New Venture Financing : Forming a Banking Partnership

1. New Venture Financing:Forming a Banking Partnership Michael J Fahlman, MBA Entrepreneurship and Small Business Management University of Winnipeg March 8, 2007

2. Agenda • Introduction and Objectives • Selecting your Bank • Non-Credit Banking Products • Credit Products and Usage • “I’d like to Apply for Credit” • Understanding Credit Criteria • Beyond Initial Credit – Expansion • Tips on Protecting Yourself • The Enduring Partnership • Questions

3. Introduction • Manager of Financial Services – Manager of Personal and Small Business Advisors. • Worked for TD for 9 years in two provinces and at 5 branches • MBA from University of Manitoba and B.Admin from University of Regina. • Industry training includes: Canadian Securities Course, Professional Financial Planning Course, BCO Course for Mutual Fund Supervision.

4. Objectives • Give perspective around financing needs and concerns of business owners. • Discuss key concerns of lenders in considering and continuing business financing. • Set expectations – what you will be asked to provide to establish banking and credit facilities and why.

5. Selecting a Bank • Important to Select a Banker, not just a Bank. • Determine what’s important to you: • Hours of branch operation/teller service • ABM, Telephone or Internet Banking Platform • Proximity to your home or business • Reputation or experience in SBB generally, or in your specific business or industry. • Favorable banking and/or credit terms • Willingness and/or ability to facilitate growth

6. Selecting a Bank • Interview your prospective Banker and bank: • ask for experience and credentials • Explain your business and ask how they can help you. Does the explanation link to what is important to you. • Come prepared for the interview. Bring a copy of your business plan. Demonstrate your credibility as a business partner.

7. Non-Credit Banking Products • The Basic Components of Banking: • Current/Chequing Services • Fee for service arrangements • Understand what your fee provides you (and Negotiate!) • Electronic Banking • Internet, Telephone and ABM services • Convenient methods of cash management • Merchant Services • Credit Card and Interac Point of Sale Technology • Essential for most Retail and Service Businesses

8. Credit Products • The Basic Components of Credit Facilities: • Credit Cards • Used to make purchases when A/P terms are not provided • While useful for procurement, should be cleared monthly • Revolving (or Operating) Credit: • Used for day to day transactions – purchasing inventory, carrying expenses prior to collecting A/R • Flexible repayment – usually interest only • Rate and terms are dependant upon strength of convents. • Must be repaid – beware of Hard and Soft Core operating.

9. Credit Products • The Basic Components of Credit Facilities: • Term Loans and Mortgages • For use in specific acquisitions including building or equipment purchases, and long term project financing. • Structured repayment of principal and interest • Associated with government guaranteed start-up programs such as CSBFL and Manitoba Business Start. • Contingency Facilities • Specialized credit facilities used to guarantee specific transactions. Triggered only when payment is demanded. • Often used in Export/Import businesses and large F/X deals.

10. “I’d like to apply for credit” • Banks are risk-selective. We look for the best risk-adjusted ROI on our capital given the opportunities presented to us. • Business Plan is key to show you’ve investigated: • Porter’s 5 Forces • VRIO Competitive Advantage Analysis • SWOT Analysis • External Influencers Analysis • Your business success factors (www.tdcanadatrust.com/smallbusiness/resources.jsp)

11. “I’d like to apply for credit” • Pro-Forma Projections • Most important is the Income Statement to determine debt serviceability. • Cash flow expectations should be provided. • Be realistic about expenses and income streams. Demonstrate sensitivity analysis • Be prepared to discuss your investment. Financers want to know know you are tied into the venture. • Personal Guarantee is almost always required at start-up. • Documents that support request (share agreements, quotes) • Investment can be by way of personal cash or assets, or that of partners or backers. Lenders need to know the involvement of each partner/backer.

12. Understanding Credit Criteria • Personal Credit Approvals are based upon the “Five C’s of Credit”: • Credit History • Collateral • Capacity • Customer Relationship • Character This is a good springboard from which to understand how Commercial Credit is adjudicated.

13. Understanding Credit Criteria • In addition to the noted criteria, be prepared to discuss: • What the facility will be used for and what terms are requested. • Equity being injected – form and amount. • Legal structure of the business. • Are there other income streams to support household. • Components of the business plan that demonstrate business success factors.

14. SBB Credit Grid:

15. Understanding Credit Criteria • Key risks that Lenders need to mitigate: • Debt Servicing – does bottom line NI support debt repayment and are there factors (non-cash, rents) that can add back to NI number – similar to EBITDA. • Does the industry present inherent risks (ie Construction can be seasonal and cyclical, Computing faces rapid obsolescence). Is there risk in the industry class (ie retailing). • What is the level of recourse given the legal structure. • What is the security and how liquid and marketable is it. Business (All Assets and Undertakings) vs Personal pledge. • What is the quality of the personal guarantee. Net Worth and personal credit history are critical factors.

16. Beyond Initial Credit - Expansion • Future credit requests are evaluated in the same manner as start-up credit. • What success has been demonstrated – execution. • Management of A/R and A/P. • Have revenues, net income and retained earnings been growing. Is the company being stripped of income – evidenced in salaries, expenses. • What is the nature of the credit request – project, asset or share financing verses debt consolidation.

17. Tips for Protecting Yourself • Some of the pitfalls in business finance: • Ensure that you have assets or cash to fall back on during business start-up or in the case of slowdown. • Budget for large payables (ie taxes). Consider a budgeted savings plan into a separate account. • Ensure that you have adequate insurance in place – personal disability, key man insurance and a business succession plan. • Be careful on extending credit – leave that to the bank! • Watch your cash-flows. Understand your payables and receivables timings. Don’t be caught by surprise. • Grow your Retained Earnings. Don’t strip out all NI. This makes financers nervous.

18. The Enduring Partnership • Banking is about mutual trust – credit is granted by seeing the whites of your eyes. • Know your Banker and Branch Manager. • Make appointments to see your banker on a regular basis (ie semi-annually) • Given the stakeholder status, advise your banker of positive and negative changes.

19. Questions Thank you for your attention. Good Luck in your studies and your future endeavors!! Feel free to contact me to discuss this presentation: 988-2811 (ext 249) ~ fahlmm2@tdbank.ca