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Loan acquisition tip #1: You have to give a little to get a little
By Eugene E. Valdez AKA The Loan Doctor
At the suggestion of the public relations firm that I hired, I am in the midst of writing a book to increase my “branding” and name exposure. Although I haven’t created a catchy title yet, the purpose of the book is to share my “insider secrets” on how to effectively obtain a small business loan. I have been a commercial banker/ business finance coach for over 30 years, so what I am about to share with you is based on thousands of loan requests (some of which were approved but most were declined).
While there were a variety of reasons the loans were declined, this is at the top.
Reporting minimal business profits on financial statements/tax returns in an effort to minimize the payment of both business & personal taxes.
If your company is “more profitable” than you are actually reporting, (yes this occurs often) then you are shooting yourself in the foot if you are seeking a loan to expand your business. While you may succeed in paying Uncle Sam less in taxes you will not get past first base with lenders if you are not showing enough profits to demonstrate your ability to make the proposed new loan payments. It is important to comment that strategies implemented by your accountants to reduce reported profitability are perfectly legal, but if they result in your loan request being turned down is that an acceptable tradeoff for you?
Hence, the title of this article, “You have to give a little to get a little.” The
“give” is you must be prepared to pay more taxes by showing more profit and the “get” is you increase your chances of obtaining a badly needed loan to expand your business operation.
Find a happy medium of reporting just enough profits to make the lenders say yes, but not so much that you pay excessive taxes. Lenders understand this strategy; they don’t like paying a lot of taxes on their profits either.
One simple way to determine what your “happy medium” net reported profits should be is to ask a commercial banker what debt service coverage ratio they use to underwrite loans. If they use a ratio of 1.25 to 1.00, this means for that for every $1.00 of principal and interest payments on the requested loan you must show a minimum of $1.25 in cash flow.
The formula is: Net Income (after tax) plus depreciation plus interest, (“cash flow”) divided by annual principal and interest payments on the requested loan.
If the annual P & I payments on a requested $500,000 loan is $135,000, your depreciation is $30,000 and your existing interest is $25,000, then you will need to show about a minimum of $114,000 in net profits after tax.
I.E. $114,000 + 30,000 + 25,000/$135,000= 1.25 to 1.00
When you have your tax saving strategy sessions with your CPA and he or she indicates that they can get your reported annual net profits to around $50,000 (to minimize taxes) from the $160,000 you could report before adjustments. Tell them this….
“I need a $500,000 bank loan to expand my business, figure out a way I can report net profits after tax of at least $114,000. I know that will cause me to pay more taxes and I promise I won’t fire you for this. Further, I will invite you to the grand opening of my new $600,000 commercial building and also refer you to all of my business owner friends seeking expansion capital!”
Eugene Valdez is a 40-year veteran of business/financial management and owner of The Loan Doctor, a full service business loan consulting firm based in Upland. He can be reached at 909-230-0024 or firstname.lastname@example.org.