Quickstart Financing 4 Rev4
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Transcript of Quickstart Financing 4 Rev4
Quick Start Financing (4)
Collateral EvaluationStartups & Franchise Considerations
January 19, 2010
O r a n g e C o u n t y
SCORE®
Presentation By
John P. LafareManagement Counselor
SCORE – Orange County Chapter
How do I get a loan?
Loan Success!Experience
At least 3+ years
Good Credit700+, maybe less if quality deal, strong
credit history
Equity StakeUp to 40%
Business Plan Positive cash flows within 6
months
Collateral / Guarantees
IncomePast & Other Sources of
Income
Prepared by John Lafare
Alternatively, the five “C”s
Loan Success!ConditionsPurpose of the loan,
economic or competitive factors
CapacityHow will the
business repay the loan?
CapitalHow much the
owner(s) have at risk
CollateralSecurity or
guarantee that the loan will be repaid
CharacterJudgment about the persons involved in
running the business
Is collateral always required?
• Requirements vary by lender, type of loan
• Some programs do not require collateral
• Higher risk means more collateral
• Strong business plans and solid financial projections can reduce collateral needs
• Borrower needs to provide reasonable reassurance of repayment from earnings
• Collateral not a substitute for repayment ability
What are the lender’s collateral requirements?
• Often the last hurdle to clear
• If no collateral, may need a co-signer with collateral to pledge
• Any asset of value can be pledged
• Up to or above 100% of loan principal amount
• Actual percentage a function of:1. Risk on your loan2. Accumulation of institutional risk
What are the SBA requirements?
SBA expects every loan to be secured
Will not decline request if inadequate collateral is the only unfavorable factor
All available collateral must be offered
SBA may decline request if loan is not fully secured and collateral is available
Lenders may require more collateral, depending on equity contributed
What are the SBA personal guarantee expectations?
• For all SBA loans, personal guarantees are required for:– Every owner of 20% or more of the business– Other individuals in key management positions
• Whether a guarantee will be secured by personal assets is based on:– The value of the assets already pledged – The value of the assets personally owned relative
to the amount borrowed
When is an owner-occupied residence required as collateral?
The lender requires the residence as collateral
Equity in residence equals or exceeds 25% of fair market value, other credit factors are
weak
Collateral necessary to ensure principal(s) remain committed to the venture’s success
The business operates from the residence or other buildings located on the same parcel of
land
Which assets can be pledged?
Real Estate
• Real Property Owned (Buildings, Land)• Equity in the Home
Fixed Assets of the Business (Preferred)
• Buildings, Equipment
Current Assets of the Business
• Cash, Savings, CDs• Accounts Receivable, Inventory
Securities (IRA, 401K, 503b cannot be assigned)
• Stocks, Bonds
Other Assets, Both Tangible and Intangible
Factoring of receivables
• Can be used to convert credit sales for immediate cash flow
• Outright sale of receivables to a factor: – Receivables sold at a discount to book value– May charge interest on the balance until collected– Often withhold some money to establish a reserve
fund
• Value assigned to receivables:– Depends on the age of the receivables– Older than 90 days typically not financed
How are collateral assets valued?
Lenders and the SBA use their own respective valuation models
Value estimated or appraised, not based on market value
Discounted to account for loss of value should the assets have to be liquidated
Collateral valuation examples
Collateral Type Lender Valuation SBA Valuation
House 75% of market value less
mortgage balance 80% of market value less
mortgage balance
Car Nothing Nothing
Truck/Heavy Equipment 50% of depreciated value Same
Office Equipment Nothing Nothing
Furniture & Fixtures 50% of depreciated value Same
Inventory 40-50% of fair market value Nothing
Accounts Receivable 60-65% of eligible receivables 50% of eligible receivables
Interest Bearing Securities
Amount no greater than cost Same
Stocks & Bonds 50%-90% of fair market value Same
Mutual Funds Nothing Nothing
IRA Accounts Nothing Nothing
Certificates of Deposits 100% 100%
Who is lending?(Source: FY10 SBA Rankings Through 12/09)
SBA loans by top 10 lendersup 105% YOY
Challenges for start-up businesses
Never easy to win bank loans, even in the best of times
Some lenders look for a long track record of earnings, don’t lend to new firms at all
Don’t expect 100% funding
Where loans are available, banks my require up to a 40% cash investment
Franchises and collateral
• Systems listed in The Franchise Registry:– Eligible for expedited loan processing– Control provisions acceptable to SBA / lenders
• For those not on the list, collateralization may be limited by franchisor requirements
• Lenders also prefer franchisees who are buying rather than leasing a store and land
• Currently, banks may not only require more collateral but may also reduce valuations
http://www.franchiseregistry.com/