Avatar's Blog

Brokers and direct borrowers alike would do well to learn more about the proper preparation of business P&Ls. Hard money lenders base their lending decisions on the answers to three questions

1. Does the subject property have sufficient collateral to serve as collateral for this loan?
2. Can the borrower afford the monthly payments?
3. Does the borrower have a reasonable and attainable exit strategy that can be accomplished within 36 months

The second question is determined by a careful reviwe of the P&Ls (Profit and Loss Statements) of the entity that will support the monthly loan payments. When preparing this document, you will financial information from the prior year and the each month to date for the current year. You will need to know the amounts spent by company, organization, or other entity broken out into details, including, rent, utilities, cost of goods, maintenance, salaries, taxes, loan payments, etc., etc. You will need to list income from all sources, also broken out into detail such as product sales, service contracts, etc. or perhaps, room rentals, events, catering, gift certificates, restaurant, bar, greens fees, etc.

A P&L that contains 'gross income' and 'expenses' and a net figure without further detail is not acceptable. An annual figure for the past year may be acceptable, but the year to date should show the monthly income and expenses precisely. If you have 'seasons' it is best to show a monthly accounting for the previous year as well as the annual report, so the lender is able to determine whether you are doing as well as or better than last year at the same time.

Finally, look at the results of your own P&Ls. The lender wants to see that you are making enough money to pay all your expenses, including the Avatar loan (less the payments you make today for loans that will be paid off by the Avatar loan). You should have a ratio of at least 1.2 : 1 of income to expenses in order to be able to 'afford' the payments. If you run 'tighter' than that, you may not be able to afford any unexpected expenses that may crop up along the way. Your P&Ls should provide a clear picture to you as well as to the lender as to whether this loan makes sense for your business today.