| Posted by: Jack Kovach Oct 4 2002, 05:52 PM |
I got a problem with a business loan for a car shop. The shop is owned
by my uncle and has been his for the last twenty year and I have been
working on it for the last five years. On top of that the place is a fixture on
the neighbor. The problem is the owner of the lot is selling and my uncle
has a couple of weeks left to buy it or it will be sold to someone else. A
month ago we went to see the banker and my uncle filled out an applicetion.
Yesterday the banker called my uncle and he told him that the loan had
weakness and could not be aproved. My uncle has been a mechanic for 40
years and has no credit problems. I do not understand why this is going
on.
can you help? Please send me an email to (edited)
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| Posted by: loanuniverse Oct 5 2002, 03:39 PM |
Thanks for posting Jack.
When looking at a loan to purchase commercial property, a serious lender looks at the repayment capability of its borrower. In this case assuming that your uncle's auto shop is the only business in the property, the source of repayment will be the cash flow generated by the business. If your uncle's shop is not the only tenant then things get a little more complicated as the source of repayment for the loan will be the rental income from the other tenants supported by the cash flow from the business.
Whenever a business loan request is analyzed, it is good form to list the strengths and weaknesses of the proposed facility just before the analyst gives his recommendation. In order to help you mitigate the weaknesses that were found in the loan request you will need to get information from the loan officer about the specific reason(s) why the loan has been denied. The type of weaknesses found on your loan can vary from bank to bank, but the ones that will be listed by everyone include:
Insufficient debt service coverage Which means that you can not pay the loan that you are requesting according to the bank's guidelines.
Excessive leverage Your company is already using too much credit or will be using too much credit as related to its net worth after the proposed loan is accounted for.
LTV Your down payment is not enough. The Loan To Value is too high.
Declining revenue
Declining profits and profitability
Get your uncle to get in touch with the loan officer to find out why the loan was declined. If it was a financial reason ask him to go over the numbers and ask him how that can that weakness be mitigated.
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| Posted by: GlobalArb Nov 15 2002, 07:57 PM |
Hello,
I just read the UCA Cash Flow vs. Traditional Cash Flow debate pages, and while somewhat familiar with both of these topics, would like your thoughts.
While it seems to me that UCA Cash Flow is an invaluable tool for seeing what happened to the cash (in and out) from any reporting period to another, I don't see how, for most small businesses, it can be a useful tool for evaluating the ability for repayment for long-term debt, such as real estate, equipment, etc. After all, for most companies visiting this site, receivables, inventory, payables, accruals, etc. are volatile during the year. For example, if a company has $1 million in receivables (with $500,000 being from one customer), on July 1st, they may have a debt service coverage ratio of X.XX. Yet, if they get that check for $500,000 on July 2nd, their debt service coverage ratio would be drastically different. Another example might be if a declining company is collecting receivables without replacing them (commonplace)...UCA cash flow is likely to be positive, resulting in a high debt service coverage ratio, yet the company is virtually liquidating the company and may be out of business next month!
While UCA Cash Flow is accurate in depicting the short-term cash flow 'stress points' and directing those interested to exactly where the company is getting/losing cash, because it utilizes balance sheet numbers (a snapshot) which may change the very next day or may have been totally different the day before, it seems to me to be a short-term tool.
If balance sheet numbers weren't fluctuating in a particular company, then to me UCA would be more accurate in anticipating long term ability to repay debt. Yet, if the assumption at that point is that balance sheet numbers weren't fluctuating much, the result is a UCA that looks a heck of a lot like traditional.
On the other hand, if a banker is not looking to UCA for guidance when discussing a line of credit or other short-term debt, then they are likely doing the company and the bank a disservice.
This is my take at the present, but would definitely like some input and ideas...thanks!
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| Posted by: loanuniverse Nov 16 2002, 11:34 AM |
GlobalArb:
Thanks for the visit and the post.
I have to say those are very good points, which lead me to believe that you are indeed quite familiar with the concepts. You make a good argument for discounting the value of a debt service coverage ratio from UCA cash flow. However, there are a couple of things that make it more valuable.
1- Three years of financial statements Most banks require at least three years of financial statements and an interim financial (if fiscal year is more than 6 months old) in order to evaluate the debt repayment capability. When it comes time for me to evaluate the prospective borrower, I usually have two years of cash flow in front of me and the cash flow for the interim period. This helps me evaluate the latest year against the prior period and get a better picture of the normal inflows and outflows.
2- Aging of accounts receivable An aging of accounts receivable is usually required and that would let me know if there is an account debtor with $500,000 outstanding out of a total of $1,000,000. Frankly, in occasions such as that, I would be more concerned about the account debtor's ability to repay the $500,000.
3- Peer information is available to compare Analysts have access to industry ratios, which are helpful in determining how the prospective borrower stacks up against the industry in the managing of trading accounts.
4- Communication While reading your post, I remembered a real life case that crossed my desk about a year ago. This wholesaler of grocery/dry goods to the Caribbean was having its line of credit being reviewed for its fourth time by my employer. The line is for $900,000 and is handled as agreed, but when it came time to look at its cash flow it had deteriorated badly as a result of its inventory tripling at 12/31/2000. The reason was that they had purchased two whole shipments (as in full ships) of rice and they had not delivered them yet. Whenever something out of the ordinary comes up like that, a question is sent to the loan officer and he speaks to management to clear it up.
5- UCA cash flow only a tool A very important tool, but only a tool. I have personally recommended loans and lines where UCA cash flow was inadequate. In fact, sometimes it has been negative. It depends on the credit criteria of the lending institution. Analysts do not create policy, they only enforce it. The hypothetical scenarios that you listed "large account debtor, diminishing accounts receivable" would be easily detected by other portions of the analysis. For instance, the first part of my credit analysis format that deals with financial information always addresses the sales, and the balance sheet portion of the analysis dissects the quality of the receivables so those two scenarios would be addressed.
In conclusion, all we are doing is making an educated guess with the tools available.
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| Posted by: GlobalArb Nov 17 2002, 11:54 AM |
Thanks for the information. As a former banker, and now as a business owner, I'm curious as to how banks look at companies, and how we as business owners should evaluate our own company's financials to understand what looks good/bad on paper. And I totally understand about using all the tools...and from my short time as a banker I recall that financials were really just a prompt for questions to understand what's going on with the company, because there's always an answer behind the numbers that may or may not make sense, and may or may not be acceptable to the bank.
So is there a 'right' answer as far as long-term debt service -- UCA vs. traditional? Alongside all the qualitative and quantitative analysis, when it comes down to that debt service ratio, what should they, in your opinion, use...and in turn what we should look at in our own companies?
Thanks! |
| Posted by: loanuniverse Nov 17 2002, 03:23 PM |
| QUOTE | | So is there a 'right' answer as far as long-term debt service -- UCA vs. traditional? Alongside all the qualitative and quantitative analysis, when it comes down to that debt service ratio, what should they, in your opinion, use...and in turn what we should look at in our own companies? |
Success depends largely on the bank's tolerance for risk and desire to do the particular type of loan your business is requesting. However, I think the most important is traditional cash flow as the loan officer can make a case for giving the loan if that one is positive and the UCA cash flow is negative. It all comes down to mitigating the bad and in order to do that you need an understanding of what is driving your cash flow. But, it would be very difficult to mitigate a negative traditional cash flow or one that is inadequate.
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| Posted by: GlobalArb Nov 17 2002, 09:35 PM |
| Thanks for the input...you've been a great help and your site is a wonderful resource! |
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