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The property may be in an unsafe or unlivable condition, or there may simply not be enough equity in the property in its unrenovated condition.
Once the building has been stabilized or restored, the owner should have created enough additional equity to qualify for conventional equity finance. There is no charge for this.
Once this form is receive the Fund runs a credit check and reviews the information provided. Considerations are not limited to these criteria, and not all criteria need to be met. The Board must be satisfied that the applicant is reasonably capable of meeting monthly payment requirements and, ultimately, of repaying the loan. Loans are offered at below market rates, usually one point below, depending on the circumstances of the individual case.
The lower interest rate is offered as an incentive to get any necessary protective work done sooner rather than later. Additional discounting may be offered to those of more limited means. Bad credit is not necessarily an obstacle to obtaining a loan from the Fund, though the Fund needs to be reasonably confident it will get its money back.
As a rule loans are offered for a maximum of three years. Terms are negotiable. People may pay interest only with a balloon lump sum payment at the end of the term. A manufacturer's inventory, consisting of component parts and other unfinished materials, might be only 30 percent. The key factor is the merchantability of the inventory—how quickly and for how much money could the inventory be sold.
Accounts receivable: You may get up to 75 percent on accounts that are less than 30 days old.
Accounts receivable are typically "aged" by the borrower before a value is assigned to them. The older the account, the less value it holds. Some lenders don't pay attention to the age of the accounts until they are outstanding for over 90 days, and then they may refuse to finance them.
Other lenders apply a graduated scale to value the accounts so that, for instance, accounts that are from 31 to 60 days old may have a loan-to-value ratio of only 60 percent, and accounts from 61 to 90 days old are only 30 percent. Delinquencies in the accounts and the overall creditworthiness of the account debtors may also affect the loan-to-value ratio.
Equipment: If the equipment is new, the bank might agree to lend 75 percent of the download price; if the equipment is used, then a lesser percentage of the appraised liquidation value might be advanced. However, some lenders apply a reverse approach to discounting of equipment. They assume that new equipment is significantly devalued as soon as it goes out the seller's door e. If the collateral's value is significantly depreciated, loaning 75 percent of the download price may be an overvaluation of the equipment.
Instead, these lenders would use a higher percentage loan-to-value ratio for used goods because a recent appraisal value would give a relatively accurate assessment of the current market value of that property.
Securities: Marketable stocks and bonds can be used as collateral to obtain up to 75 percent of their market value.
Note that the loan proceeds cannot be used to download additional stock. Understanding Your Cash Flow Cycle A lender's primary concern is whether your daily operations will generate enough cash to repay the loan.
Cash flow shows how your major cash expenditures relate to your major cash sources. This information may give a lender insight into your business's market demand, management competence, business cycles, and any significant changes in the business over time.
The worksheet is an Excel template that can be used in Excel 4. Because it's a template, you can use the worksheet over and over again and still retain an original copy of it. The worksheet is set up to be used for projecting your cash flow for six months. We've formatted the worksheet and put in most of the cash inflow and outflow categories for you. All you have to do is put in your numbers and print it. While a variety of factors may affect cash flow and a particular lender's evaluation of your business's cash flow numbers, a small community bank might consider an acceptable working cash flow ratio—the amount of available cash at any one time in relationship to debt payments—to be at least 1.
As most lenders are aware, cash flow also presents the most troubling problem for small businesses, and they will typically require both historic and projected cash flow statements.
The ratios will help you compute realistic sales revenues and the proportion of expenses typically necessary, in that industry, to generate the projected sales revenue. Warning A business's cash flow will usually include not only the money that goes in and out of the business from its operations sales less expenses , but also any cash flow from investments or financial activities e. However, the most important component to a lender is simply whether the business's ongoing sales and collections represent a sufficient and regular source of cash for repayment on a loan.
Improving Your Cash Flow If you're trying to improve your odds of getting a business loan, we suggest you review the following practices of your business: Pay off, or delay paying, debt.
If possible, pay off existing debt or refinance the debt for a longer maturity with lower payments. For other debts, try to renegotiate payment lengths. Believe it or not, some creditors may allow some delinquencies as long as some money is coming in. In some situations, you may simply have to prioritize those creditors who must be paid because they are providing necessities—such as utilities, certain suppliers, payroll, etc.
Revenues are lost when a firm's collection policies are not aggressive. The longer your customers' balance remains unpaid, the less likely it is that you will receive full payment. Reduce credit allowances and accelerate cash receipts.
If you can tighten credit terms without losing good customers, you can increase available cash on hand and reduce the bad debt expense. You can also encourage cash sales through discounting and pricing policies. In addition, try to reduce the float time on customer payment checks. You can do this by undertaking prompt processing of checks as you receive them, using a bank lockbox arrangement in which you pay a fee for the bank to collect and process all incoming payments, and by shopping for a bank that quickly processes negotiable instruments.
Increase revenues. In reviewing ways to increase cash flow through increased sales, guard against allowing too many credit downloads.
Extending credit will increase your accounts receivable, not your cash. Reduce inventory. If you can reduce the amount of inventory you maintain, your cash outflow should decrease. Review tax strategies that may help cash flow with your accountant. In addition, accelerated depreciation on certain equipment and tangible property may be available to increase your short-term tax deductions.
Assessing Your Character as a Potential Business Borrower The weight given to a lender's assessment of a borrower's character can vary tremendously between lending institutions and between individual lending officers.
Many small businesses have found more success "selling" their reputation and good character to smaller community banks who may be more directly affected by the economic health of the surrounding community.
To ensure you're selling yourself well to your lender, we've compiled the most important steps to follow. Improving Your Character in Front of Lenders As a general rule, the following traits are considered the most important when a bank considers your character: Successful prior business experience An existing or past relationship with the lender e.
If your investment is considered insignificant, a lender may consider it a lack of both owner confidence and dedication to the business. Warning One banker noted to us that he often relies upon reaching a personal "comfort level" with a borrower before making a loan. This comfort level is based upon the degree of trust or confidence that the banker has in the accuracy of the information and documentation being presented to him. He observed that in their zeal to "sell" him on the profitability of their business, small business borrowers sometimes talk him out of this comfort level by disclosing that their tax returns underreport income and overstate expenses.