Borrowing to Fund Business Growth Presented by:

TYPES & KEY ASPECTS OF FINANCING Matching Offerings to the Needs of the Business TYPES & KEY ASPECTS OF FINANCING

Debt Financing Options Bank Financing Line of Credit Term Debt Leasing There are various types of debt financing options. It is important to consider what the needs of the business are and which option(s) best suit the company’s needs

Debt Financing Options Line of Credit • Facility available as needed over the term of the agreement • Often variable rates charged • Repayment is interest only or interest plus principal • Frequently used to fund short-term working capital needs and unexpected expenditures

Debt Financing Options - continued Term-Debt • Loan for a fixed amount with specific repayment terms • Interest rates may be fixed or variable • Generally does not provide for borrowing beyond the initial amount • Frequently used to fund asset (facility and equipment) purchases

• Requires payments over the term of the arrangement Debt Financing Options - continued Leasing • Financing arrangement providing the right to use an asset over a period of time • Requires payments over the term of the arrangement • May or may not transfer ownership of the asset at the end of the lease term • Used by companies to fulfill their asset needs without significant upfront investments inherent in purchase transactions

KEYS TO SUCCESSFUL BORROWING Optimizing the Chances of a Desired Outcome Like anything else, some planning and getting started early will pay dividends and increase the likelihood of a successful borrowing effort. Remember, a potential lender should be viewed as an important business partner. Developing and maintaining an open, honest and direct dialogue will optimize a businesses chances of success and broaden its options in terms of funding alternatives available to it. KEYS TO SUCCESSFUL BORROWING

Be Prepared Evaluate your business by considering the following: Strengths and opportunities Weaknesses and challenges Your current financial situation and needs going forward; be realistic; for start-up businesses, lenders look at your personal financials Assemble information for presentation to prospective lenders – be it a bank or an alternative (micro) lender Your client’s should take stock of their current situation and its future plans. Developing and sharing information with prospective/existing lenders helps them understand your situation and needs and how they can best assist you achieve your objectives.

Build an Effective Dialogue Build an open and honest dialogue: Provide an understanding of the company’s current state and vision for the future Discuss key objectives, acknowledging key risks and related remediation plans Gain an understanding of the lender’s loan products or alternative solutions and related requirements Start early: It usually takes more than one meeting to get the best borrowing solution. Like many other things in business, relationships and good communication are critical. Don’t wait to the moment you need the funds to get started. Some up front investment in relationship building will go a long way in the long term and optimize a business’ ability to raise capital when/if needed

5 Cs of Credit Character Capacity Conditions Capital Collateral Does the borrower demonstrate a commitment to honor his or her transactions and keep promises even under adverse circumstances? Character Does the business demonstrate the capacity to re-pay the loan funds? Does management have a business plan? Are the plant and equipment sufficient? Are marketing and product delivery well developed? Capacity What are the 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? Conditions Capital Does the company have sufficient net worth to absorb normal business risk? Is the collateral sufficient as a secondary source of repayment? If the collateral must be liquidated, is the realizable value enough to repay principal and outstanding interest, and cover the bank’s administrative costs of liquidation? Collateral

The Loan Application Ensure that the loan application is complete and accurate Core bank loan application information often includes: Historical business financial information (2 years) Business and owner’s personal tax returns (2 Years) Personal Financial Statement 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! 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

Sources of Repayment Guarantor Support Cash Flow From Operations Lenders typically rely on three main sources of repayment Cash Flow From Operations Guarantor Support Collateral / Security 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. 12

Cash Flow From Operations - Questions to Consider Industry Dynamics Is the applicant’s industry stable, or does it have a history of volatility and high credit risks? What is the applicant’s competitive positioning relative to its peers in the industry? Financial Condition Are the business’s profitability and cash flow sufficient to fund debt service? What is the business’s current level of debt, and will the additional borrowing stay within reasonable debt to equity/leverage norms? Is there sufficient liquidity in the business to sustain it through normal business cycles? Management & Maturity of Business What is the stability and quality of the management team, and have they demonstrated an ability to develop and implement business strategies and achieve desired results? Has the business been operating for a reasonable period (i.e., three or more years)? These are representative questions that lenders consider when assessing the applicant’s ability to generate/maintain cash flows sufficient to repay borrowings.

Guarantor Support & Collateral/Security - Questions to Consider What is the financial condition of the guarantor? Does the guarantor have a track record of fulfilling his or her financial obligations? Collateral/ Security Is the collateral a building or physical asset that is easy to control, and is there an established market to liquidate this asset with minimal costs? Is the collateral occupied by or used in the business of the borrower? Other Is the amount requested by the applicant within the lender’s preferred lending parameters? Does the company have ready access to reputable professional support (CPA, attorney, financial advisor, etc.)? Does/Will the borrower have an established or full relationship with the bank? These are representative questions that lenders consider when assessing the guarantor's financial condition along with the adequacy and accessibility of collateral/support that an applicant will pledge.

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