#FISPA2016 Bank Loans and Balance Sheets Paul Chapman Pathwayz Communications President

#FISPA2016 The Loan Process Business owner/executive requests loan from loan officer who often says ‘no problem’ and ‘offers’ low rates Many hours of work go into educating the loan officer, answering all the questions that come up in the underwriting process, and tweaking the application to match something the loan officer can submit to the loan committee. If application isn’t turned down by the committee, the rate comes back higher than expected and bank starts ‘collateral grab’ The side with the most power gets their way 2

#FISPA2016 Why get a bank loan Cost of Capital from cheapest to most expensive (in theory): 1.Bank loans 2.Non-bank loans & capital leases 3.Operating leases 4.Loans from stockholders 5.Equity 3

#FISPA2016 Bank Loan Underwriting Five C’s of Credit Capacity Character Capital Conditions Collateral 4

#FISPA2016 Loan Officers Loan officer is a sales job (they need to grow their loan portfolio) but the loan committee will torpedo their deals Need multiple long term relationships – you will need to educate them on what you do and the annuity value of the subscribers Banks decisions are local and can be quirky 5

#FISPA2016 Loan Types Real estate loans Lines of credit Operating or project loans Equipment loans SBA guaranteed loans Private loans Personal loans (HELOC, etc.) Credit cards 6

#FISPA2016 Bank Loan Hassles Submitting financials (internally prepared, CPA compiled – reviewed - audited) Loan covenants on liquidity & profitability Additional insurance (inland marine policy) Liens on your assets Submitting personal financials Personal guarantees 7

#FISPA2016 Sample Balance Sheet (and other relevant items) Assets Current Assets Cash 250 Net Accounts Receivable 250 Inventory 50 Total Current Assets 550 Net Fixed Assets 1000 Other Assets 50 Total Assets Total Annual Sales 2500 EBIT 150 Net Income 100 Liabilities & Equity Current Liabilities Accounts Payable 150 Notes Payable 20 Payroll Payable 30 Total Current Liabilities 200 Long Term Liabilities 200 Equity & Retained Earnings 1200 Total Liabilities & Equity New Loan Requested = 5% for 7 years. Monthly Payments = $7.1 Annual Payment = 85 8

#FISPA2016 Balance Sheet Analysis Does Balance sheet show liquidity? Current Ratio = current assets / current liabilities = 550/200 = 2.75 Quick Ratio (Acid Test) = current assets – inventories / current liabilities = 500/200 = 2.5 Does the company have the income to cover the loan payment? Debt Coverage = EBIT / total debt service (payments) = 150 /85 = Does the company have too much leverage? Debt to Equity Ratio = long term debt / equity = 700 / 1200 = 58% Bank prefers >1.5 >1.1 >1.2 >20% equity 9

#FISPA2016 Preparation for a loan Steps to get your financial statements ready for a loan application: 1.Look at your ratios now and with the loan and make improvements if necessary 2.Show profits (even if you have to pay more income tax) 3.Document your unusual items and investment spending (which may not look like an investment to a banker). We use a Owner’s Discretionary Cash Flow Statement. 4.Consider investing in good financial staff who can speak the bank’s language 10

#FISPA2016 Statement of Owner’s Discretionary Cash Flow Start with EBITDA Add back: ₊Income Taxes ₊Owner perks and compensation above expenses required for management ₊Employees profit sharing bonuses (expenses above market rates) ₊Unusual & non-recurring expenses ₊Expansion expenses / Additional marketing expenses ₊(Any expenses that a new owner wouldn’t necessarily incur) Owner’s Discretionary Cash Flow (Sum) 11