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How to make an effective loan presentation
Contrary to popular myth, franchise lenders don’t approve a loan application based upon the size and weight of the credit package. Simply said, size doesn’t matter. One can surmise that the glossier the loan package and the prettier the pictures contained therein, the larger the credit story, the higher the credit risk and the lower the likelihood of approval. With all of the liquidity and lenders in the franchise sector today, if a franchise borrower needs to hire a supposed “investment banker” (isn’t everyone an investment banker today?) to prepare a book and market their loan request for a fee, run for the hills. That’s going to be one dicey credit.
 Michael Vallorosi is senior vice president of sales and marketing with Irwin Franchise Capital Corporation, a lender that offers both SBA and conventional loans to franchise companies. You can reach him at (201) 326-4002 or by e-mail at michael.vallorosi@irwincf.com. |
On the other end of the spectrum, I’ve witnessed loan requests penned out on napkins lacking in thought, details and, more importantly, likelihood of approval. So if too much isn’t good and too little is worse, then where does that leave us? Somewhere in the middle. You need to find a happy medium between presentation and content.
In order to increase your success with a lender with an effective loan presentation, you need to invest the time, thought and effort to prepare materials that makes sense to you and your lender. Like everything else we encounter in life, the better we communicate, the higher the likelihood of success. That communication can be written in a detailed business plan or loan submittal package to your lender, or can be verbal via a detailed loan discussion with your lender. Or it can be a combination of both.
Regardless of which way you go, there are some easy steps to success. In this month’s issue, we’ll look at the first seven that will get you started. In April’s issue, we’ll discuss the remaining steps you need to take to stake out that capital.
No. 1—Describe the specific purpose of the loan
Simply said, “Why do you need the money?” Many times this is not conveyed to the lender or it is not clear after we talk. That drives me loco. One of the best ways to outline your specific purpose of the loan is to utilize a Sources and Uses Statement for clarity. Typical sources of funds include senior debt, subordinated debt and equity (cash, common, or preferred equity). Typically, your lender can provide senior or subordinate debt while you, your partner(s) or a passive investor(s) could provide the equity. Typical uses of funds are building or rebuilding a store, refinancing debt, retiring debt, reducing debt, re-imaging a store, reimbursing yourself or paying for transaction costs. When preparing a Sources and Uses Statement, remember that your total sources of funds should equal your total uses of funds.
No. 2—Explain what you want to achieve with the financing
Sounds simple, right? Similar to “specific purpose,” you’d be amazed at how many times this isn’t communicated to the lender. Explain, in layman terms, what you are trying to accomplish. Through a refinance and cash out are you trying to free up cash to cover a temporary working capital deficit? Is your goal to stretch the amortization and lower the monthly payment? Are you attempting to lower your interest rates, and hence, borrowing costs? Or are you trying to recapitalize your company? Unfortunately, there are lenders out there that act as order takers. They bid on loan opportunities without diving into the specifics. They just respond to a Request for Proposal (RFP) with no additional inquiry. When a lender asks the relevant questions, I refer to it as “Pain Discovery” and compare it to a visit to the doctor’s office. The first thing a doctor asks you is, “How are you feeling and what’s the problem?.” If your lender is not seasoned enough to ask the right questions then give it to him anyway. I’ll assure you that somewhere along the way, from sales to credit to documentation, someone is going to ask anyway. It’s all part of being pro-active and getting where you want to be faster and more efficiently.
No. 3—Identify all proposed borrowers and guarantors
You should identify all proposed borrowers and guarantors for your loan transaction. What does that mean? Use specific, as formed names. Identify the form of organization. Is it an LLC, S Corp., C Corp. or some other form? Detail the ownership, both common and varied, of each of these entities. And make sure to detail the relationships between each of them. Is it a parent and subsidiary relationship or an affiliate relationship? You should identify whether the entity is an operating company holding title to equipment and franchise licenses or a real estate company holding title to real estate and development agreements. And you should identify any management companies that are paid management fees. Many folks utilize organizational structure charts and then identify the proposed borrowers and guarantors on them. If you don’t have one, ask your CFO or controller to assemble one. Finally, remember that all lien searches, credit inquiries and documentation will be prepared using these names so they better be correct. If they are not, you will incur unnecessary legal expenses and wasted time and effort.
No. 4—Identify your equity in the transaction
There are three certain things in this life—death, taxes, and LENDERS LOVE EQUITY! To make your lender happy, identify your equity in the transaction. Specify the amount of equity in dollars and percentage of the total financing. Detail your source of equity—where is it coming from? Is it from your business resources? Is it from your personal resources? Is it from friends and family? Also, what is the form of your equity? Cash is the preferred form, but in certain instances, lenders will accept imbedded equity in your business or equity in stores they financed previously. You should also specify the timing of receipt of the equity. There is nothing worse than getting to a closing table and not having access to the equity you promised into the transaction. Also, remember that seller notes, subordinated or otherwise, are NOT cash in the deal. A note is a note is a note. And equity is equity. If it looks like skunk and smells like a skunk then its probably a skunk, right?
No. 5—Summarize your background and experience as an owner
You should provide an updated resume or curriculum vitae to your lender that outlines your operator experience, business experience, education and any relevant special skills. No, your helicopter skiing experience is not relevant. With respect to your operator experience, is it in the same brand for which you are making the loan request? Let’s say you’re in restaurants: Is it in the same restaurant segment (quick service, fast casual, casual, or family)? Or is it in a different segment than your prior experience? Some operators find it difficult to cross over from one franchise segment to the next while others can make that transition seamlessly. Also, do you have hands-on operational experience or did you act as a regional director with big-picture duties? Some can make the transition from a five-unit to a 25-unit operation, but many stumble along that path. Your lender will want to know about your background and experience. Remember, the devil is in the details.
No. 6—Layout corporate organizational structure and ownership
When laying out your corporate organizational structure and ownership utilize charts for simplifying information, identifying parent companies, subsidiaries, and sister companies, and identifying the ownership percentages for each. A chart is the best way to do this, especially if you have different legal entities and/or your structure is cumbersome. Many entrepreneurs commence their operations with one store and one legal entity and, before you know it, end up with 50 stores and 50 separate legal entities. Also, many times, we see real estate held in individual names, although I would think folks would want to avoid that for liability purposes. To each their own.
No. 7—Specifically identify the collateral for the loan
With respect to the collateral for the loan there are a litany of questions that need to be answered. Is the store leased—ground or space—or owned (fee simple—land & building)? What is the format of the store—freestanding, mall, in-line or end cap? What is the specific address and location? Is it an existing, acquired or to be built store? In what legal name and entity is the store residing? If leased, is the landlord a related party or third party? Also, what are the lease expiry dates and options to renew that leased location? And did you provide copies of the leases or lease abstracts to your lender? A review of that lease may determine whether lien waivers or leasehold mortgages are available on the property and how accommodating the landlord may or may not be. Further, when did the store open or when was it acquired and what were the last remodel dates, if any? Finally, inquiring minds are going to want to know the franchise agreement expiration dates. All of these factors play into the proposed loan advances, terms and ultimate structure of your loan. Get it right.
Next month, I’ll talk about steps such as putting together site and real estate information to discussing the key metrics of your business with your lender. As I mentioned before, key to obtaining that loan is communication!
