Lending: FromA Banker’s ViewpointLending: FromA Banker’s Viewpoint
Presented by: Jamila Braithwaite
2
Sources of Repayment
3
5 C’s of Credit
CharacterCharacter
• Is the collateral sufficient as a tertiary source of repayment? If the
collateral m...
4
The Loan Application
• Ensure that the loan application is complete and accurate
• Core bank loan application informatio...
5
Underwriting Pillars
• A company’s financial
condition determines
the borrower’s ability
to generate enough
cash to repa...
6
Underwriting Pillar– Financial Conditions
Financial Conditions
Profitability Liquidity Leverage
• Indicates operating su...
7
Important to
Remember
• Cash flow
• Determine trends
(revenue/expense)
• Industry comparison
(profitability, leverage,
e...
8
Liquidity
The ability to
quickly convert the
company’s assets
into cash
Important to
Remember
• Evaluate integrity of
cr...
9
Important to Remember:
• Evaluate capital
• Assess creditor / shareholder
support
• 1:1 is good
• 3:1 is guideline
• Hav...
Underwriting Pillar– Industry Dynamics
Industry Dynamics
Restricted High Risk Desired
• Adult
• Casinos
• Check Cashers
• ...
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Business Financing | Entrepreneur Road Map | Capital One Bank

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Jamila Braithwaite from Capital One Bank gives entrepreneurs tips on how to access capital from banks at the Washington, DC Economic Partnership's Entrepreneur Road Map Business Financing seminar (3/12/14).

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  • Cash Flow from Operations.
    This is the primary source of repayment. The question: is the company making enough money to repay its debts? must be answered satisfactorily to obtain approval.
    Guarantor Support. This is the secondary source of repayment.
    The questions: does the borrower have enough capital to support their business? And does the borrower have other sources of income to support the business? must be answered satisfactorily to obtain approval.
    Collateral / Security. This is the tertiary source of repayment which the bank would look to in a worst case scenario.
    The question: would the bank be able to liquidate enough collateral to cover its position? must also be answered satisfactorily to obtain approval.
  • The extent and nature of information needed for the loan application varies by loan type and amount
    Often, 3 years of historical financial information is needed
    Financial information of the owner(s) is needed for small businesses and those closely held by one or few shareholders
    Also, open and candid discussion of a businesses challenges and risk is important for banks to better understand these issues and avoids surprises that can be damaging going forward
  • The information provided will be used to perform a thorough analysis of each of the following areas:
  • Cash reserves are very important
    Ample liquidity demonstrates the ability to offset exposure.
    Our internal loss experience has decreased dramatically when a business has 10M in checking.
  • Cash reserves are very important
    Ample liquidity demonstrates the ability to offset exposure.
    Our internal loss experience has decreased dramatically when a business has 10M in checking.
  • Cash reserves are very important
    Ample liquidity demonstrates the ability to offset exposure.
    Our internal loss experience has decreased dramatically when a business has 10M in checking.
  • Cash reserves are very important
    Ample liquidity demonstrates the ability to offset exposure.
    Our internal loss experience has decreased dramatically when a business has 10M in checking.
  • The type of industry in which a company operates within will have a significant impact in various areas of risk.
    Industry Environment
    Structural problems in an industry can affect overall risk of lending to an industry. Regulatory changes can have a negative impact on lending.
    Company’s Position within the Industry
    Competitive position is often heavily influenced by barriers to entry, bargaining power of suppliers and customers, and the threat of product substitution.
    Industry Cycle
  • Business Financing | Entrepreneur Road Map | Capital One Bank

    1. 1. Lending: FromA Banker’s ViewpointLending: FromA Banker’s Viewpoint Presented by: Jamila Braithwaite
    2. 2. 2 Sources of Repayment
    3. 3. 3 5 C’s of Credit CharacterCharacter • Is the collateral sufficient as a tertiary source of repayment? If the collateral must be liquidated, is the realizable value enough to repay principal, outstanding interest and cover the bank’s administrative costs of liquidation? • What are economic and market conditions that could impair the company’s ability to service the debt and repay the loan? Does the company recognize these risks and have plans to mitigate them? • Does the borrower demonstrate a commitment to honor his or her transactions and keep promises even under adverse circumstances? CapacityCapacity ConditionsConditions CapitalCapital CollateralCollateral • Does the business demonstrate the capacity to apply the loan funds? Does management have a business plan? Are plant and equipment sufficient? Are marketing and product delivery well developed? • Does the company have sufficient net worth to absorb normal business risk?
    4. 4. 4 The Loan Application • Ensure that the loan application is complete and accurate • Core bank loan application information often includes: o Historical business financial information (2 years) o Business and owner’s personal tax returns (2 Years) o Personal Financial Statement o Interim financial statements of the business and its owner for the current & prior year, along with accounts receivable and payable aging reports • Alternative (micro) loan application is similar, but often allows some flexibility – ask questions!
    5. 5. 5 Underwriting Pillars • A company’s financial condition determines the borrower’s ability to generate enough cash to repay the debt • Three items in particular are evaluated: • Cash Flow • Liquidity • Leverage Financial Condition • It is necessary to determine the competence and integrity of key individuals running a company • A weak management team not only endangers the second source of repayment, but opens the doors for additional problems Management Quality • The bank will determine the realistic level of control over any collateral pledged, including its likely liquidation value or net present value • Inability to realize or “call” collateral threatens the third source of repayment Collateral / Security • Analysis of the industry focuses on the particular industry of the borrower and the borrower’s position within the industry • Weaknesses in the industry foundation can negatively impact a borrowers ability to repay Industry Dynamics
    6. 6. 6 Underwriting Pillar– Financial Conditions Financial Conditions Profitability Liquidity Leverage • Indicates operating success, growth potential, and competitive position • Determines the company’s ability to meet obligations – Cash – operating expenses – debt service – supplies – credit • Determines the degree of financial risk and ability to absorb business risk • Sign of the owner’s commitment to the business as excess leverage is often a key cause of failing businesses
    7. 7. 7 Important to Remember • Cash flow • Determine trends (revenue/expense) • Industry comparison (profitability, leverage, etc) • Owner’s salaries / bonuses / dividend payments Underwriting Pillar– DeeperDive on Financial Condition Profitability & Cash Flow Provides a better understanding as to how much excess income the company will generate and the factors that influence income EBIDA Debt Service Coverage (EDSC) Calculation: (Net income + interest expense + depreciation + amortization) / (Current portion long term debt (prior period) + Interest Expenses)
    8. 8. 8 Liquidity The ability to quickly convert the company’s assets into cash Important to Remember • Evaluate integrity of creditor support (adequate asset protection for liabilities) • Evaluate current asset quality and aging of receivables (A/R > 90) • Assess shareholder’s support, willingness to guarantee / inject additional capital Underwriting Pillar– DeeperDive on Financial Condition
    9. 9. 9 Important to Remember: • Evaluate capital • Assess creditor / shareholder support • 1:1 is good • 3:1 is guideline • Have to consider officer loans (to & from) and intangibles • Negative impact of treasury stock • Consolidating statements and evaluate receivables and payables to related companies Underwriting Pillar– DeeperDive on Financial Condition Leverage Comparison of borrowed capital to owner’s investment to determine risk of lenders if the company fails Leverage Calculation: (Total liabilities – Subordinated debt) / (Equity + Subordinated debt)
    10. 10. Underwriting Pillar– Industry Dynamics Industry Dynamics Restricted High Risk Desired • Adult • Casinos • Check Cashers • Speculative • Lenders • Start-ups • Restaurants • Contractors • Firearms • Pawn Shops • Professional • Manufacturing • Wholesale • Service
    11. 11. Thank you for attending…

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