Post on 30-Jan-2015
description
Preparing Your Company Preparing Your Company for the Next Level – for the Next Level –
Obtaining Bank FinancingObtaining Bank FinancingRobert LemaireVicky Richards
David Poillucci, CPAJesse Nash, Esq.
The material provided herein is for informational purposes only and is not intended as legal advice or
counsel.
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Please help yourself to food and drinksPlease let us know if the room temperature is too hot or coldBathrooms are located past the reception desk on the rightPlease turn OFF your cell phonesPlease complete and return surveys at the end of the seminar
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CBG Banking Division Cultivating a Relationship with a BankCultivating a Relationship with a Bank
Chose for the right reasons Integrity Professionalism Creativity
Have proper documentation available Corporate tax return for the past 3 years Personal tax returns for the past 3 years Financial statements for the past 3 years
(prepared by CPA) Business plan or executive summary Projected future performance Aged receivables
Build and nurture a relationship with your banker Meet with them at least twice a year Participate in social functions and community events hosted by your bank
Preparing your business (Thunder / Wonder / Blunder) Invest in a quality information and accounting system Invest the in right people to build your management team
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CBG Banking Division What Bankers are Looking ForWhat Bankers are Looking For
The 5 C’s of Credit
Character – refers to the borrower’s reputation
Capacity – measures a borrower’s ability to repay a loan by comparing income against recurring debts
Capital – a lender will consider any capital the borrower puts towards a potential investment because a large contribution by the borrower will lessen the
chance of default
Collateral – property or large assets helps to secure the loan
Conditions – interest rate and amount of principle will influence the lender’s desire to finance the borrower
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CBG Banking Division Typical Mistakes to avoidTypical Mistakes to avoid
5 D’s of Credit Divorce Drinking Drugs Dames Disingenuous activates > gambling
Top 3 Reasons You are Declined by a Lender Customer concentration Leverage Poor information systems resulting in bad or slow decision
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CBG Banking Division Description of Typical ProductsDescription of Typical Products
Deposit (Liability) Accounts / Cash Management Checking Money Market Remote Check Deposit (RCD) Investments Fraud Protection Lockbox
Loan (Asset) Accounts Commercial Mortgage Owner Occupied Mortgage Term Loans Line of Credit / Borrowing Base SBA
Trade / Foreign Exchange Import L/C’s FX - Spot and Forwards EXIM Bank Foreign A/R – Credit Insurance
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CBG Banking Division Description of Credit Review ProcessDescription of Credit Review Process
Important Financial Ratios
Debt Service (EBITDA - Cash Taxes – Distributions – Unfinanced Capital Expenditures) / (Current Maturities
of Long-Term Debt & Capital Leases plus Interest Expense)
Leverage Total Unsubordinated Liabilities / Tangible Net Worth
Current Ratio Current Assets / Current Liabilities
A/R and A/P Turnover A/R = (Net Accounts Receivables / Net Sales) x 365 A/P = (Accounts Payable / Cost of Goods Sold) x 365
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Assessing Your Company’s Borrowing Needs
Vicky Richards
The Alternative Board
White Eagle Partners
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Short Term Versus Long Term Funding
Short term funding fills the gap in daily cash flow – the goal is to provide liquidity for short term bumps that will pay off within a year. Examples:
– Receivable cycle longer than payable cycle– Seasonal inventory build– Payroll spikes– One time or quarterly payments
Long term funding is used to fund expenditures that will contribute to company growth and cash flow over time (equipment, acquisitions, new product development, real estate) OR to term out short term debt that isn’t paying down as projected; the goal is to optimize cash flow by spreading the debt service out over time
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Short Term Debt
Standard Options available to small businesses:– Line of Credit, Swing line, Purchasing card, Factoring
How Much Should You Have:– Review monthly cash flow history - chart the peaks and valleys – Analyze trends - Is your cash flow seasonal? Do you have specific
times during the year when working capital is building, draining cash? – Think about the changes over the next 12 months – are there any
changes in customer or vendor payment patterns? Any quarterly or annual payments that need to be accommodated?
– Size the line above the historic peaks, with margin for growth and accounting for anticipated changes in A/R patterns and unusual A/P
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Short Term Debt
What You Should Know:– Maturity: typically a 1 year maturity and MAY be due on demand– Potential Requirements/Covenants which you MUST comply with
to keep your line : Reporting Financial Restrictive Annual Clean Down
– Collateral: Blanket lien, personal guaranty – Borrowing base: not typical to average LOC
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Short Term Debt
What You Should Know:– Tools needed: 12 Month rolling cash flow forecast - in some ways
more important than a budget
– When to call the Bank: Relationship Maintenance/development Rollover Increase Problem
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Short Term Debt
Best Practices– Have a line in place – even if you think you don’t need it– Use it a few times a year – even if you think you can get by without it– Keep track of your seasonal peaks and valleys; know what your
cash flow cycle should look like. When it varies, find the source– Anticipate the need for an increase well in advance and pursue the
increase with 4-6 months lead time; ideally at the rollover– Meet with your banker (and the underwriter if possible) 2-4 times a
year and provide them with a holistic update on the company– Have your accountant help you prepare for the meeting and attend
at least once a year– Document your borrowing needs/projected repayment for the bank – Know what your covenants are and DO NOT violate them
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Long Term Debt
Standard Options available to small businesses:– Term Loan, Multi-year revolving credit, Mortgage, Lease, Seller
Paper/Earn Outs How Much Should You Have:
– Tied to underlying use of funds and measured against net worth and/or cash flow (leverage ratio)
– Size the funding and the repayment terms to the company’s projected cash flow over a 3-5 year period (for non-mortgage debt). If the company can’t service and repay the debt within 5 years, and still maintain all necessary investments, then equity is probably needed
Advance planning for your long term debt needs is an integral part of the Overall, multi-year, business planning process. You should not do one without the other.
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Long Term Debt
What You Should Know:– Maturity: Multi-year; 3-5 years for non-mortgage debt– Potential Requirements/Covenants, which you MUST comply with
to maintain funding: Reporting Financial Restrictive
– Borrowing Base: Typical for multi year LOC– Collateral: Typical for term loan – Relationship to short term debt: cross-default, cross-collateral– Tools Needed: 12 month rolling cash flow, 3 year strategic plan with
three year forecast and detailed assumptions, including debt service
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Long Term Debt
Best Practices:– If you have a good rate, your business is growing, and there are a few
good options for additional investment, do not pre-pay your term debt– Assemble a knowledgeable project team to develop the forecast and
to assist in the long term financing process – accountant, experienced attorney, controller, and key operations employee for bank meetings
– Meet with your banker (and the underwriter if possible) 1-2 times a year, with your accountant, and provide them with a holistic update on the company
– Be conversant on the company’s performance versus the projections you gave to the bank when you took on the long term debt
– Do not skip the planning process when making decisions about how much and what type of debt to take on
– Under promise and over deliver
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General Best Practices For Using External Funding
Cultivate relationships within your bank; don’t wait until you need it When you approach the bank for new money, an extension or
covenant relief:– Do your homework first; run the numbers, know the numbers, be
knowledgeable and articulate about all aspects of your business and about the request on the table
– Assemble and fully engage a good project team– Seek feedback and input from peers
Engage in the planning process annually:– Helps you to position your business for growth and success– Assures that you look at the fully loaded cost-benefit analysis before making a
commitment to action– Allows you to size your credit needs appropriately
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Key Elements of a Loan Request
Clear, concise, quantitative calculation of: Use of requested funds – all expenditures related to the proposed investment Historic (3 years back) free cash flow available for debt service, after
maintenance cap/ex (with supporting documentation) Projected (3 years forward) free cash flow available for debt service, after
maintenance cap/ex AND proposed investment/expenditure
Qualitative assessment/description of company strengths, weaknesses, infrastructure, market/competitive position and growth strategy, management bio’s
Financial statements, tax returns, disclosures Demonstrated ability to comply with key loan terms Track Record
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Case Study Examples
See Hand Out
Don’t Forget to Schedule Your 2011 Planning Session!!!
Preparing Your Company for Preparing Your Company for the Next Level – Obtaining Bank the Next Level – Obtaining Bank
Financing: Financing: The Legal PerspectiveThe Legal Perspective
Jesse P. Nash, Esq.
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A Few Common Pitfalls to A Few Common Pitfalls to Avoid Avoid
Invest preemptively in the Legal Infrastructure of your Company:– Keep entity documents current and in
order– Customer Contracts– Vendor Contracts– Key Employees– Employee Handbook
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• The Lender will assume your Company’s affairs are in order when issuing its commitment. You do not want to surprise them.
• Address outstanding judgments, liens and litigation head on.
• Keep accurate, completeand up to date corporate books and other entity documents.
Anticipate and Prepare for Anticipate and Prepare for the Lender’s Underwriting the Lender’s Underwriting
ConcernsConcerns
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Understand the role of your lawyer:•The loan documents are legal
documents with legal implications.•Legal issues vs. business issues. •Work with your attorney to manage
the functions he or she performs.
The Legal Opinion
Don’t Go It AloneDon’t Go It AloneThe importance of using competent The importance of using competent
professionalsprofessionals
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• The Commitment Phase is when the basic deal points are fixed. It is difficult to argue to the contrary later in the process.
• Its important to understand from the outset the operational impacts of key business points.
• Use your leverage wisely.• Shop the term sheet around.
Negotiate the Loan at the Negotiate the Loan at the Commitment PhaseCommitment Phase
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A well-drafted loan agreement will cover three main sets of terms: 1. Conditions of closing2. Covenants to apply post closing3. Events of Default/Bank
Remedies
Understand the Impact of Understand the Impact of Key Loan Document Key Loan Document
ProvisionsProvisions
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Get the Bank’s Perspective Get the Bank’s Perspective on the Pre-closing Processon the Pre-closing Process
With respect to: •Timing•Cost•Approach to Lawyering
Question & Answer Question & Answer SessionSession
Thank you for coming!