Linda Keith CPA

Why Guaranteed Payments are not Guaranteed

2011-12-22T16:15:45Z

Lenders and underwriters in my training workshops on Cashflow Analysis of Tax Returns often stumble a bit on that word 'guaranteed'. After all, we all know what that means, right?

Well, it is dangerous to assume that words on tax returns or in financial statements mean the same thing the do in common usage. Read on and at the bottom of this post I'll tell you what 'guaranteed' means in IRSSpeak.

Where do you find guaranteed payments?

Guaranteed Payments show up on:

Form 1065 Page One
Form 1065 Schedule K
Form 1065 Schedule K-1 (for each owner who receives them)
Form 1040 Schedule E (although it is buried in the taxable amount listed for the partnership or LLC)

What are guaranteed payments?

Owners of partnership (partners) and LLCs (members) do not get paid wages. Their 'pay' is in the form of capital distributions which are based on % ownership...most of the time.

But what if my % ownership does not reflect the value of my contribution in terms of time, expertise or some other critical factor? Should I really split our 'profits' 50/50 just because I am a 50% owner, when I am the one who puts in the time or brings the expertise to the table to land the business?

Guaranteed payments are the way we can make distributions to the owners that are not related to the agreed-upon profit and loss split.

How guaranteed payments work

Here are some examples:

I own 25% of my LLC. The other owner owns 75%. We have an agreement that whichever one of us brings in a new client receives a 'finder fee' of 1% of first-year revenues from that client. Those payments will be made as guaranteed payments.
I own 50% of my partnership. I work full time in the business and the other 50% owner does not work for the business. We have an agreement that I get paid $20 per hour for each hour worked. Then we split the profits 50/50.
I own 75% of my partnership. I recruit a second partner who has an incredible reputation in the business. He does not work in the business but is an avid blogger and speaks at industry conferences. We have an agreement that he gets a $1,000 bonus for every referral that turns into a client.

What do you as a lender/underwriter do with guaranteed payments?

Form 1065 Page One: Nothing if you have already included them in taxable income either by starting with the bottom line of the return, with net income from Schedule M-1 or by subtracting total expenses on page one. Or include guaranteed payments just as you include other expenses if you are entering each type of expense on your spreadsheet.
Form 1065 Schedule K: Nothing
Form 1065 Schedule K-1 (for each owner who receives them): Include the Guaranteed Payments (Line 4 or 5 depending on which year return you are reviewing) in personal, historical cashflow
Form 1040 Schedule E (although it is buried in the taxable amount listed for the partnership or LLC: Do not use this number. It is a placeholder for the number you actually need, which is either historical personal cashflow or cashflow available from the company.

CAUTION!!!

If you are not in the habit of checking for guaranteed payments on a 1065 K-1 when you are calculating actual historical cashflow you run the risk of missing a significant, recurring source of cashflow.

IRS definition of 'guaranteed':

When it comes to guaranteed payments, this refers to the fact that these payments are guaranteed by an agreement between the partners that is unrelated to the agreement for the profit/loss split.

Just don't look at Schedule K-1, Guaranteed Payments...breathe a sigh of relief...and say to yourself: "Well, at least they are guaranteed income from this company."

ALLL and TDRs: How to decide if a loan is a TDR

2011-12-08T19:11:09Z

One of the ways the Allowance for Loan and Lease Losses (ALLL) is impacted occurs when a financial institution grants a concession through modification of the terms of a loan due to the financial difficulty of the borrower. This is called a Troubled Debt Restructure (TDR).

Understanding whether a particular concession is material enough to qualify the loan as a TDR, or whether the cause of the concession is truly the financial difficulty of the borrower, is critical in determining the appropriate balance for the Allowance for Loan and Lease Losses.

And since that balance determines the expense, 'Provision for Loss', which determines profits for the period, which determines capital levels...the cascading impact of the wrong decision on a TDR can be significant.

Further, if an examiner or outside auditor does not think your bank or credit union is getting this right, it reduces confidence in the entire ALLL and in other major judgement areas as well...another cascading impact.

Two elements

Concession

Just changing terms does not mean you have made a concession. If your financial institution renegotiates to a lower interest rate because you want to keep the customer who could get that lowered rate elsewhere, that is not a concession. That is just good business.

But if you drop the interest rate or extend payments or allow interest-only for a short period which results in terms so favorable the borrower could not get them elsewhere, that is a concession.

But wait, there is more...

Financial Difficulty

If you make a concession just to keep a customer because you don't want to lose their business, but they are not in financial difficulty, then it is not a Troubled Debt Restructure.

Some of the indicators that a borrower may be in financial difficulty even though they are currently paying your loan as agreed include

they are out of compliance with another loan
you have updated your cashflow forecast and it does not appear they will be able to continue paying your loan as agreed
they have filed for bankruptcy
their CPA-prepared financial statements indicate in the CPA letter that there is substantial doubt that the company is a going concern

So what's a financial institution to do?

Make sure you are current on the rules for TDRs. The Financial Accounting Standards Board (FASB) has issued an update, Accounting Standards Update (ASU) No. 2011-02, Receivables (Topic 310): A Creditor's Determination of Whether a Restructuring Is a Troubled Debt Restructuring, that is effective for nonpublic entities for annual periods ending on or after Dec. 15, 2012.

Be sure your software solution for the Allowance for Loan and Lease Losses (ALLL) handles TDRs correctly. (I like Sageworks Surety.) Identify correctly which impaired loans should be selected for TDR status. Document your thinking on why, or why not, you will treat that loans as a TDR.

The more transparent your thought process and decision-making, particularly if the examiners and outside auditors agree with your findings, the better.

Resources

Contact Sageworks Surety for a demo of their ALLL solution.
Read my book on The ALLL Triple Play: Examiners and Auditors Reveal Best (and Worst) Practices in your Method, Transparency & Efficiency
Read this article by CliftonGunderson LLP, a CPA firm with a financial instituitions practice, on New Guidance and Clarification on Troubled Debt Restructuring

Why capital gains count even when they don't!

2011-11-22T21:54:06Z

Many lenders and their financial institutions don't want to count on income from capital gains as a recurring source to service debt. I get that and don't necessarily disagree. Although see the post on 'Lending on Asset Conversion instead of Income' for another point of view.

Why the confusing blog title?

Admittedly, you are more likely to read a controversial title. But that is not why I said what I said.

Even if you do not plan to use the cash inflow from capital gains, whether stock or real estate, as a recurring source of cashflow to service debt going forward...the cash inflow (or outflow) happened! It may explain some things like where the borrower came up with the money to:

fund their lifestyle
contribute capital to their business
purchase equipment without financing it

If it seems unlikely that any of those could happen with the cashflow you have calculated, it might lead you to suspect fraud.

Notice capital gains as a source even if you won't use it as a recurring source

I suggest you notice capital gains as a source, maybe even mention it in your write-up. If you don't, the borrower's situation make not make sense and may even be suspicious.

When capital gains is from an installment sale

2011-11-08T22:03:32Z

An installment sale, where the taxpayer will receive payments over time from the sale of an asset, is treated differently in the tax return. The lender needs to spot it to find out:

how much the borrower is receiving each year
if there are balloon payments anticipated that might impact available cashflow
if the borrower is receiving payments as agreed
how much longer the contract/note receivable will create cashflow

First of Two Tax Forms Needed:
Schedule B Interest and Dividend Income.

Click on the image to enlarge.

The interest received from the note or contract receivable will show up on Schedule B, right along with the interest from a credit union or bank. You can usually spot it because the source does not sound like a financial institution. If 'Linda Keith' is listed as a payer, then the borrower likely has a note or contract receivable from me.

The amount showing on the Schedule B is only the interest. So unless I am paying interest-only, it does not show the entire cashflow provided by the note or contract.

Second of Two Tax Forms Needed:
Form 6252 Installment Sales

Click on the image to enlarge.

Check Line 21: Payments received during the year NOT including interest. This is the principal payments received during the year.

Calculate amount received and then what?

You can add the interest income from Schedule B to the Installment Sale principal received from Form 6252 Line 21 to find out how much I paid (and the borrower received) in 2011. That is historical cashflow. If that is what you want, you are done.

If you want recurring cashflow, you still need a copy of the contract. From there you can determine how much longer the borrower will be receiving the payments.

How to spot a red flag:
Compare the contract and the tax return

If you want to know whether your borrower is receiving payments as agreed, compare the terms of the contract to the amount calculated as received from Sch B and the 6252. If they don't give you the same answer you have uncovered a red flag.

Perhaps the payer was not paying as agreed. And if that is the case, you'll have to decide whether to count it going forward even if the contract says there are plenty of years left on the contract.

Capital Gains: Using the portfolio as potential cashflow

2011-10-25T20:17:33Z

What about a track record

To count capital gains activity for recurring cashflow many, if not most, financial institutions will want to see a track record. But not all.

A lesson learned from lenders to High Net Worth/High Income Clients

What if your borrower has a million-dollar portfolio? Does it really matter that s/he has not tapped it in the last few years? In fact, is it a plus that during the recession s/he did not have to tap it?

Here is the way some lenders look at a significant portfolio:

Consider first discounting the portfolio value significantly, perhaps 30% to 50%.
Assume a very conservative rate of return, perhaps 1% to 2%.
Amortize potential liquidation of the portfolio value after discounting over 20 or 30 years.
Include the potential yearly cashflow from portfolio liquidation in your cashflow calculation or as a quantifiable compensating factor.

Guidelines Rule!

Look to your financial institution's guidelines to decide what you can use and how. Often when your guidelines do not allow you to count an income source formally you can still use it in your write-up.

What less traditional sources of income are you using to qualify your borrower in this post-recession environment?

Stock Capital Gains: What to count when it is long-term

2011-10-11T20:40:06Z

First decide if you will count it at all

See this post on 'Lending on Asset Conversion instead of Income'.

Here is the form

Click on the image to zoom.

Beware non-cash entries

Line 12 (2011 Form 1040) is a pass-through from a K-1. It is not cashflow to this borrower, although now you know you'll need to ask for the k-1(s) to find cashflow from them. Or perhaps the full source return (1065 or 1120S) to determine cashflow available from the entity to your borrower/guarantor.

Line 14 (2011 Form 1040) is a carryover. It is a long-term loss from a prior period that was not allowed because they were over the limit for capital losses. You should have counted this loss against them (if at all) when they actually incurred it.

Where is the cashflow if it is Stock?

Well, it is not the gain or loss. Let's say they bought stock in 1995 for $100,000 and sold it in 2011 for $80,000. Gain or loss? How much?

The tax return will properly show a loss of $20,000. But what happened in the checkbook in 2011?

Their cashflow increased by $80,000! So a loss in a 1040 can actually camouflage a real increase in cashflow.

The rest of the story...

But we are missing an essential piece of the puzzle. The taxpayer does not report the purchases of stock on the Schedule D. So in the example above, you can spot the $80,000 in the column for proceeds. But you don't know if they just called up their broker and said: "Sell XYZ stock, take the $80,000 proceeds and by ABC stock."

If you decide to give your borrower/guarantor credit for cashflow from stock transactions you will need to get a copy of their broker's statement to determine the real cash inflow or outflow for the year in question.

What if your guidelines say otherwise?

Lenders in my Tax Return and Financial Statement Analysis workshops hear me say it often: "Guidelines rule". But I also say: "Guidelines are guidelines". You need to know if your guidelines are hard-and-fast rules or a common starting point.

If your guidelines allow you to use a figure from Schedule D, whatever it is and whatever line it comes from, you are making a simplifying assumption. If you need to know their real cashflow from stock transactions the Schedule D just alerts you that there were transactions. The broker's statement will tell the story.

RE Capital Gains: What to count when it is long-term

2011-09-27T19:52:53Z

First decide if you will count it at all

See this post on 'Lending on Asset Conversion instead of Income'.

Here is the form

Click on the image to zoom.

Beware non-cash entries

Where is the cashflow if it is Real Estate?

It is not here. We can see the proceeds in column d (2011 Form 1040) but since we have no way of knowing what the amount of the underlying mortgage or contract was that had to be paid off, we are missing critical information.

If not the tax return, where do we get the essential information?

Use the tax return for the list of what Real Estate was sold. Then request the closing statements so you can determine 'cash to seller'.

The rest of the story...

If you decide to give your borrower/guarantor credit for cash from real estate sales, it is likely you also need to count against him or her the cash invested in new real estate purchases. No where on the tax return does the borrower/guarantor list purchases. That is because, once again, the IRS does not care. But we do.

Look to the borrower's application to see what Real Estate they own. Find the RE acquired in the year in question. Ask for the closing statement and count against cashflow the 'cash from buyer'. Now you'll have a complete picture of the cash in and out from their RE activity.

Capital Gains: What to count when it is short-term

2011-09-13T19:40:51Z

What is short-term and where do I find it?

Schedule D, Part 1 is where you'll find short-term capital gain or loss. This is related to assets held one year or less.

Here is the form

Click on the image to zoom.

Beware of non-cash entries

Line 5 (2010 Form 1040) is a pass-through from a K-1. It is not cashflow to this borrower, although now you know you'll need to ask for the k-1(s) to find cashflow from them. Or perhaps the full source return (1065 or 1120S) to determine cashflow available from the entity to your borrower/guarantor.

Line 6 (2010 Form 1040) is a carryover. It is a short-term loss from a prior period that was not allowed because they were over the limit for capital losses. You should have counted this loss against them (if at all) when they actually incurred it.

Where is the cashflow?

Given the assets are held one year or less, and backing out any non-cash items (see paragraph above), the gain or loss in column f (2010 Form 1040) is also the impact on cashflow.

Should I use it in recurring cashflow?

That is another question altogether. Take a look at this blogpost on 'Lending on Asset Conversion instead of income'.

Lending on Asset Conversion instead of Income

2011-08-30T19:26:46Z

Really? Can you do that?

Check your Guidelines

Well, first, consider that a lender/underwriter can do whatever the financial institution's (FI) guidelines allow assuming they are consistently applied in a legal manner. So if your FI allows you to use asset conversion, you can.

What is the difference?

Asset Conversion

You are counting on the borrower to liquidate assets to service the debt.

Income

You are counting on the borrower to generate income from earnings (or operations if a business) to service the debt.

Is there a preference?

Most lenders prefer to lend on income from earnings (or operations if a business) rather than counting on the prospective borrower to liquidate assets (asset conversion) to make their debt payments on a timely basis.

Wait just a minute!

There are groups of borrowers who absolutely count on asset conversion to service debt, with the blessings of their lenders. This includes retired people for whom, if they did it right, their asset conversion is now their primary source of income. Drawing from IRAs and Pensions is asset conversion. Selling off an accumulated stock portfolio or real estate is asset conversion.

Borrowers who are real estate investors, especially if they have done okay during the recession, are buying (and sometimes rehabbing) and then selling real estate. I know we are all leery of the 'flippers' but some of them did just fine.

My advice:

Consider whether the income from asset conversion is sustainable given the borrowers networth and access to readily converted assets. Your guidelines may allow you to use this in borrower projected cashflow. If not, it may at least be a significant compensating factor.

Do you use asset conversion as cashflow? If so, when and how?

Beware Assumptions: 5,400 feet makes a difference!

2011-08-21T22:09:45Z

I live at sea level but only two hours from Mt. Rainier. We had a very late summer this year, some would say we missed it altogether in the Northwest.

But Friday was a summer day. Warm but breezy. Lots of sun. And late August is a great time to visit Mt. Rainier as the wildflowers pop in profusion.

Right? Not quite.

A late summer at sea level, it turns out, means a late summer on the mountain. The wild flowers are not out yet. And on the Skyline Trail, you cannot even get past Myrtle Falls without traversing some snow.

Don't assume...

If you were to go to the Rainier National Park website to check on trail conditions before heading up to the mountain with athletic shoes instead of climbing boots, and without your climbing poles -- I can't imagine who would do that -- here is what you'd find:

August 17, 2011: Mt. Rainier received a heavy amount of spring snow this year creating hazardous conditions in the backcountry. Subsequently we expect a very late melt-out this summer. Issues to consider are route-finding, creek and river crossings and trail damage. Good navigation skills are needed in these conditions. It is easy to get disoriented and/or lost. There are also steep, icy slopes in numerous locations around the park. Always check with Park Rangers for trail conditions before heading out into the backcountry.

Rather than the anticipated 3 hour hike, with a 1,700 foot elevation gain, we headed up one way, turned back due to snow, tried another, turned back. It was still breathtaking but not what we expected.

And if we plan to see the wildflowers, we need to head back up in a few weeks. I'll check online to see if they have popped before I drive the two hours each way to see them!

Lenders: What assumptions are you making about your borrowers?

About how their business is doing because:

it is 'Back-to-School' season
the recession is over
your other borrower's business is improving

Directors: What assumptions are you making about your financial institution?

About how you are doing because:

management is upbeat
the recession is over
the other directors don't seem as concerned

Check your assumptions by checking in...

For lenders and business bankers, not only is it a great time to visit business borrowers to be sure you have a good sense of how business is going, but it is essential because other business bankers looking to increase market share or re-balance their loan portfolio might just get there first.

And if you are a director? Never stop asking those substantive questions to continue monitoring the health of your financial institution.

What is good enough?

One last thought. Just because conditions are less than what you expect doesn't mean they are not good enough. We had a fantastic day. Be open to what you'll find when you ask the questions you should ask. And then make a fresh assessment of the situation.

S-Corps vs LLCs: A Lender's Perspective on the Differences

2011-07-21T22:37:44Z

S Corporations

A corporation that decides to be taxed under Sub-chapter S of the Internal Revenue Code is an S-Corporation. The Corporation files an 1120S instead of an 1120.

The big difference between a 'regular' corporation and an S Corporation is that the latter is a pass-through entity. Income, deductions, credits all pass through to the shareholder's return, where it is taxed.

Limited Liability Companies (LLCs)

If an LLC has only one owner, it files as if it was not a separate entity at all. If it is a business it will file on Schedule C or F (Farm) in the owner's 1040. If it is a rental, it will be reported on the 1040 Schedule E, just as if the owner of the LLC owned the rental personally.

If there are two or more owners (called members), an LLC actually chooses how it will file. The return-of-choice in my experience is the Form 1065, the same form filed by partnerships.

Similarities:

Both are pass-through entities. Generally, the owners pay taxes on the income or get the tax shelter of the losses. (You'll see CPAs use the word 'generally' when there are some exceptions. Those exceptions are definitely beyond the scope of this blog post!)

Both provide limited liability. Generally, the owners are not personally liable for business obligations. (Yes, you caught that word generally, right?)

Differences:

Generally, the S Corporation shareholder can take some 'pay' as wages and some as distributions. The federal taxes are not impacted but there are no payroll taxes on shareholder distributions. The IRS will challenge it if the shareholder takes all their 'pay' as distributions just to avoid payroll taxes.

There is more flexibility with an LLC in terms of profit-, loss- and owership-percentage. But the LLC owner, if involved in the business more than just an investor, must pay 'payroll taxes' on all the profits.

Too much information?

If that last section was more than you wanted to know, know this. From your perspective as a lender, there is not a lot of difference.

They both have limited liability in most cases, except when they have guaranteed loans.
They both have a k-1 to tell you what they actually took home from the business. (With the S Corporation, the k-1 distributions are in addition to wages.)
In both cases, if the owner owns a high percentage and you are lending to the business, you'll likely want to include the owner/guarantor in your analysis.
In both cases, if the owner owns a high percentage and you are lending to that owner, you'll likely want to include the business in your analysis.

Need more help?

The series at www.LendersOnlineTraining.com on Tax Return Analysis: Business Tax Returns includes 9 eCourses: 3 each on 1120, 1120S and 1065. And the eCourse on Types of Entities can be purchased a la carte or is part of the Financial Statement Analysis set of 9 eCourses. Check them out.

Two ways to grow the Allowance for Loan and Lease Losses (ALLL)

2011-07-05T21:50:15Z

Allowance for Loan and Lease Losses: ALLL

This is often thought of as a reserve, a set-aside for the fact that some borrower is not going to pay. Which borrower? We don't know, otherwise we would not have lent to them.

Going up?

The Allowance increases in one of two ways:

The financial institution recognizes an expense, the Provision for Loan and Lease Losses, to build the Allowance to the 'best guess' required to prepare for loans that will not be collected. This guess is based on a rather complicated, and extensive process of

identifying loans that are at risk (impaired) and determining the likely amount that might be received, and
applying a historical loss rate, modified for today's environment, to the remaining loans on the books.

Recoveries outpace charge-offs. This is the least painful way to build (or rebuild) the allowance and results when the financial institution recovers previously charged-off loans faster than the decision to charge-off other loans.

This may happen when a recession truly turns the corner into recovery and loans perform better than expected.

The impact of an increasing ALLL

If it goes up as a result of booking the expense, the increase reduces profits and the resulting addition to capital for that period. Shareholders may not be as happy, but examiners and auditors likely will be.

If it goes up as a result of improving recoveries, everyone is likely to be happy.

Either way, if the guess as to the ALLL is a good one, the balance sheet more accurately reflects the loans receivable. Anyone trying to understand how well (or not) the bank or credit union is doing should appreciate that.

The ALLL Time Warp: Why getting it done well is getting harder

2011-06-22T04:26:30Z

This article,The Allowance for Loan and Lease Loss Becomes a Heavier Burden for Credit Unions, includes my thoughts on one of the up-and-coming challenges for credit unions and banks in keeping up with the time necessary to review loans for impairment to calculate ALLL accurately at the same time that loan volume is (finally) ticking up.

Read the article...

The issues this article touch on are the very same for community banks.

BTW...I have a strategic partnership with the software company, Sageworks, mentioned in the article. They have a new software solution for ALLL and my clients, readers and subscribers get a significant discount. Let me know if you are interested in a demo and I'll get you the discount!

Interest from a K-1 on Schedule B: Count it or not?

2011-04-18T18:11:06Z

Here is how you end up with Interest from a Schedule K-1 on 1040 Schedule B:

Schedule B includes all taxable income.
Interest income received by an S Corporation or a 1065-filing entity like an LLC or partnership is passed through and taxed to the owner of the company
Thus interest not received by an individual will be listed on Schedule B

This is another example, once again, that taxable income is not necessarily cashflow.

What do you count?

My favorite answer...and if you are a regular reader of my blogs or have attended my training for lenders and underwriters on Tax Return Analysis...you know what is coming! It depends.

My approach

I do not include Schedule K-1 Interest in personal cashflow. The 1040 filer did not receive that cashflow. It does not mean they did not receive ANY cashflow from the company. But if they did, we'll find what they actually received on their K-1.

The K-1 is a schedule of the 1120S or 1065, not the 1040. So you won't have it unless you ask for it.

It still depends

With a lower % owner, of if you only want to consider actual cashflow from the company to the owner/guarantor, obtain the K-1 and cashflow that. Don't know what to use? Time to come to class, take the Business Tax Return Analysis series of nine eCourses at www.LendersOnlineTraining.com, or order the manual.

Okay, you could also do a site-wide search of this site and find the answer. But if you are a lender, underwriter or analyst -- for a bank or credit union or creditor -- and you have that question, you have other important questions that need a more extensive review of tax return analysis.

With a higher % owner who has control over what she takes from the business, you might prefer to use cashflow available from the company instead of what she took the last couple of years. Obtain the full 1120s or 1065, determine company cashflow, and then give her credit for her share. This is where interest income received by the company will come in.

How low is low and how high is high?

Most lenders provide a guideline for determining whether you request only the K-1 or the entire tax return. Residential mortgage lenders often use a 25% threshold. SBA lenders often use a 20% threshold. I've seen as low as 10% and as high as 51%.

Check your guidelines to decide.

Common sense and judgment

Also consider what type of flexibility you are expected to exercise in the area of judgment and common sense. Are your guidelines more 'guide' or more 'lines in the sand'. Even if the borrower owns less than 25%, if you know the underlying company is in trouble should you consider that? I can't tell you the answer but you need to find out.

Two Clues and 5 Surprises in a Business Loan Proposal

2011-04-13T21:53:03Z

I just published the latest eCourse at www.LendersOnlineTraining.com. I know that some small business owners sign up for the Lender's courses to see what the lender wants. This would be a good one!

Here is my short list:

Cover page...sizzle optional
General info including details on source and use of funds
Company info including history and management
Marketing info including brochures, website screen shots, info on market share and competitors
Financial info including projections and recent financials

The eCourse on Loan Proposals can be purchased a la carte or as part of the subscription to the entire eCourse List of over 30 courses. Check out the entire list of online credit courses for lenders.

Clues the lender doesn't want to miss

The extent of the business owners marketing and financial knowledge about their business can either give the lender confidence or give her the willies!
Typos and grammatical errors in the loan proposal may be an inside window into the sloppy way the company does business with their customers

Surprise!

Here are a few surprises a lender might like to see:

Updated loan proposal even if the business lender did not ask
Information previously provided has been updated for newer information
If financial projections are included, what is the thinking behind it?
Independent information that backs the proposal up, such as from the local Economic Development Council
An honest and forthright description of recent challenges in the business, actions taken, results and adjustments.

Give 'em a break

If the loan proposal seems overly thick, give the business owner a break. Some lenders take the 'thud factor' (the sheer weight of the proposal) into account so more pages seems the norm these days. Besides, business borrowers may be nervous with what they've heard about the scarcity of business loans. They may think more is better!

Linda Keith CPA

Why Guaranteed Payments are not Guaranteed

Where do you find guaranteed payments?

What are guaranteed payments?

How guaranteed payments work

What do you as a lender/underwriter do with guaranteed payments?

CAUTION!!!

IRS definition of 'guaranteed':

ALLL and TDRs: How to decide if a loan is a TDR

Two elements

Concession

Financial Difficulty

So what's a financial institution to do?

Resources

Why capital gains count even when they don't!

Why the confusing blog title?

Notice capital gains as a source even if you won't use it as a recurring source

When capital gains is from an installment sale

First of Two Tax Forms Needed: Schedule B Interest and Dividend Income.

Second of Two Tax Forms Needed: Form 6252 Installment Sales

Calculate amount received and then what?

How to spot a red flag: Compare the contract and the tax return

Capital Gains: Using the portfolio as potential cashflow

What about a track record

A lesson learned from lenders to High Net Worth/High Income Clients

Guidelines Rule!

Stock Capital Gains: What to count when it is long-term

First decide if you will count it at all

Here is the form

Beware non-cash entries

Where is the cashflow if it is Stock?

The rest of the story...

What if your guidelines say otherwise?

RE Capital Gains: What to count when it is long-term

First decide if you will count it at all

Here is the form

Beware non-cash entries

Where is the cashflow if it is Real Estate?

If not the tax return, where do we get the essential information?

The rest of the story...

Capital Gains: What to count when it is short-term

What is short-term and where do I find it?

Here is the form

Beware of non-cash entries

Where is the cashflow?

Should I use it in recurring cashflow?

Lending on Asset Conversion instead of Income

Really? Can you do that?

Check your Guidelines

What is the difference?

Asset Conversion

Income

Is there a preference?

Wait just a minute!

My advice:

Beware Assumptions: 5,400 feet makes a difference!

Right? Not quite.

Don't assume...

Lenders: What assumptions are you making about your borrowers?

Directors: What assumptions are you making about your financial institution?

Check your assumptions by checking in...

What is good enough?

S-Corps vs LLCs: A Lender's Perspective on the Differences

S Corporations

Limited Liability Companies (LLCs)

Similarities:

Differences:

Too much information?

Need more help?

Two ways to grow the Allowance for Loan and Lease Losses (ALLL)

Allowance for Loan and Lease Losses: ALLL

Going up?

The impact of an increasing ALLL

The ALLL Time Warp: Why getting it done well is getting harder

Interest from a K-1 on Schedule B: Count it or not?

What do you count?

My approach

It still depends

How low is low and how high is high?

Common sense and judgment

First of Two Tax Forms Needed:
Schedule B Interest and Dividend Income.

Second of Two Tax Forms Needed:
Form 6252 Installment Sales

How to spot a red flag:
Compare the contract and the tax return