Borrowing to Fund Business Borrowing to Fund Business GrowthGrowth
Presented by:
Ken Rosenberg, Vice President
Jamila Braithwaite, Vice President
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Capital One BankToday, Capital One Bank is one of the top 10 banks in the country, with a network of more than 1,000 branch locations across NY, NJ, CT, TX, LA, DC, MA and VA
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Objectives
• Identify and explain key aspects of debt financing• Understand the key elements of successful
borrowing• Discuss the key aspects of evaluating a
company’s creditworthiness• Review financial ratios
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Growth: The Increasing Demands for Cash
Cash Flow Is the Gas in the Engine That Powers an Entity’s Growth
External sources of capital often accelerate and support growth
Business growth funded by operating cash flow
Business growth funded by external sources of
capital
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Primary Sources of External Capital
TYPES & KEY ASPECTSOF FINANCING
Matching Offerings to the Needs of the Business
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Debt Financing Options
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Debt Financing Options
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Debt Financing Options - continued
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Debt Financing Options - continued
KEYS TO SUCCESSFUL BORROWING
Optimizing the Chances of a Desired Outcome
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5 Cs of Credit
CharacterCharacter
• Is the collateral sufficient as a secondary source of repayment? If the collateral must be liquidated, is the realizable value enough to repay principal and outstanding interest, and cover the bank’s administrative costs of liquidation?
• What are the 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 borrower demonstrate a commitment to honor his or her transactions and keep promises even under adverse circumstances?
CapacityCapacity
ConditionsConditions
CapitalCapital
CollateralCollateral
• Does the business demonstrate the capacity to apply the loan funds? Does management have a business plan? Are the plant and equipment sufficient? Are marketing
and product delivery well developed?
• Does the company have sufficient net worth to absorb
normal business risk?
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Be Prepared
• Evaluate your business by considering the following:• Strengths and opportunities• Weaknesses and challenges• Current financial situation and needs going
forward; be realistic and try to avoid subsequent unplanned credit request that can jeopardize credit standing and overall relationship
• Develop information that can be shared with prospective lenders.
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Build an Effective Dialogue
• Build an open and honest dialogue:• Provide an understanding of the company’s current state
and vision for the future • Discuss key objectives, acknowledging key risks and
related remediation plans• Gain an understanding of the lender’s loan products or
alternative solutions and related requirements
Start early: It usually takes one meeting to get the best borrowing solution.
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The Loan Application
• Ensure that the loan application is complete and accurate• Core 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 Statemento Interim financial statements of the business and its
owner for the current & prior year, along with accounts receivable and payable aging reports
Maintain open, balanced and responsive communication throughout the process
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Sources of Repayment
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Cash Flow From Operations - Questions to Consider
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Guarantor Support & Collateral/Security - Questions to Consider
KEY RATIOS & RELATED GUIDELINES
The Importance of Metrics in the Application Process
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Lenders typically look at ratios, focusing on the sufficiency of cash flow to fund debt service as well as the overall level of debt relative to invested capital (equity)
Key Ratios
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• Total Sources of Cash• Net profit (loss)• Depreciation & amortization• Interest expense• Other (i.e., rent expense
if swapping rental for ownership)
• Total Debt Service (interest & principal; existing debt plus requested amount)
• Mortgage• Auto loans/leases• Term loans• Lines of credit
Business Debt Service Coverage Ratio
Cash Flow Debt Service
Business Debt Service Coverage Ratio is a measurement of an entity's ability to produce cash to cover its debt payments; a higher ratio suggests
the business is better able to fund additional debt obligations
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• Total Liabilities• Liabilities minus
subordinated debt
• Equity• Equity plus
subordinated debt
Business Leverage Ratio
Total Liabilities Equity + Subordinated Debt
Business Leverage Ratio is an indicator of the level of investments made by the business owner(s) versus lenders; a lower ratio
generally indicates lower level of default risk
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• Total Sources of Income• Wages, salaries, etc.• Interest & dividends• Pensions & annuities• Rental income• Other
• Total Debt Service (interest & principal)
• Mortgage• Auto loans/leases• Notes payable/term loans• Lines of credit & revolving
charge obligations• Other debt
Personal Debt to Income Ratio
Personal Debt Personal Income
Personal Debt to Income Ratio is a measurement of the sufficiency of an individual's ability to fund its existing debt payments; a lower ratio
suggests the individual is better able to fund additional debt obligations
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Ratio Guidelines
• Thresholds for ratios vary by lender; the nature, type and amount of financing requested; the level of collateral/security provided; and the industry of the applicant. Typical minimum levels are:
Note: An applicant’s low Personal Debt to Income ratio may be taken into consideration when considering business-related ratios (Debt Service & Leverage)
Thank you for attending
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