Understanding the Basics of Your


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Understanding the Basics of Your

  1. 1. Understanding the Basics of Your Family Business Commercial Banking Gilmore, Jasion & Mahler, LTD. Bob Bobek, Partner Steve Schult, Partner Huntington National Bank Jay Malcolm, Vice President
  2. 2. Agenda  Review of Financial Statement Analysis, Questions  Banking 101 – Bank business model  Lender, not Investor  Boring Ratios  Bank Experience  Applications/Common Issues  Case Study  Today’s Financial Mess
  3. 3. Banking 101 Bank business model  Our commodity = dollars  Risk-based pricing  Highly regulated  Ultra competitive  Historically profitable
  4. 4. Lender, not Investor  Two forms of Capital  Equity  Debt Equity Capital Significant upside return potential Loss potential is entire investment, plus Typically, highest cost of capital Last paid in liquidation Debt Capital Bank upside is limited to interest earnings Loss potential is entire loan amount, plus costs Typically, lowest cost of capital First paid in liquidation
  5. 5. Lender, not Investor The bank needs to get its principal back All its principal back, every time. Margins are too low for any other outcome (exception is a very low % of loans charged off) Venture Capital model
  6. 6. Boring Ratios Fixed Charge Coverage Funded Debt/EBITDA Total Liabilities/Tangible Net Worth Determine credit “ranking” and critical measurements with your bank. This determines structure and pricing.
  7. 7. Bank Experience Huntington is 140+ years old Survival and success has depended on learning from past experience and mistakes  Loan documents – keep getting longer. Why?  Thousands of similar cases reveal some common “truths”
  8. 8. Bank Experience – Common Truths  Banks see the world the same  Projections are rarely met  Banks don’t like start-up ventures, restaurants and the hospitality industry (hotels, marinas, golf courses)  Borrowers will put a positive “spin” on the situation  Sick companies rarely get well  Most companies don’t cut deep enough, fast enough  We want companies to make money
  9. 9. Some Applications  Pre-payment penalties  Pricing (Interest rates) relative to risk  Personal guarantees  Collateral coverage  “We’ve never missed a payment”, “we run $5 million dollars through your bank”, “I’m paying you $19,801/mo.”
  10. 10. Case Study  $10,000,000 revenue manufacturing company  Sales down 20% this year  Company is $1,000,000 below break-even sales level of $9 million  Owner’s Equity is negative  Owner personally guarantees the debt (and has liquid assets of $150,000)  Bank has asked the company to leave (in work- out group) What should this company do?  Increase marketing?, Cut workforce?, Hire turn- around specialist? Inject cash? Liquidate?
  11. 11. Today’s Financial Mess This crazy, unprecedented environment What will happen next? Best ways to protect your company and family FDIC/CDARS Pendulum swinging back in bank’s favor
  12. 12. Conclusion Who is in control? What can you do?  Pay attention to financial measurements monthly – financial dashboard  Trust and use professionals  Be proactive  Over communicate with your bank.  Plan for next 12 mos. and next 5 years. Plan capital needs
  13. 13. QUESTIONS?