Issues Relating to Construction Lending and the Construction Industry

Construction- Start to Finish- seek lender involvement early during the approval process and shortly after receipt of approvals.

Permanent Financing- allow 60-90 days (or more) from meeting to closing. Appraisal, Environmental reports and title work need a few weeks lead time.

Any Government sponsored involvement such as the EDA or SBA should be coordinated through your lender

Appraisals-more conservative

Lending criteria post sub prime debacle

Lending to Contractors- Specialized Field

Some Lenders will not entertain lending to this specialized field.

Lending to some specialties and not others.

Choosing a Bank

Questions to ASK! What is your legal lending limit? What is your ‘hold’ or limit?

Prohibition on certain industries or groups. i.e. road building contractors, bridge or dam builders etc.

What is the approval process? Is it a signature process or committee process? Usually driven by the loan amount.

Loan Structure

Collateral- business assets, lien on real estate.

Cash Flow- debt service coverage.

Conditions

Capacity- ability to service the debt. Previous history and proforma cash flow.

Character- most important in some lenders eyes.

Specialized Criteria for Lending to Contractors

Stricter covenant criteria.

A/R to A/P ratio: Minimum: 1.5X--Like to see: 2.0X to 2.5X

Debt to Worth: Minimum: 2.0X—Like to see: 1.5X to 2.0X

Current Ratio Minimum: 1.0—Like to see: 1.20 to 1.0 or better

Cash to Total Assets: Like to see: 5% to 7%

EBIT/Interest Expense: Like to see: 3.0X to 8.0X

Financial Reporting:

An accurate and timely reporting of financial information is crucial to a successful borrowing relationship.

Reporting for Working Capital Lines of Credit:

FYE- audited are preferred for credits in excess of $5 million.

Reviewed FYE with disclosures. Within 120 days of FYE.

Semi Annual Statements- compiled or reviewed with disclosures. Can be negotiated.

Quarterly financial statements – company or mgmt prepared.

A/R and A/P agings- quarterly.

Contract Status Report – quarterly.