Speaker shares inside tips on effective borrowing

By:
Chris Gaetano
Published Date:
Feb 11, 2016

Speaker shares inside tips on effective borrowing 

By CHRIS GAETANO  |  Trusted Professional Staff

Maybe you have an idea for a new business, or maybe you already have one and want to take it to the next level. But you need some capital to do that. Where will you get it, and how? Neville Grusd, a former member of the Private Company Council with decades of experience in the finance and banking, shared his views during the NYSSCPA’s recent Business and Industry Conference.

“I’ve pretty much been on every side of the desk where you’re looking for financing. [If you’re] coming with your accountant, I know what he’s feeling, I know what the client’s feeling, and I know what the lender’s feeling,” he said.

 Grusd said that before doing anything else, it’s vital to prepare an information packet with as much detail as possible.

 “Think of the lender: he’s getting requests every day for financing, packages are coming in, they look at the package. If it’s a simple, straightforward package, they will give it the greatest attention. If it’s not well presented, missing information, it will be pushed to the side until they get some time,” he said. “Prepare a complete package and you will get the quickest response.”

 Prospective borrowers should include their business plan, income statements and balance sheets, along with disclosures of off-balance sheet items, monthly (at minimum) cash flows, at least three years’ worth of reviewed and footnoted financial statements, the latest interim statement and projections for at least one year (though investment bankers will probably want at least five). Each of these items should go into as much detail as possible.

 Grusd said that while many potential borrowers include projections in their information packet, few actually discuss the assumptions behind them—something he, as a potential lender, would want to know.

“The most important thing to do is state the assumptions of all the critical aspects going into the projection. If you go for sales increases, are you basing it on actual orders, or on hopes and prayers you might get them? If I see, as a lender, the viability of a business depends on getting one huge order from one retailer and they haven’t got that order, I’m going to be very skeptical of giving you credit,” he said.

The package should also include a one-page executive summary that covers the amount to be borrowed, what the funds will be used for and what kind of collateral is being offered, Grusd said. Details about the company itself like the type of business, who owns it, a brief history, and whether there are negative events, like litigation, that need to be disclosed should also be provided. He added that lenders will also want to know what the candidate’s current borrowing situation is, and why they’re changing if they have an existing lender.

The next step is actually finding a lender. “If you’re lucky,” lenders will call you, Grusd said. With a lot of liquidity over the past two or three years, money can be easy to come by. If that happens, he said, “first thing you say to them is I don’t need the money.”

“There’s nothing a bank likes to hear more than ‘I don’t need the money’ because that means you must be a very solid company, and I’ll fight to get this guy. If you say ‘oh, thank God you called, I almost missed payroll on Friday’ that is not a good thing to say, even if it’s true. No matter what your situation, say I don’t need the money. Those are the magic words,” he said.

If a lender doesn’t find you, however, you’ll need to pursue one. In this case, Grusd said start with someone you already know, since they’ll have your information; failing that, get a referral from a trusted CPA.

“This is where I think accountants can be of great service to their clients; helping them find the money they need. That’s value added. … Lenders react more favorably and expeditiously to loan requests from familiar and trusted CPAs,” he said. 

This is because lenders always prefer someone with roots in their professional community, versus someone who comes in out of nowhere and starts asking for money. It’s also why financing associations, another possible avenue of securing capital, aren’t as reliable, according to Grusd. To a lender, it signals that they don’t have a lawyer, an accountant, or anyone else who can help find financing, which does not inspire confidence.

Now turn the situation around. How is someone supposed to evaluate whether a lender is right for them?

Grusd said that while cost is certainly a factor, it should not be the only factor. Beyond how expensive a loan will be, potential borrowers should evaluate whether the lender understands the business they’d be lending to, and its industry. There’s also the matter of flexibility: loans have terms and conditions. Are there early termination penalties? What are the reporting requirements? How easily can you extend the credit line if business picks up?

The final matter is to comply with the terms of that loan: the covenant. If that covenant is broken, said Grusd, at the very least there will be heavy fees and increased loan restrictions. At worst, the credit line will be terminated.

 

cgaetano@nysscpa.org

 

 

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