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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).

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Governor’s Housing Conference Creating & Financing New Business

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  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

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