Garry Bartecki Are you prepared to talk MTM to your banker?
Hey, let’s talk MTM, otherwise, known as Mark to Market. You will soon become very familiar with this phrase. Especially if you are renewing your banking arrangements or are looking for a new loan or loans for 23 and beyond.
How about we see if your banker has a sense of humor? When he/she asks for your latest Balance Sheet, how about your ask to see the bank’s Balance Sheet to see if they are liquid and will be able to process your payroll when it comes due? But if you are in serious negotiations with the bank you may want to skip this idea.
A number of banks are worried about what is going on in the banking arena. Thus, they will take steps to increase their liquidity which in turn reduces any incentive they have to make loans. NOT GOOD FOR YOU if you have not finalized your arrangements for this year.
This is where MTM comes into play because banks will scrutinize the individual categories on your balance sheet to determine whether they are valid, correctly accounted for, and properly valued. Gee, that sounds like what they were doing regarding SVB. They may even ask you to have an audit performed by an agreed-upon accounting firm, hopefully, one that understands your business. They may also ask for annual equipment valuations encompassing both used equipment as well as rental assets. Do not be surprised if they ask for both orderly liquidation values (OLV) and forced liquidation values (FLV).
They need these values to mark your assets to market. Which in turn is processed as part of their MTM calculation. And you can imagine how difficult the process can be with the past as well as current used values increasing because of a standard demand/supply situation. If you were in the banker’s shoes, how would you value used equipment as well as recently purchased rental units in terms of loan collateral? I find the answer to this question perplexing. Think about it.
Let’s consider some assumptions.
- Cost of a unit five years ago at $20,000
- The cost of the new unit is currently at $26000 to $28,000
- Book value of the five-year-old unit. $6,000
- The current auction price is $10,000
- New EV units coming into market……$30,000
This is a rough idea of what is going on with all types of business equipment. The point is that used prices and demand/supply force prices higher. Lack of new units forces used prices higher. EV units are more costly than current units. Put this all into a blender and I would hate to be the banker required to provide MTM numbers for these units, especially if their loan portfolio stretches over 5-6 years, which is probable in an industry that supplies both short and long-term rental activity.
If I were the banker I would be saying. …..here is a used unit that was probably worth $6,000 a few years ago which is now selling for $10,000. What will it be worth (OLV or FLV) five years from now? What if we enter a recession? What if inflation cools or deflation takes hold because of a recession? How much of the inflated costs will stick if there is a recession? If I could build that new machine in 2024 or 2025 for using costs for materials with a cost close to what they were the year before the pandemic hit, what would the value be assuming the labor costs would stick? Would the increase in the used units remain higher than it would have been if the pandemic and related demand/supply issues did not materialize?
In the end, the banker is interested in collateral value he can use as a market. What is that market today and what will it be like four or five years from now? He/she will err on the conservative side which means lower collateral value and thus fewer assets to use to make loans. I guess the annual equipment valuations will eventually smooth out and stage the used units by age and hours which will be lower than what you would have to pay for the unit today. Make sense?
In the end, it will be tougher when it comes to negotiating with the bank this year. Remember it will be LONGER and HIGHER for some time which translates into higher interest rates for maybe years to come. And that BALANCE SHEET management I keep harping about will provide what the bank needs to support your loans or it will not. I would do my homework regarding the market of the collateral you are providing and how that collateral will provide liquidity as the loan is amortized.
This will be a very crazy year. Do your homework and be prepared to show your historical GP margins from used equipment sales including the used rental units as well.
One last issue to discuss. It pertains to the commercials about the ERC credits available to companies that qualify. If you did not receive any ERC money to date and you qualified for it, somebody screwed up. But if you didn’t qualify, then nobody screwed up. So, before you sign up with a third-party ERC consultant make absolutely sure you qualify for the funds. I would take the docs to either an independent accounting or law firm familiar with this program.
Because
- There is a lot of money involved
- It is taxable
- The consultants take a hefty fee
The IRS will audit these transactions and you may have to pay it back if they find you are not entitled to the payment. You do not want to be in this position.
About the Columnist:
Garry Bartecki is a CPA MBA with GB Financial Services LLC and a Wholesaler columnist since August 1993. E-mail [email protected] to contact Garry.
