Checklist Checklist

Category: business financing

  • #35 MERCHANT CASH ADVANCES Buyer Checklist You Need To Know Before You Spend Your Money. 60 Buyer-Beware Intelligence Points.

    1. A merchant cash advance is not economically identical to a conventional loan.
    2. The headline “factor rate” can obscure the true cost.
    3. Frequent repayment can strain cash flow.
    4. Daily or weekly payments can become painful during slow periods.
    5. A high approval rate does not mean affordability.
    6. The financing can be extremely expensive.
    7. Stacking multiple advances can create a debt spiral.
    8. A second advance can worsen the first one’s cash-flow problem.
    9. Personal guarantees may create personal exposure.
    10. Confession-of-judgment provisions or similar contractual provisions may deserve specialist review where applicable.
    11. ACH withdrawals can create operational problems when cash flow falls.
    12. Revenue-based repayment does not eliminate economic risk.
    13. A business can generate revenue while still losing money.
    14. Financing inventory does not guarantee inventory will sell.
    15. Financing marketing does not guarantee customer acquisition.
    16. The promised use of funds should be tested against actual return.
    17. Broker fees may add to cost.
    18. Renewal offers can encourage additional borrowing.
    19. “Fast funding” can discourage careful comparison.
    20. The repayment structure matters as much as the amount received.
    21. A lower payment can simply mean a longer repayment period.
    22. The true dollar cost should be calculated.
    23. Legal documents may contain provisions that are easy to overlook.
    24. Multiple simultaneous advances can consume future revenue before it arrives.
    25. If the business needs another advance to make the current advance’s payments, the financing strategy is already in trouble.

    B. PREMIUM BUYER CHECKLIST

    TRUE COST

    ☐ Amount received
    ☐ Total repayment
    ☐ Factor rate
    ☐ Broker fees
    ☐ Origination fees
    ☐ Other fees
    ☐ Expected repayment period

    Calculate:

    Total Repayment − Net Cash Received = Financing Cost

    Then determine the approximate effective economic cost over the expected repayment period.

    REPAYMENT

    ☐ Daily amount
    ☐ Weekly amount
    ☐ Percentage-of-revenue mechanism
    ☐ ACH requirements
    ☐ Estimated payoff date
    ☐ Early payoff terms

    STACKING

    ☐ Existing advances
    ☐ Existing credit lines
    ☐ Credit cards
    ☐ Equipment debt
    ☐ Other short-term obligations

    CONTRACT

    ☐ Personal guarantee
    ☐ Default provisions
    ☐ Collateral
    ☐ Arbitration
    ☐ Legal remedies
    ☐ Payment authorization
    ☐ Broker compensation

    CASH-FLOW STRESS TEST

    ☐ Revenue −20%
    ☐ Revenue −40%
    ☐ One slow month
    ☐ Two slow months
    ☐ Major customer loss

    FINAL RULE

    Never evaluate the advance based solely on how quickly you receive the money.

    FINAL QUESTION

    How much of my future revenue am I giving away to receive today’s cash?

  • #34 BUSINESS LINES OF CREDIT Buyer Checklist You Need To Know Before You Spend Your Money. 60 Buyer-Beware Intelligence Points.

    1. A line of credit is not free cash.
    2. Available credit can disappear if the lender changes terms.
    3. Variable rates can increase payments.
    4. Interest may accrue on outstanding balances.
    5. Annual renewal requirements can create risk.
    6. Borrowing capacity can depend on financial performance.
    7. Personal guarantees may apply.
    8. Collateral may be required.
    9. Covenants can restrict business decisions.
    10. Lenders may require financial reporting.
    11. Fees can include unused-line or annual charges.
    12. Late payments can trigger penalties.
    13. Default can accelerate repayment.
    14. A line used for permanent expenses can become a permanent debt problem.
    15. Borrowing to cover recurring operating losses is a warning sign.
    16. Seasonal businesses may need more capacity than the line provides.
    17. Customer concentration can suddenly reduce borrowing capacity.
    18. Receivables may not all qualify for borrowing.
    19. Inventory may have limited borrowing value.
    20. The stated credit limit may not equal practical availability.
    21. Drawing the full line can leave no emergency capacity.
    22. Refinancing risk exists if the facility is not renewed.
    23. Interest expense can quietly erode margins.
    24. A line should support a clear working-capital cycle.
    25. The critical question is “What specifically will this borrowed money accomplish?”

    B. PREMIUM BUYER CHECKLIST

    ☐ Credit limit
    ☐ Interest rate
    ☐ Fixed/variable
    ☐ Draw fees
    ☐ Annual fees
    ☐ Unused-line fees
    ☐ Renewal date
    ☐ Maturity
    ☐ Collateral
    ☐ Guarantee
    ☐ Covenants
    ☐ Reporting requirements

    PURPOSE

    ☐ Inventory
    ☐ Receivables
    ☐ Seasonal cash flow
    ☐ Short-term opportunity
    ☐ Emergency liquidity

    Avoid using a revolving facility to permanently fund operating losses.

    BORROWING-CAPACITY TEST

    ☐ Eligible receivables calculated
    ☐ Eligible inventory calculated
    ☐ Advance rates understood
    ☐ Concentration limits understood
    ☐ Borrowing-base formula understood

    LIQUIDITY TEST

    Model:

    ☐ Normal month
    ☐ Slow month
    ☐ Worst month
    ☐ Major customer delay
    ☐ Unexpected expense

    FINAL QUESTION

    If the lender froze the line tomorrow, how long could the business operate?

  • #33 BUSINESS ACQUISITION FINANCING Buyer Checklist You Need To Know Before You Spend Your Money. 60 Buyer-Beware Intelligence Points.

    1. You are financing a business—not merely buying its assets.
    2. Historical profits may not continue.
    3. Seller-adjusted earnings require verification.
    4. “Add-backs” can be overly optimistic.
    5. Customer concentration can create hidden risk.
    6. Key employees may leave after acquisition.
    7. The seller may be critical to operations.
    8. Customer relationships may not transfer.
    9. Contracts may not transfer.
    10. Licenses may not transfer.
    11. Lease terms may change.
    12. Hidden liabilities can survive the transaction depending on structure.
    13. Working-capital requirements can be underestimated.
    14. Inventory can be overstated.
    15. Accounts receivable may not be collectible.
    16. Equipment may require replacement.
    17. Deferred maintenance can become your problem.
    18. Tax liabilities must be investigated.
    19. Litigation must be investigated.
    20. Debt service can consume the cash flow you expected to receive.
    21. Seller financing terms can complicate the capital structure.
    22. Earnouts can create disputes.
    23. Overpaying can make even a good business a bad investment.
    24. A financing approval does not prove the acquisition is economically sound.
    25. The most dangerous assumption is “The business has always made this much money, so it will continue to do so.”

    B. PREMIUM BUYER CHECKLIST

    BUSINESS QUALITY

    ☐ Revenue history
    ☐ Gross margin
    ☐ EBITDA/SDE
    ☐ Cash flow
    ☐ Customer concentration
    ☐ Supplier concentration
    ☐ Recurring revenue
    ☐ Churn
    ☐ Competitive position

    FINANCIAL VERIFICATION

    ☐ Tax returns
    ☐ Bank statements
    ☐ Financial statements
    ☐ General ledger
    ☐ Accounts receivable
    ☐ Accounts payable
    ☐ Inventory
    ☐ Payroll
    ☐ Owner compensation
    ☐ Add-backs

    LEGAL

    ☐ Entity structure
    ☐ Contracts
    ☐ Leases
    ☐ Licenses
    ☐ Litigation
    ☐ Regulatory obligations
    ☐ Intellectual property
    ☐ Employee agreements

    FINANCING

    ☐ Purchase price
    ☐ Buyer equity
    ☐ Senior debt
    ☐ Seller financing
    ☐ Earnout
    ☐ Interest
    ☐ Amortization
    ☐ Guarantees
    ☐ Covenants
    ☐ Working-capital requirement

    TRANSITION

    ☐ Seller transition period
    ☐ Employee retention
    ☐ Customer retention
    ☐ Supplier continuity
    ☐ Systems transfer
    ☐ Password/data transfer
    ☐ Insurance transfer
    ☐ Licenses

    FINAL TEST

    Calculate the acquisition using:

    ☐ Seller’s projections
    ☐ Your conservative projections
    ☐ 20% lower revenue
    ☐ Higher expenses
    ☐ Loss of largest customer
    ☐ Seller departure

    FINAL QUESTION

    Would I still buy this business if revenue fell 20% immediately after closing?

  • #32 SBA LOANS Buyer Checklist You Need To Know Before You Spend Your Money. 60 Buyer-Beware Intelligence Points.

    1. “SBA-backed” does not mean the government is simply giving you the money.
    2. You work directly with a lender for an SBA loan.
    3. The lender still evaluates your business and repayment ability.
    4. Eligibility requirements matter.
    5. Loan proceeds may have permitted-use restrictions.
    6. Repayment comes from the business and/or other sources according to the loan structure.
    7. Variable-rate loans can produce changing payments.
    8. Fees can materially affect total borrowing cost.
    9. Collateral requirements may apply depending on the loan.
    10. Personal guarantees may create personal exposure.
    11. Business projections are not guaranteed results.
    12. Acquisition financing requires careful valuation.
    13. Buying a business at an inflated price can create a debt problem.
    14. Working-capital estimates can be wrong.
    15. Seasonal businesses may require more liquidity than expected.
    16. Existing debt can reduce borrowing capacity.
    17. Seller financing can change the transaction economics.
    18. Lease obligations matter.
    19. Tax obligations matter.
    20. The business must generate enough cash flow to service debt.
    21. A loan can solve a capital problem while creating a cash-flow problem.
    22. Refinancing should not be assumed.
    23. Default consequences must be understood before signing.
    24. Loan documents—not sales presentations—control the obligation.
    25. “SBA loan” is not a substitute for underwriting the business itself.

    The SBA states that most 7(a) term loans are repaid through monthly principal and interest payments from business cash flow, with variable-rate payments potentially changing when the rate changes.

    B. PREMIUM BUYER CHECKLIST

    BUSINESS

    ☐ Legal entity
    ☐ Ownership
    ☐ Years operating
    ☐ Revenue history
    ☐ Profitability
    ☐ Existing debt
    ☐ Tax obligations
    ☐ Customer concentration
    ☐ Supplier concentration

    PURPOSE

    ☐ Acquisition
    ☐ Working capital
    ☐ Equipment
    ☐ Real estate
    ☐ Expansion
    ☐ Refinancing
    ☐ Other permitted purpose

    LOAN

    ☐ Amount
    ☐ Rate
    ☐ Fixed/variable
    ☐ Term
    ☐ Payment
    ☐ Fees
    ☐ Collateral
    ☐ Guarantees
    ☐ Covenants
    ☐ Default provisions

    CASH-FLOW TEST

    ☐ Current cash flow calculated
    ☐ Debt service calculated
    ☐ Existing obligations included
    ☐ Owner compensation included
    ☐ Taxes included
    ☐ Working-capital needs included
    ☐ Downside case calculated

    IF BUYING A BUSINESS

    ☐ Tax returns reviewed
    ☐ Financial statements reviewed
    ☐ Bank statements reviewed
    ☐ Customer concentration
    ☐ Owner add-backs verified
    ☐ Seller claims independently tested
    ☐ Assets verified
    ☐ Liabilities verified
    ☐ Contracts reviewed
    ☐ Litigation reviewed

    FINAL QUESTION

    If the business produces substantially less cash flow than the seller’s projections, can the debt still be serviced?

  • #31 EQUIPMENT FINANCING Buyer Checklist You Need To Know Before You Spend Your Money. 60 Buyer-Beware Intelligence Points.

    1. The monthly payment can hide the total financing cost.
    2. A low rate does not necessarily mean a low-cost loan.
    3. Equipment can depreciate faster than the debt declines.
    4. Used equipment may have uncertain residual value.
    5. The lender may require a down payment.
    6. Fees can substantially increase acquisition cost.
    7. Documentation fees should be identified.
    8. Origination fees should be identified.
    9. Personal guarantees may be required.
    10. Collateral requirements may extend beyond the equipment.
    11. Cross-collateralization can increase exposure.
    12. Balloon payments can create refinancing risk.
    13. Variable rates can change payments.
    14. Prepayment penalties can limit flexibility.
    15. Equipment may become obsolete.
    16. Maintenance costs are part of the economic decision.
    17. Downtime can destroy the expected return.
    18. Manufacturer warranties may not cover everything.
    19. Vendor financing should be compared with independent financing.
    20. Leasing and purchasing produce different economics.
    21. Tax treatment can materially affect the effective cost.
    22. Insurance requirements add to ownership cost.
    23. Delivery delays can leave you paying before generating revenue.
    24. Financing equipment that doesn’t generate sufficient cash flow creates a debt problem.
    25. The right question is “What will this equipment actually earn me?”, not “What is the monthly payment?”

    B. PREMIUM BUYER CHECKLIST

    EQUIPMENT

    ☐ Exact equipment identified
    ☐ New/used condition documented
    ☐ Serial number recorded
    ☐ Age verified
    ☐ Hours/usage verified
    ☐ Maintenance history obtained
    ☐ Warranty reviewed
    ☐ Inspection completed

    ECONOMIC VALUE

    ☐ Purchase price
    ☐ Installation
    ☐ Delivery
    ☐ Training
    ☐ Maintenance
    ☐ Insurance
    ☐ Financing
    ☐ Expected useful life
    ☐ Expected resale value

    FINANCING

    ☐ Interest rate
    ☐ APR/effective cost where applicable
    ☐ Term
    ☐ Down payment
    ☐ Origination fees
    ☐ Documentation fees
    ☐ Prepayment terms
    ☐ Balloon payment
    ☐ Variable-rate provisions
    ☐ Personal guarantee

    CASH-FLOW TEST

    Estimate:

    Additional Revenue

    Cost Savings

    −

    Financing

    −

    Maintenance

    −

    Insurance

    −

    Downtime

    =

    Net Economic Benefit

    Then test the result at:

    ☐ 10% lower revenue
    ☐ 20% lower revenue
    ☐ 20% higher maintenance
    ☐ 3-month delayed implementation

    FINAL QUESTION

    If this equipment produces 30% less economic benefit than expected, can the business still comfortably make the payments?