Understanding How Banks Lenders Look at Your Small Business The MetroIBA Education Committee welcomes you to the webinar: Understanding How Banks Lenders Look at Your Small Business Presented by Roger Hamilton, BankCherokee August 18, 2015 9 – 10am CST

Presented by Roger Hamilton, Commercial Lender/Sr. Vice President Understanding How Bank Lenders Look at Your Small Business Presented by Roger Hamilton, Commercial Lender/Sr. Vice President

Understanding How Bank Lenders Look at Your Small Business Types of Business Loans Loan Application & Financial Reporting The Five C’s of Credit Assessment of Capital Assessment of Capacity Role of Financial Covenants Examples Summary & Questions

Types of Business Loans: Line of Credit Importance of Principal Payments/Clean-up Equipment Loans Down payment is typically modest Real Estate Loans Down payment ranges from 5-25% SBA Loan Programs 7a Guaranty, Capline & 504 program Importance of Personal Recourse

Commercial Real Estate Loan Options Owner-occupied Commercial Real Estate Loan Options 20% Down 10% Down 3.3% Down Conventional SBA 504 SBA 504 with Uses of cash: Loan Non-profit Purchase property 480,000 Improvements to property 120,000 Closing costs 12,000 Total Uses 612,000 Sources of cash:   BankCherokee 1st mortgage 300,000 SBA 504 2nd mortgage 240,000 MCCD 3rd mortgage 40,000 Owner's equity contribution 132,000 72,000 32,000 Total Sources The "as-completed" appraisal came back at $600,000 or $50 per SF on a 12,000 SF building, as compared to project costs of $600,000.

Loan Application & Financial Reporting FYE Statements for past 3 years (Tax Returns) Interim Financial with prior year comparison Account Receivable & Account Payable . Aging Reports Debt Schedule Projections (fast growing or turnaround company) Personal Financial Statement Personal Tax Returns for past 2 years

The 5 C’s of Credit Capacity: Ability to Repay Loan from Cash Flow Capital: Assessment of Tangible Net Worth Collateral: Assets to Secure the Loan Character: Integrity / Personal Credit Score Conditions: Industry Specific and Economy

Assessment of Capital Tangible Net Worth Calculation Leverage Ratio Total Shareholders Equity Less: Notes due from Officers, Shareholders or Affiliates Goodwill or other Similar Intangible Assets Plus: Subordinated debt = Tangible Net Worth Leverage Ratio Total Liabilities less Subordinated Debt Tangible Net Worth

Assessment of Capacity Cash Flow Calculation Net Income Less: Distributions Plus: Depreciation & Amortization Expenses Interest Expenses = Traditional Cash Flow Debt Service Coverage Ratio (DSCR) Traditional Cash Flow Interest Expenses Plus CMLTD (prior period) or Scheduled Principal & Interest Payments

Role of Financial Covenants Section 9 – Financial Covenants. The Borrower will maintain and comply with the following Financial Covenant: Borrower shall maintain a minimum debt service coverage ratio of 1.15 to 1 as of December 31, 2015 and annually thereafter according to the following calculation: Gross rent less operating expenses less distributions divided by Annual Debt Service. Annual Debt Service is all regularly scheduled principal and interest payments.   Section 10 – Event of Default. The following shall constitute an Event of Default under this Loan Agreement: The failure by Borrower to pay any sum with respect to the Notes within five (5) days following the date upon which payment is due; The failure by Borrower or Guarantor to keep and perform any covenants or obligations under the terms of this Loan Agreement and the failure to cure such default within thirty (30) days following written notice thereof from the Lender specifying the default; Upon the occurrence of an Event of Default, Lender shall have the right to decline to make any further advances or disbursements of the Loan and may accelerate all of any portion of the balance due under the Notes and assert any and all rights and remedies available to the Lender under the Mortgage and Security Agreement.

Other Financial Covenants: Maximum Capital Expenditures Minimum Clean-up Days on Credit Line Minimum Capital Levels

Limitations of Traditional Cash flow May not provide match of FY taxable income to the FY tax distribution Ignores source & uses of cash flow from the balance sheet (operating company) Ignores reclassified distributions Bank’s loans will get repaid from future cash flow NOT past cash flow

Manufacturing Company DSCR based on definition   12/31/10 12/31/11 12/31/12 12/31/13 12/31/14 12/31/15 Net Income 259 205 125 143 442 400 Distributions -202 -141 -91 -131 -354 Depreciation 45 62 47 222 28 Interest 91 88 89 84 81 80 Cash Flow 395 153 120 358 420 154 Debt Service 1st mortgage 59 Debt Service 2nd mortgage Interest-Bank credit line 21 23 24 18 Debt Service equipment loan 30 33 Total Debt Service 127 129 134 130 157 DSCR 3.11 1.19 0.90 2.75 2.73 0.98 Manufacturing Company DSCR based on matching taxable income to the related tax distribution -320 193 214 170 318 197 188 1.52 1.66 1.27 2.45 1.28 1.20

Retail Company Capital Analysis   2010 2011 2012 2013 2014 Total Stockholder's Equity 324 339 445 412 521 Less: Due from Shareholder -105 -78 -74 -132 -215 Due from Affiliate 59 Plus: Subordinated Debt Tangible Net Worth 219 261 371 280 247 Total Liabilities 758 907 1,265 1,968 2,024 Leverage Ratio 3.5x 3.4x 7.0x 8.2x

Retail Company Capacity Analysis (using traditional cash flow)   2011 2012 2013 2014 Net Income 120 185 17 114 Less: Distributions (33) (100) (73) (4) Plus: Depreciation Expense 151 57 78 118 Interest Expense 19 24 90 Traditional Cash Flow 257 166 112 306 Credit Line Interest 6 8 16 Installment Loans 13 36 117 Total Debt Service 44 94 133 Debt Service Coverage Ratio (DSCR) 13.5x 3.8x 1.2x 2.3x Retail Company Capacity Analysis (using modified traditional cash flow) Reclassified Distributions (58) (83) Due from Affiliate (59) Modified Traditional Cash Flow DSCR 0.6x 1.23x

BankLocal. BankCherokee. How's Your Flow? Cash Flow Not Profit Summary & Questions Contact Information: Roger Hamilton Commercial Lender/Sr. Vice President email: rhamilton@bankcherokee.com Phone: 651.291.6263 BankLocal. BankCherokee. Recommended reading: Forbes Article How's Your Flow? Cash Flow Not Profit As Predictor Of Entrepreneurial Success http://onforb.es/1LeJvt2

Thank you for attending today’s webinar! We hope to see you at these upcoming events: Member’s-Only - Business Owner’s Roundtable Thurs Aug 27, 7:30-9:00am 1st Tuesday Networking Events 4:30 – 6:30pm, Sept 1st @ The Wedge Table Public Policy Caucus – Member Only – Sept 29th, 6 – 8:15pm Free Webinar Oct 20th, Start Thinking About What’s Next For You – NOW! Visit www.buylocaltwincities.com/events for more information Not a MetroIBA member? Visit www.buylocaltwincities.com/join to learn more about the benefits of being a member and to join online today!