks told him, We love your business. Were very confident youll do what you say. However, we cant help you right now because of the current financial situation and our current financial situation. Instead, Markie turned around the 16-year-old company by cutting staff, reining in expenses and launching new products. He also secured financing based on his outstanding receivables. Those actions paid off, and the companys revenue is on target to hit more than $10 million this year. It dipped to $3.6 million last year from a peak of $6 million in 2007. Like a lot of other businesses that couldnt get bank loans during the height of the recession, Markie is taking steps to make sure the company is bankable now that lending is expected to loosen up. One of those steps is putting together a winning loan package to improve the odds hell get a different answer as he makes the rounds of lenders once again. Having a winning loan package is important because for many midsize companies, securing financing is still a bit like a gladiator contest in the Roman Empire: only the fittest will prevail. When it comes to small and midsize companies, lenders remain concerned about making bad loans to smaller firms, which tend to be greater credit risks. Theyre also under heightened pressure from federal regulators to maintain higher cash reserves. They dont have a lot to lend, and they have to know the credit they are giving out is high quality, says Robert Bunting, president of the International Federation of Accountants (IFAC). The way you win is to go beyond a simple loan application. Elements of a Winning Loan Package Banks underwent an historic belt tightening last year. In 2009, overall loan volume declined by $587.3 billion, or 7.5 percent, compared to 2008 the largest percentage drop since 1942, according to the Federal Deposit Insurance Corporation. This year, bankers expect that lending standards will loosen. In a September 2009 survey of 559 bankers by IFAC and The Banker magazine, 23 percent expected to make loans to new small and mid-sized businesses in 2010 and 2011, and 20 percent expected to increase loan amounts to existing business clients.

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The way you win is to go beyond a simple loan application.

Robert Bunting, president, International

Federation of Accountants Even with optimistic forecasts, businesses in need of cash cant take chances. Borrowing conditions have changed, says Bob Seiwert, senior vice president of the American Bankers Associations Center for Commercial Lending and Business Banking. Banks are increasingly looking at a business means to repay a loan, including not only cash flow but also secondary sources of repayment if cash flow dries up generally collateral or guarantees from shareholders or other third parties that have substantial net worth, Seiwert says.

When it comes to putting together a loan package, dont just fill in the blanks. A winning package should explain a companys story, answer more questions about its financial condition than it raises, demonstrate managements ability to make accurate financial projections and most importantly in this market detail how the business will repay the

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Preparing a Winning Loan Package

02/05/12 20.56

loan. Here are crucial elements: An Introduction to the Business Many businesses start a loan package like a job application, with a cover letter and an updated business plan. Particularly when approaching new lenders, provide a well-written description of the companys history, products or services, market, management team, why you need the loan and how youll repay it. You want to build confidence by showing you have a vision and a plan and a track record of successful execution, says Bunting, the IFAC president. Show them what the loan is going to be used for and how that impacts the business. Thats a good story to tell, says Connie Wright, managing director of Accounting Management Solutions, a Waltham, Massachusetts, financial consulting firm that helps companies prepare loan packages. Financial Statements Bankers want loan packages to include three to five years of financial statements, including balance sheets, income and cash flow. They also expect to see financial statements assembled by an accountant. A CPA can provide three types of financial statements: a compilation, review or a full-blown audit. Bankers prefer the latter. Although theyre more expensive and time-consuming to pull together, audited financials prove numbers have been validated and provide bankers with additional information on which to base their decision, including comprehensive footnotes and an auditors opinion letter. Bankers look for a clean opinion, and if its not clean, they want to know why, says Seiwert, the American Bankers Association executive. Tax Returns To help validate numbers, bankers want three to five years of corporate tax returns. Dont put together a package until your taxes are done, says Robyn Barrett, managing member of Factors Southwest, an alternative lender. Lenders make 90 percent of decisions based on financial data and tax returns, Barrett says. If you dont have that theyre not going to even talk to you. Forecasts or Projections A loan package should include financial projections for three to five years out or for the term of the loan. Most midsize companies should have the resources to assemble sales, revenue, cost and market projections, but accounting professionals can help. Banks assume youll be overly optimistic, so submit forecasts showing the best, middle and worst-case scenarios based on different market assumptions. Remember the banks underlying goal: getting repaid. For you to be successful, under all three scenarios you must demonstrate you can repay that loan as agreed, Seiwert says. Collateral While banks expect cash flow to be the primary means for repaying a loan, today they also want a secondary source. As a result, a loan package should include a list of collateral; provide appraisals if available. Not all collateral is created equal. A restaurants cooking equipment and fixtures would be liquidated at pennies on the dollar, but its accounts receivable are as good as gold. Real estate was once collateral enough for most banks, but given whats happened in the real estate market, Theyre less comfortable these days, says Jerry Jolly, KPMGs national managing partner for mid-size companies. Banks may also ask businesses to back up loans with personal guarantees of executives assets in the event the business cant pay. References A strong loan package should include references from banks the business has borrowed from in the past as well as from key suppliers and customers. It gives a banker the sense that you have nothing to hide, Seiwert says. If a would-be borrower previously defaulted on a loan or foreclosed on property, it can torpedo an otherwise perfect loan package. Dont think you can get away with not mentioning it, because bankers will run a credit check. Finding the Right Bank Its usually easier to secure a loan from a bank with which a company has a good track record. Still, loan requirements may vary depending on the banker, the economy and industry practices. Its clearly not a one-size-fits-all process, Bunting says. Now that Engenuitys sales have bounced back, Markie, the companys CEO, is visiting banks once again looking for a revolving line of credit. Though banks havent changed, Engenuity has. Now when Markie comes to call hes armed with a three-ring binder an inch thick full of details on the companys finances and forecasting its growth. He has learned his lesson. He says, Had we walked into the bank with a standard application and maybe a balance sheet and income statement, we would have been out the door in 10 minutes.

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