Borrowing Basics

For the first time since its founding 15 years ago, RICO Equipment Inc. needed a little financial help to grow.

The Medina-based lift truck manufacturer always prided itself on the fact that it had never borrowed money to purchase equipment, acquire companies or expand its facilities. The family-owned business, started by President Dave Mueller’s father-in-law, was founded on the principle that the company should never borrow money, unless it was absolutely critical.

With a new headquarters and a third manufacturing facility on the drawing board, RICO was in the market for a $3-million loan.

In May 2005, the mid-sized company with 90 employees and sales of more than $10 million went to work positioning itself to get the best loan possible.

Today, RICO expects to pay off its loan within 12 months – not necessarily good news for the bank, but good news for the business.

Things may have gone smoothly for RICO, but it was not without hours of preparation. Northeast Ohio financial leaders say the best way to position your company for a significant loan – $500,000 or more – is to think like a banker and have all financial details in order.

“It’s all about presentation,” says Jim Castrigano, senior vice president of commercial banking with KeyBank. “First impressions are lasting impressions as they say.”

Companies need to provide an overview of the key players in the company, the ownership and/or management teams, as well as a financial portrait that includes at least three years of historical numbers and the most recent interim.

“Bankers like to look at trends,” says Castrigano, who has been a lender for 20 years. “We’d also like to see what they think the next six to 12 months will bring. What we like to see is consistency in terms of revenues, sales and earnings.”

Financials come under scrutiny of the three Cs: cash flow, collateral and character.

The amount of cash flow a company has indicates the ability to repay the loan; the collateral that a company can offer determines if it can back up the loan; and the character of the individual who owns or runs the company can determine if what is presented on paper is reliable.

“What we need to do is know enough about a company to understand how well it can perform going forward, based on its historical performance,” Castrigano says. “We are relying upon them to provide us with the appropriate information to make a [decision].”

Lenders also want to see detailed business plans, financial forecasts of sales, income and balance sheets, as well as the company’s strategies for the future, says Patrick M. Pastore, senior vice president and division manager of corporate banking with National City Corp.

“The more polished a client can bring his story, the better off they are with any bank,” Pastore says.

Additionally, companies should include any valuation on buildings and equipment, tax abatement information and any other important documents.

Seek out the assistance of your accountant or a trusted business adviser when putting together the loan proposal, says Timothy Dixon, executive vice president, commercial banking with Sky Bank in Cleveland. 

“A lot of business owners feel that they have to come forward with the perfect package,” says Dixon. “Don’t be afraid to talk to your banker beforehand to get a feel for what they might require.”

Dixon also suggests drawing on existing networks of colleagues and business owners for advice in creating a loan request for the bank.

“It needs to be complete, but it doesn’t need to be a phonebook full of information,” he says.

What we are trying to get to with all this information is a very good comfort level with the company. By having all that knowledge and by having that level of understanding, I think we can really begin to serve that company in terms of custom tailoring the loan that they are requesting.”
The loan request should include a summary outlining how the loan will be used and how it will be repaid.

When it comes to a loan request, it’s really a sell-sell situation. The company is not the only one who is trying to put its best foot forward; the bank is also trying to sell itself to the company.
With that in mind, business owners should do some digging of their own to find the ideal match.
Companies in the market for a loan should look at the strength of the banking institution, its reputation and the product set, Castrigano says.

The business owner should get to know the person he or she is working with. The business owner needs an advocate.

“Anyone can pop a rate out there. It’s more the relationship and how you feel about your banker that is paramount,” says Kim Gottfried, senior vice president in commercial lending with FirstMerit Bank. “Do they feel like the lines of communication are open, because you need continuous communication with your banker.”

It’s also important for the business owner to know and ask about the loan-approval process, Dixon says.

“It is very important for a company to be very clear about what they need and when they need it,” he says. “Then everybody can agree on that time frame and then deliver.”
Equally important is the range and flexibility of loan products.

“It’s not necessarily a plain vanilla set of products across the board,” Dixon says. What the company plans to do with the loan determines the type of product needed. Typically, revolving lines of credit support working capital; term financing and leasing aid the purchase of equipment or assist with an expansion or acquisition; and commercial real estate mortgages help companies finance office space and production facilities.

Banks are making loan decisions faster than ever before. Some loans can be closed within a week’s time, while more complex loans could take up to 45 to 60 days, especially those that rely on real estate appraisal or environmental studies, Dixon says.

Terms to Know
There are many different loan options available to businesses. Here are a few.

Line of Credit/Seasonal Line of Credit/Demand Line of Credit: A line of credit is a short-term loan, usually less than one year, used to finance inventory and/or accounts receivables for a company with a seasonal financing need. The line of credit amount is set at a limit that allows for peak borrowing and structures repayment with the low point in the seasonal cycle. Depending on the length of the cycle, there may be a clean-up/clean-down/clearance period, when the company is required to be free of debt for at least 30 days each year to prove its borrowings are seasonal. The principal purpose of the proceeds is to finance the cash cycle. Repayment typically consists of scheduled interest payments on the outstanding balance with principal repayment due on demand.

Revolving Line of Credit/Revolving Credit Facility/Revolver: A revolver is a contractual agreement whereby the bank agrees to make loans up to a specified maximum amount for a specified period, usually one year or more. As the company repays a portion of the loan, an amount equal to the repayment can be borrowed again under the terms of the agreement. In addition to interest, the bank charges a commitment fee to hold the funds available on the unused portion. The purpose of the revolver is to finance permanent working capital needs that arise through the continual replacement of accounts receivables and inventory, thus providing a permanent layer of working capital. These financing needs occur in new or expanding companies when growth outstrips the financing generated internally or externally. Repayment typically consists of scheduled interest payments on the outstanding balance with principal repayment due as detailed in the agreement.

Term Loan: A term loan is structured as an intermediate to long-term facilities, and the loan amount is amortized over a fixed period. Loan proceeds are used to finance the long-term needs of the company, including acquisitions, purchase of equipment or fixed assets, and to refinance debt or equity. Repayment typically consists of scheduled principal and interest payments.

Commercial Real Estate Loan/Commercial Real Estate Mortgage/Commercial Mortgage: Commercial mortgage financing is to provide funds for the construction, acquisition or refinance of real estate property. Financing is generally a long-term loan that provides the lender with a lien on property as security for the repayment of the loan. The company has use of the property, and the lien is removed when the obligation is fully paid. Lenders will generally allow a loan based on the percentage of property market value. Repayment typically consists of scheduled principal and interest payments.