Having worked in manufacturing finance for more years than I care to admit, I’ve seen a lot of transactions. Some have been fairly straightforward and simple, others have been extremely complicated, and a number have been downright painful. But even the complicated deals can be made easier if all of the information and details are organized and provided quickly at the inception of the transaction. Here are some tips for making a finance transaction go smoothly, efficiently, and get completed in a timely manner.
GET YOUR STUFF TOGETHER
The amount of the information required will be somewhat dependent on the nature and size of the financing needed. The larger and more complex the transaction, the more information required. What is typically needed includes:
- Signed credit application and authorization.
- Financial paperwork: financial statements/tax returns, interim financial statements.
- Purchase paperwork: equipment specifications, invoice, delivery date, insurance (if required).
- Ownership verification: Articles of Incorporation (if applicable), Operating Agreement for LLCs, Driver’s License of the owners.
This may sound simple, but it’s amazing how many applicants just don’t understand that documents are requested because they are needed to evaluate a transaction. No lender wants unnecessary paperwork, so if they ask for something, try to provide it as quickly as possible. If it’s not possible to obtain a specific document or piece of information, let the lender know. There are times when substitute documents or information can be used.
Completed Credit Application
The signed (by all principals) and fully completed credit application is essential to starting the credit evaluation process. In addition to providing basic information about the company, it typically provides authorization for the lender to run basic credit reports. The application and these reports provide a lender with the first look at the character of the company and will often dictate how much additional information may be required. Smaller transactions can sometimes be evaluated with some basic information and a simple credit score, but if that is all a credit analyst has to review, very little can be done to mitigate a lower than acceptable score. A lender familiar with your business and industry could then ask for additional information to determine whether credit could be extended even with a lower credit score. With the full disclosure submittal package that is required in larger loans, a negative or sub-prime score can possibly be overcome. Often, bad events happen to good companies and good people. A thorough look at the company and its principals may give a credit officer that is familiar with the industry and the equipment confidence to provide an approval when other lenders would not.
Financial statements and tax returns provide a picture of the state of the business and its credit worthiness. A minimum requirement is two year-end statements, but three year-end financials show a “video” over time, providing a credit officer with a more complete picture of your business. Two years provides a shorter video, and one year-end is only a “snapshot.” The more video, the more the company’s story is revealed. If the date of your credit request is six months past your year-end, consider including an interim financial as well. Tax returns are important because they are the official external reporting of the company’s results in a standardized presentation. Statements that are Reviewed or Audited are qualified and quantified by the accounting firm under acceptable standards to external reviewers. Internally prepared or compiled financials are not considered qualified for outside sources. While in some cases they are helpful as supplemental information, they do not on their own provide sufficient information upon which to make a credit decision.
Potential loan applicants may ask why tax returns and internal year end financials are both needed. The answer is simple: the tax accountant is doing his best to reduce tax liability and may be using accelerated write-offs and cash basis accounting that may not be presenting the company’s full financial picture. Cash basis reporting will not show the accounts receivable or the accounts payable which, in many cases, would show the company in a better light. Having both tax returns and financial statements provides the lender with a more complete picture of the company’s financial health.
Purchase documentation is needed so that the lender knows exactly what equipment is being financed. Technical specifications, accessories, and soft costs for tooling, part programming, and fixturing need to be assessed in the credit review process. Depending on the type of equipment, additional paperwork may need to be filed (UCC, for example), and having the correct information early on helps streamline this process. It also helps the credit team understand the equipment and any type of accessories or add-ons being included in the purchase price.
Documents verifying ownership and identity are required by law and for loan documentation to assure that the documents are being signed by the authorized parties and that the documents reflect the exact legal name of the entity acquiring the loan. Presentation of a valid driver’s license by the signing parties also helps streamline the process.
COMMON PITFALLS THAT DERAIL THE PROCESS
- Delays in providing paperwork
- Incomplete or inaccurate paperwork
- Undisclosed past financial issues
Delays and Incomplete Paperwork
Especially when a quick credit decision is needed, it’s important to provide all the information as quickly and completely as possible. Missing paperwork and unsigned documents are sure ways to delay the process and create additional work and confusion. Providing information in a complete, organized and timely manner indicates to a Credit officer that your business is well organized and well run.
Undisclosed Financial Issues
Full disclosure is in the borrower’s benefit. Trying to avoid showing poor results from a prior year will only complicate the credit picture. Undisclosed financial issues, once discovered, can cause a transaction to come to a screeching halt. These issues can include prior or current litigation, bankruptcies or losses, tax liens and more, but these aren’t always impediments to financing. Being upfront with your lender about these situations allows them to address the issues up front and try to find alternative ways to deal with and solve them. For example, poor results in a given year can be made a positive when information from other years indicate that the problem was an aberration or corrective measures have been put in place to mitigate the problem. Many times, credit can be offered to companies that have had recent negative results when an appropriate explanation has been provided and the lender who is familiar with your business understands the situation.
It is the explanation and “story” behind these adverse events and the corrective measures taken by the principals and management of the company to overcome these issues that can often lead to an approval. A knowledgeable lender should be able to understand the situation and structure a transaction to help you accomplish your goals.
DETAILS THAT HELP THE PROCESS
- Narrative on the business
- Full list of facilities and equipment
- Information on customers and/or contracts
You know your business inside and out. A narrative about the business helps the credit analyst understand it as well, assisting them in rendering a decision and structuring the transaction. Details that help paint the picture include the experience of the business principals, a vision for future growth, the industries being served, the driving force behind the purchase, information about cash flow and business seasonality.
Facilities and Equipment List
With Section 179 and accelerated depreciation the net assets of a company’s balance sheet are often far less than the real value. A full list of the primary plant equipment and age of each piece allows an accurate appraisal of the total value of assets, thus giving a more accurate picture of the actual net worth of the company. Very often assets are depleted on the balance sheet with most of the debt in the liability section. The value assessment can greatly improve the critical debt-to-worth ratio and industry finance experts can quickly assess the true value of the equipment without the need for formal appraisals or third party intervention.
An accounts receivable list provides the credit team with an understanding of the company’s customer base, including any potential customer concentration issues. Additionally, contract details and production backlogs are extremely helpful to understanding the long-term plans for the company. If financed equipment is being purchased to fill a specific production gap, providing the contract that supports the purchase will help the credit analyst render a decision and structure a transaction that meets your needs.
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