Today s Business Environment

Transcription

1 6/21/2013 SECURING FINANCING IN TODAY S BUSINESS ENVIRONMENT Presented by Ken Paton Today s Business Environment In recovery from worst recession since the Great Depression Hundreds of bank failures More restrictive FDIC regulations and audits Banks have substantial liquidity but making fewer loans 1

2 Causes of Recession 1992 Standards for Fannie Mae and Freddie Mac weakened 1992 Countrywide and Wachovia starting making subprime residential loans Causes of Recession 1997 Bear Stearns issues first mortgage backed security 2000 Home ownership rose to highest in history (67.7%) 2001 Federal interest rate lowered to 1% (9/11 recovery) 2

3 Causes of Recession 2004 Derivative market expands (leverage triples) 2006 Residential foreclosure rate up 43% in Q Freddie Mae and Freddie Mac leverage increases to 130:1 (bank requirement 10:1 to 12:1) Gross Domestic Product % Change 6% 4% 2% 0% % 4% 6% 8% 10% Q1 Q2 Q3 Q4 3

4 Unemployment Rate 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Bank Charge Off Rates 12% 10% 8% 6% 4% 2% 0% Q1 Q2 Q3 Q4 4

5 Bank Failures Costs of Recession on Banking Combined bank legal fees now exceed $100 billion 471 bank failures with FDIC costs exceeding $13 billion $787 million to FDIC in settlements with banks 5

6 Criminal Proceedings Too big to fail Not too big to jail 225 open criminal investigations into 144 bank executives What were banks looking for? SCORE EQUITY COLLATERAL MANAGEMENT REPAYMENT CREDIT At least 20% cash equity injection At least 15% cash injection At least 10% cash injection and 10% seller standby note At least 10% cash injection and 5% seller standby note Where allowed by SBA rules, 100% financing 3 years ownership or Maximum 75% LTV on management of subject well located real estate business profitably Maximum 75% LTV on going concern value of business Maximum 80% LTV on well located real estate Maximum 85% LTV on going concern value of business Over 100% LTV with reliance on outside collateral 1 year ownership or management of subject business profitably 1 year industry specific management experience of this type of business before 2 years transferable management experience not specific to industry No transferable management experience 1.3 debt cover or better for 3 years plus interim with positive or stable t trend 1.1 debt cover or better for 2 years with 1.25 in interim 1.25 debt cover or better in last year plus interim 1.1 debt cover in interim (6 months minimum) Projections no historic debt cover FICO score of 700 or better with no derogatory credit items in past 36 months FICO score of 650 or better with no more than 2 30 day late payments within 36 months FICO score of 600 or above with no more than 2 past or present 30 day late payments 60 day late payments within preceding 36 months Collections, charge offs, or bankruptcy with satisfactory explanation 6

7 Equity Requirements Purchase POINTS REQUIREMENT OLD NEW 5 At least 20% cash equity injection Most lenders with SBA participation Most lenders with SBA participation 4 At least 15% cash injection Commonly approved with SBA participation Only approved for strong buyers with SBA participation 3 At least 10% cash injection and 10% seller standby note Commonly approved with SBA participation Approved with restrictions on seller note and SBA participation 2 At least 10% cash injection and 5% seller standby note Commonly approved for stronger buyers with SBA participation Only approved for strongest buyers with SBA participation and restrictions on seller note 1 Where allowed by SBA rules, 100% financing Commonly approved for stronger buyers with SBA participation Only approved for strongest buyers with SBA participation Equity Requirements Refi POINTS REQUIREMENT OLD NEW 5 Proforma debt/worth of 3:1 or less Conservative lenders want 2:1 or less Most lenders want 2:1 or less 4 Proforma debt/worth of 4:1 or less Commonly approved with SBA participation Commonly approved with SBA participation and strong cash flow 3 2 Proforma debt/worth of 6:1 or less Proforma debt/worth of 8:1 or less Commonly approved with SBA participation and strong cash flow Commonly approved with SBA participation with strong cash flow and strong guarantors Commonly approved with SBA participation and strong cash flow Commonly approved with SBA participation with strong cash flow and strong guarantors 1 Proforma debt/worth over 8:1 Approved only with strong secondary support Difficult to approve 7

8 Collateral Requirements POINTS REQUIREMENT OLD NEW 5 Maximum 75% LTV on well located real estate Approved by most lenders if real estate is general purpose and has good cash flow Approved by most lenders if real estate is general purpose and has good cash flow 4 Maximum 75% LTV on going concern value of business Approved by most lenders with SBA participation and significant real estate value Approved by most lenders with SBA participation and significant real estate value 3 Maximum 80% LTV on well located real estate Commonly approved with SBA participation Commonly approved with SBA participation 2 1 Maximum 85% LTV on going concern value of business Over 100% LTV with reliance on outside collateral Approved by most lenders with SBA participation and significant real estate value Sometimes approved for strong buyers with SBA participation and strong cash flow Approved for stronger borrowers with SBA participation and significant real estate value Difficult to approve Management Requirements POINTS REQUIREMENT OLD NEW years ownership or management of subject business profitably 1 year ownership or management of subject business profitably 1 year industry specific management experience of this type of business before 2 years transferable management experience not specific to industry No transferable management experience Acceptable to most lenders Commonly approved with SBA participation Commonly approved with SBA participation and strong cash flow Commonly approved with SBA participation with strong cash flow and strong guarantors Approved only with strong secondary support Acceptable to most lenders Minimum for most banks to approve with SBA participation Some lenders will accept with SBA participation and strong cash flow Experience must be directly comparable to center being financed with SBA participation Difficult to approve 8

9 Repayment Ability POINTS REQUIREMENT OLD NEW debt cover or better for 3 years plus interim with positive or stable t trend 1.1 debt cover or better for 2 years with 1.25 in interim Acceptable to most lenders Approved only with strong secondary support Most lenders expect 1.5 debt cover plus stress test at 1% to 3% higher rates with SBA participation Difficult to approve debt cover or better in last year plus interim Approved only with strong secondary support Difficult to approve debt cover in interim (6 months minimum) Approved only with strong secondary support Difficult to approve 1 Projections no historic debt cover Approved only with strong secondary support Difficult to approve Personal Credit POINTS REQUIREMENT OLD NEW FICO score of 700 or better with no derogatory credit items in past 36 months FICO score of 650 or better with no more than 2 30 day late payments within 36 months FICO score of 600 or above with no more than 2 past or present 30 day late payments 60 day late payments within preceding 36 months Collections, charge offs, or bankruptcy with satisfactory explanation Acceptable to most lenders Approved with good explanation and SBA participation Approved with good explanation and strong secondary support with SBA participation Approved with score of 650 or above and good explanation with SBA participation Difficult to approve Acceptable to most lenders Approved with good explanation and SBA participation Difficult to approve Difficult to approve Difficult to approve 9

10 Determining Value The Appraisal Federal law requires that bank order appraisal Appraiser with industry knowledge needed Hard asset vs. going concern True bowling comparables hard to find Accurate revenue and cash flow data almost impossible to find Type of Appraisal Real estate Bowling (special purpose) Alternative Use Hard asset valuation Going concern valuation 10

11 Appraisal Issues Appraisers taught to use local comps 32 lane suburban center not comparable to 16 lane rural center 2005 design not comparable to 1965 design General purpose vs. special purpose Type of Building General purpose: suitable for wide range of tenants Special purpose: extensive modifications needed for alternative use Hotels, car washes, bowling centers all considered special purpose 11

12 Bowling Building Design Floor not level: lanes typically 15 below rest of building Bowlers area two steps to two feet below concourse Restrooms at front of the building Heating/cooling focused on concourse and bowlers area 14 to 15 foot ceiling height Purchase Equity (SBA Rules) Cash that is not borrowed Cash that is borrowed from outside center being purchased Seller note (with restrictions) Property traded (real estate/equipment) 12

13 Refinance Equity Difference between FMV and debt Based on appraisal Goal: 80% LTV or less Outside collateral possible to overcome shortfall Previous lender note on shortfall possible Collateral Types of valuation: Fair market value Orderly liquidation Forced liquidation Determined by appraisal Not subject to negotiation but sometimes subject to interpretation 13

14 Management Previous ownership experience documented with tax return Previous management experience letter of reference from owner or W 2 Document success not that you warmed a chair provide details Repayment ability / debt cover Cash flow = Net profit from tax return or income statement Plus depreciation Plus amortization Plus interest expense Plus one time expenses or non repeating expenses 14

15 Interest Stress Test Debt cover with today s interest rate Debt cover with higher interest rate Some banks 1% higher Some banks 3% higher Based, in part, on the period on which the interest rate is fixed (monthly, annually, five years, etc.) Personal Credit FICO: Fair Isaac Company Credit Bureau Score Experian Equifax Transunion 15

16 Payment History (35%) Credit cards and retail accounts Home equity Loans Auto and home loans Collections and tax liens Excludes most commercial loans Credit Available (30%) Revolving accounts (credit cards and credit lines) Balance owed relative to total available Number of accounts with high balances 16

17 Length of Credit History (15%) How long since account was opened How long since account was used Average age of accounts New Credit (10%) Percent of accounts that are new (30 to 90 days) Number of request for new credit Length of time since last credit request 17

18 Types of Credit (10%) Mix of credit Credit cards for short term (not permanent) working capital Installment (auto, home, RV) appropriate for the asset purchased Retail cards deemed higher risk than credit cards Improve Credit Score Pay down credit card/credit line balances to less than 30% of credit limit Fix errors Eliminate disputed accounts such as small collections Use dormant/stale card Don t close accounts unless there are an excessive number 18

19 How to Correct Errors Write to credit bureau Contact credit bureau through Have documentation to support claim of error Contact Federal Trade Commission if creditor refuses to correct error What Else do Bankers Want? Business success/failure impacts loan officer s career What can bank do with collateral? Portfolio issues industry concentration 19

20 Bank s Concerns Business success/failure affects bank and banker. Borrower s revenue/cash flow trends Explanation for negative trends Economy Competition Staffing issues Results of previous plans and projections Prepare a Loan Package Financial Statements Detailed income statements Consistently prepared Comparable to the same period prior year Balance sheet CPA/bookkeeper/internally prepared 20

21 Prepare a Loan Package Tax returns (3 years) Business Personal Explain unusual transactions One time write offs or income Expenses no longer needed (terminated employee, multiple payments on repairs, etc.) Prepare a Loan Package Support need for the loan Purchase agreement Copies of notes to be refinanced Quotes for building/equipment upgrades Projections showing the expected result of changes 21

22 Projections Based on history adjusted for changes Explain reason for changes Not best case and not worst case Banks will compare to actual Prepare Loan Package Check personal credit report and correct errors Identify changes that will improve credit score in short run 22

23 Prepare for Site Visit Complete minor repairs Clean inside and out Touch up paint Prepare for Interview Review financial statements and have answers to obvious questions Be ready to discuss changes in the business Be ready to discuss new competitors (bowling and others) 23

24 Prepare for Interview Be ready to discuss impact of loan on business Don t be defensive or overly aggressive Most Misunderstood Concepts BANKS NEED TO MAKE LOANS TO SURVIVE 24

25 Most Misunderstood Concepts BANKS NEED TO MAKE LOANS TO SURVIVE BANKS NEED TO BE PAID BACK TO SURVIVE Most Misunderstood Concepts BANKS NEED TO MAKE LOANS TO SURVIVE BANKS NEED TO BE PAID BACK TO SURVIVE BANKS FEEL THE COMPETITION FROM OTHER BANKS FOR GOOD LOANS 25

26 Additional Considerations Loan approval depends on preparation prior to meeting with bank Additional Considerations Loan approval depends on preparation prior to meeting with bank Loan approval depends on having a credit worthy business 26

27 Additional Considerations Loan approval depends on preparation prior to meeting with bank Loan approval depends on having a credit worthy business Loan approval depends on the bank understanding the business Where are we going? Economic indicators can give warning FED is giving more information on its plans than before 27

28 Short Term Interest Rates Influenced by inflation and unemployment rates Set by Federal Reserve Inflation 2% Goal 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 2.0% 28

29 Unemployment Goal under 6.5% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Conclusion Short term rates likely to remain stable Long term rates trending up FED projects stable short term rates until end of

30 Long Term Interest Rates Determined by market Influenced by FED open market purchases (ending mid 2014) GDP Growth Goal above 2.5% 6% 4% 2% 0% % 4% 6% 8% 10% Q1 Q2 Q3 Q4 30

31 Current Forecast FED projects 2.6% (2013) and 3.2% (2014) Wall St. Journal projects 2.3% (2013) and 2.8% (2014) Goal: 2.5% Consumer Confidence Index Measures 5,000 households monthly Change of more than 5% important Benchmark = 100 (1985) 31

32 Consumer Confidence J 11 F 11 M A 11 M J 11 J 11 A 11 S 11 O 11 N 11 D 11 J 12 F 12 M A 12 M J 12 J 12 A 12 S 12 O 12 N 12 D 12 J 13 F 13 M A QE 3 Goals Bring down long term rates Increase asset values Spur spending/investment 32

33 Results So Far Long term rates declined but now are up 10 year Treasury: 1.61% in May 2.18% in June Impact: $279 per month on $1,000,000 loan over 20 years FDIC Issues Concerned that bank lending practices are too loose Commercial loans back to 2008 levels in March 2013 but small business loans (under $1 million) are down 17% Concerned that bank monitoring of loans is too weak 33

34 Conclusion Economy weak but improving Conclusion Economy weak but improving Little likelihood of change in short term interest rates 34

35 Conclusion Economy weak but improving Little likelihood of change in short term interest rates Long term rates likely to start climbing before short term rates Lending Environment Banks are making loans but only to strong borrowers 35

36 Lending Environment Banks are making loans but only to strong borrowers Bankers don t understand bowling Lending Environment Banks are making loans but only to strong borrowers Bankers don t understand bowling Bankers don t understand your business unless you inform them 36

37 Put Your Best Foot Forward Prepare prepare prepare Put Your Best Foot Forward Prepare prepare prepare Know your banker 37

38 Put Your Best Foot Forward Prepare prepare prepare Know your banker Know your bank Put Your Best Foot Forward Prepare prepare prepare Know your banker Know your bank Know your center s economic performance 38

39 6/21/2013 Put Your Best Foot Forward Prepare prepare prepare Know your banker Know your bank Know your center s economic performance Understand how a banker will view your center Thank You! 39