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Business Debt Consolidation



It is no secret that by consolidating business debt, entrepreneurs can normally significantly improve their cash flow.  This is almost always because their existing debt is amortized on shorter schedules and the new loan spreads out the debt repayment period over a longer time.  Here's a typically example of a small business wanting to do a business debt consolidation type loan:

Existing Loans:

Prosposed Consolidation: 

For most small business owners this would be attractive to say the least.  Where else can you find another $34,159 of cash flow from you existing operations?  

Business Debt Consolidation, The Challenge

However, it has never been more difficult to pull this type of loan off.  There are many reasons for this as well as some potential solutions, which we will describe below.   Here are the problems which are all intertwined, 1. Use of Proceeds restrictions as set forth by the FDIC/Banks/SBA (& others),  2. how personal expenses are calculated/cash flow issues and 3. general lack of banks wanting to do any type of cash out refinance. 

USE OF PROCEEDS

Use of Proceeds can be defined as how the proceeds of a loan are dispersed at funding.  In the case of a debt consolidation type loan, it means what types of debts are being paid off.  In the example above, the use of proceeds was to refinance an existing mortgage, business credit card debt and an equipment loan. 

Virtually all sources of capital now have restrictions on what they will allow to be rolled into a loan.  Here is what is still easy to consolidate into a a well collateralized (ie meaning that the total loan to value is within the restrictions set by the funding source) small business commercial real estate loan (Which includes conventional bank loans, SBA or USDA B & I loans.  These 3 sources represent appr 95% of the commercial real estate/small business loan market, at this time):

Here is what is difficult or almost impossible to consolidate with a small business real estate loan:

HERE'S THE "RUB" - on refinancing business lines or business credit cards. For one, most loan officers at banks don't want to get involved and will simply "pass" due to the complexity of documenting the balances.  So you have to first find a bank and a loan officer that is willing to do it.  Secondly, in order to refinance business credit card debt, the borrower will have to provide receipts on every SINGLE purchase.  No matter how long ago that particular purchase was made.  So if you bought a ream of paper 8 years ago on your credit card you will have to provide the receipt of it...  Or that amount of the balance will not allowed to be refinanced.  And, providing the credit card statement itself is not enough. 

In addition, say you renovated the property and paid for the work via your unsecured business line.  You will have to provide the invioces AND receipts to prove it.  They must all be properly dated, legable and filled out.

This can become very cumbersome to say the least, especially for businesses that have mediocer record keeping. 

These restrictions are especially true with the SBA programs.  And to make matters worse.  Most conventional sources will only go up to 55% loan to value on refinances, so most borrowers are limited to the SBA because they can go up to 85% loan to value. 

Personal Debt

Including personal credit cards or loan secured by your house (or other residentially zoned property) are not normally allowed to be rolled into commercial loans.  This is the case with virtually all conventional banks as is true with 100% of the SBA lenders/banks.  If you have a personal credit card that you made business purchases on, you have a problem if you are trying to refinance that debt with a commercial loan.   

GENERAL SOLUTIONS TO THE  USE OF PROCEEDS

CASH FLOW

Here is the other major issue with personal debt in regards to how it negatively effects your ability to consolidate business debt.  It greatly reduces your cash flow as calculated by underwriters.  Bankers call your personal expenses your "Personal Needs".  The formula is to DOUBLE the personal expenses that show up on your credit report, AND SUBTRACT THAT AMOUNT OUT OF YOUR NET BUSINESS INCOME. 

Example, say your credit report reveals you have monthly payments that look like this:

Underwriters double this total amount to calculate your "Personal Needs."  So they would say your total monthly Personal Needs are $8,160 ($4,080 x 2)...  They than take this amount and subtract it out of your net business income.  What is left over, is your "Cash Available For Debt Service". Or the money left over to pay for the proposed debt consolidation loan.  

The key point here is that personal expenses are doubled, while business expenses are calculated off a 1.25 ratio...  So you want as much debt to be attributed to the business as possible.  For example, the same $600 equity loan and the $800 of credit card debt payments, look like this on a cash flow analysis:

Again, we are talking about the exact same debt here.  On the personal side it eats up an additional $1,050 ($2,800 - $1,750) of cash flow for underwriting.  You want as much of your debt to be attributed to the business as possible because the ratios/calculations are more forgiving on the business side.  

SOLUTIONS

Cash Out Refinances

There's nothing to complicated here, but most banks have simply  stopped wanting to do any type of cash out refinance (Note that a business debt consolidation type loan is categorized as a cash out refinance).  Traditionally a cash out refinance, meant that at closing the borrower would receive a check for the difference between his previous balance and the new loan amount.  Ex:

Now, most banks will not consider this type of structure and or just handing the borrower a check.  They want control and want to know what exactly the borrower is going to do with the money.  So it goes back to the Use of Proceeds issues we discussed above.  They want to know exactly what the borrower is going to do with the money.  Meaning that are going to approve it, and document it.   

The slight exception to this is working capital.  Some banks, especially through the SBA are still offering working capital loans.  They normally are in conjunction with a a larger loan amount, though.  So we are seeing deals get done that are structured as say, $1,000,000 refinance of real estate debt and $100,000 of working capital.  Total loan amount of $1,1000,000.   However, most banks will still want to hold the working capital and release it upon request, which normally means that you will have to tell them what you are going to do with the money and provide documentation. 

SOLUTION

We do SBA business loans and commercial real estate loans for small business owners, nationwide.  Our minimum loan amount is $400,000.  Learn more about our commercial mortgage consultant services here. 

  


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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