|January 18, 2012|
Previously published on January 9, 2012
Some lenders are starting to aggressively seek corporate borrowers. Will you be attractive to a potential lender?
In the past, lenders correlated borrowing ability with a company’s assets. If you had enough collateral, you could borrow what you needed. Now, the emphasis is on the ability of the borrower, its owners and its guarantors to make the payments. To determine this, lenders analyze “global cash flow.”
As a borrower, you will need to show all cash coming into the borrowing company from all sources, and then do the same for all the principals of the business, particularly if they are going to personally guaranty the loan.
While I think the initial emphasis on repayment instead of assets is sound, current federal banking regulations apply equally to all transactions, no matter the size. For a small transaction, especially for a new-ish company, the paperwork can be overwhelming to both the borrower and the lender. Even community banks and credit unions, who are often more flexible and approachable than national banks, are hamstrung by these underwriting regulations.
To be loan-ready post-2008, a corporate borrower should gather these materials:
- Amount of the loan;
- Purpose of the loan;
- Detailed description of any collateral (real estate, equipment, accounts receivable, etc.);
- Business plan/projections for the Borrower;
- Current financial statements and at least two years of historical financial statements for the Borrower and every corporate or LLC principal or guarantor, parent and subsidiary companies of any of these;
- Federal corporate tax returns for at least two years for the Borrower and every corporate or LLC principal, guarantor, parents and subsidiaries;
- Organizational documents (articles of incorporation or organization, bylaws or operating agreement, etc.) for the Borrower and every corporate or LLC principal, guarantor, parents and subsidiaries;
- If a principal guarantor derives income from ownership of other closely held entities, the lender will want financial statements and tax returns from those entities as well.
We are seeing clients gather these documents in advance and have a “book” available to potential lenders. If you need help making sure your company’s organizational and maintenance documents are “credit-worthy,” contact your business lawyer. To make sure your books are accurate and clean, contact your CPA.