Make Sure Your Lender Gets Current Information

Make Sure Your Lender Gets Current Information

I'm the managing general partner of a hotel business. The partnership recently invested nearly $1 million in cash to modernize the property. The motel - a franchise - is well-located and profitable.

As part of the project, I applied for a $25,000 loan to erect a sign on the property. The credit company called a few days after I submitted the application to say that the loan was rejected due to the borrowing entity's credit picture.

I was astounded. The borrower had just invested a potful of equity in the project; the entire mortgage debt against the hotel was roundly 55 percent of the appraised value; the inn's cash- flow was good.

I asked the credit company to arrange for the credit agency, Dun & Bradstreet, to send me a copy of the report. I received it a few days later.

Inaccurate Financial Picture

After reading the report, I could see why the loan wasn't approved - had I been the lender, I wouldn't have made the loan, either. The report reflected an inaccurate picture of the borrowing entity's financial condition - but it was all the credit company had upon which to base its decision.

I soon realized that the borrower had never provided a current picture of the inn's financial condition and ownership structure to the rating agency. Nor had it cleared old tax liens that had been paid off many moons ago. Therefore, the potential lender received a report of the inn's financial condition that was more than two years out of date.

Though the loan application was rejected, I learned some important business lessons that I'd like to share with you:

Many lenders are owned by partnerships and lease to wholly owned "Subchapter S" entities. Make sure that the structure of the operation's real obligations is clear. Often, invested equity funds are treated as loans on the books of the partnership or operating company. While treating capital as equity gives you a terrific- looking balance sheet, treating it as a loan makes that same balance sheet look much less stable. But if it's not a "hard" third-party debt - such as a mortgage to a bank - you should clearly explain that to the credit agency.
Make sure that old liens are always cleared. In the normal course of business, state and local taxing authorities often file the liens. Though paid, they sometimes are not recorded as such because of administrative oversight. When there's a list of five or six tax liens incurred over a several year period, it gives the lender the feeling that you can't pay your bills. Sometimes, that may indeed be the case - but more often than not, it's simply a seasonal cash-flow mismatch against monthly obligations that cause liens to be filed, then paid, as the good cash-flow months generate income. But the lender can't know this, and it's your obligation to keep the record clean and currently accurate.
Information given to the credit rater regarding the inn's markets, potential and business character should be constantly reviewed for accuracy. I found that Dun & Bradstreet had interviewed a former employee, still listed as being on the staff, and had out-of-date and incomplete information. Make sure that you give the credit agency these facts yourself.
Be certain that the credit agency has current information on the profitability of your hotel. In my case, I made a point of visiting the D&B office and talking with the credit analyst about our motel. I brought him up-to-date on our profitable business and provided all the data necessary so that D&B would have the true picture of the inn's financial condition. We won't ever get turned down for deserved lined of credit in the future - make sure you don't, either.