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according I will have that available for Slater give me questions - feel free to chime in at any time also please if you have the capability meet your phone's meet them on your in that way I won't have to mute everyone and then when you have a question you can just unmute your phone and ask it at any time so we appreciate that this morning we got Gary Griffin and Ray Chia Merliah how do I say it right they're going to touch on me um is Daniel era Samuel era flux that wonders now Campbell era they're going to touch on some 7a loan underwriting talk a little bit about Gary Gary is a 35 veteran of SBA lending 35 years he's a CPA and president of Capital Growth solutions of SBA loan provider in Chattanooga Tennessee and Ray is a 25-year veteran of SBA lending and president of radar lending services SBA service advisor in Indianapolis Indiana and we appreciate them they both are current presenters at SBA conferences and throughout the year and all over the country so further ado we'll turn that over to them appreciate it okay thank you very much ray and I have known each other for years we met at an SBA conference we were doing presentations for an Alabama some time ago the information that Richard and Leo have asked us to go over is typically something we could actually do in a two day period of time so we're going to go relatively quickly over this information at the end of the presentation you'll see Richard Leo's mine and Ray's email addresses please feel free to call or email us at any time with any questions ray and I do this all the time and we do a lot of pro bono work for SBA so feel free to ask any questions we travel a great deal to visit our lenders so again you're not bring us by asking questions / Richards emailed that he sent sent out earlier we're going to try to go over the FDA application the processes and practices that we do what really needs to be in the sba credit memo and the format that we use touching on some financial stage and analysis which is really going to be what is one of the keys to SBA lending really is working capital and Ray is one of the masters at putting together formulas for calculating working capital and global cash flows so he's going to handle that section of it and then we're going to talk about some of the problems and challenges we have dealing with the SBA go ahead Richard okay what we are going to do again is basic reviews of the submission press process and best practices that Ray and I have defined over the years what this seminar will not do is it's not going to go over every scenario we're not going to review the SOP we got to assume something that you guys are at least familiar with the SOP if you're not it is not a horrendous read it will take you two or three hours and sit down and read the SOP cover to cover you may not get it all but it will give you a working handle on what you're doing and this is not geared towards PLP lenders POV lenders are held to a higher degree of scrutiny certainly you can use the techniques that we're going to be talking about here but PLP lenders really really need to be careful and need to go the extra step in underwriting their credit since SBA is not proofing the credit memo going on the application process itself there is a if anybody has been under a rock and doesn't know there's a new process coming out called sba one which is a TurboTax like model that's going to be a menu-driven or a decision tree I believe is what the technology term is driven application process that should make just about anybody able to fill out an SBA loan application I have seen the demonstration as a prod I'm not actually sold on it yet but we'll see what happens once it actually rolls out in January it's going to roll out in a kind of beta test in January then more and more lenders are you come on board so that everybody should be using this by June but that's still to be determined in my book make yourself familiar with the SBA website SBA spent a lot of time and effort and a lot of intellectual capital in developing their website it answers a ton of questions and it is very easy to navigate go to the for lenders section in the upper right-hand corner of the website and just just play with it when you've got some spare time it'll give you a lot of information in is really very self-explanatory for the application itself right now there's probably a half a dozen limp lenders lots of software vendors out there P CFS SBA one which is now part of Encino t soft there's a 504 company credit application and there's one other I can't think of the top of my head we don't use one of these vendor processes right now because it's easier for us just to go to the SBA website and follow the format and we'll go over that a little bit later but there is absolutely nothing wrong with any of those vendors and if that makes you comfortable in terms of generating a credit memo because all of them do generate very fine credit memos please feel free to use them also Ray are a part of a new industry it really wasn't new and he and I it was brand new when he and I got into it back in 2008 when I started this company there was maybe two lsps out there there's now well over 40 on the Nagel website we do we are complete back rooms of small community banks that do not want to or invest in the personnel to establish a complete SBA department where both of us are nationwide and there's a number of other LLC's out there that are fine people I would just check with the SBA district office or with other people in the industry because there's a lot of LSPs out there that do not know what they're doing so just check with your district office and other lenders in the marketplace before you hire an LSP the SBA district offices have lender representatives now who are like Richard and Leo and there's there's two or three in every state these people are very knowledgeable they would be happy to help you if you have any problems and they will provide free training for your institution any time that you ask them and finally Nagel is the National Association of government guaranteed lenders I have been on the board of Nagle a couple of times over the last 35 years or so it's a great organization it is very user friendly they send out a monthly newsletter with all the changes it's a resource source it's a job posting site it does just about everything SBA and it's a lobbying group with Congress to make sure SBA gets funded so if you're not a member of Nagel and you're going to do more than two or three loans a year I would recommend you become a member of Nagel the application process is really so simple nowadays in today please jump in here if you disagree with anything that I'm saying the forms 1919 and 1920 are the SBA loan application back in the in the 70s and 80s we used to be talking six inches to eight inches worth of paper every time you did a loan application that is pretty much gone by the wayside there are two applications now the 1919-1920 I'm not going to go over them because they are so simple and so self-explanatory something to pay attention to is the form 912 that can bite you in the in the but if you do not do it it is not a required form any longer unless you have customers that have had a felony conviction at some point in their in their lifetimes and we find right now somewhere around ten to fifteen percent of our applications have had somebody with a DUI a brawl in college bar fight and occasionally we'll find something like mail fraud and a bank fraud so you need to ask that question when you're talking to your customers right up front it is not that big of a deal if it's something minor like a DUI ten years ago you have the form filled out you send off to your district office and they typically will clear it right then and there if it's more complicated it goes to DC for an FBI background check that takes 30 to 45 days but if you start the process ask that question right when you start the process it'll probably be ready by the time you're ready to submit your application there's a debt schedule that's very informative you'll see some links that will give you here in a few minutes you got a when you're submitting an application to Sacramento for processing you have to have all the information on your notes we go the extra step and actually send copies of the notes but fill out that debt schedule or you will have a screen out from SBA asking for additional information the credit memo itself we will go over in in terms of what I think the highlights are and again ray and I everybody's got their own preferences on how they do a credit memo based on the Learning Tree if you've been in this industry long enough you probably work for all the major lenders at least ray and I have have over the past few years being the last 30 years or so so everybody's credit mental is a little different but it's the fact that go into the credit memo are always going to be the same business valuations if you've got any change of ownership get your business valuation done right up front that is something that has never changed you have got to get your business valuation done and I would recommend when you have a customer getting a business buying a business that they shoot you a copy of the purchase agreement before they execute it because you want to make sure one that the the purchase price is going to be verified by a business valuation because SBA will not finance more of a purchase price than the business valuation supports and to there's little things in there like the existing management cannot stay on on onboard IRS verifications the famous 4506 t get that signed as soon as you start your application process one it will weed out anybody that may be thinking about funny business and yeah I would say probably 20% of the time when I get a 45 or 60 back is different than what we originally were received from the customer and it's not always or it's very seldom somebody intentionally trying to mislead us but it's things like if somebody has filed a amended return the IRS will not post an amended return to their website so the information you get may be different from theirs there may be transcription errors everything is scanned in it could be a mistake you just need to document the file and have your verification done before you submit the sba and then cavers is the avenue you have to go into as an individual institution to verify that the individuals the principal's and the business have never defaulted on any government loans that will preclude your borrower in or principals from SBA financing moving on best practices this is you know the best $300 you're ever spend is get the full Adobe package I use I write a lot of loan policy so what I can do with that is I can scan in a banks loan policy and convert it to Word by the press of a button that's what it's best you subs for me so I can go in and cut and paste where I need to to make sure a banks loan policy complies with SBA policies and procedures but the reason my submission people love it so much is you can organize stand documents into complete files just like it would be a paper file and when you can do this as you can do things like quote unquote the SBA way you can follow their ten cap submission process get all your information put in the right place if you send in a bunch of papers that are not well organized and labeled a technician will get your stuff and this is you know somebody barely above minimum wage over in Sacramento that's going to be putting these things together and they're not going to understand exactly what you have sent them so they're going to either throw stuff away that they don't think is important or it's going to be put someplace where the loan processor themselves cannot find it save yourself screen out letters and this one thing right here will eliminate 75% of your screen out letters from SBA it will take you an extra 20 minutes to a half an hour to create it but it will save you weeks in the submission process the must dues in the credit memo always break down your working capital this is something that that is weak in what I see in most credit memos that are we received from the banks they say we're giving them $200,000 in working capital okay that's great why are you giving them $200,000 of working capital that will s be a will screen that all almost automatically and again we were talking about the credit memo list the debts make sure at least term the original purpose because that's going to determine the eligibility in other words there's somebody cashed out of a deal the amount that they cashed out it's not going to be eligible for SBA financing if they did something with personal with the proceeds that they bought a partial interest in a business things like that are not going to qualify for SBA financing so if you know the original purchase purpose make sure you outline that in your and your note secured by meaning that you're going to have SBA policy is that you're going to take the same collateral when you're briefly refinancing an existing note your current payment is going to be important because you're going to go into your proposed new payment in the savings if your equity injections require verify the funds before you make the application and make a statement that you have verified those funds in the credit memo itself and again clearly state the interest rate that you're going to be charging any adjustment periods and payments in our reason I say this and I'll say this three or four times or in this presentation is loans morph from the time they come in the door to the time they finally been approved at credit committee especially if they're larger credits you might have proposed something at prime plus one and a half percent twenty-five years adjusted quarterly or was Lois Wall Street Journal prime when you started the process and when he gets out a loan committee it might be 15 years prime plus to fix for five years and then floating and you just make sure as you that you're consistent in your forms 1919-1920 in your credit memo moving on must dues must include a statement in your credit memo saying that prior to submission 45 or 60 was sent in on the business the transcripts are received and you have to state that they were verified for the years that you verified them in this particular case 11 12 and 13 if you do not you will receive a screen out letter you do not want the screen out letters by the way because that means the SBA processor has put it aside on his desk and went working on another file you want all these questions answered so as they go through their checklist in Sacramento that they are going to be able to check yes all these questions and get to the meat of your credit recently SBA asked us to state again that's just that's just something that's happened recently I'm sorry Richard go ahead always again this is my practices and Ray you may do something differently I always state what SOP I'm using when I'm doing a credit just in the past 24 months there have been four different versions of the SOP and there's minor changes and glitches should say collisions minor changes in terms of things like insurance and verification of equity that sort of thing business valuations 45 or 60s those sort of things but if somebody's going to pick up your file and second-guess you at some point in the future it's always wise to say which SOP you use when you under wrote the credit two to two and again that doesn't affect you guys if you've done a great job on the front end but I don't care how good of a job you do probably one in 20 loans is going to go into default for reasons that you have no you know no inkling about right now so again you're just covering yourself in the event of a liquidation okay we're going the wrong way you okay the 1919 this is this is again the common mistakes is that every just about everybody the brother has to sign the 1919 it's got to be signed by everybody only 20% or more ownership any officer and director if they no matter how much ownership they have if they're listed as an officer director they have to fill out the 1919 any key employees and any and all geared towards the exception to that is when a spousal is a spouse of pledging a spousal interest in a residence and of course that excludes Texas where you cannot take its acting on a residence or even anyways it does not include a spousal guarantee moving on and Gary yeah I need to go back a little bit on something happened with the presentation I think I missed about three slides so okay I don't think we touched on this one this is where we left off okay right there okay sorry about that okay um there's went collateral that's a also obviously a hot button with SBA three things one you state that all available collateral has been taken this is on loans that are three hundred fifty thousand dollars and above the formal SLA loan which is now called a small loan and then if you have if the loan has not been if you have not taken all collateral you have to make the statement the loan is fully secured by the above collateral meaning that you've used the SBA's percentages and based on those percentages or the bank policy percentages you can use either one that the loan is fully secured if you have not taken all the collateral if it's a small loan not only you know you you have to make the statement in there that that you have taken all collateral as the bank would on similarly sized non SBA guarantee commercial loans and we go as far as to say SBA fifty 10 G page 162 if a business plan is involved reference the business plan frequently you've got to say that you looked at it and it's accessible to you and then you have to list the pros and cons and the analysis to prove that you've actually read and you'd be shocked how many people just stick it in there and never read it go on credit analysts are small loans the if everybody probably is aware that under the the new policies in an effort to get credit out to the quote-unquote underserved markets SBA is pretty much done away with underwriting they've done away with underwriting as far as the submission process is concerned because they're they're concerned about how much time and effort goes into generating a credit memo 95% of the lenders that we represent our small banks small banks being under say two hundred and fifty million dollars those banks for them one hundred and fifty to three hundred fifty thousand dollar loan is a reasonably large blown so the credit memo still needs to be done even though SBA does not requirement if that is what your bank would do on a similarly sized credit if you're one of those behemoth banks that credit score's everything under 350 or five hundred or whatever it is that's fine I'm just saying that if your credit if you're used to doing analysis on loans of 350 or less continue to do the analysis on the lowest 350 and less even though SBA does not requirement if even if you do not require sorry if you do not do the credit memo you still have to make a statement in there that the equity Pro forward that the worth ratios are acceptable to banks existing policies and procedures and you have to state that the business financial statement and the personal financial statements have been reviewed and are consistent with banks similarly sized non SBA commercial loans can't go on the 1919 okay we're going backwards again okay again on the 1920 that's the bank's application just make sure that your interest rate term and use of proceeds are consistent with your credit memo each Korean as again as everybody is probably aware SBA is going to a completely electronic process if you do not have an each grounded crowd each Trant account go ahead and sign up and get one once you go through the process and sign up you've got a select your functions that you're going to need ninety-nine percent of the time all you're going to need is lending and servicing you and you input your location ID and the location ideas assigned to you when you filed your 750 agreement and again goat Richard can walk you through the process but you go to four lenders on the SBA website go to each Rhian and then look up look up location ID and then you plug in that number and then it takes you to three days and SBA will send you back a confirmation that you are registered for each ramp you know they can just check with us Leo now we have a list of those thanks guys captain Eric alright going on um when you do the Etrian submission which is when you're sending your documents SBA well they say they will not take paper documents they still will take paper documents just to hate it and it will sit on somebody's desk for two weeks I guarantee you in Sacramento before somebody actually stands it in so somebody can process so instead of a three week turnaround you're probably looking at two months so do not submit any paper files to SBA if you take nothing away from this presentation don't send paper if you do in a transom mission it will take you about 15 minutes again the big keys here double check the interest rate term and use of proceeds with your credit memo in your 1920 once you have entered the guarantor and owner information you are finished do not start attacking stuff because you're uploading a 10 tab submission file prior to prior to submitting it for small loans you're going to have to do the credit score we do that soon as we start looking at alone you'll have the information that you can go ahead and plug in make sure it scores we've raised scores 140 correct that's correct it is 140 yes okay so it's going to have to be a pretty stinkin loan not to not not to rake 140 the ones that we find that do not rank are those businesses that have already started and are in the startup stage and are not profitable yet those will typically not score under those circumstances and you still want to do the credit you submit it just like a regular 7 8 application but the $350,000 business assets only exemption does not apply we submit it alone regular 7 8 that does not credit score so in other words you have to take all available collateral once everything is completing the 10 tab submission file is uploaded you just hit submit button if any fields are skipped the system will state the applications and process just need to go back through it should identify which fields have not been filled out you fill them out and hit the submit button again and then you want to see the reply and reviewer stage moving on these are the links that are valuable to you these are for your forms for the 1919-1920 this is the debt schedule that we use on every loan request and this is the link to the 10 tab submission template template ok the credit memo format these again this is kappa gross solutions internal stuff we basically have set up an Excel spreadsheet that feeds on itself and this is the information that we put in there but this is the minimum information SBA is going to want before they when they get an application the borrower the legal name of the borrower the address the max code what the specific industry is a description a franchise everybody should know about the franchise eligibility if they don't that's a whole seminar in itself the loan amount processing method if you're going regular 7a CLP or PLP and then the guaranty percentage guarantees anywhere from 50% for the Express product to 90% for anybody at first second generation exporting guaranteed percentages a lot of people don't know this but probably 20% of the loans we process through our office have international trade components which allow them to get a 90% guarantee versus a 75% guarantee and the process does not take any longer than the regular seven a process of executive summary this is keep in mind the person that SBA is going to be seeing probably five or six loans that day and they are not going to have a clue who your borrower is we like to make it very simple probably written in like a fifth-grader you know the old TV show are you smarter than a fifth grader you don't have to be write the memo that so that a fifth grader could understand it tell the story start about you know why the loan request how you got involved what you're trying to accomplish at the very least though you got to hit on the lip the use of proceeds is going to be a description of the project an outline of your project request the dollars requested state your term interest rate in payment again like I said you're going to hear that a bunch and then state what the objection is going to be and where it's going to be coming from for your collateral analysis make sure that you list your collateral the value of the collateral what liquidation percentage you're going to using in the net liquidation value of that collateral it's my understanding this is what we do if the bank has a valuation method they use we would typically use that unless the SBA's is more conservative if the SBA's is more conservative we would use that but I have not I don't think I've seen a business a bank yet that has more liberal terms than the SBA's liquidation evaluations go over your business operations in history do a detailed analysis of the business and analysis of the business plan if applicable this is where you would go over you know the profitability of the company you know what its business cycles are and why we're going after the you know why we're doing the loan request management gearing tours this is something that's critical in our opinion I'd say in almost every circumstance those individuals that have a lot of experience in an industry almost always succeed those people that are getting in the industry for the very first time seldom succeed so just that's an important important factor as far as our analysis goes go on on the financial analysis we don't spend a lot of time internally on balance sheets because small business balance sheets can be so funky because of just the way they're structured they can be highly leveraged because it's an LLC and people take the money out of the business to live on but you at least need to look at the balance sheet make sure nothing just jumps out and grabs you like the the current ratio is a hundred to one something like that so if the company is not going to survive because they don't have the current assets to service their current liabilities repayment ability is the key to any credit SBA is a cash flow lender net income plus depreciation plus interest expenses is the is the thumbnail quick-and-dirty sba analysis you're looking at debt service of 125 to one and a half that's your going to be your typical SBA loan which is good if you're looking at the 1.15 minimum that SBA says that they will live with your you're going to be you're you're tempting fate I guess is the best way to put it look at historical numbers more so than projected because projections can pretty much say whatever you want them to say but if you are going to use projections analyze the tar out and make sure you understand exactly where those numbers are coming from we shock our interest rates 2 and 4% prime is not going to be at three and a quarter forever so we assume prime at five and a quarter and seven and a quarter if it's even if it's a break-even at seven and a quarter prime we're satisfied with the analysis and then you need to also do a global debt service coverage with the different entities that people have now you're going to have to make sure that all the companies are cash flowing people have Schedule C income on their personal tax returns K ones which may alert you to the fact that there are other businesses out there that may they may be contingently liable for or they may have cash contributions necessary to shore up other businesses on the guarantor analysis make sure that you've done one for each guarantor which includes an analysis of their personal financial statement look at their personal tax returns and again look at look for K ones and schedule C and schedule a items those will tell you that there's other businesses out there they may have failed to mention to you look at the credit report SBA will not process loans that have existing credit and outstanding liens they can have poor credit if there's an explanation for that poor credit but if there's existing liens out there assuming that's not fraud or something like that SBA is going to suspend processing that application until those credit reports are cleaned up and again just include a personal cash flow analysis which Ray's going to go into a little bit later specific things for SBA loans you have to state that why you're doing in an SBA loan credit elsewhere test it can be term it can be the size of a loan it can be the collateral availability can be industry type it can be location there's a number of reasons to do SBA loans one of them is not because it's a bad loan you have to address the size standards is again it's typically I believe now it's 500 employees just about everybody qualifies for an SBA loan and debt refinancing again you want to make sure what you're doing is for the benefit of the small business but again if the credits got a balloon on it you know it almost always would it will qualify for SBA financing in a summary just make sure that somebody has actually signed a credit memo don't just send it in there in a blank format we usually have the senior lender or the senior credit officer sign off on our credit memos okay ray your turn yo like yeah I'm awake I'm sorry sometimes my phone my phone goes asleep on me but I'm so awake I was at the I was only able I see the whole time all right go ahead all right you know here you had talked about and alluded to the debt service coverage ratio requirement so they change quite a bit so you have to be careful about what we have in here 250 10 5 G states that the small business applicant must debt service ratio its debt by 1.15 times on historical and or projected cash flow basis the key here is 1.15 and then global cash flow analysis must include an assessment of the impact that can flow to and from any affiliate business if you'll note the 50 10 5 F stated that the global debt service coverage had to be 1 to 1 the 5 G does not state that it's still highly recommended that you have at that service coverage ratio of 1 to 1 globally the other aspect here on the on the debt service coverage at 1.15 times is to remember that that's on both a historian on a historical and on a projected basis if you have a start-up company that is going to take a while to get to the 1.15 debt service coverage and because they are a manufacturer or we are looking at something right now that's going to take two years for them really to get to that point in conversations with the SBA you need to be able to show a month about projections to show when that business does finally start that's everything at one point one and that you have sufficient working capital to get through to that point and we'll go over cash flow and adequacy of working capital here in just a bit okay and the SBA does not formally dictate the definition of the global cash flow but it says it includes all of these things it needs to have the income and or loss from any affiliated companies it needs to have adjustments for any intercompany transactions personal financial needs of the guarantors analysis of both cash based and accrual basis of statements where appropriate and then an explanation of any excluded debt that 15 placed on standby that this being paid off in a short period of time etc and any non recurring expenses would also fall into that category so in going through that then what I've done is I put together here at the standard debt service coverage ratio analysis where you take the net income of the borrower you add back to rent and you would only add back to rank in a situation where you were doing kind of a rent replacement with regards to you know an existing renter buying a building then you would be able to pass back that rest interest expense you're going to add that back because you're going to take out the the total debt service for not only the subject loan but all of the put all of the other debt that the company might have the depreciation or amortization you're going to add back typically what I do is I add back the officers salary and we calculate an officers draw or new owners compensation and that's based on the needs of that individual different lenders will have different criteria they'll have a debt to income ratio that they feel they need to meet things of that nature whatever your calculation is explain it and how you got to your draw requirement that gives you your cash available to service the debt your projected debt service in this case it's $200,000 that leaves you the excess cash flow and the debt service coverage ratio at 1.90 so that is your cash available there you see cash available divided by your projected back so that's your debt service coverage ratio model we put together and I am seeing and Gary probably has as well and dealing with a lot of different lenders how how they calculate their global debt service coverage ratio and things of that nature as Gary had mentioned earlier you want to write something at and I get maybe idea we for benefit of the SBA people who might be on the lino a little more credit I get you to the seventh grade level but that's that's a pretty standard thing for everybody you don't you don't want to be too complicated in what you do and I've seen some very complex things that people can't understand and then they have a series of questions so I make it simple I keep it very simple and the more than I can do in picture is the better and you know the people who are looking at it or credit people and credit people prefer pictures towards so the personal cash flow of your guarantor the evidence of the operating companies the Abaddonn of any affiliates and that gives you your total existing cash available cash flow the venue would would go with the personal debt of the guarantor personal debt of or the existing debts of the operating company existing debt of any of the affiliates and then the proposed Nemo and very simply then you're going to take your total existing cash flow divided by your total debt and that will give you your global debt service so and that's it in that in that ratio I do not include like we were talking about just a second ago I do not include the any kind of a debt to income ratio anything of that nature all I am doing is calculating specifically the global debt service in if if you as a lender calculate it a different way that's fine but you need to explain it the SBA you know let us say they see thousands of different versions of what you what you calculate and they don't you know if you want to slow down across source make it more complicated and then don't explain it so definitions the SBA is a little bit more specific in how to calculate your cash flow coverage the definition of ocf or operating cash flow is simply the debt service is equal to the TNI of all business that included in the subject including the subject law your debt service coverage ratio simply then is your cash flow or evide / your debt service the other calculation the other adjustments you will need to make is unfunded capital expenditures the amount and this is the amount of capital expenditures less any capital expenditures funded by permitted debt subordinated debt or other proceeds of any equity issue of the borrower's so vaca mouthful bottom line is if you have a company that has significant capital extensions but expenditures on an ongoing recurring basis you need to make adjustments for those you cannot just ignore the fact that they have to replace machinery and equipment every three years or that they had hundreds of thousands of dollars and those kinds of expenditures on an annual basis so even though those are balance sheet transactions you do need to account for the fact that that cash does leave the business okay tax returns business tax returns when you look at tax returns you're going to look at several sections obviously on a business act at return you're going to look at the front page whether it's your 1120 or your 1065 or your your your other business financial tax returns you're going to look at the front page that's going to give you the bulk of the information that you need you're also going to look at in that first page they're going to have a place for other expenses find the correlating statement for those expenses and make any necessary adjustments I highly recommend although I do a prevent for lack of a better term a quick and dirty debt service coverage ratio I always do a detailed income statement analysis so that I can see the changes from a percentage base of certain categories from year to year to help explain ups-and-downs potentially of your debt service coverage so in other expenses you're in the look primarily you know one of the two things you're looking for there the amortization because that's not included in your creation video on the front page you're going to look for any kind of excessive fees or one-time fees as potential add backs as non recurring expense some of those things typically you'll see from a year-to-year analysis you'll see it in legal fees if they started up a new company and/or insurance fees or some of those things that may may have had a one-time boost and and then no longer - okay and then m1 and m2 adjustments keep in mind that you are looking for you're looking for cash flow so if you see huge cash adjust that's in your M ones and M choose you're going to want to account for those whether they be distributions or whether they be and I just analyzed deal recently that showed a twenty-five thousand dollar meal expense keep in mind that for the tax purpose that your meal expenses are only fifty percent so you have a twenty-five thousand dollar adjustment potentially can need to make within your debt service analysis for for loans your again I before that you're going to want to do a detailed income statement so you can see a yield thirty-year comparison where you see huge anomalies from one setting to another you're going to want to explain those I wouldn't put a lot of stock in huge differences and categories in your tax returns historically versus your income statement in the interim period because many of the things that I do or you do as a business owner are not the same as what your accountant is going to do for cases they're you're going to look more category at the end of it try to see deihi of you at the end of the day are falling within the same typical percentages as what you would see is what you've seen historically and then you're going to look at the K once and specifically you're looking at the K ones what I do primarily is I'm looking at those K ones to see what distributions of Education but I'm also looking for that percentage of ownership you would be surprised the number of people who don't know what the percentages of ownership are in their company take a look there because from an eligibility perspective we're Gary talked about earlier you need to know who the owners are who the 20 percent owners are specifically and keep in mind that it s that the SBA has a 6-month look-back period so somebody you know diminished their percentage of ownership below that was above a twenty percent is now down below a 20 percent and that occurred within the last six months that person may still need to guarantee the loan personal tax returns obviously you're looking at Schedule C income you're looking at whatever their wage income if you're considering that and determining how much of a draw they're going to need for the business that wage income you know if it's if it is going to be ongoing whether it's sort of from the guarantor the guarantor spouse however you're counting it you're going to want to make sure that you get those that that number matches what you're using historically Schedule C income obviously if you're analyzing a sole proprietorship that's where you're going to find all your information within the schedule see if that fantasy is an affiliate and you're going to want to consider that in the global cash flow and then recognizing potential affiliates you're going to want to look at your schedule e to determine if your borrower failed to mention any other affiliates on their application package again you want to analyze all all affiliates okay adequacy of working capital this is a key component to the credit decision or one that's scrutinized and repurchases and audits the lender must determine and justify the adequacy of working capital in the loan request if any of you who have had an sba audit or review you'll see one of the key things they're very critical on is the depth to which you have done your working capital analysis and the sufficiency of that working capital simply stating that the business is a cash business or that the principal's have additional cash if needed is not sufficient you need to determine what the cash cycle is how much time will Proform a working capital support the business we talked about that earlier and how much availability is there in other lines of credit these questions must be answered and the amount of working capital in the loan supported all right steps to determine adequacy of working capital for a non cash business German first you're going to determine the cash expenses of the business you're going to calculate the cash needs of the business and you're going to determine what sources will support the cash Beach we talked about that just a second ago whether it's of the Atlanta credit whether it's their personal income whatever that case might be I will tell you right now as a credit person if you're a salesperson on the line and you said to me well they'll just happen to their 401k gary will probably tell you that or this the last thing a borrower will do will tap is happen to their 401k because they know it's protected all right working capital analysis calculations and determining cash expenses you take your net sales you subtract out your net income and you subtract out your depreciation amortization that gives you your actual cash expenses there keep calculating your cash needs well actually let's talk about your calculating the cash cycle in Bates you're going to take your accounts receivable in days you're going to add your days in inventory and you're going to subtract out your accounts payable in days that's going to give your cash cycle in days now it's up to in your a let me stop you for a second how do I find out what my accounts receivable days are my inventory days are and my accounts payable days are where do I get that you calculated Gary leave me alone your we're going to get to that but if we could jump ahead no I don't show that calculation out here Gary I'm sorry but I will I will if the folks who are running this will send you this I'll get that calculation out to you it's a great question Gary um so anyway let me go back so in cow it's in calculating your cash cycle in days and you're calculating your cash takes your gas expenses divided by 365 times the cash cycle and Bates this is the amount of money you're going to need as a business owner before you earn so to speak a dime if your cash cycle is in the example that we have here coming up next let's talk about it real quick the assumptions net sales of 2 million dollars you have a net income of $50,000 depreciation and amortization of 75,000 accounts receivable are at 45 days your inventory days are at 35 and your payable days at 30 okay in this example determining your cash expenses you're going to take net sales of 2 million dollars you're going to subtract out your net income of $50,000 and you can subtract out your depreciation amortization of 75 gives you cash expenses of 1 million 875 cash calculating cash needs actually calculating the cycle of days you have 45 days and accounts receivable you have 35 days of inventory that 30 days in accounts payable and you have a cash cycle and 850 days so you make the assumption here if you look at it from this from this perspective you're going to need cash within the next 50 day period so your cash needs your cash your counter you're calculating your cash needs you're going to need in the million 875 divided by 365 that's your daily cash feed times fifty because that's how long it typically takes for you to cycle your cache you're going to need in this example 256 almost two hundred fifty seven thousand dollars for the start now that does not fit and then we're going to go real quick here on under the but what you're going to do and I think I did it in the side a little bit further ahead no I didn't make really with with this what you're going to put you don't want to talk about here is where bad cast is going to come from now within your first if a business is part cash part accrual there are going to be money coming in if this is an ongoing business a continuing business you're not going to start that same calculation this is a calculation that's used for start-up or a business acquisition that's not assuming any accounts receivable okay in the other in the other scenarios where you have an on an ongoing business they're going to want to calculate the amount of cash that they're getting in within that time period and can actually do a statement of cash flows versus a debt service coverage ratio analysis those I know we use debt service coverage and cash flow interchangeably but they are two completely different calculations you're going to want to do a cash flow analysis specifically if you have a business that has large or long accrual periods cash businesses very simple okay your annual count cost of goods sold plus your annual operating expenses plus your owners draw owner salary non-renewed or subtracting your owner salary adding your non recurring expenses and subtracting out depreciation amortization these are your annual operating costs divide that number by 12 and you'll get your monthly operating costs and so if you have a business I typically want somewhere between 30 and 45 days worth of working capital even for a cash business and that's working capital and after expenses so if you have a a business startup and they have cash expenses that they're going to outlays of cash that they're going to have during your your closing period potentially it was a multiple disbursement with resold for improvements throughout that period day one I like to have 30 to 45 days worth of operating costs yes working capital leftover you'll have your own preferences just explain why you have that and that's what I have with regards to working capital sufficiency and calculations all right great thanks very much Gary and right at this time we can open it up for some questions does anyone have any questions at all for hearing array right this is Gary can you send the calculation of the AR AP in some business cycle over to Richard so that he can disseminate it to all the folks that are on the call and will absolutely do that Malcolm I can handle that I'll send everyone a copy the presentation and a recording of the presentation as well and we also post these on our website they're up for at least a year so you'll have a opportunity to go back and review this if you go to our website and some of the other ones that we do so and there any questions I know we didn't do that good of a job you have everybody mood muted possibly Richard or is that is it if we do that good of a job they mute themself so let me see if I can unmute them and I'm sure they have them you know any questions at all just visit an excellent job so you do again you appreciate it leo do everything that oh I might be trying to digest one just ray says those basically what happened anyhow odd those two resources are available all the time I guess and yours in the screen where you can see their information you can either email guy real ray at any time that's why you can email WIC and I appreciate that again if you have any questions or any comments please feel free to share them with us Leo and I are always available to help out and Gary and Ray's contact information is there to be able to help out as well so all right now also this is Gary any anybody that has any feedback positive or negative feel free to email myself array we always do a number of these presentations around the country all the time we're always trying to do better so a constructive criticism would be greatly appreciated and thank you all very much for your time I would echo that thank you all very much for your diamond if you have any questions or concerns we know we went through it really fast so don't be afraid to contact us separately or together and we'll book the answers to your questions thanks very much scurrying right we do appreciate that that was a lot of information there and it very well touched on it very well so we do appreciate that thanks very much thank y'all alright everyone have a happy holiday your conference is ending now as requested by the host please hang up