How to Become A Bankable Business

Helping Businesses

Grow & Succeed

Presented by Ray Juncosa, Florida SBDC at FIU

State Designated as Florida’s Principal Provider of Business Assistance [§ 288.001, Fla. Stat.]

Helping Businesses Grow & Succeed

WHERE DOES OUR STORY BEGIN?

Helping Businesses Grow & Succeed

BEGIN BY UNDERSTANDING HOW LENDERS EVALUATE BORROWERS

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THE 5 C’S OF CREDIT

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1. CHARACTER. The first of the 5 C’s – and the most important

Helping Businesses Grow & Succeed

YOUR CREDIT SCORE. What it means. Work on improving it.

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FICO. FAIR ISAAC COMPANYCREDIT SCORING

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THE CREDIT BUREAUS

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WHERE ARE YOU ON THE CREDIT SCORE SPECTRUM?

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BANKS ARE CREATING SCORES WITH MORE STRINGENT REQUIREMENTS

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TAKE ACTION TO REPAIR CREDIT

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WHAT CREDIT SCORE RANGES TO TARGET FOR?

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2. CAPACITYYour ability to repay a loan

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CAPACITY EVALUATION IS A PURELY QUANTATATIVE PROCESS

UNIVERSAL CASH

FLOW & LEVEL

OF

INDEBTEDNESS

COMPANY

PERSONAL

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WHAT ARE THE KEY AREAS THAT BANKS WANT TO EVALUATE ?

CREDIT

ANALYSIS

LIQUIDITY

INDEBTEDNESS

PROFITABILITY

EFFICIENCY

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LIQUIDITY: Ability to meet short-term obligations with short-term assets

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SOLVENCY: Level of indebtedness & financial management

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UNDERSTANDING THE DEBT SERVICE COVERAGE RATIO

ØBanks use the DSCR as a way to weed out undesirable loans due to high level of debt.– The ratio simply states that an acceptable

DSCR is 1.25– Or, for every dollar you spend, you should

produce $1.25

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UNDERSTANDING THE DEBT SERVICE COVERAGE RATIO

ØThis is where higher cash flows and profitability come in.

• 1.25 DSCR is the typical entry level at all banks. Anything lower will keep you out of the game.

• As the risk on the lending activity grows, so does the required (higher) DSCR.

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PROFITABILITY: Reflects company’s success in generating profits

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TYPICAL CHALLENGES WITH SMALL BUSINESSES

ØLack of knowledge regarding operating margins & profitability.

ØNot understanding how to do a breakeven analysis to adequately price products or services.

ØPoor management of working capital cycle is often the demise of small businesses

Helping Businesses Grow & Succeed

TYPICAL CHALLENGES WITH SMALL BUSINESSES

ØNot understanding the 3 key statements: Balance Sheet; Profit & Loss; and Cash Flow Statements.

• The above are the financial language of bankers and what they use to evaluate your company.

• Your statements will tell the story on the course of your business and its overall performance.

Helping Businesses Grow & Succeed

EFFICIENCY: How a company manages its cash conversion cycle. The shorter the cycle, the better.

Helping Businesses Grow & Succeed

A FEW QUICK POINTS ABOUT CARRYING RECEIVABLES

ØBanks often offer lines of credit secured by your receivables• These receivables are often short term in

nature and a current asset of the company that can be used as collateral

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A FEW QUICK POINTS ABOUT CARRYING RECEIVABLES

ØHowever, these receivables are often carved down by required limit on term, level of delinquency, and risk concentration of customers

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A FEW QUICK POINTS ABOUT CARRYING RECEIVABLES

ØSo, that very large customer who buys and pays on time and you value so much – if he or she make up more than 15-20% of your portfolio, they are not included.

Helping Businesses Grow & Succeed

WITHOUT A QUANTITATIVE ANALYSIS OF ALL KEY AREAS OF A BUSINESS, BANKS CANNOT EXTEND LOANS

LEVEL OF

INDEBTEDNESS

GOOD CREDIT

SCORES

STRONG &

SUSTAINABLE CASH FLOWS

STRONG

PROFITABILITY

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3. COLLATERAL. A secondary source of repayment

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THE BENEFITS OF SECURED LENDING

SECURED

LENDING

RATES

TERMS

NEW

CO.

LOW

SCORE

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COLLATERAL DOESN’T MAKE A BAD LOAN GOOD …

ØIn today’s environment, bankers are more cash flow sensitive than asset sensitive.

ØCollateral can be difficult to manage in a default scenario

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… BUT A GOOD LOAN BETTER

ØThe financial crisis of 2008 was a testament to this fact.

ØManaging REOs are expensive and almost always sold at a discount.

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4) CONDITION. Evaluates the industry of borrower’s business & its external

factors

MATURITY

REGULATION

INDUSTRY

BARRIERS

OF ENTRY

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5) CAPITAL. This is your skin in the game; your equity in the business

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HOW DO YOU CALCULATE YOUR CAPITAL ?

Assets – Liabilities = Owners Equity

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HOW TO PREPARE TO MAKE YOUR COMPANY BANKABLE

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TO BECOME BANKABLE, UNDERSTAND WHAT BANKS LOOK FOR

KEEP YOUR CREDIT SCORE AT

A REASONABLE LEVEL 670+

REASONABLE LEVEL OF

INDEBTEDNESS (DEBT SERVICE COVERAGE OF 1.25

AND ABOVE)

EFFICIENTLY MANAGE

WORKING CAPITAL CYCLE; AVOID TOO MUCH

INVENTORY OR TOO MUCH

IN CREDIT SALES ( A/R)

UNDERSTAND YOUR

PERFORMANCE MARGINS & OVERALL FINANCIAL

PERFORMANCE

MAINTAIN AN ADEQUATE

LEVEL OF CAPITAL THROUGH RETAINED EARNINGS OR

CAPITAL INFUSIONS

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KEEP TAXES UP TO DATE & CURRENT YEAR FINANCIAL STATEMENTS ON

ACCOUNTING SOFTWARE

ØLender’s loan process require last two years tax returns and current financial statements

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ACCOUNTING SOFTWARE

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ALL LENDERS’ LOAN PROCESS REQUIRE LAST 2 YEARS TAX RETURN & CURRENT FINANCIAL STATEMENTS

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EMBRACE & UNDERSTAND FINANCIAL STATEMENTS TO BETTER UNDERSTAND

YOUR COMPANY’S PERFORMANCE

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THE BALANCE SHEET

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THE INCOME STATEMENTALSO CALLED P & L

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THE CASH FLOW STATEMENT

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THE BREAKEVEN ANALYSIS

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COMPONENTS YOU WILL NEED

FIXED

EXPENSES•OVERHEAD

VARIABLE

EXPENSES

•COST OF

GOODS

SOLD

CONTRIBUTION

MARGIN

• MONEY LEFT

OVER TO COVER

OVERHEAD

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VARIABLE EXPENSES AND COST OF GOODS SOLD

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FIXED EXPENSES

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USE YOUR CAPITAL STRUCTURE ADEQUATELY TO STRENGTHEN

FINANCIAL POSITION

CAPITAL

STRUCTURE

SWAP

EQUITY FOR DEBT

RESTRUCTURE

DEBT

SWAP SHORT

TERM FOR

LONGTERM

DEBT

REFINANCE

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CAPITAL STRUCTURE: Made of equity & debt / Your funding sources

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FINAL RECOMMENDATIONS

KEEP TRACK OF YOUR

CREDIT SCORE AND

SEEK CREDIT REPAIR

WHENEVER NEEDED

TAKE A COURSE IN

FINANCIAL

STATEMENTS AND

BREAKEVEN ANALYSIS

LEARN TO BETTER

MANAGE YOUR CASH

CONVERSION CYCLE

MANAGE YOUR DEBT

RESPONSIBLY

UNDERSTAND YOUR

PROFIT MARGINS TO

BETTER MANAGE YOUR

PROFITABILITY

Helping Businesses Grow & Succeed

Helping Businesses Grow & Succeed

SBDC.FIU.EDU