Credit Resources
Strategy If the first lender can approve you, depending on what they want for collateral, it is wise to try to negotiate the collateral. If your company has $2MM worth of equipment, $1MM in Accounts receivable, Real Estate worth $2MM, and you are asking for $200,000, some institutions may try to take everything you own as collateral. This is when you should try to negotiate what they take as collateral. Suggest up front what you want to offer as collateral. Simply put, if you give it to them, they will take it. You may end up having to provide all this collateral and institutions normally don’t negotiate this, but most people don’t try to negotiate this. They think if the bank asks for it, it is set in stone. An example would be for you to negotiate and the lender agrees to take everything but the Accounts Receivable and equipment as collateral, or maybe the Equipment and Accounts Receivable but not the land. Lenders are not used to the borrower handling it this way, but you wont’ get it if you don’t ask for it. Another major reason to do this is that traditional lenders will automatically take most everything you have as collateral. Suppose you are requesting a 6 year loan. If the bank takes all your assets as collateral, now have no collateral to offer should you need to borrow again in the next 6 years. Does the lender care about that? No, but you need to put great importance on that. As the owner of the business, you intend to expand in the next several years. It is just as likely that due to expansion, need for inventory, raw materials, relocation, marketing programs, etc. that you will need capital again before the current loan is paid off. When that happens, all your assets will still be tied up in the original loan. You certainly won’t be able to get a totally unsecured loan at that time. Don’t count on previous lender to release part of your collateral just because you balance is a small fraction of the original amount. They rarely do. If this does not work, another approach could be to get either the same amount of loan, but half from one lender and the other half from another lender. Or to get different types of small business loans from different lenders. All things equal at your company, it will be harder for you to get $150,000 from one lender than it will be to get $75,000 from two lenders. You could use the Accounts Receivable for one loan and the equipment for another. That could leave the land free for a future request. Watch out! Buying A Business If you want to buy an existing business, financing can be difficult to obtain. You will be looked at as a new owner. There are options that make it easier to arrange this type of financing…….more Asking the owner to Self Finance part of the sale is a creative option that many people overlook or don’t negotiate aggressively enough. Most people cannot get a small business loan to 100% cover the purchase, so ask the owner to finance a percentage of the purchase to you directly. Being able to sell the business is the motivation the seller has to self finance a part of the business to you. The higher the percentage you ask the seller to finance themselves, the more motivation you need to give them to do so. Should you not make your payments on time, you can arrange for certain increasing penalties, the more delinquent the payments become. If you are more than 60 days Past due on your payments, you can increase the late fees. You can put in a clause that in event of a default, certain assets automatically become property of the seller. Buyers typically do not want to arrange this type of financing, but if it is your goal to have that business, you must be willing to take aggressive risks in order to give the seller a compelling reason to accept less than 100% of what the business is worth. Call Options Some loans will have covenants or provisions that seem minor but can really cause problems later. Traditional lenders like to put clauses into their loans that allow them to “Call” the loan anytime. This means that if they feel like it, they can call you anytime and demand you payoff the balance either immediately or within 30 days! This can be devastating to your business. Try to negotiate that out of your loan. Any one of a number of things could happen that are out of your control and the bank might call the loan. The economy could worsen. Maybe you were paying a little slow on your loan, and they had an upsurge in defaulted loans and they decided to call all but the best paying loans. It could be they urgently needed capital and to help themselves they call the loan. These things could happen! What would you do? If you try to get it re-financed at another bank, the other bank will soon figure out that your bank is calling the loan, which they consider a negative, justified or not. If you cannot get it re-financed, you are now wide open to that bank suing you, reposing your assets, selling them and then you are out of business. Avoid a call option being put in your loan. Annual Payouts Some lenders that approve you for a business line of credit will have a condition in the line of credit for you to pay the balance down to $0 once per year, regardless of how much you borrow, how well you pay. This could be extremely difficult for you to do. If you fail to do so, the remaining conditions for failure to annually pay out could be severe. Depending on the loan contract, they may have the option to do any number of things from raising the rate to calling the loan. Company Only or Corp only Loans Some lenders will approve loans that are just in the name of the company, that is, no principal or signer is required to guarantee the loan. This only occurs with Corporations, and is most often considered for 5 Year or older corporations. The idea behind these began with larger companies. For example, if Coca-Cola takes out a $500 Million loan, none of the employees or officers of the company would consider individually guarantee these, otherwise the lender could come after them if the loan is in default and ruin them financially. In such a loan, the loan is in the name of the company only, so if the company defaults, the lender can only liquidate the company assets in their efforts to partially repay the balance of the loan. An Example of this was Eastern Air Lines. The lender actually sold the hard assets of the company to repay the loan as much as possible. This is another reason to incorporate and work to establish business credit. Within a few years, you will then be considered for some types of small business loans and other types of capital in the company name only without having to individually guaranteeing every loan. Another benefit is that any small business loans you do not guarantee will not show up on your personal credit report. If you are having to currently guarantee all business loans now, it is likely these loans are showing up on your personal credit report. This will cause you to to appear to be overextended when in fact the revenues from your business is being used to pay these loans rather than from your personal income. The more of these you personally guarantee, the harder it will be to get other personal loans or small business loans in the future since you appear to be making yourself more and more “debt heavy”, based on your personal credit bureau. |
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