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Capital & Finance Blog

Lending to Your Industry

Tuesday, 24 October 2017 06:25

Capital & Finance Blog

You have the great idea to move your business to that next level however; the idea did not arrive fully funded. As such, you are assembling the material you will need to go shopping for a loan. As you debate whether including pictures of last year’s vacation to the Cayman Islands into your application packet will improve your prospects or hinder them, it occurs to you that really have no clue what loan underwriters look at when it comes to making a decision on your loan.

Going through the loan process can be an arduous and time-consuming ordeal, so it behooves the would-be applicant to understand what criteria are used in determining a loan’s prospects for success. Generally speaking, as a starting point underwriters will be looking at the general health of the industry that the loan would be targeting.

Industry Specific Focuses

When underwriters look at an application, they do so with a myriad of questions, requirements, and criteria. First and foremost, any lender wants to guarantee that they are going to be paid back the loaned money and each of their inquiries is conducted with that fact in mind.

Mark Twain once famously noted, “A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain.”

If you’re seeking an expansion loan in an industry that is not performing at optimum performance, relative to other investment opportunities, then you may well feel the same way as the frustrated 19th-century humorist above.

To better assess your chances of obtaining a loan against a crowded field of other applicants, the Small Business Administration has recently compiled their loan performance report. The study looks at every business category along with their history of SBA loan failures and defaults.

Marinas Float Underwriter’s Boats

Receiving high marks from the SBA were marinas, which performed extremely well when looking at historic rates of successful loan paybacks, particularly compared to other special purpose property types like hotels, car washes, restaurants, and gas stations. A special purpose property is one that can’t be readily changed to any other purpose.

As such, when you’re looking to expand your business, it makes sense to determine if the industry that you are looking to expand in is operating in a loan-friendly environment and which lender would be willing to lend to your industry.

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Contracting for Personal Residences

Tuesday, 24 October 2017 06:25

Capital & Finance Blog

Like many other businesses, contractors and construction consultants require financing for projects, including bank loans and Title I loans.

Starting a company works roughly the same in many industries – an individual comes up with a concept, creates a business structure, and secures capital. In line with this process, contractors and consultants in the construction industry starting or developing a company are required to follow similar steps: establishing a business model, hiring employees, securing office or business space, and arranging for a commercial business loan. However, if you are interested in contracting for personal residences, don't rush off to the bank for a loan just yet. The financing options in contracting, most notably in contracting for personal residences are not necessarily the same as in other industries.

Title I Loans

Contractors and others in the construction industry may find themselves faced with an extraordinary need for capital. After all, money is needed to finance a project before the job is finished and the payments for labor and materials are paid in full. Title I loans are loans intended to finance home repair and refurbishment projects and are available to contractors.

Securing Capital With a Title I Loan

A Title I Loan is different than a standard bank loan. Offered through the U.S. Department of Housing and Urban Development (HUD) for personal property improvements, Title I loans are fixed rate loans available to homeowners as well as contractors working on home repairs or property development with interest charged at a current market rate. With a modest limit for family homes, Title I loans are a great way for contractors to obtain the capital required to begin a project.

Underwriting and Collateral

Underwriting for Title I loans includes examining a company’s debt-to-income ratio, anticipated housing expenses, and regular fixed expenses. Like other forms of home loans, Title I loans are secured by property and are repaid at a fixed rate, making them a convenient and safe option for borrowers.

For contractors specializing in personal residences and other HUD-code property, Title I loans can be a great way to finance a project. With clear underwriting considerations and sensible collateral, Title I loans provide low-risk financing for homeowners and contractors alike.

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Collateral for a Business Loan

Tuesday, 24 October 2017 06:25

Capital & Finance Blog

Imagine that you have finally decided to quit your day job and take a leap into entrepreneurship. You've pooled your capital, decided on a business model, and created detailed plans to get things up and running. There's only one thing that stands between you and the inevitable takeover of the business world: financing. Since you don't have the capital needs to seek out investors, your first stop is the bank. Confidently, you tell your banker what you are hoping for, only to hear a puzzling question: what are you willing to use as collateral?

Secured Vs. Unsecured Loans

If your only experience with loans extends to things like buying a car or securing a mortgage, the idea of negotiating collateral might be quite foreign. With these sorts of loans, the bank has a good idea of what you're using the loan for, and that you are paying for something that can easily be seized if you default on your payments. Other forms of loans, like business startup loans, are a little less clear.

The way banks see it, you are more likely to repay your debts if you have something to lose. Secured loans are loans that are ensured by secured debt, or the promise that an asset can be claimed and sold if the loan isn't paid back in full and on time. Evaluating the property that can be used as collateral, or something the bank can repossess should you become unable to make payments properly, can be a major factor in the underwriting process.

Unsecured loans, on the other hand, are loans that are not backed by any collateral. Interest rates, repayment periods and rules and regulations are often less desirable for unsecured loans, largely due to the lack of assurance the bank receives. While ideal for someone without the means to pledge collateral while securing a loan, the steeper interest rates and higher payments make these loans riskier for both the borrower and the lender.

Types of Collateral

Many different things can be used as collateral for a loan, although the assets in question can play a part in an underwriter's considerations. Banks prefer to see property you own, such as stocks, bonds, vehicles, insurance policies, cash, and land. With several of these assets, however, there is the idea of valuation to consider, something that underwriters frequently use to determine the amount of collateral required. For example, should you use your investment portfolio as collateral, you may have to pledge an amount higher than the face value of the loan to account for market fluctuations.

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Financing Business Acquistions

Tuesday, 24 October 2017 06:25

Capital & Finance Blog

Financing Business Acquistions

The decision to buy another company can be challenging. While the situation is usually not as simplistic as a stranger walking up to you on the street and asking if you want to buy a company, there are a lot of details that may be lacking in such a business transaction. Whether a company sought you out as a potential purchaser or you pursued the company, there are likely many questions you are asking yourself. How do I know a deal is worthwhile? Can I incorporate this acquisition into my current company? And, perhaps most important, you may be wondering how to finance a business acquisition.

If you’re new to the world of mergers and acquisitions, there is a lot of legal jargon and hoop jumping you may need to adjust to. Selling a business is rarely an easy process, and buying it can be even trickier, especially when it comes to securing capital. Since many small business owners rely on bank loans for financing needs, especially while creating an established business, it’s only natural to head on over to the nearest branch. But wait. Stop. Don’t pass go. Do not collect two hundred dollars. Or, at least, not yet.

Business Acquistion Loans

Business acquisition loans are not the same as more traditional financing. There are a lot of elements for underwriters to consider, especially in comparison to what you went through in establishing your company initially. While your purpose, the amount desired and your credit history played a large role in securing start up capital, obtaining a loan for acquisition purposes requires a lot more information.

Underwriting Process

When it comes to acquisitions, most banks will want to see evidence of going concern, financial statements, verification of liquidity, and a credit history related to your current business venture. They will likely also want to see legal documents and agreements, the proposed ownership structure, and proof of the profitability of the company being sold. This process can be lengthy and complex, creating a different level of pressure. Furthermore, profitable businesses are often sold with a weighty amount of goodwill, or the excess of capital over the fair market value of the assets. Banks do not generally like to fund goodwill, making your own personal assets relevant to the underwriting process.

If you have found yourself facing a beneficial acquisition, hats off to you. Creating a new corporate structure or owning multiple businesses can be quite challenging, especially when it comes to financing. Be aware that the process of securing financing will be longer, more rigorous, and will require a large range of paperwork. However, with proper planning, organization and a great opportunity for growth, you can be well on your way to corporate success.

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Bank Loans and Invested Capital

Tuesday, 24 October 2017 06:25

Capital & Finance Blog

Bank Loans and Invested CapitalIf you've found yourself with a small business on the rise, congratulations. In a turbulent economy, it's often difficult to find the courage to get a business off the ground and expensive to keep things flowing. No matter your capital source upon commencement, most businesses need more money than they make to keep operations in motion, especially at first.

There are two major ways to secure capital to fund business needs: bank loans and invested capital. For private companies or those too small to trade publicly, private equity investments make for a convenient possibility. However, what works for one company may not work for another.

Private Equity

Private equity investments are alluring to business owners for several reasons. For example, invested capital by any party is non-refundable unless specifically stated otherwise. If a business venture fails, the investor loses and the business owner is not liable. Additionally, terms can be freely negotiated with an investor to reach a solution that appeases both parties, something often lacking in loan financing.

However, when investors put their own capital on the line, they become partial owners.Allowing an individual or fund to buy ownership rights in exchange for capital can be risky, especially if an investor's views differ greatly from yours. Furthermore, coming to terms with an investor over capital amounts, terms, and other details can be an incredibly lengthy process, making the outcome uncertain until a deal has been signed.

Bank Loans

Bank loans, on the other hand, act as a way of securing capital without the need to appease an investor or negotiate terms. While an investor may take weeks to ponder an opportunity, a bank's underwriting team general turns around decisions in a matter of days, making for an alluring prospect for those who need reliable capital on a specific time line. Additionally, borrowed capital does not make the lender a partial owner, allowing an owner to retain autonomy over his or her venture.

Banks do, however, like to be repaid, and usually at a cost. With good credit and a reliable history, a bank may be willing to offer excellent terms but at some point, it will want its money back, even if your venture fails miserably. Additionally, an underwriter establishes terms and limits that are largely non-negotiable, mostly for liability's sake. While a private investor may be okay with the risk an investment brings, banks generally are not.

For most business owners, the question of speed, reliability, and ownership make bank loans a preferred option. With profitability comes financial freedom, allowing a company to pay back debts and operate alone. Investors generally want to see a high return while banks are satisfied receiving their principle, plus interest income. For most small business owners, bank loans are the right choice. Even with a forced repayment, the low amount of risk is worth the payoff.

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