Guarantors For Business Loans

A guarantee is basically a promise to satisfy the performance of an agreement. A guaranty is similar, but is used to satisfy the performance of a loan by an individual. Analysis of credit and guaranties is a discipline that only the most qualified people should perform. Investigating guaranties is never performed alone -it is part of the overall credit review of a business requesting a loan. It is a complex set of procedures beyond the scope of this article. This article will summarize the elements involved to investigate a business loan guaranty. Consult with your CPA or Banker for assistance before attempting to do it yourself.

Investigating a personal guaranty for business loans is part of commercial credit analysis. The credit-underwriting department of a commercial bank or business lending institution typically performs this analysis. Any institution or person considering the extension of credit related to a business can perform credit examination. All guarantors must complete a Personal Financial Statement accompanied by tax returns and sometimes-additional supporting financial statements. Guaranties are legal agreements that obligate a third party, usually a business owner or key corporate officer, to repay a business debt should the business entity default on its repayment of a credit facility. A guaranty is not a primary source or substitute of a borrower’s credit worthiness.

Personal guarantees are frequently obtained from the owners of a corporation, partnership or any other form of a business entity. From the lender’s perspective, a personal guaranty ensures the personal and business interests of the owners are equivalent. If the business entity defaults on the loan, the guarantor promises to cure the default. Since most guaranties are unsecured, their values are more psychological than tangible. However, a lender can ask for some type of personal collateral of the owner for additional security for the making the loan. For example, the lender may ask for a pledge of a secondary lien on the owner’s home. The type of property pledged depends on the risk factors calculated by the lender. Some property holds greater security values than others.

Investigating the credit worthiness of a loan and a guarantor involves careful credit investigation. In commercial lending, banks will apply principles called the 5 Cs as a basis for credit examination. The 5 Cs are Character, Capacity, Capital, Conditions, and Collateral.

Character – This relates to the motivation of the borrower to repay a debt obligation. It is unlike any other financial performance indicator found in the financial statements. Determining character is a judgment call derived from careful interviewing of the applicant and study of the applicants’ historical credit reputation. Background checks and interviews with others having business relations with the applicant are useful to make a fair appraisal.

Capacity – “Cash is King”. Loans are repaid from cash generated by the business’ operating cycle. Can the borrower manage their cash efficiently enough not only to repay the loan, but all other debts simultaneously? Historical financial performance is evaluated to determine how the borrower handles their debts and expenses. Sources to review include the Income Statement, Statement of Cash Flows, and partially the Balance Sheet. A new or very young business is difficult to judge because they have not yet accumulated enough historical data to review.

Capital – It is the funds available to operate a business. The two primary conditions in this area involve the amount of owner’s equity (OE) and efficient uses of the capital to operate the business. It is not good when borrowed capital (credit) is greater than OE. Careful scrutiny of the Balance Sheet is required in this area. The purpose of capital is to maintain operations. Borrowing funds to augment operations is normal. However, too much borrowed capital is a sign that something is wrong.

Conditions – These are external factors relative to the industry of the business. The current state of the economy is a good example. Industry events and situations (current and predicted) are taken into consideration as to how it affects the business. For example, if a key supplier of the business experiences a labor strike, further investigation is needed to consider the affect on the business. Interviews with key officers and the business owner can shed light on what is happening. Additional resources like trade journals, industry news reports and the like are useful tools.

Collateral – Lenders want repayment from cash, not property. The last thing a lender wants to do in a default is take the property pledged backing up a loan. Property pledged is only a means to offset weaknesses in the other Cs. It is a safety net of last resort should a loan default a secondary source of repayment. A collateral pledge is completely irrelevant if the loan request contains too many negative signs in the foregoing credit assessment areas.

Guaranties are generally classified as unlimited and limited. An unlimited guaranty covers all the debt obtained by a single borrower to a single lender. Limited guaranties are associated linked to a specific loan with a capped dollar amount.

Other types of guaranties include corporate and government agencies.

Corporate guaranties are similar to personal types except it is generally one corporation guarantying the debt of another corporation. Usually, large corporations guaranty the debts of its smaller subsidiaries or new business units.

Government guaranties are special situations, whereby a state or federal agency guarantees a business loan. An example agency is the Small Business Administration (SBA). Governmental guaranteed loans are very complex and typically take longer to process. A lender processing governmental secured loans must adhere strictly to the guidelines of the agency guaranteeing the credit. Under an SBA loan, the lender provides the money to the borrower and the SBA guarantees the loan amount up to certain percentages depending on the program loan used. Each loan program has specific qualifications and conditions attached to it. Anyone can contact the SBA directly for more information by visiting www.sba.gov. It is recommended to speak with an SBA approved lender to see what options are available. Obtaining an SBA loan is often the best choice for a business because the borrower cannot qualify under conventional terms. The SBA assumes most of the risk, thus making the credit request more palatable for the bank.

Careful credit examination is required to investigate any guaranty for business loans. Analysis should account for all tangible and intangible factors of the individual guarantor with the associated business. The guaranty does not stand alone without review of the business. Credit analysis is both an art and a science. Sound judgment based on financial data, combined with practical experience is necessary to consider all variables of a credit request. Professionals that have formal credit training usually perform business loan analyses. Consult with your CPA or Banker for assistance before attempting to do it yourself.

Scheduling for Your VA Business

Once you get established with a few clients, it’s easy to find your schedule either keeping you insanely busy or insanely bored. There doesn’t seem to be much in the middle, which is your ideal. So this month I’m offering tips on how to schedule your workload out.

First of all, never go over 30 hours a week with scheduling your clients. So make sure you account for that in creating your hourly rate. Why? Well, two reasons. One, this allows you the opportunity to be flexible with your ongoing current clients if they need more from you one week than they do normally. They will appreciate that and their loyalty to you will increase.

Also, it allows you time for one time projects that might drop in sporadically (and with minimum charges on those they usually turn out to be very profitable). This also gives you time to handle some of your own business administrative functions (billing, record keeping, etc.) during normal business hours so you are not up late at night or weekends when you should be spending time with family.

Next, make sure your contracts all state that normal business requests must be scheduled 48 hours in advance. This way, when someone calls and says, “Heather, are you available to work with me on a project on Friday?” on a Wednesday, you can open your calendar and schedule appropriately.

Many clients will try to treat you like an employee–requesting same day if not immediate turn arounds. This is your time to remind them that while you do try to process same day requests, you do require a 48 hour notice for all normal business requests and that rush fees can apply if they need things done sooner.

Now, I’m pretty flexible with most of my clients, because I understand that things DO come up as a surprise now and again. So most of the time I don’t charge a rush fee for doing work the same day or in less than 48 hours from request unless they either are abusing this by constantly wanting things done same day or I’m really that busy that I can’t process their requests same day unless I work until midnight. Those two times, I will actually tell them that if I do their work I will require a rush fee in addition to normal hourly rates.

Always keep an electronic and a paper copy of your calendar. Technology is great, but you never know when it will decide not to function anymore! Even if I know a phone call or project will only take 30 minutes or so, I go ahead and block an hour in my schedule just in case something goes wrong or the client requests changes afterward.

This is a good rule of thumb to keep yourself out of a quandary and it gives you the opportunity to get up and stretch your legs or get some fresh air or a cup of coffee between projects. Believe it or not, these little “breaks” even if just for a minute or two will help keep your mind fresh all day.

Keep moving toward success

How To Qualify For A Business Loan

Qualifying for a business loan is not as easy as it was even one year ago. This is because most lending institutions have increased the requirements for businesses requesting a loan. The recent slowdown in our economy has forced banks to re-examine their lending practices as many businesses are experiencing lower profits. So when you are looking for a loan for your business it is important that you have everything in order so you will have the best chance to be approved.

One of the first things that you need to look at before going to a lending institution is whether or not you have a good business plan together. Having a business plan drawn up for your company is a great way to show the bank that you have carefully considered your request. This will show the bank where your business is currently and where you hope it will go once you have been approved for a loan. There are many professional writers that work as freelancers that have the expertise in this area that you can hire if you are uncertain about your ability to convey your thoughts on paper.

The next thing to do before you go to a lender is to look at your company’s financials. Clear as many debts as you possibly can. For example, if you use a credit card start paying it off monthly or if you have a vehicle loan with just a few payments left on it you might want to consider paying it off. This will help your income to debt ratio and make your business a more attractive prospect.

Once you have done that, you should look at all the officer’s credit reports. Every officer of the company will have a credit history run on them because they will be personally guaranteeing the loan. So make sure that the person income to debt ratio is good and clean up any bad marks against your credit.

When you have all of that together you are now ready to go to the lending institution. With the situation the way it is currently it would be wise to start with the bank you already have a relationship with. This is especially true if you have a community or local bank. They make their decisions based on the local area unlike the larger national banks. If your company is turned down don’t take it personally but consider your other options.

There are other places to gain access to a loan. You need to keep your eyes open, when the private market tightens the amount of money they are willing to lend oftentimes you can more easily qualify for an SBA loan. So if your bank says no don’t give up to easily especially if all of your financials are strong. So when you are looking for a business loan make sure that you have your company looking the best that it can financially and present the lenders with a solid business plan.