Many borrowers do not consider their personal liquidity when seeking financing. With everything that has happened in the real estate market, this could be one mistake that could cost you an approval on your loan.
In order to meet the liquidity requirements lets define what lenders are calling personal liquidity. Most lenders will call anything that can be converted into cash within 3 days as liquid; however, they will pay most attention to verifiable cash on hand and in the bank, stocks/bonds, and other marketable securities. Automobiles, boats, jewelry, etc… is not considered liquid.
If you are considering obtaining financing, it may be worth it to liquidate some other assets that aren’t as liquid and put the cash in the bank. While underwriting guidelines will vary from lender to lender, many lenders want to see the borrower’s personal liquidity at approximately 10% of the loan amount or 12 months of debt service reserves. I have seen lenders approve a loan with as little as 3 months debt service reserves, but those cases are few and far between.
Something else you will want to pay close attention to is pre-funding vs. post-funding liquidity. A sources and uses statement can help you determine what this will be, but it is exactly how it sounds. Pre-funding liquidity is liquid assets in your account before you pay the down payment and loan fees, etc. Post-funding liquidity are your liquid assets after you have made these cash expenditures. Lenders are primarily looking at your post-funding liquidity to confirm that you have adequate liquid assets in case of a downturn in your business or a tenant stops paying rent or vacates.
Many borrowers do not give proper consideration to personal liquidity and I have seen many loans declined solely on the basis of inadequate personal liquidity. If you are low on liquid assets and need commercial financing, it would be wise to consider liquidating some other assets or possibly even borrowing money from family. If you decide to do the later, you will need to know that banks and lenders frown on this. They will collect bank statements and if they see two months with low cash reserves and then a jump in the most recent bank statement, many times they will not count the increase. If you have had the cash in your accounts for 3 months or longer, many lenders will accept it because they are not seeing the large fluctuations in cash.
Personal liquidity is just as important to a lender as net worth. If you take time to get your personal liquidity in order, you will find a smoother and quicker approval process and the lender will not come back looking for more information to prove you are a good credit risk.