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Presented by:. Borrowing to Fund Business Growth. Ken Rosenberg, Vice President Jamila Braithwaite, Vice President. Capital One Bank. Today, 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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Presented by: Borrowing to Fund Business Growth Ken Rosenberg, Vice President Jamila Braithwaite, Vice President
Capital One Bank Today, 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
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
Cash Flow Is the Gas in the Engine That Powers an Entity’s Growth $ $ $ $ $ $ Business growth funded by external sources of capital Business growth funded by operating cash flow External sources of capital often accelerate and support growth
Matching Offerings to the Needs of the Business TYPES & KEY ASPECTSOF FINANCING
Optimizing the Chances of a Desired Outcome KEYS TO SUCCESSFUL BORROWING
5 Cs of Credit • Does the borrower demonstrate a commitment to honor his or her transactions and keep promises even under adverse circumstances? Character • 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? Capacity • 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? Conditions • Does the company have sufficient net worth to absorb normal business risk? Capital • 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? Collateral
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.
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.
The Loan Application • Ensure that the loan application is complete and accurate • Core loan application information often includes: • Historical business financial information (2 years) • Business and owner’s personal tax returns (2 Years) • Personal Financial Statement • 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
Guarantor Support & Collateral/Security - Questions to Consider
The Importance of Metrics in the Application Process KEY RATIOS & RELATED GUIDELINES
Key Ratios 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)
Total Sources of Cash Net profit (loss) Depreciation & amortization Interest expense Other (i.e., rent expense if swapping rental for ownership) Business Debt Service Coverage Ratio Cash Flow Debt Service • Total Debt Service (interest & principal; existing debt plus requested amount) • Mortgage • Auto loans/leases • Term loans • Lines of credit 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
Total Liabilities Liabilities minus subordinated debt Business Leverage Ratio Total Liabilities Equity + Subordinated Debt • Equity • Equity plus 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
Total Sources of Income Wages, salaries, etc. Interest & dividends Pensions & annuities Rental income Other Personal Debt to Income Ratio Personal Debt Personal Income • 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 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
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)
