This article are provided for information purposes only, and are not intended as legal advice.


Are you better to be asset rich and cashflow poor or have great cashflow and less assets?

June 11th, 2009

The business market is currently in turmoil, some industries are doing well while others are suffering tremendously.  Because of poor investment strategies, banks have made many poor investment decisions and are now trying to recoup their mistakes on the businesses which have survived so far but they are cutting back on the amount that they will lend and the type of assets that they will lend on.  What are banks looking for to provide a loan, that is the million dollar question. I am not sure that even some bank managers understand the credit decisions being currently made by their risk managers.

 

It appears that bankers are looking more to businesses which are generating large amounts of positive cash flow rather than companies who have significant assets but weak cash flow.  It does not matter that the real estate owned by a customer is two to three times the amount of loans outstanding.  The banks do not want to repossess the property even though there is significant equity in the real estate even at fire sale prices.  The banks are no longer asking for just the corporate guarantees.  They appear to be looking for hard security, personal guarantees, your first, second and third born child.  You have have a loan for $1 million but the bank wants equity in the company of $500,000 or more, personal guarantees of $700,000 of all shareholders, registered liens on other real estate properties for the total value of the loan – does this look like the banks are taking risks and lending to the average person?  If you cannot provide this type of coverage, are you going to be able to get a loan?  In this case, the cash flow of the company prior to owners compensation would allow the loans to be repaid in 1 to 1.25 years.

 

I am not sure where the lending practices of the banks are going but if one bank calls your loan, you may not have a lot of options to find alternative financing.  Although the government is trying to provide a stimulus to the economy, the banks can single handed grind our economy to a halt unless they change their current lending practices.


Filed under: Buy a business — Gary Landa @ 8:31 am


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