Cash Flow Improvement
Loan Packages
Bad news: The American Bankers Association reported in September 2016 that 1,708 U.S. banks have closed (more than one in five) since the inception of the Dodd Frank Act, which was signed into law by the Obama Administration in 2010. The community bank closure rate is about one business each day. [1] The New York Times reported in April 2016 the number of community banks shrank by 14% since the Dodd Frank Act and its more than 22,000 pages were made law. [2]
No new banks: The American Bankers Association has reported that, since the inception of the Dodd-Frank Act, "... virtually no new banks have been formed, (due to) a historically unprecedented lack of investment and startup activity for the industry." [1]
This means: With fewer banks and more federal regulation it is much more difficult for privately-held businesses to get loans from banks.
Good news: About 80% of U.S. banks are still in business since the Dodd-Frank Act was placed into law. These banks have tightened their lending requirements, but they are still lending some money. In a twist of great irony, they have also become more knowledgeable about using the resources of the federal government to get loans for their customers by using the SBA.
SBA: The Small Business Administration (SBA) is a U.S. government agency. This agency was established to bolster and promote the economy in general by providing assistance to small businesses. (Investopedia.com).
SBA Loan Program: The loan programs offered by the SBA are among the most visible elements the agency provides. The organization does not offer grants or direct loans but instead guarantees against default pieces of business loans extended by banks and other official lenders that meet the agency's guidelines. The number one function of these loan programs is to make loans with longer repayment periods available to small businesses. (Investopedia.com).
Where to go: The place to go to get an SBA-backed loan is your local bank. Most of these banks have become specialists in obtaining SBA guaranteed loans. It is not unusual for a bank to split a loan into two parts, one that is guaranteed by the SBA (with longer repayment periods) and a second one issued by the bank, with shorter payment periods.
Loan packages: It is rare today that banks will loan money to privately-held companies unless those companies meet certain minimum criteria:
- The internal financial statements are impeccably accurate and timely.
- Detailed documentation of future free cash flow.
- The company's KPIs (Key Performance Indicators) are within a reasonable percentage of its industry KPIs (Same or similar SIC Code, similar sales volume, etc.).
- Collateral that protects the bank.
- A solid management team that gives the bank comfort that the future performance of the company will be adequate enough to pay the new debt service.
- Evidence that important ratios (Current, Debt-to-Equity, etc.) are within industry averages.
- A comfort level that certain financial loan covenants documented in the note payable can be achieved by the company.
- Etc.