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5 Killer Tips to Get Loans For Your Business

By on January 10, 2013 in Entrepreneurship

On January 10, Josh Gutstein from the Chicago Minority Business Center joined us on the Profit and Laws Radio Hour. Josh helps small businesses find cash. Here are 5 killer tips to get loans for your business.

  1. Do your homework. Know how much cash you need and why you need it.
  2. Identify collateral. Lenders look for collateral they can seize if you don’t pay them back. “Collateral” means customer invoices, real estate and equipment. Line up some customers and orders in advance. You may have to moonlight. And, don’t steal business from your current employer – it’s a violation of your duties as an employee.
  3. Tend to your personal credit. Lenders look to your credit history to predict your business repayment tendency.
  4. Break your cash needs up into manageable pieces. Don’t assume you need one massive solution. For instance, if you need to buy equipment, you could either rent it or finance it through companies that finance equipment.
  5. Buy an existing business instead of starting from scratch. This is the most eye opening trick of them all. When you start a business, lenders have no way of really knowing if your business will actually make money. Lenders may be more likely to see you as a good risk if there is an actual business that you can use to pay them back. Buying a business could be a shortcut to your start-up dreams.  I’m going to focus on this in later posts, because I think it is such an amazing idea.

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6 Ways to Deal with Loan Covenants

By on January 9, 2012 in Business Law

If you borrow money, you may expect that the terms of the loan, including the loan amount, payment terms, interest rate and all other terms, are listed in the cover letter. The rest of the documents may look like inaccessible lawyer filler that have no bearing on your conduct.  But, in fact, that is wrong.

Most people simply don’t read the loan documents they are about to sign.

Intro to Loan Covenants. Business bank contracts usually have these paragraphs called “loan covenants.” These are minimum standards and prohibitions for you and your business to meet.  Loan covenants are the bank’s weapon against bad management or economic downtimes. The bank uses the loan covenants to pressure the borrower into keeping enough cash flowing to pay its debts, to keep growing and to protect the bank’s investment and collateral.

The Stakes. What happens if you violate one of these covenants? The bank can call your loan and make you repay it today. The bank may also be able to increase your interest rate. If you can’t repay the loan, the bank could move to grab the collateral you have pledged to the bank to sell it. In other words, all bad things.

TIPS FOR LOAN COVENANTS
  1. Read and understand every page and every clause before you sign.
  2. Don’t be afraid to negotiate any clause you don’t thing is fair.  That includes financial ratios.
  3. Once you sign, make sure you get at least one folder of all documents.
  4. Give copies of your financial covenants to your accounting professional to make sure you stay vigilant on compliance.  (Particularly beware of the positive cash flow covenant.)
    And, if you have to produce audited financials, reserve plenty of cash and time for the audit fees.
  5. Calendar the due dates for delivery of financial statements or other reports.
  6. If you have to sign a personal guaranty, negotiate limits and terminations so if you leave or get deposit, the guaranty ends.

Loan Covenants can be “affirmative” covenants to do something and “negative” covenants to refrain from doing something.

Affirmative Covenants
These are typical do’s:

  • Get and keep liability and property insurance with minimum coverage amounts
  • Get and keep “key man’ life insurance on top management
  • Pay all taxes and state fees on time
  • Deliver certificates of insurance to the bank
  • All loans must be subordinate to the bank’s loan
  • Financial statements must be prepared and “reviewed” or “audited” each year, and then delivered to the bank. Push back on audit requirements if you can.
  • Maintain liquidity and performance ratios
  • Deliver annual corporate tax returns

Negative Covenants
These are typical don’ts:

  • Change management
  • Merge with another business
  • Take other loans
  • Issue dividends
  • Increase management salaries
  • Sale of assets
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