One hundred beta tests will not impress a lender more than a committed customer.
Hoffman Estates, IL (PRWEB) January 31, 2012
Large start-up project developers are often puzzled to learn that lenders do not take their project seriously.
Perhaps they should consider these ten tips from Affiliated Financing, LLC., a lender employed by investors to fund commercial term debt to projects with investment grade customers in the USA and Canada.
1. The best case for a lender is to be repaid, on time, without drama. Lenders are not your partner. If you make huge profit, lenders are only repaid, on time, at the stated interest rate.
2. Remember, it is income from sales that repays loans. To prevent the lender from tuning out after a few minutes, the first ten minutes of your initial conversation should address customer demand for your product. Please do not tell me that if you build it, customers will come. Unique processes should provide results that customers want to buy.
o The lender would like to hear that your unique feature is just what a Moody’s or S&P investment grade customer needs … and that the customer is willing to buy enough product to hedge the project’s fixed overhead.
o No “unique patented process” or even one hundred beta tests will impress a lender more than a committed customer.
3. Loans are repaid by cash flow, not “hard collateral”. Talking to me about collateral won’t make nearly as good an impression as talking to me about how your customers’ need for the product can deliver minimum sales/cash flow. Real estate and equipment are essentially worthless without a successful cash-flowing business. The collateral from a failed project may return only ten percent of the loan amount after legal and collection fees.
4. Start-up project loan underwriters focus on these “Black Swan” risks:
o If the project works as planned, will the lender be paid on time?
o If the project does NOT work as planned, how will the lender be paid on time?
o Does hedged operational integrity match the amortization? For example, is the inventory/fuel stock delivery hedged for the duration of the loan amortization? What happens if corn prices triple and the price of your ethanol does not?
5. Lending is a process. Have your CFO answer all of the questions at least two days before the conference call, so we can read them and determine which loan fund would best fit your project. Do not “bluff” answers… we have a team of experienced underwriters who verify everything the borrower says.
6. No lender got fired for saying “NO” to a loan request. When projects of this size fail, the loan officer’s career is over. Saying “YES” and delivering a loan requires significant effort from a team of lenders and underwriters. Why do lenders want to lend to your project? The best reason is because you have customers lined up to buy at a profit.
7. Finding customers is an equity risk. Dealing with Venture Capitalists (“VC”) is the penalty for not having a strong relationship with a Moody’s or S&P investment grade customer. Equity people understand the value of their contribution and a lot of the VC’s contribution will be introductions to investment grade prospective customers. By the way, the VC’s are not kidding when they say they want cashed out in 3-5 years and expect no less than a 300% return on their equity. That is a value of a strong customer.
8. No “skin in the game” = low lender credibility. Most bank-type lenders require 60% equity (cash and tax-credits) for start-up ventures, and require management to put in all their own money, houses and “friends & family” money if the project does not meet projections. Lenders think, for this large a financial reward and such a sure thing, why not go all-in?
9. Do not “save money” on P&C insurance. If you do not have 125% of the deductable reserved, a lender will have a problem with your skimping on the lender’s best hope to recover from an unexpected “Black Swan” event. Remember, even if you haven’t read your insurance policy, we have.
10. Lenders are serious about money. Are you? It is amazing to lenders the number of borrowers that apply for $20 million or more without an experienced CPA or CFO in the management team. A quality CFO already knows the predictable questions a lender will ask on fixed and variable costs, what quarterly governmental filings are necessary, and can deliver other lender financial reports. Lenders think that a CFO-less borrower is not serious.
James Forrest is the Managing Principal of (http://www.AffiliatedFinancing.com) near Chicago, and has 33 years in commercial financing. Affiliated is a lender for Private Placements of debt for Project Financing, Management Buy Outs and Economic Development Projects with Investment Grade Sponsors/Customers. Our funds are from major US institutions, offered at a fixed rate for 5 to 20 years at “par” (no “lender points” or annual fees). Since 1990, Affiliated has never received a single complaint and is rated by the Better Business Bureau as “A+”.
BBBureau Link: http://www.bbb.org/chicago/business-reviews/financing-consultants/affiliated- financing-in-hoffman-estates-il-88010813
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