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Increasing Your Clients Bankability

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Presentation on theme: "Increasing Your Clients Bankability"— Presentation transcript:

1 Increasing Your Clients Bankability
(and Your Center’s Economic Impacts) Rod Bristol Profit Mastery Phone: (206) Toll Free: Fax: ASBDC 2012 Annual Conference

2 SBDC Economic Impact Measurements
The performance of the SBDC is measured by the total economic impact achieved its clients. Criteria that are measured include: Increased business revenue and profit Business loans received SBA Financing Debt Financing Equity investment or other capital raised New jobs created and current jobs saved Successful start-ups Extended engagement clients (EECs: clients that have 5 or more counseling hours with you) Long Term Clients (LTCs: clients that have a combined prep and counseling hours of 5+hours with you in one year) 1

3 Sources of Capital The Bank: (Leasing Companies, Credit Cards)
Equity: (Owner, Family, Friends) Trade Credit: (Suppliers) Net Profit After Tax: (usually not enough!) The Bank: (Leasing Companies, Credit Cards) 2

4 The Case of the Vanishing Banks (2012!)
In the 1960s the US had some 14,000 Banks and a large, prosperous thrift Industry. Credit inflation and rising interest rates in the 70s eventually bankrupted the thrift Industry. 2011: Less than 7,800 Comm. Banks 2012: As of the 3/31/2012 FDIC Institutions Report: 6,263 Commercial Banks reporting in the US. There are also approx. 800 State Charted Banks = 7,270 total institutions. And we are on track for 4,000 by 2019 “The Government is trying to put small banks out of business.”

5 What Does That Mean for Your Clients?
A continued erosion of local ownership Fewer banks to approach in a smaller region New, tougher loan approval requirements Deeper scrutiny of the existing portfolio “Know your Numbers or Stay Home”

6 The Bankers 3 Cs of DATA Complete
Complete Income statement and Balance Sheet Including a comparison to the Annual Plan AR and AP aging If requested, a monthly Cash Flow Extraordinary Issues explained Consistent Prepared by a competent bookkeeper using appropriate accounting tools Formats and pagination are maintained Current Monthly is usually the new minimum If you are in trouble, weekly can be required

7 Real Opportunities For the Client whose business is making money and is well managed there are real opportunities. The healthy banks have lots of money and need to lend it. They are chasing a shrinking pool of good loan prospects. Increase a credit line, acquire new technology, open a new location

8 Banker’s Red Flags 4 The business doesn’t make money.
Inadequate, infrequent or inaccurate financial statements Hurried Loan request Unclear, poorly thought out loan purpose Rapid, unusual inventory build-up Uncontrolled, unmanaged growth 5. Inadequate Cash Flow and coverage of debt service Thinly capitalized operations (current ratio < 2:1) & cash flow is tight Lousy or Marginal personal credit scores Lousy = sub 650 Marginal = sub 680 High accounts receivable concentrations if any customer is greater than 20% of total A/R and/or sales. Don’t know the major customers, economic forecast, trends, and payment terms. 9. No three year financial spread analysis 10. Don’t understand or use benchmarking for financial analysis 11. Don’t know or understand their Key Performance Indicators Are they going to improve, stay the same or deteriorate- and know why. 12. Multiple entities that are not clearly divided for P and L and cash flow purposes. 13. Starting/buying a business with no previous background 14. Any significant management change: Owner to kids or internal management Significant owner health issue 4 Profit Mastery 2010

9 Business Killers 5 Divorce – Owner or key employees 50/50 partners
Retired in place Absentee owner Overuse of Credit Cards Permanent, incompetent employees Big imbalance between business and personal time Lack of training/expertise – Business, Succession Expensive or destructive hobbies Rapid growth - Expansion New technology Embezzlement Family transition 5 Profit Mastery 2010

10 Golden Rules Evaluate carefully where your client fits in this list, then observe the following guidelines. These are just some helpful suggestions in developing and maintaining good banking relationships. Be prepared: think things through before they have to present them. Let their banker know that they understand their business -- by helping their banker to understand their business. Always keep the commitments they make; without credibility they have nothing. Remember it's always best to borrow money when they don't need it. Bankers often conclude that no news is bad news, so keep them appraised of the situation -- both positive and negative developments. Know how much they need and what they plan to do with it. Keep in mind that they need to build a relationship; they want their banker there when they need them -- and that's probably when they won't look so good. Rates are negotiable, but they're not the only issue -- it's always strategically best to negotiate from a position of strength. This is a sales situation: sell themselves and their abilities. Remember the most important rule of all: there are really very few rules; with common sense and forethought, they can create new rules to fit the needs of their situation. 6 Profit Mastery 2010

11 5 C’s of Credit 7 1. Character 2. Capacity 3. Collateral 4. Capital
History of Business Resume Personal and business references Bank references Succession Debt Service Coverage minimum benchmark (1.25) Global cash flow (Business and Personal) Projections/Pro-Forma’s Key Performance Ratio’s Net Worth Retained Earnings Growth Working Capital Debt to Tangible Net Worth (TNW) A/R-A/P/inventory turnover (Cash Conversion Cycle) Loan to Value (LTV) Appraised value to cost A/R benchmarks Equipment/rolling stock appraisal-evaluation Invoice/down payment Additional collateral-junior liens on real estate Outdated or old inventory that is discounted Work in Progress Retention Government A/R’s Debt to tangible net worth Down payment Subordination of debt Outside investor Distributions Volatility Local, regional, state economy Product replacement, improvement, or enhancement Social-divorce or death Business-stockholders, partners, ownership changes Competition Location 1. Character 5. Conditions 2. Capacity 3. Collateral 4. Capital 7 Profit Mastery 2010

12 Debt Structure 1 2 3 Assets Financed By Paid Off By Time 8 Seasonal WC
Cash Inv A/R Credit Card Line of Credit Cash Flow 1 2 3 A/P Int. Debt 3-5 year Net Profits Permanent WC Cash Inv A/R Long Term Debt Retained Earnings Net Profits plus Depreciation Fixed Assets Leasehold Imp, Equip, Building Time W/C = Working Capital A/P = Accounts Payable A/R = Accounts Receivable 8 Profit Mastery 2010

13 Sample Loan Package Five Key Borrowing Points: How much do you need? 2. What will you do with it? 3. When will you pay it back? 4. How will you pay it back? 5. What if something goes wrong? 9 Profit Mastery 2010

14 Purpose of the Loans (There are two types)
LOAN PROPOSAL Purpose of the Loans (There are two types) Convert existing short-term notes of $165,000 to a long-term note to be repaid at $3,000 per month (plus interest) Establish a credit line of $250,000 to finance expected seasonal fluctuations in inventory and accounts receivable Repayment Repayment on long-term financing will come from continuing net profits. Repayment of the seasonal credit line will come from liquidation of inventory and receivables. 10 Profit Mastery 2010

15 Corporate Data 11 CORPORATE DATA Name: Olympic Flooring
Address: nd Avenue N.W. Seattle, Washington 98139 Phone: (206) Date Established: February 14, 1997 Form of Organization: Washington Corporation Incorporated by: Bob and Andrea Nelson on June 25, 1997. 11 Profit Mastery 2010

16 Description 12 CORPORATE DATA
Olympic Flooring is a Seattle-based corporation that wholesales flooring products to retailers and contractors out of a North Seattle warehouse location. The average customer is a small- or medium-sized retailer of carpets, linoleum, and window coverings; no one customer is key. Estimated sales for fiscal 2011: $1,430,000. Advertising expense has been low since most advertising is at the retail-level, co-op by manufacturer. The primary focus of the business is service and delivery -- and the ability to keep fast moving items in stock. Most accounts are carried on a 2% 10/Net 30 basis; few customers take discounts. Contractors are generally carried on a Net 10 basis. Distribution is from a central warehouse in North Seattle, which is connected to a small showroom and also contains the corporate offices. Lead-time on ordering for inventory is quite short and style changes generally occur once per year. The major supplier is Footloose Coatings. Footloose's terms are 2% 10/Net 30. Almost all the suppliers offer discounts, some even larger than 2% 10/Net 30. During 2010 there was one major price increase of about 5%. Olympic operates out of leased premises and holds a very favorable lease through Location is not critical, although current location does provide excellent access for delivery trucks. This is a distribution business and, therefore, depends upon efficient routing and/or shipping. Bad debts have recently taken an alarming upturn 12 Profit Mastery 2010

17 Product: 13 OPERATIONAL INFORMATION
This section includes narrative discussion of the following points: (a) Classification code, including the principal products sold or services rendered. (b) General development of the products and/or services during the past five years or since inception. (c) Relative importance of each principal product or service to the volume of the business and the profits. (d) Significant changes in types of product or services. (e) A tentative five-year plan of the objectives and goals of the company, including anticipated revenues and earnings. 13 Profit Mastery 2010

18 EMPLOYMENT (a) The total number of employees as of the date of the application, or the expected employment for a new venture. (b) A description of the critical skills require in the business and availability of these skills within the present work force or within the local labor market. (c) Description of labor relations (including any prior difficulties) and a copy of any current union contract. 14 Profit Mastery 2010

19 SOURCE OF SUPPLY (a) A brief description of the significant materials and supplies employed or to be employed in the activity of the concern, including the adequacy of the available sources of these materials and supplies. (b) Names of the major suppliers, including disclosures of any single or limited sources of essential materials. (c) Adequacy of available storage and materials handling facilities. 15 Profit Mastery 2010

20 MANAGEMENT (a) Detailed biographies on all officers, directors, owners, and key personnel, including, but not necessarily limited to: age, health, business experience, business affiliations, education and experience, time to be devoted to the business, and degree of ownership of the business. (b) Any contract or proposed contract between the company and any member of management and/or outside consultants. Also include the name(s) of the accountant and/or attorney. 16 Profit Mastery 2010

21 MARKETING AND DISTRIBUTION
A narrative discussion of the following: (a) The type, number, location and financial strength of customers and potential customers (including the names of the five largest) indicating the percentage of the gross revenue accounted for by these customers. (b) A marketing survey and/or economic feasibility study of a scope commensurate with the size of the company and the proposed investment. (c) A brief description of the actual or proposed terms of payment by customers if other than cash, including the method of financing utilized. (d) The methods by which the products or services are now (or will be) provided to customers, including the adequacy of physical distribution facilities (i.e., warehousing, delivery equipment, etc.). (e) A description of the techniques presently utilized (or to be utilized) to create the demand for the products or services. (f) Any significant seasonal aspects pertaining to the marketing of the products or services. 17 Profit Mastery 2010

22 COMPETITION A descriptive summary of the competitive conditions in the industry in which the concern is engaged along with the relationship of the applicant to its largest and smallest competitors. 18 Profit Mastery 2010

23 FACILITIES (a) A detailed description of the real and physical property and equipment, including age, condition, insurance coverage, and adaptability to the principal business in which engaged. (b) Copies of agreements pertaining to any encumbrances on property or equipment owned, or lease or rental agreements on non-owned property. (c) The same information for property proposed to be utilized by new ventures. (d) Copies of any franchise agreement, distributorship, dealership, royalty contract, or similar contract with other companies. 19 Profit Mastery 2010

24 REFERENCES (a) List a minimum of one banking, one business, and three personal references for each member of management and each principal owner. (b) Credit report on principals and company. (c) Discuss the company's reputation with suppliers and customers; a small sampling should be taken. Ask the suppliers / customers about the company's reliability, credit-worthiness, fair business practices, etc. 20 Profit Mastery 2010

25 21 FINANCIAL STATEMENTS Historical
Balance sheets and profit and loss statements (preferably prepared by an independent public accountant) for a minimum of the last three fiscal years or from inception, including the latest interim period. Include a comparison with industry averages from RMA (The Risk Management Association). Proforma A proforma balance sheet which includes the effect of the financing, supplemented in the case of new ventures, with a description of the source of the original funds and assets. Cash Flow A detailed projection by month of anticipated revenues and expenses and a schedule of cash receipts and disbursements for a minimum of twelve months subsequent to the proposed financing. Proforma profit and loss statements for the next three years. 21 Profit Mastery 2010

26 FINANCIAL STATEMENTS Continued
Accounts Receivable/Payable An aging report of the last 90 days of both receivable and payables. Personal Financials Statements for the principals. Salaries and Benefits Schedule of past, current, and proposed salaries and other benefits of each member of management and/or owners, including bonuses, free arrangements, profit sharing, stock options, etc. Use of Proceeds The reasons for the request for funds and a description of the proposed uses, including the timing of the requirement for funds. 22 Profit Mastery 2010

27 FINANCIAL STATEMENTS Continued
Capacity of Business A statement of the capacity of the enterprise, both current and subsequent to the financing, including the current and expected rate of utilization of such capacity and current backlog of orders in relation to the capacity. Outstanding Debt A description of all outstanding debt or commitments for funds, including the original balance, current balance, interest rate, and amortization schedule, and a copy of the instrument. Prior Denial of Funds A statement indicating whether recent requests for funds from other sources have been denied, including names and addresses of parties refusing funds, amounts requested, dates of applications and reasons for denial. * this item is for SBA direct-funded loan proposals 23 Profit Mastery 2010

28 If You Don’t Get the Loan…
If you get turned down at the bank, don't give up after the first try. Instead, explore new strategies: 1. Ask for specifics on why the loan was refused. Some common causes are the bank's being overextended or not understanding your company's type of business. 2. Invite the loan officer and one of the officer's supervisors to visit your company -- to build confidence by showing off your equipment, facilities, and personnel. 3. Ask for ideas on how the application can be made more acceptable through financial or accounting changes, tax regulation, government programs, or production changes. 4. Apply for another type of loan or a different credit basis. For example, possibly pledging machinery as collateral, using a third-party guarantee, or borrowing against seasonal receivables. 5. Reapply when the timing is better. Use an upswing in sales or profits to obtain a line of credit or develop a close enough relationship with your banker to be informed when the bank has excess funds to loan. 24 Profit Mastery 2010

29 Idea Exchange Share the best idea that a client has come up with to ‘Get The Money’ from their friendly banker. It’s possibly worth $50!! Profit Mastery 2010


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