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PROBLEM:  Affiliates aka Other Sources of Income


Affiliates create major havoc for borrowers and bankers.  They complicate loan requests from an underwriting perspective and often increase chances of small business loan decline.

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(This is just one page of the report.  Scroll below to see all the SOLUTIONS.) 


Definition:  Affiliates refer to other businesses, or Other Sources of Income that an individual borrower has.  Borrowers that have multiple businesses have the additional potential problems of having one of them damage or destroy their loan request – even if that other business has nothing to do with the business trying to get a loan. 

Definition:  Global Income is an underwriting term.  It calculates ALL of the borrowers personal and businesses expenses (throughout all of their businesses) and puts the total cash flow onto a Debt Coverage Ratio (DCR) analysis.  The minimum ratio that banks allow is normally a 1.25. 

Here’s a simple example of how DCR is calculated.  If after all business and personal expenses, but before the PROPOSED loan payment, you have $125,000 of annual CASH FLOW, and your annual proposed loan payments are $100,000, than your DCR is a 1.25.  $125,000/$100,000 = 1.25. 

So after all expenses including the proposed loan you would have $25,000 left over.  As far as cash flow, underwriters are referring to your real cash flow, with accounting items such as deprecation or one time events taken out such as losses due to a fire, etc.  Figuring out what the real level of global cash flow is one of the most complicated underwriting tasks to perform.  And the more businesses or sources of income, the harder it is to do this.   

Additional Challenge

Say you own three businesses and two of them are doing fine, but one is losing money, this will negatively affect your global cash flow and may kill your loan request.   As 1. you maybe losing money overall and 2. Even if you are still making money globally it may put a "stain" on your loan request that bankers just can't get over from a risk tolerance stand point.  This is often a very frustrating issue for borrowers - from their perspective, the other failing business may not have anything to do with the subject, healthy business.  From the banks point of view, the failing business could cause a tremendous amount of problems for the individual borrower and this could come back to hurt their loan.  Bottom line is that it’s a negative mark on the loan request.     

This problem is all to common, as declining trends and low cash flow are so prevalent in this economy.  And the more businesses you have, the higher chances are that one of them is causing you issues.       

SOLUTIONS

There is no cookie cutter answer here.  Identify your specific issues, within the troubled business, and refer to the other solutions presented in this guide.  With that said, here are some general solutions to cash flow issues with your other entities. 

  1. Sell or shut down businesses that are dragging you down, if possible.
  2. One of the main options for low cash flow is to pay down debt.  This should immediately improve cash flow.  Or you maybe able to refinance/restructure debt within that entity.  However, if it is losing money this will be hard to pull off.  Refer to either the business debt consolidation page or to the low business cash flow section for more strategies.
  3. Wait it out.
  4. Bring on a partner.   Ideally the partner will help you by paying down debt or by substantially increasing your revenue/profit.  Perhaps they have better/more contacts than you in your field, etc.  But before rushing into this read our warnings about bringing on a partner to help you get a loan.   
  5. Transfer your ownership levels to less than 20% on that entity, so that you will not have to have this business underwritten.  However, be careful will this.  You can’t just shuffle paper here.  It has to be a legitimate transfer.  Also, many banks will have a seasoning issue on this.  Ie they may want to see that you transferred the company 6 months ago, or a year ago, etc.  Do not do anything fraudulent such as back dating agreements.  This will end you up in jail. 
  6. The bankers maybe acting “wimpy.”  If this is the case, keep looking to find a more aggressive lender (click here to learn how to research banks).  For example, if your main business is doing good and is carry your other business, from a trends & cash flow perspective, than you should still be able to get your loan closed.  From your perspective the attitude is “we are making money here, we are working on the other business to resolve its issues.  However, our cash flow is strong and carries the business you are worried about.”  You may have to show the banker how you are going to stabilize that business and or dispose of it, but regardless that should still be a doable deal.  Refer to the section on low cash flow for other ideas.
     

Overall the main solutions to problems you’re having with your affiliates businesses is to fix their individual issues.   This probably seems painfully obvious but that is the overall solution.  You are most likely going to have to demonstrate to the bankers/underwriters that whatever the problems where, that they have been resolved.  Or at a minimum, that by doing the loan, that the problems will be resolved (such as in a debt consolidation type loan, to increase low cash flow).  So the business is stabilized and you will have to demonstrate this with proper documentation.         



Continuation of Report:  Other Common Causes of Small Business Loan Decline and Their SOLUTIONS 
  • Small Business Loan Help Beginning of Report
  • Dealing With Bankers An overview of how an imperfect loan submission process works, and strategies on how to overcome it. 
  • Commercial Loan Solutions General Overview of most of the Solutions.
  • How To Research Banks & avoid working with SICK banks.
  • High Loan To Value How to deal with being over leveraged.
  • Declining Gross Revenue Get over declining gross sales.
  • Disadvantages & Advantages of Partnerships Specifically related to loan requests.

  • Low Business Cash Flow AKA low debt coverage ratio's & what potential solution are.
  • Low Liquidity or to little cash, relative to the loan request.
  • High Personal Debt your personal expenses have a big impact on your cash flow, see some solutions here.
  • Bad Personal Credit Scores Best solutions to getting over low credit scores.
  • Business Debt Consolidation Loans have their own set of issues, learn best solutions here.
  •  Problems With Other Sources of Income also referred to as Affiliates
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