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Starting a Nonprofit | Capital One | Entrepreneur Roadmap

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Capital One spoke at the WDCEP's Entrepreneur Road Map's Starting a Non-Profit seminar held at Venable (9/10/14).

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Starting a Nonprofit | Capital One | Entrepreneur Roadmap

  1. 1. Lending: From A BBaannkkeerr’’ss VViieewwppooiinntt
  2. 2. 2 Sources of Repayment
  3. 3. • Does the borrower demonstrate a commitment to honor his or her transactions and keep promises even under adverse circumstances? • What are economic and market conditions that could impair the entity’s ability to service the debt and repay the loan? Does the entity recognize these risks and have plans to mitigate them? 3 5 C’s of Credit CChhaarraacctteerr • Is the collateral sufficient as a 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? CCaappaaccitityy CCoonnddititioionnss CCaappititaall CCoolllalatteerraall • Does the entity 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 organization have sufficient assets to absorb normal business risk?
  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 Form 990, Return of organization exempt from income tax (2 Years) o Interim financial statements along with accounts receivable and payable aging reports if applicable • Alternative (micro) loan application is similar, but often allows some flexibility – ask questions! 4
  5. 5. Industry Dynamics 5 Underwriting Pillars Financial Condition • An organization’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 Management Quality • It is necessary to determine the competence and integrity of key individuals running an organization • A weak management team not only endangers the second source of repayment, but opens the doors for additional problems Collateral / Security • 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 • 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
  6. 6. Underwriting Pillar – Deeper Dive on Financial Condition 6 Important to Remember • Cash flow • Determine trends (revenue/expense) • Industry comparison • Total administrative costs Cash Flow Provides a better understanding as to how much excess income the organization 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)
  7. 7. Underwriting Pillar – Deeper Dive on Financial Condition Liquidity 7 The ability to quickly convert the organization’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) • Variety of funding levels from different sectors including corporate foundation, individual, or government grants
  8. 8. Thank you for attending…

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