It is easier to get a loan when you know the recipe. One of the major players on our AEM Consulting Team is Jerry Merola, Managing Partner. As a former commercial bank loan officer, he has spent many years evaluating thousands of businesses in almost every industry. There were so many business owners applying for loans and project funding that he had to look for several key ingredients in any deal to ‘whet his appetite’ before he would ever consider approving the package and bringing it to the loan committee. The leisure entertainment industry is one that requires constant upgrades and improvements, such as the purchase of new equipment, expansion of an existing facility, or major renovations, to maintain repeat business and constantly attract new customers. These following five key elements are often missing or not properly developed in many of the business plans that AEM has seen over the past 25 years:
Reprinted and Updated from Funworld – February 2000
The success of a loan applicant is often dependent on the presentation of these 5 elements:
- financial stability of the company or proposed project
- economic outlook of the company’s immediate industry
- value of collateral available
- ability of business to service the current (if any) and proposed debt
- support available from guarantors
These five variables, in addition to a few others, form the basis for a favorable funding decision, and establish the criteria by which terms, interest rates, and covenant requirements are determined. To present yourself and your business in the best possible light, consider this ‘menu’:
With a little prep work, you can offer your banker a five-star meal and get a loan
Spend time with your accountant or financial advisor to fully understand the contents of your financial statements. (It is often helpful to choose an accountant who is well known to the banks in your area and comes highly recommended.) Loan officers are quickly turned off if they discover that you are not capable of explaining how you arrived at each line item of your balance sheet, income statement, statement of cash flows, and statement notes. Keep in mind that financial statements report conditions during a defined time period (calendar or fiscal such as June 30th), so if a large event didn’t hit your hooks until a week or a month after the closing date, be prepared to offer this additional information to your banker. In most cases, ‘good news’ will he evaluated favorably and may serve to offset negative events, such as a decline in gross revenues, an increase in expenses, or sub-standard profitability.
Always prepare a written summary to accompany the accountant-prepared financial statements. This will not only help the banker better understand the financial period under review, but will impress him or her as well. Were there any one-time events that occurred, such as road construction or adverse weather conditions that negatively affected your business? Each of these events would dramatically impact any business, but without a detailed explanation, your banker will not be aware of these. Yes, loan decisions arc based largely on ‘the numbers,’ but the numbers don’t always tell the real story—that is your job!
Soup & Salad
Bankers typically rely on printed material in evaluating different industries. The odds are that your banker docs not fully understand the intricacies of our industry and may misinterpret the average standards of performance. To guard against this, it is important that you provide an overview of the industry, complete with your marketing plan and performance targets. Articles and press releases written about you and your company are helpful. Don’t allow your company profile to be ‘lumped’ in with an industry classification, as many are composed of groups of companies that may not even be considered a part of our industry. We are very fortunate that there is an abundance of printed material that favorably reports on our industry as well as the need for leisure options. Clearly identify your company’s recent successes and demonstrate how and why your business excels amongst the competition.
An adequate collateral package has become essential in today’s society. Without it, a banker must rely solely on a company’s future performance to repay a loan package, which typically means greater risk and higher interest rates. Some loans are self-collateralizing—that is, the funding is used to directly purchase an asset that has a defined market value. Equipment loans can fall into this category if they are set up properly. For example, if the equipment supplier agrees to buy back the equipment at predetermined prices at the end of one year, in two years, in three years, and guarantees such recourse, the loan package takes on much less risk for the lender. Other types of loans, such as leasehold improvement or renovation loans are more difficult to collateralize, particularly if the business facility is leased or rented. Don’t be surprised if your banker requests a ‘blanket’ lien on the company’s business assets, particularly if the requested loan would represent the company’s main debt instrument.
Whenever possible, look to confine the collateral lien to specific assets, thereby safeguarding the unencumbered assets for use on future transactions with the same or other lenders, such as a working line of credit (usually paid down to a zero balance for a period of time each year). Be prepared to provide a collateral ‘portfolio’ to your banker, which may include a variety of assets sufficient in value to adequately cover the amount of the loan package.
Confirm in advance that these offerings are ‘free and clear’ and not already pledged to any other funding source. Again, a proactive approach can permit your loan application to be viewed in the best possible light and enhance your ability to negotiate improved interest rates and terms.
Ability to Service Debt
Before setting foot in your banker’s office, develop your own loan repayment plan. Don’t wait for the banker to tell you that your company can’t afford the requested loan, as your credibility will then be lost and the chances of receiving any level of funding significantly reduced. Instead, prepare a spreadsheet of company earnings and expenses along with a pro forma statement that incorporates the new loan facility into the operation. Make sure your revenue projections are both realistic and conservative. If the loan is for the purchase of equipment or attractions that will increase per capita spending, length of stay, and/or expand your customer base (i.e. increase age group of target customer), include these projected additions to revenues and expenses in the pro forma statement. This single step can go a long way in showing your banker that the company has carefully evaluated its ability to service new debt and may help to establish a solid case for presentation by the banker to his or her loan committee. For new projects, this proforma statement should be detailed and describe how each attraction (revenue stream) was selected and the impact that each has on per capita spending within the facility.
More often than not, AEM receives questions from business owners about the best method to avoid personal guarantees. While a personal guarantee effectively punctures the corporate veil and exposes the business owner(s) to debt repayment responsibilities, it sends a clear message to the lender that the loan applicant is willing to stand behind his or her business. Refusing to offer a personal guarantee sends an alternate message: “Let the lender beware!” If you are seeking funding for a new project or concept but are unwilling to provide a personal guarantee, does this mean that you are not sure about the project’s ability to succeed? Maybe not, but put yourself in the lender’s shoes. The answer, perhaps, is to provide a ‘limited’ guarantee that clearly identifies the assets at risk for the guarantor (such as specific securities, real estate, etc.). In this manner, both parties are cognizant of their exposure and can more effectively negotiate a favorable loan agreement.
Take Your Banker to Lunch Now
Invariably, many applicants wait until a real need exists to begin establishing a strong relationship with their banker. This type of relationship, however, must begin months (if not years) earlier, so that prospective lenders can enjoy the benefit of tracking your growth and performance. The easiest method in establishing a banking relationship is at the local level, where both your business accounts and personal accounts should be opened. Create as ‘big’ a relationship as you can by moving your personal investments and savings accounts into the same local branch, as a frequent customer is viewed as an important customer. Get to know not only the branch manager, but the commercial lender for the district as well. Consider applying for a small business line of credit that is fully collateralized, as this will provide a starting point in developing a larger relationship. On a regular basis, request moderate increases in the line and don’t be afraid to use it to cover temporary working capital needs. Bring the balance back to zero (‘clean up’) at intervals throughout the year to show the bank that you are a responsible borrower. Always pay the monthly installments on time. If there is a problem, or you anticipate a cash flow jam during a particular month, notify your lender before it happens, and provide a plan by which to resolve any such delinquency.
Communication is by far the most critical step in the relationship. If you fail to communicate, the bank will almost always assume the worst, and your loan facilities may be ‘called’ if your future financial statements fall behind your projections. Provide regular updates to your banker, including press releases of new business achievements (don’t be shy), so that the bank can stay abreast of your progress. Encourage your accountant to establish a relationship with your banker as well, so that each party can share suggestions and solutions in designing a lending program for your business. Keep in mind that your accountant can be an excellent source of referrals for your banker, so whenever possible your banker will look to appease your accountant with prompt, effective service.
Take time to attend bank-sponsored seminars, workshops, and grand openings, and make a point to introduce yourself to other bank officials. These same individuals may serve double-duty on the bank’s loan committee, and a personal attestation of your ‘character’ by such individuals can go a long way toward swaying a board’s decision into favorable territory.
Unless you are independently wealthy or have wealthy friends to loan you money whenever you need it, the need for financing will be an ever-present part of your business life. How quickly a loan can be obtained could mean the difference between expanding your facility to capture greater marker share (or retain your current customer base) or sitting on the sidelines while your competition serves up a ‘five-star meal’ and gets their big loan. Protect your ability to borrow by carefully managing your current credit facilities and plan your approach alongside a qualified accountant and a well-versed industry advisor. Bon Appetit! And don’t forget to celebrate with a special after-dinner drink!
Frank Seninsky, President/CEO and Jerry Merola, Chief Financial Officer
Amusement Entertainment Management, LLC (AEM) and Alpha-Omega Amusement & Sales
Jerry Merola, Alpha-Omega Amusements & Sales’ Chief Financial Officer also serves as managing partner of Amusement Entertainment Management L.L.C (AEM), a top rated worldwide leisure industry consulting agency. He has focused much of his efforts on analyzing and enhancing the performance of the Alpha-Omega Group’s domestic and international client portfolio, which includes developers, manufacturers, and entertainment facility owners. Jerry has developed in just the past ten years more than 250 feasibility studies, business plans, marketing programs, operation manuals, and funding programs for some of the most notable names in the entertainment industry and performed business audits in almost all demographic markets and sectors. Jerry and the Alpha-Omega Group have developed one of the most comprehensive attractions databases available, allowing AEM’s clients to obtain real-world performance results and earnings capability for virtually any entertainment component.
Earlier in his career, Jerry served ten years in the commercial banking industry as Vice President of one of the Northeast’s largest commercial banks, where he managed a team of lenders that controlled the bank’s Fortune 1000 client portfolio. A holder of bachelors and masters degrees in corporate and international finance from Fordham University and Fairleigh Dickinson University respectively, Jerry brings to the table a wealth of experience in financial markets, project and land development, budgeting, and risk management. As a monthly feature writer for Playmeter Magazine and Entertainment Management Magazine, he maintains a library of articles in both the entertainment and financial services industries. Since 2001, Jerry has served as Chairman of the industry’s Finance Council through the International Association for the Leisure Entertainment Industry (IALEI). Jerry has also been a presenter at Foundations Entertainment University for the past 13 years, and an important team member of the Rookies & Newcomers educational program for IAAPA (International Association of Amusement Parks & Attractions). Contact Jerry Merola directly at [email protected] or Ph: 732 254-3773. For more information on AEM visit www.aemllc.com