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Developing financing proposals for road contractors .

Developing financing proposals for road contractors. Module 5: Session 3. Training objective:. Developing financing proposals for road contractors Training outcome:

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Developing financing proposals for road contractors .

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  1. Developing financing proposals for road contractors. Module 5: Session 3 M5S3

  2. Training objective: • Developing financing proposals for road contractors Training outcome: • By the end of the session trainees should be able Identify the major types of information required in preparing financial proposals in order to access bank services. • They should be able to develop a fundable proposal acceptable to financing institutions M5S3

  3. Piecing the puzzle together • Financing is a puzzle with many pieces • Developing a proper structure for a proposed financing program is critical to successfully completing the puzzle • This proposal can be used as a stand-alone document or can be included as a separate section of the business plan itself M5S3

  4. Key components • Uses and extent of funds • Sources and nature of funds • Proposed security • Business and financial assumptions • Income and cash flow projections • Historical statement of income and cash flow M5S3

  5. Uses and extent of funds • Uses of funds – what is the funding for? • Here the strategies outlined in the business plan are summarized and quantified to demonstrate the use and extent of funding. • The cost of additional inventory, equipment, asset purchases, acquisitions, refinancing, working capital, and so on, are identified and quantified. M5S3

  6. Sources of funds • Not all lenders or all products are fit for all purposes. • A tiered or layered approach to financing uses multiple and/or niche lenders to fill the gaps in a financing program. • Identify and match the uses of funds to the most appropriate products and lender(s) • Match Purpose to the product • Product to the asset • Asset to the lender • Lender to the industry • Industry-specific niche lenders can often provide more flexible credit arrangements with better terms and conditions than traditional lending sources M5S3

  7. Tiered financing scheme Illustrative example of a tiered financing scheme: Use of funds: Sources of funds: Purchase of equipment shs 40 Capital lease shs millions 25 Operating lease 10 Term loan — secured 5 40 Inventory/Accts receivable shs millions 50 Line of credit — secured 10 Line of credit — unsecured 5 Factoring facility 12 Letter of credit 8 Suppliers’ credit 15 50 Working capital 80 Sub-debt term loan — unsecured 10 Term loan — unsecured 20 Line of credit 18 Sale lease-back 12 Asset-based financing 20 80 Purchase real estate 100 Commercial mortgage 60 Collateral term loan 40 100 Total shs millions270 shs Million 270 M5S3

  8. Proposed security • Deserves to be properly addressed and identified • Security should not be assumed but rather proposed upfront • Assist the lender in making a favourable decision about the financing proposal • Some assets can be the security for the financing • Funding will only be given for a percentage of the value of the security (50 - 60%) • Banks may require personal guarantees in addition M5S3

  9. Business, financial assumptions and predictions • State the major assumptions made about the future of operations and general assumptions about the industry, the economy and competition • Demonstrate knowledge of the business and why the business will succeed • Make reference to past performance • Show capacity for good leadership and the presence of a winning team that can be trusted • Outline the challenges and the threats M5S3

  10. Statement of income and cash flow • The purpose of this section is to restate income and cash flow on a normalized basis to show available operating cash flow, given a normal operating environment and circumstance. • Show the company’s ability to generate cash flow on a normalized basis and to service the facility. • An income statement will list sales and expenses and indicate potential for profitable operations • Provide projected cash flows M5S3

  11. Statement of income and cash • First-year projections should be done on a monthly basis. • Provide summarized annual projections to cover the period of the facility • Proposed financing amortization and cost • Demonstrate the ability to service the facility • Where possible, derive ROI and IRR • Attempt some sensitivity analysis of key assumptions M5S3

  12. Summary • In today’s business environment, a properly structured financing program is key to the success of any business • At the core of this approach is the financing proposal; matching purpose to product, product to asset, asset to lender, and lender to industry • By providing lenders with a financing proposal structured to the lender’s requirements, the chances for success in obtaining financing are greatly increased. M5S3

  13. Group discussion • Describe the main components of a financing proposal • Identify the qualities and the benefits of a good financial proposal. • Discuss Common basic questions every lender will require to be answered. • Discuss the Dos and Don’ts in loan utilization and servicing. • Identify the key challenges in preparing a financial proposal and suggest how they can be addressed. M5S3

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