Getting your clients the financing they need.In today's competitive climate, many small and medium-sized CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. firms are seeking new ways of becoming more valuable to existing and potential clients. However, these firms often overlook the fact that all enterprises, especially growing businesses, need financing. CPAs are in an excellent position to obtain financing for their clients they are in close contact with their businesses and are aware of the types of internal and external changes that can precipitate precipitate /pre·cip·i·tate/ (-sip´i-tat) 1. to cause settling in solid particles of substance in solution. 2. a deposit of solid particles settled out of a solution. 3. occurring with undue rapidity. financing needs. CPAs who choose to help their clients obtain financing need to create the kind of financing package that will make a positive impression on potential lenders. This article will show CPAs what they need to prepare a complete financing package. It will help them identify the right sources for financing and lists ways CPAs can assist in negotiations between the lender and the client even after the financing agreement has been reached. PREPARING THE FINANCING PACKAGE Success in obtaining a new credit line or increasing an existing one often depends on how a request is made. The right information in the proper format increases the chances of obtaining funds and speeds up a process that often takes longer than expected. Each lender may have different requirements, but there are certain basics CPAs should follow. A complete financing package should include * An executive summary. An executive summary should state 1 . The name and location of the borrower. 2. A brief history of the business. 3. The amount required. 4. How the funds are to be used. 5. Suggested repayment terms or credit line arrangements. 6. The amount and description of collateral offered. The executive summary should be no more than three pages and be easy to read because it is the lender's first contact with the borrower. * Annual financial statements. For credit lines over $250,000, review statements generally are needed. Most lenders require audited statements for credit lines over $1 million. Compilations may be accepted by some lenders for smaller lines, and lines under $100,000 may require additional information based on the lender's requirements. All statements should comply with generally accepted accounting principles The standard accounting rules, regulations, and procedures used by companies in maintaining their financial records. Generally accepted accounting principles (GAAP) provide companies and accountants with a consistent set of guidelines that cover both broad accounting and include all required disclosures. The package should include at least three years of annual financials. If the borrower is a group including affiliates, all relevant financials should be included. Also, the CPA should make sure the affiliates share common yearends. * Interim financial statements. Lenders need current information. If the latest annual statement is more than three months old, the CPA should submit an interim statement. * Business plans and background information. For mature businesses not anticipating material changes, a long-term detailed business plan generally is not required. However, the applicant should explain any expected near-term substantial growth or major changes. Background information must fully explain any past setbacks such as a bankruptcy or major lawsuit. Nothing turns off a lender more than discovering problems that wire not revealed in advance. * Projections. The CPA should present the lender with detailed, monthly projections for at least one year, and consider providing annual projections for two additional years. These should include cash flow statements, income statements and balance sheets, as well as any off-balance-sheet financing Off-Balance-Sheet Financing A way of raising money that does not appear on the balance sheet. Notes: This is unlike loans, debt and equity, which do appear on the balance sheet. such as letters of credit. If the proposed financing is secured lending based on accounts receivable accounts receivable n. the amounts of money due or owed to a business or professional by customers or clients. Generally, accounts receivable refers to the total amount due and is considered in calculating the value of a business or the business' problems in paying or inventory, the monthly borrowing/collateral position should reflect how the money borrowed will fluctuate through the year and show that the collateral, at proposed advance rates, covers the loan at all times. A practical point to consider for seasonal and highly leveraged businesses is the intra-month peak requirement. This is particularly important in the case of asset-based lending Asset-Based Lending A business loan secured by collateral (assets). The loan, or line of credit, is secured by inventory, accounts receivable and/or other balance-sheet assets. Also known as "commercial finance" or "asset-based financing". and revolving credit Revolving Credit A line of credit where the customer pays a commitment fee and is then allowed to use the funds when they are needed. It is usually used for operating purposes, fluctuating each month depending on the customers current cash flow needs. lines. While the month-end numbers may show full collateralization In medicine, collateralization, also vessel collaterlization and blood vessel collateralization, is the growth of a blood vessel or several blood vessels that serve the same end organ or vascular bed as another blood vessel that cannot adequately supply that end organ , the client may be borrowing in excess of the agreed collateral percentages, particularly if a heavy shipping period occurs at the end of the month. The projections should include all significant assumptions and follow the AICPA AICPA See American Institute of Certified Public Accountants (AICPA). Guide for Prospective Financial Information (1993). The guide says the disclosure of significant assumptions is "essential to the reader's understanding of the financial forecast." It also says a disclosure should include a caveat that prospective results may not be attained and should include the usual disclaimer language. Lenders are aware that projections are not written in stone, but a well-presented projection with logical assumptions is vital for earning credibility. If projection assumptions vary materially from historical data, the application should explain any differences. * Guarantors' personal financial statements. Most lenders to closely held corporations Noun 1. closely held corporation - stock is publicly traded but most is held by a few shareholders who have no plans to sell corp, corporation - a business firm whose articles of incorporation have been approved in some state require the guarantees of the major stockholders, so CPAS should include personal financial statements. In addition, lenders may request outside collateral if a company is undercapitalized Undercapitalized A business has insufficient capital to carry out its normal functions. undercapitalized Of, relating to, or being a firm that has insufficient long-term equity to support its assets. or if they are left unsecured. The CPA should alert the client of this possibility. Applicants should disclose any prior financial problems or litigation An action brought in court to enforce a particular right. The act or process of bringing a lawsuit in and of itself; a judicial contest; any dispute. When a person begins a civil lawsuit, the person enters into a process called litigation. , especially with other financiers. Lenders will conduct extensive due diligence Research; analysis; your homework. This term has caught on in all industries, because it sounds so "wired." Who would want to do analysis or research when they can do due diligence. See wired. including credit reports, litigation and lien lien, claim or charge held by one party, on property owned by a second party, as security for payment of some debt, obligation, or duty owed by that second party. searches, and personal references. Undisclosed negative information will prove fatal to a loan application, no matter how well it is prepared. * Biographies of key managers. Management is a key ingredient to viable businesses, and lenders are well aware of this. Biographies of key managers detailing their experience and education should be included in the loan application package. The applicant should fully disclose and explain any past personal or professional problems relating to relating to relate prep → concernant relating to relate prep → bezüglich +gen, mit Bezug auf +acc the management. * Asset-based lending. Many credit lines are secured by accounts receivable and inventory. Client records are the key to persuading the lender to offer this type of financing. Accounts receivable agings should be available within a few days of month-end. If possible they should be aged from invoice date Invoice date Usually the date when goods are shipped. Payment dates are set relative to the invoice date. rather than due date, and special dating should be explained. The lender is going to examine the "over 90 day" column very carefully. CPAs should write off any old balances that are considered uncollectible, even if reserves are set up to cover them. A high percentage of uncollected balances gives a lender the impression of sloppy slop·py adj. slop·pi·er, slop·pi·est 1. Marked by a lack of neatness or order; untidy: a sloppy room. 2. procedures and accounting or a weak collateral base. It is difficult to obtain financing on inventory. Lenders are more inclined to lend on inventory when they can see accurate, perpetual records adjusted by regular cycle counts and periodic physical counts. ASSISTING IN THE NEGOTIATION PROCESS Once the loan package has been submitted to a potential lender, the CPA can act as facilitator, providing any additional information the lender requests. While the CPA firm can guide or facilitate the proposal process, the client should do the hard negotiating with the lender to keep its CPA firm from impairing its independence. If a lender is interested in a financing request, the client should obtain a proposal letter or letter of intent from the lender. The CPA can help the client review the proposed financing and ensure all relevant points are covered. Many lenders conduct field examinations on the clients' premises. Besides the usual books, records and inventory, the examiners will look at operational items including shipping procedures (comparing dates on the invoices with bills of lading); the currency of all taxes - including payroll taxes Payroll Tax Tax an employer withholds and/or pays on behalf of their employees based on the wage or salary of the employee. In most countries, including the U.S., both state and federal authorities collect some form of payroll tax. - lease payments and payables; and other related-party transactions Related-Party Transaction A business deal or arrangement between two parties who are joined by a special relationship prior to the deal. For example, a business transaction between a major shareholder and the corporation, such as a contract for the shareholder's company to perform . The CPA can assist the client by ensuring all the information the field examiners require is available, all internal control procedures are in place and critical payments are current. CHOOSING THE RIGHT LENDER How should a client choose a lender if it is fortunate enough to have more than one that is prepared to offer financing? Cost of financing should not be the only consideration; an unsuitable choice based on cost alone could lead to a strained relationship and an early end to the financing arrangement. This is both expensive and time consuming and makes a bad impression on other potential lenders. When advising a client as to which lender to choose, CPAs should discuss the competing lenders' * Relative costs of alternate proposals. * Understanding of the client's business. * Swiftness in making decisions. * Personnel - the level of the loan officer that handles the account and the frequency personnel will be changed. * Flexibility when revising credit lines and responding to special requests. * Ability to meet future financing needs. AFTER THE FINANCING HAS BEEN OBTAINED Once the financing arrangement is in place, the CPA will continue to work with both client and lender to ensure * Timely presentation of financial statements as written in the credit agreement. * All covenants specified in the credit agreement are met, such as net worth, ratios, officers' compensation. If they are not met, the CPA should discuss any breaches and how they will be resolved before issuing the financials. * The client keeps all information current and delivers all required reports to the lender on time. * The client is performing satisfactorily according to according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. the lender's terms. CPAS ARE SUITED FOR THE JOB The CPA firm is in a great position to help clients obtain financing the right way. Lenders are inundated in·un·date tr.v. in·un·dat·ed, in·un·dat·ing, in·un·dates 1. To cover with water, especially floodwaters. 2. with incomplete and unprofessional loan requests, and brokers and consultants who often provide leads for financing charge large finder finder, in law. Ordinarily the finder of lost property is entitled to retain it against anyone except the owner. It is larceny, however, for the finder to keep the property if he knows or can easily determine who owns it. fees. A well-presented package from a CPA who prepares financials in full compliance with GAAP GAAP See: Generally Accepted Accounting Principles GAAP See generally accepted accounting principles (GAAP). , includes all relevant information needed by the lender and is able to facilitate the loan proposal process, makes a positive impression on the lender and improves the client's prospects for obtaining financing. CPAs who assist clients with their financing needs will greatly enhance their chances of retaining existing clients and obtaining new clients, leading to a vibrant and growing practice. CASE STUDY: HELPING CLIENTS OBTAIN BANK FINANCING Freed, Maxick, Sachs & Murphy is a full-service, 100-person CPA firm in Buffalo, New York New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of . The firm has a department specializing in obtaining lender financing for clients. Howard A. Rein, CPA, a director at the firm, heads the client-financing department. Rein, who has developed relationships with bankers outside of the Buffalo area to increase financing options, reviews the requirements of potential lending facilities and matches a particular client's needs with appropriate lenders from anywhere to the United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. . One of the firm's clients, a local manufacturing company, needed $8.5 million in financing. The company had operating losses operating loss The excess of operating expenses over revenue. As with operating income, operating losses exclude revenues and expenses from operations that are not considered a regular part of the business. Also called deficit. Compare operating income. and equity erosion but held viable collateral in the form of accounts receivable, inventories and fixed assets fixed assets npl → activo sg fijo fixed assets npl → immobilisations fpl fixed assets fix npl → . The current lenders were unwilling to provide the company with additional financing to meet its working capital needs, forcing the company to look elsewhere. Rein developed a business and financing plan package. Working with the client's financial staff and members of its management group. Rein was able to establish a timetable. At the same time, Rein made preliminary contacts with various lenders to advise them of the proposed lending opportunity. The firm's financing package had a comprehensive and organized strategic business plan that included * An executive summary listing the financing requirements. * An overview of use of proceeds and finances. * A history of the company, including facilities management The management of a user's computer installation by an outside organization. All operations including systems, programming and the datacenter can be performed by the facilities management organization on the user's premises. and ownership. * A marketing strategy. * An operations strategy and historical operating results. * Projected financing data for balance sheets, cash flows and net income for a three-year period. Additionally, the package explained the operational losses and the company's plans and abilities to turn the business around. And most important, it specifically described proposed collateral from a lender's perspective. The package was presented to approximately 30 lenders. The firm fielded the bankers' questions and was present when bankers visited the facility and met management. This gave both the client and banker confidence that the professional adviser was providing more than a compliance service for its client. The loan facility closed in a timely fashion, the client's working capital requirements Capital requirements Financing required for the operation of a business, composed of long-term and working capital plus fixed assets. had been met and an excellent banker-customer relationship was established. EXECUTIVE SUMMARY * CPAs ARE IN A STRONG position to help clients obtain financing because they know how to obtain it and where to find the right lenders. * CPA FIRMS THAT HELP clients receive the financing they need benefit by satisfying their current clients, attracting new clients and receiving referrals from lenders. * IT IS IMPORTANT TO prepare a professional financing package that includes an executive summary, annual and interim financial statements, business plans and projections and biographics of key managers. * AFTER THE LOAN APPLICATION has been submitted to the lender, the CPA can act as facilitator while providing additional information the lender may request. * THE CPA CAN HELP the client choose the right lender if they have more than the choice. Cost alone should not be the deciding factor. * AFTER THE FINANCING arrangement is in place the CPA can continue to work with both client and lender to ensure the relationship works smoothly by providing all requisite information. WHERE TO FIND FINANCING Knowing where to find sources of financing, especially for start-up businesses, is as important as the financing package itself. Being "plugged in Plugged In is a monthly magazine put out by Focus on the Family (founder: James Dobson) which reviews movies, music, general media, and pop cultural issues from a conservative Christian perspective. " to the lending community will maximize the value of the CPA firm. Getting to know banks, factors and other finance companies is tremendously valuable to CPAs because lenders react more favorably fa·vor·a·ble adj. 1. Advantageous; helpful: favorable winds. 2. Encouraging; propitious: a favorable diagnosis. 3. and expeditiously ex·pe·di·tious adj. Acting or done with speed and efficiency. See Synonyms at fast1. ex to loan requests from familiar CPAs. Also, lenders are great referral sources. Some of the various ways of networking with available lenders include. * Arranging meetings or lunches with account officers at local. banks and other institutions who handle the financing the CPA's clients require. The Commercial Finance Association in New York City New York City: see New York, city. New York City City (pop., 2000: 8,008,278), southeastern New York, at the mouth of the Hudson River. The largest city in the U.S. maintains a national register of lenders by size, geographic area and type of finance available for secured lending sources. * Attending meetings of local trade associations or credit clubs. If there are no local associations or clubs the CPA should start one. * Conducting seminars, giving speeches and writing articles for the local business community (see "A Roadmap to Growth," JofA, Jan.95, page 46). A ROSTER OF FINANCE COMPANIES The Commercial Finance Association (CFA (Computer Fraud and Abuse Act of 1986) Signed into law in 1986, the CFA was a significant step forward in criminalizing unauthorized access to computer systems and networks. The Act applies to "federal interest computers" that include any system used by the U.S. ) is a trade group for commercial finance companies, banks and factors engaged in the asset-based financial services The examples and perspective in this article or section may not represent a worldwide view of the subject. Please [ improve this article] or discuss the issue on the talk page. . There are over 240 members worldwide. The CPA publishes a membership roster based on the geographical area of the finance company, the types of financing they provide and the loan size they handle. CPAs can contact the CFA by writing to 225 West 34th Street, Suite 1815, New York, NY 10122, or by calling (212) 594-3490. |
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