Business Health Series – Preparing Your Business for Bank Financing

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Welcome everyone. Thank you all for joining us today. my name is Gershon Morgulis. I am the founder of Imperial Advisory. We are a fractional CFO firm. I’m gonna talk about the firm in a moment, but I’m gonna start by saying thank you to Tony, our marketing person, for putting this all together. welcome to our CFOs from where I’m looking. I see Tom Amato is here and

Maybe we’ll have some others. We also have Rick, one of our CFOs, who is presenting today. Very exciting. Thank you, David Koegel, as well for co-presenting with Rick. all right, I’m gonna spend a moment introducing the firm and then I’m gonna hand it over to the excellent speakers. So we’re a fractional CFO firm. What does that mean? We work with CEOs and in larger companies. We’ll work with CFOs and we work with growing.

Typically growing businesses who need help. And then we come in either as a part-time CFO or sometimes, particularly when there is a CFO, we’re coming in either as an interim because the CFO disappeared, or for some kind of project working for the CFO. we’ve got a really amazing team, you know, lots of really good experience. Most of the CFOs on our team have thirty to forty years of experience.

And generally they’ve got ten years sitting in the CFO seat. So and obviously they’ve embedded a lot. So we we’ve got a really top good, top notch team. And we go into businesses and we help kind of pull owners out of the things that they don’t want to be doing, that they shouldn’t be doing, or that they don’t have time to be doing.

We work closely with CPA firms while not you know overlapping. You know, they we help, you know, they’re often focused on compliance, whether it’s tax or audit or whatever, and they will often hand other, you know, strategic or really deeply involved things to us to execute on. that’s the high level. So here

Today we’re gonna be talking about banking and having a banker and how companies should think about that. Many companies

need bank capital to help them grow. But that’s not what I’m going to talk about. I’m going talk about the other kinds of situations that we sometimes get called into. We sometimes, and recently it’s happened a bunch where we get called into a business and, you know, they have some issues, whatever those issues are, they might be in distress, they might be growing fast. And their problems with their bank and their banking relationship. And

Having a good CFO on your team, as well as having a good banking relationship, really make things better. And so one example recently, or a few examples would sound quite similar, we’ve had these clients where you know the bank sees they’re growing fast and they’re paying money back, but they don’t have confidence in the numbers that the company is presenting. Or

the company maybe hasn’t been paying back and is looking to tell the bank that things are going to be different this time and here’s why and here’s how, but they don’t necessarily have, you know,

the trust of the bank or the banker at that point in time. And that’s where one investing in that long having that long term relationship, building the trust and having that all set up before there’s a problem becomes really important, as well as having the right CFO so that the bank has someone that they’re hopefully more comfortable with, particularly when it’s an outside person in a messy situation, bringing bringing that CFO

Either having the CFL build a relationship or potentially bringing in new blood, you know, financial professionals can help smooth things over with the banks. Anyway, that’s a little bit about how this fits into who we are and what we do. And without further ado, I’m gonna introduce our excellent speakers, Rick and David. I guess why don’t you start by introducing yourselves and then take it away? Sure. Rick, go ahead. Sure. So I’m Rick Katz of

Been a CFO for the last twenty-five years and prior to that had general management experience, both in South Africa, my roots, and here forty years. And I really enjoy working with owners and CFOs and CEOs on in trying to improve their business from any aspect. Most financial influence sort of delves into all sides of the business, and I really enjoy doing that and

Want to help wherever possible. and enjoy working with Gerson and the Imperial Advisory Group. David? Okay. Thanks so much, Gerson, for having us. This is an exciting opportunity. I see a bunch of names on the participants that I know, so I’m not gonna shout out everyone, but thank you for hopping on. My background is thirty-three years in middle market lending. I was a banker at Republic.

Sterling Signature Webster, Sterling Webster was my last round. And four years ago I went out and hung up a shingle with some partners and we’re doing debt advisory for companies. over the years in 36 years, I’ve bumped into many, many situations where a CFO could be used and it would have helped the client to be able to access capital in a much easier fashion with less resistance, less problems. and had they had some foresight.

they would have been much more successful. So our goal is not to focus on the past, on the negative, our focus is on the future, to help people be more proactive and be able to get themselves positioned properly. So when they go for financing, the numbers and the situ and the situation of the company, the fundamentals are all in a good good place, a good setup, good good qualifiers. And we that’s what we hope to accomplish today, to give you the basic tools.

understanding of what the bank really wants to see, how to navigate it. and I look forward to working with Rick and hope you all will be you’ll be able to take away something from it. Without further ado, I guess well let’s pop on the share screen and get going. Very good. So I’m going to start off kind of segueing from what Gershen was saying before we get into some of the details of how to present a bankable loan request. You know

The relationship between you and your banker should be a fairly close one. I’ve worked over the years with a number of bankers, and early on in my career I was actually in quasi-lending and on the other side of the desk. And considering that everything you do in the business involves cash coming in and going out, your banker should be a a very good sounding board.

And a very good participant as you develop your business, and as you need money, and as you need other services that a Treasury Department provides to move forward. I have had very close relationships with bankers, and that has led to getting banking facilities.

which are always cheaper than going through a broker. I mean, if your own bank and provide the money, it’s going to be cheaper. The problem is if you don’t have the relationship or you don’t have the financial expertise available to you, you are not going to satisfy a banker enough to do a loan without further research and without further documentation.

and without further input which you have not provided earlier on with your relationship with your bank. Some people require seasonal money, a line of credit that goes up and down. Some people will use it as part of their working capital on a permanent basis and collateralize it. And others need loans for specific events and so on.

a couple of good experiences or bad experiences, should I say, that I’ve had with bankers and the reason. we were in a previous time, I was working with a company that we used Bank One in Columbus, Ohio, which was purchased by Chase Bank. And I actually went to the meeting where Jamie Diamond came and presented the Chase philosophy to all the customers who wanted to attend.

And I really knew the bankers at Bank One very well. You know, it’s it was a a big bank in Columbus, but it wasn’t a big bank nationally. So the importance of each customer was quite high. And everything went very well. And when I moved to a different company, we were then with Wachovia Business Group, which is the small business group. And they have a different mentality, obviously, to a larger bank group.

Although Wackovia was a big corporate bank as well, and a very good one, they had a situation where they allowed an overdraft, unauthorized overdraft of $3 million to occur, and they were panicking. And this was at a time when the company was under stress, and I was hired first as a consultant and then became the CFO and found that I could not work with Wacovia Business Group.

They just didn’t understand how to deal with it. The company had built too much inventory. The company was running at a loss because they got into a new building with a new plant and they went 24 7 from day one and they they would just get in a mess. But the the the overdraft was led was allowed to develop. I moved it over a six month period to Chase from Columbus, Ohio, where I knew some most of the people.

And it was a very clean move. We even did it without shareholder guarantees, which is a big factor when you’re looking at a private company. And I had paid down that three million to zero by the time we moved it. We fixed the inventory problem, the production problem, and we were running profitably. And everything went well for a number of years, and we grew and we reached a point where we had a fantastic year. It was an S-corp, and we had to provide

Tax payments the following year, which happened to go down. And as the as the profits went down, we were still having to pay the tax based on the previous year with SCOP and draw money out of the business. And we broke a covenant. Well, when I got in touch with and I got in touch with Chase about sixty days prior to this going to happen, you could see it going to happen, and all the people I knew were suddenly gone.

The direct contact left thirty days ago. His boss was gone. The president no longer existed. And I was stuck with dealing with them.

The Chase people in Dallas and they were gave me a very hard time. So what did I do? I spoke to another Bank Regions, who had a very good account executive who had been staying in touch four years with me. By the time I called him and said, I need you now, he knew me and I knew him. He knew what our business was. I explained the problem. I was introduced to the management team in Dallas, and we did a deal.

And that showed that the importance of these relationships and building them is very important. And they will help you. You know, you go to a bank when you really need money, if and it’s the first time you’re dealing with them, they’re not going to bring out an umbrella when it’s raining. They don’t know you yet. They don’t know your ability, your credibility, your management style, what the problem is, how you’re going to fix it. And all of those issues, if you stay in touch with your bank.

Through thick and thin, when the trouble hits you, and everybody has a problem sometime. It could be simply breaking a covenant, it could be growing very quickly and just needing more cash. And, you know, your your receivables and your inventory collateral isn’t sufficient for for everything. They’re all different reasons. But if you have a good relationship with your bank and they already know you, and they know you are predicting what’s going on, you’re projecting, you’re changing your management.

Daily events to handle it, you will not have a problem. However, too many situations arise, especially in smaller companies where maybe your bank is just where you go and deposit and where you write checks and you don’t have a relationship. Big banks won’t have time for you if you’re a smaller company. You know, you’re another dot in the huge screen. But if you’re working more with a community bank or a local bank or a regional bank, you are more important to them.

And the relationship can be built. And that’s where we come to a point where I need a loan, I’ve got to get this done, but I can’t talk to my bank about it. And at that point, you have to find two people. You have to find a financial person capable of presenting your story, understanding your business, and a bank style person, a David Kogel.

Who can help you through and get you what you need? Right, David? That’s right. Okay. Let’s let’s jump on. Let’s share the screen here.

All right. I’m I’m actually finding, I don’t know about you, and we can post this afterwards, we can when we open up the floor for a little conversation. I’m finding now a lot more distress situations similar to back in in 2008 to 2012. surprisingly as strong as the economy is. I I am seeing though that there’s a lot of distress, particularly on the real estate side, developer side.

and those that are importing. the importing factor is clearly because of the the tariffs. thank you, President Trump and President Biden. I’m not sure who to blame at this point, but we have to blame somebody. and on the real estate side, we can thank the New York City current market. and and then and also the increase in rates. That was a Biden issue when rates went up so high.

that it triggered a a true distress situation for many, many companies that were many real estate operators that are are now in the refi state and once upon a time at four percent, now up at seven percent or six and a half percent. So we’re we’re seeing a lot of distress on that side. keeping positive though, which is what we always like to do, there’s a huge amount of people making money and opportunistic and taking advantage of the the current market, which is exploding. AI is one

one way of doing it and not and and and taking advantage of finding the opportunities that are available there. So there there’s always going to be good and bad that’s happening. Clear, credible, financeable is really what you want to do. You want to make sure that you can get to that point with your lenders. And how do you do that? So the first thing is you want to make sure that you’re clear with what you want. Never go to a bank and say, I need a loan. Okay, how much? Well as much as I can get

That’s the worst answer you can give. As much as I can get. We we’d like to present. A banker likes to hear the specific, the Claire request, I need a half a million dollars to buy a piece of equipment. I need $250,000 to install it. I need another $150,000 to get the supplies to get it going. I’m gonna put in $150 of it. I’m asking the bank for the difference.

What is the machine going to be used for? Be very clear. Who’s going to operate it? Who’s going to execute and make sure that the project goes to where it has to get to? These are very important questions. The amount, what it is, how long, and the purpose. And where’s the money coming back from? So let’s talk about that for a minute. And this is very high level, but I think it’s very clear. If I’m buying a new machine for my business,

It’s going to produce widgets. I have sales from Walmart already, purchase orders in place. Well, Walmart’s not necessarily a good client, but let’s use that for conversation purposes. And the machine will take about six months to get set up. it’ll take me two months to start producing, and I’ll be able to deliver within the within a one-year period. And Walmart said, we are going to commit to a $2 million order. you have 12 months to deliver the product.

And the machinery is going to come from wherever. I have I have quotes for you, and I’m gonna show the bank exactly how I’m getting it, who’s installing it, what the setup is, making sure that my floor plan works, making sure I can get the resources for the supply. I have resources to get the supplies. and that’s my resource of that’s my source of repayment to the lender. Okay, David, this sounds to me like it could be a mix of a working capital line and a term loan.

So let’s let’s qualify that. When you’re looking for a loan, you want to make sure that the term is gonna match what the use is gonna be used for. So simplistically, I take a machine, how much I’ll get 15 years out of it, 20 years out of it. I’m not using, I’m not borrowing money for short-term use. I’m borrowing money for long-term use. This is a very important component of a request.

I need the money now for a machine that I’m going to use for the next 15, 20 years. It would make sense to get a 15, 20 year loan. Now, will a bank lend that much that long? Possibly. But let’s assume, let’s say, even get a 10-year loan or a five-year loan. What that does is that gives you time to be able to manage the repayments according to my profits that come in. I don’t want to have to take every dollar of profit and apply it towards the loan.

I want to be able to grow the business and get more customers and more customers. So I want to retain my earnings and be able to then go ahead and expand and expand.

If there’s any questions, by the way, feel free to pop up, you know, raise a hand and interrupt for a second. I’m I’m okay with that. Very important, very, very important. Have your ducks in order before you go to the bank. I’ve received financial statements that were prepared internally.

They’ve sometimes not even been prepared. They have tax returns. So if you’re going for an SBA loan, then tax returns work great. But for traditional bank loan, you need to have your financial statements in order in addition to your tax returns. Many companies are reporting on cash basis on the returns. You have to do accrual-based financial presentation for the banks. Very often you’ll have companies that don’t have their ownership in order.

I’m I’m working on a loan right now. it’s an individual that is taking over an a union operation. the operators are still owned. The op the owners are the the original founders of the company, and it’s transitioning over into his name. So how how do you present that to a bank? Is the ownership the the current ownership or is it the new person that’s taking over and operating and running?

So the first request that I always make is send me the tax returns. If I can’t look at a K1 and see clearly who owns the company, then there’s no org chart. You can send me an org chart.

But the K1s are what the bank is going to reference at the end of the day. So it’s got to be very clear. And it and if you haven’t done the the new the new bylaws or updated the the ownership, then get get started earlier than later. if you have partners, run credit on each other. The way you do that is you go to annual creditreport.com once a year. I tell everyone to do this anyways for themselves. from there you can get into all three credit agencies.

Transunion, Equifax, Experian, and just make sure there’s no negatives on any of the partners. That’s a huge thing. It really is. Because you’ll end up finding that you’ll have judgments, or there could be tax liens, there could be late payments. If you don’t have a credit score over 700, it’s it it immediately gives a little bit of a flag what’s going on. it’s nice when I see the credits that someone has like an 850 credit score.

It’s very far and few in between, but there are people that do actually have 850. they’ll run credit once in a while and then it’ll come down, but then it’ll come back up. At the same time, you should make sure your credit reports are frozen all the time. You don’t want anyone any bad actors to be able to access them. But that means you have to be able to unfreeze them when you’re going for your score for your for your for your your application for credit. So th that’s an important piece as well. Make sure you’re you’re doing that.

So going back to the financials. Interim numbers, projections, clean balance sheets. What is a balance sheet cleaning? Clean balance sheet. What does that mean? Very simple. I’m an owner of a business and I fund money. As the business needs money, I put in money. I’ve been the bank, but now I’m ready to go to the bank. So I’ve got my credit cards in there, I’ve got my cousin’s loans in there.

I’ve got my own loans. We just keep feeding the money. We I however I can get money, I I squeeze it and I feed it. And that’s great. It shows that there’s resilience and that I stepped up to the plate myself as the business owner. But I have to be able to identify and show each piece on the balance sheet and then tell the lender these loans are being repaid with some of your money, or these loans that were put in are going to stay.

So, what that means is you’re going to subordinate your money to the company. I, as the owner, will subordinate the money I put until now, and I’ll tell the bank I will not step in your shoes and take any money back without your permission beforehand. now it becomes like equity. It’s clean, it makes your balance sheet much stronger. So you have to make sure when your balance sheet, you’re preparing your balance sheet.

Put in there and make notes of all of these line items. Do it in an Excel. And then on the side of the Excel, you can list each of the items. It’s so helpful for a lender when they can see and understand each line item in the financial statement. And that’s assuming you’re not having account prepared statements. If you have account prepared statements, very often the footnotes will show will show that as well. When you’re going into the transaction, you want to make sure that again, as we said before, that the use of the funds is very clear.

the contracts for purchase, purchase order, the specs, those are all ABCs. It’s not so ABC for a lot of business owners. they’re running, they’re doing too much at the same time. Make a folder in your file manager, drop in all the proper paperwork that you need for this transaction, and then you can do a data dump to the lender and say, I’ve got everything for you. You can look through it very clearly.

What do you do if you have insufficient collateral? So that that’s a point of of hist of contention very often. What do you mean? I have a building, it’s worth $10 million. I’m operating my company out of it. I only have a six million dollar mortgage on it. I have four million dollars of excess equity. I’m very I have enough receivables to cover your line of credit. I have more than enough inventory to cover your your your your loan that you’re providing me.

Why are you giving me such a hard time with each of these pieces of the collateral? This is a very common, common question that comes up. And the answer is that the lender doesn’t want to be busy liquidating or taking any of your assets. They want to know that you will be able to convert any asset into a loan repayment, should God forbid your working capital not work. So again, source of repayment from the operations.

secondary source from the collateral that the business from the assets that the business has. Who’s going to do that? The business owner. He’s going to convert and make sure that the bank gets paid in whole. I had a client goes back about 15 years ago. They were in the in the business of plastics and resin was the core in in the core core inventory.

What the company didn’t do well and they ended up closing shop. We’re not going to go into details here. But the the borrowers helped the lender liquidate every last piece of plastic that was in the factory to make sure that they got paid. Even loose resin that was sitting around, the broad resin, they found people to pick it up and recycle it and use it for other stuff. So that that’s a a a character component of it.

make sure that the collateral will be able to to to perform. I’ll hand over the cons for a little bit. You don’t want to hear me speaking the whole time. Yeah, so and just just a couple of points arising out of that. You know, the the importance of having good numbers. This goes to a a problem with the level of internal accounting you have and whether you have have external help.

I think it makes such a big difference if you do have the expertise to help you through this. I would even suggest that a good fractional CFO, because until you’re a fifty million business, you may not have a good real CFO full time, would be the way to make sure that what you deliver to the bank is not only accurate, but

It takes into account the factors that could be a problem moving forward. I would also make sure very often owners are very optimistic about their own businesses and they only see the upside, which is what they should see. You’ve got to be optimistic, you’ve got to expect the sales as you as you plan them. But when you go to a bank or with a loan

bro broker involved, you have to make sure you are not embellishing the situation. You have to make sure what you tell them is normally more the worst case scenario than the best case scenario. You have to make sure that the cash flow analysis, the forward projections, cover servicing the loan, repaying the loan, and running the business. David’s example is very good when it comes to

putting in a you know half a million dollar piece of equipment, how much you actually spend before you start getting a return. These numbers have to be accurate. They have to be conservative. They have to take into account possible delays all along the line. You can’t go to the bank and afterwards have a problem because your cash flow isn’t meeting the demand required to start financing, servicing the loan.

The interest payments. It is vital that your revenue is solid and conservatively projected forward. It is vital that your cash flow takes into account all possible problems along the way. And it’s very difficult sometimes to give a delivery date a year ahead of time when you have to purchase a machine to do it. Very difficult.

Rick, I’m gonna interrupt you for a second. That’s a very good point you bring up. When when a company is presenting its projection to the bank, the bankers know that very often it’s pie in the sky, and you’re just doing the best that you can in preparing the projection. So, what I tell the clients to do is do a three-month re realistic based on current sales that you have in your pipeline, and then do an a guesstimate for the remaining year. Not everyone has the luxury of dealing with Fortune 500 companies.

Who actually give you 12 months of buying from their buyers what they’re going to be buying for the next 12 months? Not everyone gets that. Everyone else, some other companies have to make a guesstimate. So that’s a great point that you bring up. Projections, good, great. Cash flow projections, awesome. Be realistic to the tune of two to three months, four months, whatever you really know. But after that, the lenders know that you’re guesstimating. So therefore, don’t go crazy and over-guestimate.

Be conservative. Please. Yes. And in fact, you know, perhaps every three months along the way, you are giving your your lender updates on what’s happening. If there’s a delay, or if you’re running ahead of schedule, or if there are other issues that are going to affect the business for the rest of the time. You know, I was in a business doing maybe thirty-four million in a division, and we had half a dozen pieces of equipment.

And sales guys were always selling to their customers and adding products, whether we could have the equipment or not to run them. So some of our machines ran three shifts, which is fantastic, some won two shifts, which is okay, and some were only on one shift. And yet we get r input from sales guys. Well, we if we get this piece of business, we need a new machine. That’s another million. I said, What about all the time we’ve got on these machines that we’re not using?

How long will it take us to fill a new machine that costs a million? Unless it’s one client, and then of course there are other risks. It takes time to fill the pipeline. It may take longer. The market may change. The industry may change. So you’ve got to be really careful about investing in equipment that you really don’t know how much of it is going to produce immediate returns.

How much of it will take a year or two to fit fix it? And I always look first at filling the capacity you have across the board. And filling really means 80% of capacity. You have to have that buffer anyway. The same thing goes with the inventory that you’re you’re bringing in. The raw materials make sure that you don’t have you don’t want to have too much raw material. I I I love the stories of the guys that fall in love with their inventory. what are you talking about?

I can save this for next year, Christmas time. It’s gonna sell then. I go, yeah, but how much shelf space is that taking up in the meantime? That’s real estate that you’re paying dollars for in your warehouse. Do the math. How much of your money is being being bl being used up in the meantime or being held hostage when you could be working it for another product? You go buy the next thing again. Don’t keep a million dollars of something in stock.

For next year sales, it’s costing you eight percent a year to borrow it. It’s costing you shelf space. It doesn’t make sense. Let’s jump into the weaknesses, if we can. Is that all right? yes, I just wanted to say on inventory, I’ve I mean, I had some very personal experience with that. We especially in the fashion industry, owners fall in love with the, you know, with the inventory, with this beautiful wool or cotton or silk or whatever it may be. And we’ll use it, don’t worry, we’ll use it.

And every year that pile gets bigger. And it’s not only the cash value that you’re losing, it’s insurance, it’s obsolescence in terms of getting unusable, old, getting damaged. I always say your first loss is your best loss. Turn it into cash that you can use today. Don’t store it. And don’t buy too far ahead. Prices change. You can buy it. All in favour say aye. I’m up for that. Absolutely.

Good. Okay, let’s move on. All right. Let the bank know before the problem comes. When you can call and tell them that there’s an issue, this is what’s happening. Whatever it could be, whatever the situation might be, Rick, you might should have so some good stories on that. But it be up front and explain how you’re getting out of it or not getting out of it. That that’s so crucial in relationships when you’re dealing with the banks.

And David, to do that, you need financial help in your business. Yes. You know, most owners are on the sales side, on the product side. Very few owners are actually, you know, CPAs who’ve who’ve studied only the financial side. And that help, whether you think you need it or not, that help can make a big difference, especially with all contact with the bank. The CFO.

Will ensure that what the bank hears is all what they should hear. It is so important that you do not tell stories that afterwards come out to be just stories. Your whole credibility, your whole ability to borrow is based on fact. And being honest, and the bad things, let the bank know we’ve got a problem here. Our sales are going to dip. But

We this is what we’ve done to fix it. It will take three months, it will take four months. The loan provider can deal with that. The loan provider cannot deal with a phone call that says, I I’m not paying your interest tomorrow.

Bear that in mind. I I wanted to share with with with the participants. My experience has been companies that are pretty solid, they have a CFO full time, they’re doing really well. They very often don’t need a broker to go help them with the bank loan, but very often they will need an outside CFO to help with some advisory work on particular projects.

I have seen this very, very often. The clients that come to me personally for loans, very often there’s a dysfunction there. they don’t have a full-time CFO. and they’re doing well, but they’re just not organized. And the the books and records and the presentation needs to be put together. And that’s where my hand holding comes in. and or I recommend a CF outside company to help get themselves ready beforehand. But the the the

Companies that are are solid, they’re in good shape, they’re functioning well, good good management, good execution, very often it’s just having their own banking relationship already and and putting it together and making it happen. So as long as you can structure and manage it and understand what the bank is looking for, you very often can do it yourself. You don’t need to spend money on an outside advisor for it. but just just putting that out there.

What type of questions are are are you going to be asking when you go out and look for financing? It’s not all about just interest rate. it’s it’s finding the right product, as we discussed before, making sure you have the right structure, the right term. Term in banking world means how long is it? Six months, twelve months, five years, ten years, how long is the loan for? the covenants involved are very often debt service coverage. it’s capital ratios.

It’s not not not being allowed to take on additional debt without the bank’s concurrence. It’s reporting quarterly, monthly, annually, what type of financial statements? I don’t know if everyone on this call, the participants are familiar with it, but there’s three types of accounting statements. You have compilations, you have reviewed, and you have audits. when an accountant prepares a financial statement, if they’re just relying on management.

Then they’re gonna issue a compilation. And you’ll the way to tell is by looking at the first page of the of the financial, there’s a letter in there written by the accountant, and it says these financial statements have been compiled, reviewed, audited. And if there’s an if there’s a problem, they’ll put in there there has been an opinion or there’s no opinion on the matter. So what we normally see are reviewed statements. A reviewed statement means that the accountant

has internally checked and verified most of the financial information, the bank statements, bank reconciliations, payroll reports. They really are living and breathing the books and records of the company. It’s not quite an audit, deep dive, but it’s pretty strong. And most bank loans are, most bank lenders are are happy and they’ll be okay with just a reviewed financial. Compilations are for small loans, half a million, million dollars and other

If you’re doing more than two, three million, you have to get reviewed. Under three million, compilations very often can work. It it depends. and or with tax returns. So the underwriting and the process of the lender, how they look at things will also be dependent on the financials that you provide them. what is the current market? Let’s talk about economics. I I I think this is a it’s a it’s a

Small bank versus mid bank versus large bank versus finance company financing, the type of pricing you’re gonna get. in today’s market, just for those that are interested, bank loans for businesses are anywhere from five and a half to nine percent money, ten percent money. SDA loans are mostly floating, except if you get a five four, which is a fixed rate loan. if you’re going to finance companies like

Rosenthal’s and the merchants, the CITs, these are the asset-based lenders that are out there. So there you’re going to be at Prime Plus One, Prime Pwo, or SOFR Plus Three, Silver Plus Four Plus Five. And then you’re going have for those companies that are really distressed or they’re really tight, their balance sheets are leveraged up to Gazoo. They don’t have enough equity in the business, but they have performing receivables and inventory, and those are great.

They’re just over leveraged. So then you’re going to be in the 12 to 20% range, depending where and how. There’s a lot of good companies out there that they’re called factors. They buy your receivables and you’ll pay anywhere from one to two, two, two and a half percent for each time you borrow. That’s okay, because if your margins, your gross profit margins are are are large enough, then okay, you’ll pay that money until you can afford to go to a finance company or afford to go to a bank.

your underwriting in the land. That’s a very sorry, David, that’s a very important issue. You know, when you do calculations about purchasing and the cost of bringing the bringing equipment in and getting it going and what you can make of it. I mean if you’re paying eight, ten percent on the money, what is that equipment going to actually return you?

And don’t get into a negative situation where your profit’s going to be five, but you’re paying eight or ten to get the money to to run it. And it’s sometimes something that can really just derail you down the road. Paying that kind of interest rate, you’ve got to know that that your business can handle that and still get a return. And you’re not in a negative cash flow at the end of the day. On the working capital side, it’s a different calculation. we have a question here.

Approved asset-based borrower. Okay. So From your experience, David, what’s the typical approved to asset based borrower terms requirements duration? Great question. So we’ll go back to that. So not speaking on the equipment side, but speaking on the working capital side, which is what I was referencing before. When you when you’re borrowing funds from an asset-based lender,

they’re looking strictly at your accounts receivable and giving you an advance of 75, 80, 85% of your current to 90 day receivable performing with with across aging, et cetera. and then against inventory, depending on what the inventory is, a net an NOLV, which would be anywhere from let’s say 35 to 65%. if it’s fish, then it’s one thing. If it’s furniture, then it’s another thing.

So, my experience with them is that the terms are typically a two-year commitment from the borrower. they’re covenant-light. they really require strictly a lock box for the payments to come into. a lock box means in the olden days, if physically a lockbox at the post office where the money would come in and then get applied to the loan. And then when you want to borrow again, just

Upload your recent invoices and you’ll borrow again and it’s just three cycles. Today a lockbox means that the bank, the lender has asset access to your bank account and they’re gonna sweep on a daily basis any monies that come in from your vendor payment, from your customer payments. it then they apply it to the loan. And then when you borrow money again, your next advance, the funds go into your operating account, and that’s how you pay your vendors.

I hope that answered the question that you were looking for.

Let’s jump to the next slide.

Okay. Avoiding the credibility killers. So, first of all, time kills deals. If if you’re spending three, four months getting all the information together for the bank while you’re in the process of the underwriting, it’s just going to be hard. It’s going to be torture. there’s a field exam, a field exam examiner comes in.

And he should be done within one to two weeks. He should be able to get all the information that he needs out of your out of your accounting department. If it’s taking longer than that, then that means you’re you’re you’re you’re still growing. You have to create new processes and put things in place to be able to get there. I see it all the time. the financials that come in from the accountant are nice and clean, but then when they come in to do a field exam, things are not in order. There’s a disarray.

and it ends up taking weeks, which then at that point you lose credibility with the lender. and although the company is good, everything is is up and up, the financials are clean, but you can’t produce current information, that is a is a is a very it’s a hindrance. so that’s primarily with with ABL, with asset based lending, with the check the assets. And you know, the other

problem with asset based lending, if you have a a period of time when sales drop, you’re not going to be able to get any cash off the invoices that you haven’t created. And suddenly some people end up with a rush to get a payroll for next week and things like that with an ABL focused loan. So there are pluses and minors with with it. If you if you’re invoicing you’re getting cash. And if you have a problem getting goods out the door,

All of a sudden you’re not getting the cash. It’s something that needs a lot of a a lot of upfront projections to make sure that you have the smooth amount of sales being conducted to get to to follow that that type of loan. Like seasonal. What happens when you have a company that has a dry June to September is dry time? What what are you gonna do? How are you gonna function during that period? You have to you have to plan for it.

So if you’re building inventory for Christmas. Correct. Correct. So maybe special terms. You have to have special terms with your vendors, perhaps. Exactly. Exactly. Seasonality increases where they’re allowed to borrow more on inventory during off seasons to help them, exactly as you’re saying, to get through till the Christmas season starts.

Or or if you sell matzah during right before Passover with Matzi Ball. So some guy says he has a two million dollars of annual sales of matzo balls. The whole business is a two-week business. That’s the whole thing. All right, no, because I’m exaggerating. All right. What happens? What’s the process to borrow? So you you you prepare your request, you build the package, you gotta find the right lender for it.

What does that mean, finding the right lender? It means finding a lender that understands your industry. and there’s a lot of players out there. If anyone’s on LinkedIn, you you’ll you’ll see yourself. There’s finance companies and bankers that have special they specialize and they understand. I’ll give you an example, Esquire Bank. They know lawyers, they really get it. They understand, you know, when you when you’re when you’re waiting on on a a collection for

For a case and you know it’s gonna take three years to settle it, but as a lender, you understand that the process takes that long, you’re okay lending the money. So if I’m man of a manufacturer, I’m importer, I’m a service company, whatever it might be, find the lender that really knows and breeds your industry. And the way to do that is either through if you’re not gonna use a broker or a finance advisor, the way to do that is by typically at the trade events.

Any trade show, any trade event that special for a specialty industry, they’re gonna be there. So I went to a healthcare conference and Bank of America has a group which specializes in dental practices. You can come out of school and they’re gonna give you a loan. You know, that’s that’s their specialty. They live and breathe dentists. They know it inside and out. and that that that’s where you wanna go when you wanna get financing for something like that. So those are important.

You want to manage the underwriting questions in advance as best as possible. I found it’s very helpful to do a practice run and literally create a list of bullet point questions and answers in advance in some form of a memo. So this way that the lender can get a handle on it before they have to ask all these questions. those are very helpful. Then comes the term sheet point. Once you have a term sheet, at that point you have to be respectful.

And let all the other lenders know I’m accepting a term sheet from the following bank. You can share your your your terms and and and rates and pricing just so you know they know why they didn’t get picked. but respectfully, I I will never run two term sheets at the same time with lenders. I don’t think it’s respectful to do that. I believe that you have a a relationship and investment with the banker that you’re working with, and you have to respect his time the same.

But this is where the challenge comes. How many times did you go down a rabbit hole with the bank? Yes, yes, yes, we’re gonna do this, we’re gonna get this done for you. And then at the end they don’t get committee to approve it. And here you are, you just wasted three, four weeks of time, and you have to go back to the drawing board, which comes back to knowing your lender and making sure there’s a real relationship that they can execute. there’s a great SBA guy I work with, Jerry Friedman.

He’s awesome, or Yankee Markovicz from the SBA group, they’re awesome. And they have a list of a small box of lenders that they work with. That’s it. And they’re not bringing in other people because once you start getting out, you don’t know whether they’re gonna be able to deliver it. And if you’re only delivering a certain amount of loans a year to a particular lender or in that space, so then you’re not gonna be able to leverage the relationship and make sure that you can get to that execution point.

So I I stress that it’s very important. on my AB on the ABL side, which is where my specialty is, I have a core group of about six or seven lenders that I’m working with now. making sure there’s a real relationship that they can execute. Exactly. There’s a great SBA guy I work with, Jerry Friedman.

So that that that’s the important part of it. Make sure that you have lenders that can execute. And when you have to go into specialty areas, you can go into those specialty areas. and find those one-off banks in Wichita, Kansas or Hawaii that’s going to do a loan for you. All right. What’s what what’s the common questions? Very obvious things. You know, prepare yourself for the one-page loan request. Make sure you have everything in order. Let them know if there’s a rush.

If there is a rush, then they’ll tell you we can or we can’t come through on it. and these are just basic, you know, items that everyone should be should be aware of. Well I’m sure David, if they use you, you’ll know in advance. Yes, yes, you are. So this isn’t a promotion though for me. This is something I really want people just to be prepared on their own. We’re gonna send out the deck afterwards, by the way, to make sure you can review it on your own at a at a later time. how about we open up the floor for questions?

In the chat, so we have some questions. Let’s answer that. Do most banks have a formula for AR? I’ve heard a certain percentage of AR. Yeah, we said before that they’re typically between 70 and 85% of receivables, less they do, you know, dilution, less, less ill ineligibles, cross-agings, etc. over 90 days.

typically will not get approved. in certain industries you can get to a hundred and twenty days, maybe a hundred and fifty, if it’s industry specific.

Yes. Just anything overdue will be removed, yeah.

this was very interesting. I learned a lot. and I like what you said, David, that really is the goal of these webinars is to teach people things. Obviously, if they need a loan broker, you’re gonna be a great guide for them to reach out to. But the information that you the two of you have provided, and obviously if they need a CFO.

Reach out to us, reach out to Rick. But the the information here is incredibly incredibly valuable and really very well presented. And I did not make the presentation, everyone. So that was Rick and David and Tony. So quick qu question here. So I have a situation where

I just got approached by a venture capital firm that wants to secure a letter of credit. so they don’t actually need the funds. They just need to know that there’s availability for the funds up there. What is the best way for me to approach that? this is a technology company that is out of China and is looking to have a toehold here in the United States for a distributor.

And so he’s reached out to me and said, How do I best get a hold of a a letter of credit accordingly so that they can take me seriously? Okay, so let me let me make sure I understand the question. There’s a a a a vendor out in China that wants to

use your company or what you’re gonna buy from them. It’s a it’s a it’s another company, but yes, and this other company has spoken to me about can I help them source this. But yes, they wanna use this other company as a US based entity to be able to then make distributions of their technology product in the United States. But before that they are willing to contract with them as a US distributor

They want to ensure that they have a certain amount of capital backing them through a letter of credit from a banking institution. Okay, so something smells wrong there. normally you don’t ask for a letter of credit unless you’re buying merchandise or selling merchandise to someone and you want it backed by an LC to ensure that there’s gonna be payment. for something like this, I would ask for financial statements certified by an accountant to verify that the funds are

That the balance sheet and the company is healthy and that they can support this transaction that they’re asking to do. Be very careful. There’s a lot of bad actors out there that will try to scam you. there’s I’m not gonna pinpoint any particular names of any companies, but there’s a lot of MCA businesses out there that are are not really great. There are a few of them that are okay, but most of them are are shady. and then and and when someone sends you from

Nigeria, I have a great business for you. Just wire me a million dollars and you’ll be a hundred percent investor in my company. You know, run as fast as you can. Well, they they haven’t asked for anything quite like that or anything like that. This is a robotics company that has approached this colleague of mine to do this kind of thing. And again, they they’re not looking for

investment. His his LLC they set up for this is specific for this. So there is nothing I’d I’d be happy to talk to you about it in a little more detail offline. Sure. I I would suggest I would suggest really a letter of credit can be worded the way you want it. And if you deal with a a good large American based company that work with letters of credit regularly, banks that do, you can put clauses in there that can protect

against being drawn against it unlawfully or without the the the right situation. You can protect yourself. But most of them are going to need cash collaterally. So you it’s not so simple to get an LC. It’s okay well it depends how big they are and whatever. Thanks a lot this was super helpful as always. Take care everybody. Thanks. All right. thank you to all of our guests. Thank you to our wonderful speakers.

we have a quick poll we’re gonna put up if you can take a second to answer. looks like it’s pretty two simple questions. and until next time. Very good. Thank you, Gershon. Thanks, David. Thank you everyone for joining us. Thank you. Thank you. Be well.