1 / 21

Governor’s Housing Conference Creating & Financing New Business

Governor’s Housing Conference Creating & Financing New Business. September 27, 2013. 6 C’s of Credit Evaluation. Character Capacity (cash flow) Capital Collateral Conditions Common Sense. Character (Personal Credit).

eliot
Download Presentation

Governor’s Housing Conference Creating & Financing New Business

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Governor’s Housing Conference Creating & Financing New Business September 27, 2013

  2. 6 C’s of Credit Evaluation • Character • Capacity (cash flow) • Capital • Collateral • Conditions • Common Sense

  3. Character (Personal Credit) • Integrity of the borrower • Personal payment history • Willingness to repay.

  4. Character (Personal Credit) Con’t. • Fair Isaac Corp. (FICO) is the company that originally developed the credit scoring methodology we use today. • On the next slide below are the financial behaviors and related factors along with the percentage weighting that each contributes to an overall credit score

  5. FICO • 35% - An individual's history of making credit payments on time • 30% - The total amount of debt being carried along with available credit • 15 % - The age of an individual's open credit lines (more history is better) • 10% - The frequency with which someone applies for new credit • 10% - Wild card factors such as the types of credit lines

  6. Capacity (Cashflow) • Borrower’s ability to repay loan • Debt to equity(leverage) ratio • Net excess (cash reserve)

  7. Conditions • Macro and micro economic environment • Industry conditions & trends • Owners experience and length of time in industry

  8. Conditions, Con’t. Porter’s 5 Forces • “3 forces” from “horizontal” competition: • Threat of substitute products • Threat of established rivals • Threat of new entrants • “2 forces” from “vertical” competition: • The bargaining power of suppliers • The bargaining power of customers.

  9. Porter’s 5 Forces

  10. Collateral • Secondary source of repayment • Commercial or residential property…..(with unencumbered equity) • Business assets (i.e.: account receivables, inventory, FF&E) • Cash value life insurance or marketable securities

  11. Collateral, Con’t. • Example: Commercial or Residential Property • Market Value of Property = $1,000,000 • 80% of Market value = $800,000 • Current Mort. Balance = $500,000 • Available for Collateral = $300,000

  12. Collateral, Con’t. • Account receivables aging less than 90 days – 50 to 80% advance rate. • Business assets (i.e.: office equipment, vehicles, and inventory) – 20 to 60% advance rate.

  13. Matching Capital to the Corporate Life Cycle Rejuvenation High Stagnation Early Stage Company Decline Sales Maximum Opportunity Low Start-Up Growth Maturity Uncertain R&D Individual Investors Venture Capital Private Equity Strategic Alliance Financing Options Asset-Based Working Capital Lines/Bank Debt Mezzanine / Subordinated Debt Internally Generated Cash Flow Cash Flow Based Term Debt

  14. The Push-Pull Dilemma - Balancing Risk and Cost To Lender/Investor Least Flexibility Lower Cost To Company Lower Risk Higher Risk Senior Debt Mezzanine Lower Risk HigherRisk Equity Most Flexibility Higher Cost

  15. Providers of Capital • Commercial banks are only one source of capital for businesses. Borrowers should have a balanced mix. • Owner’s equity • Vendor credit • Equipment leases • Landlord concessions • CDC financing – US SBA 504 program • Seller financing

  16. Corporate Cash Flow Template

  17. Corporate Cash Flow Template, Con’t. Typically, we look to see global cash flow coverage of 2.00:1 as that indicates that there is sufficient cash flow not only to service existing and proposed debt levels (corporate and personal), but to continue a reasonable lifestyle.

  18. Applicable Corporate Ratios

  19. Cash Flow Takeaways • Business should be able to cover its debt service on a standalone basis – typically like to see at least 1.25:1 business cash flow coverage. • 3-years of historical cash flow coverage is preferred – an indication of sustainability • If the owner takes a substantial sum out of the business in salary and/or distributions, banks will look at personal income as well – called Global Cash Flow analysis.

  20. Personal Income Analysis • In cases where the owner is taking a substantial amount of income from the business in salary and/or distributions, Bank’s will do “Global Cash Flow” analysis which incorporates the owner’s / Guarantor’s income (and personal debt service). This is typical in many medical and legal practices. • Personal debt service is considered for this calculation. • The following personal income is considered: • Salaries and wages • Interest income • Dividend / Distribution income • Net operating income (NOI) on rental properties (add back depreciation and amortization as well as interest expense).

  21. Contact Information Sonja Sanders Wells Vice President Sr. Relationship Manager 410-244-4351 swells@mtb.com

More Related