Jay Sachetti joined Jeff O’Brien, partner at Husch Blackwell and Dyanne Ross-Hanson, president of Exit Planning Strategies talked about the market for mergers and acquisitions, exit planning opportunities for companies that don’t end up for sale and how companies can maximize their eventual sale price during an early October panel at the first Upsize on Tap event at Summit Brewing Co. in St. Paul.
When the state Legislature passed a law requiring employers to provide paid leave and safe time for employees, Justin Bieganek started hearing differing details from friends, colleagues and peers.
Determine what else is important to you. Is it a relationship with a lender who is looking to grow with you as a business? The answer to these and other considerations impact both the choice of lender and the timing for financing.
Given the recent economic climate, lenders are competitively pricing their loan products. But choosing the right lender goes beyond just the pricing of a loan.
Perform due diligence on the lender so you know the lender’s financial strength, level of familiarity with your asset type and business, as well as the lender’s philosophy on lending and servicing of clients.
Once you’ve developed a short list, talk to these lenders about their approach to these areas and be prepared to hold up your end of negotiations with proper documentation and planning.
The underwriting test: Borrowers should be prepared to pass underwriting at two levels — as a borrower and on the asset or assets that will serve as collateral for the loan.
Borrowers should expect to submit three years of business financials and tax returns. They need to provide the lender with a sound business plan that includes anticipated growth projections for the future or solutions to address any problem areas.
If the asset to serve as collateral is real estate with tenants, be prepared to submit a rent roll and copies of all leases. If the collateral will be business assets, be prepared to submit a complete equipment list, aging accounts receivables or inventory list, depending on collateral type. Generally accounts receivable over 90 days old will be disregarded as well as obsolete equipment or inventory.
Personal guarantees: The principals (or owners) of the borrower should expect to sign personal guarantees for the loan. This means the guarantors could be held liable to repay the loan if the borrower defaults.
Some lenders will require unlimited guarantees for all principals of the borrower. However, in some instances where many individuals hold ownership interests or there are minority owners, the lender may allow pro-rata guarantees based on the percentage of the individuals’ ownership interests in the borrower.
Life insurance companies or nationally based lenders may only require personal guarantees for carve-outs or “bad boy or girl acts.” These items may include misappropriation of condemnation or insurance proceeds, insolvency, bankruptcy, fraud, waste of the asset serving as collateral, failure to pay taxes or insurance, and environmental issues.
A borrower, and any guarantors, should thoroughly understand what each of these carve-outs means and when full liability under a loan may occur.
Cash, collateral and covenants: The borrower should expect to have some skin in the game. If the collateral is real estate, you might also need to show 25 percent or more in cash equity, which will depend on the asset type lent against as collateral.
Some lenders may only lend up to 50 percent of the value for more risky asset types such as vacant land for development. The lender will require a current appraisal of the asset to determine value; keep in mind appraisal values are relatively conservative given recent economic times.
Be aware that lenders will typically require borrowers to pay all costs incurred by the lender with respect to the loan. These amounts will include a closing fee, fees of third parties relating to due diligence review, the appraisal, title insurance, lender’s legal fees, survey costs, and environmental updates.
Covenants are another area that requires careful review. Almost all lenders will require both the borrower and guarantor to provide annual financial statements during underwriting and throughout the term of the loan, as well as measuring the borrower’s debt service coverage ratio on an annual basis.
The debt service coverage ratio is a measure of net income, plus interest, taxes and amortization to principal and interest payments under the loan. If the loan is an operating line of credit, the lender may also measure tangible net worth and require a minimum amount of liquid assets.
Underwriting and closing on a loan secured by business assets can take a minimum of 30 to 60 days. The lender may also require a collateral review and audit on larger business operating lines, which could extend the time to close. Loans secured by real estate can take 60 to 90 days. The lender will need to obtain and review appraisal and title work, have a survey prepared of the property and conduct an environmental review.
Negotiations can also take time depending on the amount and complexity of the loan and method of loan documentation. If the lender is using standard form documents, there will be little room, if any, to negotiate the terms and provisions of the loan documents. If, however, the lender uses the services of an attorney to document the loan transaction, there will be more room for negotiation and tailoring to the specifics of your loan.
Borrowers should be prepared to answer the lender’s questions in order to get the credit request approved, according to Jeff Shellberg, chief lending officer of Bridgewater Bank. “It’s still all about answering the five C’s,” he says, and we’ve detailed what those are in the tips box accompanying this article.
If you know what you are looking for in a lender, gather the appropriate documentation in preparation for the lending request, and understand what the lender is looking at in the underwriting process, the process can go more smoothly and improve your chances of obtaining the right financing.
In the long run, the right lender aligned with a solid business plan will support your business growth.
Contact:Michelle Jester (left)and Lisa Ashley are attorneys in the banking and finance group of Messerli & Kramer in Minneapolis:
