Module 5: Session 3 M5S31

Training objective: Developing financing proposals for road contractors Training outcome: 1) By the end of the session trainees should be able Identify the major types of information required in preparing financial proposals in order to access bank services. 2) They should be able to develop a fundable proposal acceptable to financing institutions M5S32

Piecing the puzzle together Financing is a puzzle with many pieces Developing a proper structure for a proposed financing program is critical to successfully completing the puzzle This proposal can be used as a stand-alone document or can be included as a separate section of the business plan itself M5S33

Key components Uses and extent of funds Sources and nature of funds Proposed security Business and financial assumptions Income and cash flow projections Historical statement of income and cash flow M5S34

Uses and extent of funds Uses of funds – what is the funding for?  Here the strategies outlined in the business plan are summarized and quantified to demonstrate the use and extent of funding.  The cost of additional inventory, equipment, asset purchases, acquisitions, refinancing, working capital, and so on, are identified and quantified. M5S35

Sources of funds  Not all lenders or all products are fit for all purposes. A tiered or layered approach to financing uses multiple and/or niche lenders to fill the gaps in a financing program. Identify and match the uses of funds to the most appropriate products and lender(s) Match Purpose to the product Product to the asset Asset to the lender Lender to the industry Industry-specific niche lenders can often provide more flexible credit arrangements with better terms and conditions than traditional lending sources M5S36

Tiered financing scheme Illustrative example of a tiered financing scheme: Use of funds: Sources of funds: Purchase of equipment shs 40 Capital lease shs millions 25 Operating lease 10 Term loan — secured 5 40 Inventory/Accts receivable shs millions 50Line of credit — secured 10 Line of credit — unsecured 5 Factoring facility 12 Letter of credit 8 Suppliers’ credit Working capital 80Sub-debt term loan — unsecured 10 Term loan — unsecured 20 Line of credit 18 Sale lease-back 12 Asset-based financing Purchase real estate 100 Commercial mortgage 60 Collateral term loan Total shs millions 270 shs Million 270 M5S37

Proposed security Deserves to be properly addressed and identified Security should not be assumed but rather proposed upfront Assist the lender in making a favourable decision about the financing proposal Some assets can be the security for the financing Funding will only be given for a percentage of the value of the security ( %) Banks may require personal guarantees in addition M5S38

Business, financial assumptions and predictions State the major assumptions made about the future of operations and general assumptions about the industry, the economy and competition Demonstrate knowledge of the business and why the business will succeed Make reference to past performance Show capacity for good leadership and the presence of a winning team that can be trusted Outline the challenges and the threats M5S39

Statement of income and cash flow The purpose of this section is to restate income and cash flow on a normalized basis to show available operating cash flow, given a normal operating environment and circumstance. Show the company’s ability to generate cash flow on a normalized basis and to service the facility. An income statement will list sales and expenses and indicate potential for profitable operations Provide projected cash flows M5S310

Statement of income and cash First-year projections should be done on a monthly basis. Provide summarized annual projections to cover the period of the facility Proposed financing amortization and cost Demonstrate the ability to service the facility Where possible, derive ROI and IRR Attempt some sensitivity analysis of key assumptions M5S311

Summary In today’s business environment, a properly structured financing program is key to the success of any business At the core of this approach is the financing proposal; matching purpose to product, product to asset, asset to lender, and lender to industry By providing lenders with a financing proposal structured to the lender’s requirements, the chances for success in obtaining financing are greatly increased. M5S312

Group discussion 1. Describe the main components of a financing proposal 2. Identify the qualities and the benefits of a good financial proposal. 3. Discuss Common basic questions every lender will require to be answered. 4. Discuss the Dos and Don’ts in loan utilization and servicing. 5. Identify the key challenges in preparing a financial proposal and suggest how they can be addressed. M5S313