Transcript LCPA Training Package - Washington, DC Economic Partnership

Lending: From A Banker’s Viewpoint
Presented by: Jamila Braithwaite
Sources of Repayment
Guarantor
Support
Cash Flow
from
Operations
Collateral /
Security
Banks
typically rely
on three main
sources of
repayment
2
5 C’s of Credit
Character
Capacity
Conditions
Capital
Collateral
• Does the borrower demonstrate a commitment to honor his or her
transactions and keep promises even under adverse
circumstances?
• Does the business demonstrate the capacity to apply the loan
funds? Does management have a business plan? Are plant and
equipment sufficient? Are marketing and product delivery well
developed?
• What are economic and market conditions that could impair the
company’s ability to service the debt and repay the loan? Does the
company recognize these risks and have plans to mitigate them?
• Does the company have sufficient net worth to absorb normal
business risk?
• Is the collateral sufficient as a tertiary source of repayment? If the
collateral must be liquidated, is the realizable value enough to repay
principal, outstanding interest and cover the bank’s administrative
costs of liquidation?
3
The Loan Application
• Ensure that the loan application is complete and accurate
• Core bank loan application information often includes:
o Historical business financial information (2 years)
o Business and owner’s personal tax returns (2 Years)
o Personal Financial Statement
o Interim financial statements of the business and its owner for
the current & prior year, along with accounts receivable and
payable aging reports
• Alternative (micro) loan application is similar, but often allows
some flexibility – ask questions!
4
Underwriting Pillars
Financial Condition
Industry Dynamics
• A company’s financial
condition determines
the borrower’s ability
to generate enough
cash to repay the debt
• Analysis of the
industry focuses on
the particular industry
of the borrower and
the borrower’s
position within the
industry
• Three items in
particular are
evaluated:
• Cash Flow
• Liquidity
• Leverage
• Weaknesses in the
industry foundation
can negatively impact
a borrowers ability to
repay
5
Management
Quality
• It is necessary to
determine the
competence and
integrity of key
individuals running a
company
• A weak management
team not only
endangers the
second source of
repayment, but
opens the doors for
additional problems
Collateral / Security
• The bank will
determine the realistic
level of control over
any collateral pledged,
including its likely
liquidation value or
net present value
• Inability to realize or
“call” collateral
threatens the third
source of repayment
Underwriting Pillar – Financial Conditions
Financial Conditions
Profitability
• Indicates operating success, growth
potential, and competitive position
Liquidity
• Determines the company’s ability
to meet obligations
–
–
–
–
–
Cash
operating expenses
debt service
supplies
credit
6
Leverage
• Determines the degree of financial
risk and ability to absorb business
risk
• Sign of the owner’s commitment to
the business as excess leverage is
often a key cause of failing
businesses
Underwriting Pillar – Deeper Dive on Financial Condition
Important to
Remember
Provides a better
understanding as
to how much
excess income the
company will
generate and the
factors that
influence income
EBIDA Debt Service
Coverage (EDSC)
• Cash flow
Profitability
&
Cash Flow
• Determine trends
(revenue/expense)
• Industry comparison
(profitability, leverage,
etc)
• Owner’s salaries /
bonuses / dividend
payments
Calculation:
(Net income + interest expense + depreciation
+ amortization) / (Current portion long term
debt (prior period) + Interest Expenses)
7
Underwriting Pillar – Deeper Dive on Financial Condition
Important to
Remember
The ability to
quickly convert the
company’s assets
into cash
• Evaluate integrity of
creditor support
(adequate asset
protection for liabilities)
Liquidity
• Evaluate current asset
quality and aging of
receivables (A/R > 90)
• Assess shareholder’s
support, willingness to
guarantee / inject
additional capital
8
Underwriting Pillar – Deeper Dive on Financial Condition
Important to Remember:
• Evaluate capital
Comparison of
borrowed capital to
owner’s investment to
determine risk of
lenders if the company
fails
• Assess creditor / shareholder
support
• 1:1 is good
• 3:1 is guideline
Leverage
• Have to consider officer loans (to
& from) and intangibles
• Negative impact of treasury
stock
• Consolidating statements and
evaluate receivables and
payables to related companies
Leverage
Calculation:
(Total liabilities – Subordinated debt) / (Equity +
Subordinated debt)
9
Underwriting Pillar – Industry Dynamics
Industry Dynamics
Restricted
• Adult
• Casinos
• Check Cashers
• Speculative
• Lenders
High Risk
• Start-ups
• Restaurants
• Contractors
• Firearms
• Pawn Shops
Desired
• Professional
• Manufacturing
• Wholesale
• Service
Thank you for attending…