April 3, 2012

Buying or Selling Stocks

Stock Market Game March 5 – May 11 Partners/Teams: Kwaku and ReillyLauren B. and Lauren C. Caleb and JaredIndia and Patrick Charlotte and Winnie Buying & Selling (10 Minutes): Buying & Selling will take place on Monday, Wednesday and Friday during the first part of class. Research company before making purchase

Warm-up- 4/1 1. What type of business loan is often packaged with a real estate loan? 2. What would a business finance with a term loan? 3. Most business short-term loans are for how long? 4. What is factoring? 5. Debt divided by Income = 6. What does a high DSCR (debt service coverage ratio) indicates that a company has? Add to existing warm-up We will meet in 5 minutes

Student Learning Map – Commercial Lending Key Learning#3: The purpose of the SBA Essential Question#2: What is the purpose of the SBA and what are the loan options? Vocabulary: Small Business Administration (SBA) 7 (a) Loan Guaranty SBA Express Loans

Commercial Loans Purpose of Commercial Loans: Real Estate, Construction, Equipment, Operations Types of Commercial Loans: Term Loans, Short-Term Loans, Lines of Credit, Real Estate and Equipment Loans, Contract Financing, Bridge Loans, Leasing, and Asset-Based Loans Types of Business that acquire Commercial Loans Merchandisers – sell goods or services Manufacturers – build items to sell to merchandisers

Commercial Credit Analysis – take notes Analysis of a business (all types/sizes) can repay their loan Same general steps and ideas apply as consumer loans but with some modifications : Assess individuals employment, Income Current amount of debt to determine if loan can be repaid Analyzing a business is far more complicated Past financial statements are studied Underwriters estimate the likelihood of the business future success The relationship between the bank and company is vital

Commercial Credit Analysis Large corporations, very complex – lenders hire or employ financial analysts that carefully study a company’s financial position. Whether large or small business the financial analysis for a loan is measured in three ways The measurements determine whether the loan makes sense for the company Read pages 272 Debt Ratio, 273 Loan-to-Value Ratio, Debt to Service Coverage Ratio

Debt Ratio Debt Ratio ~ is the total obligations (how much debt ) compared to the total income. (debt could be existing loans) Formula for calculating Debt Ratio Debt ratio = Debt / Income Example: Monthly income $3000 Monthly debt $1500 Debt ratio= $1500 / $3000 =.5 or 50% Note: Lenders will usually not consider a business with a debt ratio above 40 percent. (above scenario?)

Loan-to-Value (LTV) Ratio Loan-to-Value (LTV) Ratio ~ the principal amount of the loan divided by the value of the securing property. Formula for calculating LTV Ratio Loan-to-value ratio = Principal / Market Value Example: Principal $500,000 Market Value $1,000,000 LTV ratio= $500,000 / $1,000,000 =.5 or 50% Note: Lenders for commercial mortgages more conservative, look for a LTV ratio of 80% maximum and will not lend more than 60% than the appraised value. (above scenario?) Review another sample - Excel Can get complicated for business property such as equipment. Real estate usually appreciates while equipment loses value.

Debt Service Coverage Ratio (DSCR) Debt Service Coverage Ratio (DSCR) ~compares net operating income to the total cost of debt. Net operating income is gross income minus expenses, taxes, insurance, utilities, etc. (It does not include debt for mortgages, equipment, services, etc.) Cost of Servicing the debt, including all principal and interest, but not taxes or insurance Used for commercial real estate, and looks at company’s overall position Not a simple task to compile these numbers

Debt Service Coverage Ratio (DSCR) Formula for Debt Service Coverage Ratio (DSCR) DSCR = Net Operating Income / Total Debt Service Example Small Business: Net Operating Income $650,000 on a gross income of $1,000,000 (minus expenses, taxes, insurance, utilities, etc.) Total Debt Service - $520,000 (includes principal, interest but not taxes or insurance) DSCR = $650,000 NOE/ $520,000 TDS = 1.25 Note: The lender prefers to see a high DSCR, the more net operating income is available for debt service. A ratio of 1.0 negative cash flow. Lenders except different ratios; however, never below (above scenario?)

Calculate the Ratios - Excel File – Chapter 9 Math – Commercial Credit Analysis Review calculations Complete questions 1 and 2 using the existing formulas Explain your results – print out and hand write results

Other Evaluation Lenders want full access to company’s financial records. Very complex compared to individual lending Lender must understand the true nature of a company’s financial position can a lender hope to make a sound decision Lenders want to examine the following: Federal and Income tax returns for three years Year-to-date profit and loss and balance statements Projected cash flow estimates for at leas the coming year Valuations and appraisals for collateral used to secure the loan Written business plan (for small business) Personal financial statements of owners (for new or small business)

9.3 Activities Small Business Loan Programs 9.3 Activities SBA project/presentation India, Caleb and Patrick

Starting a Business – Use Credit Wisely Website Activity ~ Understanding Business Credit To help make good business decisions Review of Project and Website… 80 Process Points Questions 20 Product Points Presentation Partners: Winnie & PatrickLauren C. & Lauren C. India & Jared Caleb & CharlotteKwaku & Reilly You will each be responsible for completing the project, each person must complete ½ or a section of the project – online activity You will not receive the same points as your partner unless you equally share the workload You will briefly explain your business to the class and discuss your loan criteria through the use of PowerPoint, 2-4 slides

Starting a Business – Use Credit Wisely Business Development: Now that you have the true understanding of business credit, commercial lending and the SBA, you and your partner must decide on a type of business. What is your business? Provide a brief overview - purpose Is it a manufacturing or merchandising business? What do you produce a product or provide a service or both What will you need to establish your business (building, equipment, etc)? What will you need to run your business What type of funding will you obtain, commercial loan – what type or SBA – what type? What type of loans do you need to be successful Will you lease instead of purchase

Business Presentation Guidelines Project: 80 Process Points for Questions -20 Product Points for Presentation Presentations 2-3 minutes, everyone participates Slides – 2 to 4 slides All questions should be answered Make sure all information is relevant and related to your topic Presentation format should be legible, include graphics, images, charts, etc. that represent you topic Use of inappropriate graphics, etc. will result in loss of points for the entire group Note: Any changes made to the assignment must be discussed with Mrs. Marine prior to completion

Rubric – Business Presentation Project ___ ___ ___ (presented topic – answered all questions) Presentation___ ___ ___ (met time allocations, use of graphics/images) Assignment ___ ___ ___ (Completed all parts of the assignment) Stayed on Task ___ ___ ___ (Did not deviate from completing assignment, and finished in allotted time)

Agenda Monday Using Credit Wisely Developing your Business – answer all questions and prepare PowerPoint to share with the class Tuesday Turn in Using Credit Wisely PowerPoint and Business Presentations to class Study Guide Review for test Wednesday Commercial Loans Assessment Thursday Mr. Terranova – Guest Speaker - Commerical Lending

Study Guide Complete Study Guide 50 Process Points Collecting before test Review for test: (All papers returned) Graphic Organizers Activities Study Guide, Student Learning Map Taking books out? We will meet in 20 minutes

Exit Ticket How are consumers loans alike and how are they different Provide two reasons for each. (compare and contract graphic organizer)