W.P.A.S.G.L. Western Pennsylvania Association of SBA-Guaranteed Lenders

The Competition for Your Borrower’s Cash - Global Cash Flow Analysis

Objectives

• SBA Requirement• Terminology/Process• Sample analysis-Field Underwriting

Disclaimer (a statement that is meant to prevent an incorrect understanding)

• Your Institution’s Credit Officer is 100 % Correct !

Avowal(an open declaration or acknowledgment)

• 50% of the Time!

SBA SOP 50 10 5(F) Requirements

• (c) The Small Business Applicant’s debt service coverage ratio exceeds 1:1 on a historical or projected cash flow basis; and • (d) With the exception of loans under $50,000, the Small Business Applicant’s global cash flow coverage ratio exceeds 1:1 on a historical basis

or, projected cash flow basis. Lender must document in the loan file the definition or formula used to calculate global cash flow ; and • (e) Owner/Guarantor analysis, including personal financial statements, consistent with lender’s similarly-sized non-SBA guaranteed

commercial loans.2. For Standard 7(a) loans greater than $350,000 and up to and including $5,000,000 : • Lenders analysis must demonstrate the Small Business Applicant’s ability to repay the loan from the cash flow of the business by documenting

the following:Loans from $350,001 to $5 million • c) A financial analysis of repayment ability based on historical financial statements (including balance sheet with debt schedule and income

statement) and/or tax returns (if an existing business) and detailed projections, including the supporting assumptions: • 1. Analysis of historical cash flow should demonstrate total debt service coverage after the SBA loan; • 2. Define operating cash flow (OCF) as earnings before interest, taxes, depreciation and amortization (EBITDA); • 3. Analysis must document additions and subtractions to cash flow such as the following: • (a) Unfunded capital expenditures; • (b) Non-recurring income; • (c) Expenses and distributions; • (d) Distributions for S-Corp taxes; • (e) Rent payments; • (f) Owner’s Draw; and/or • (g) Assessment of impact on cash flow to/from any affiliate business. • 4. Debt service (DS) is defined as required principal and interest payments on all business debt inclusive of new SBA loan proceeds. The small

business applicant’s debt service coverage ratio (OCF/DS) must be 1.15 to 1 or greater on a historical and/or projected basis:

What does that mean?

• (a) Unfunded capital expenditures % of depreciation is commonly used

• (b) Non-recurring income; Gain on sale of assets, Capital gains for guarantor, Lottery winnings, insurance proceeds et al

• (c) Expenses and distributions; Moving, and any other extra-ordinary Expenses. Document in credit write up

• (d) Distributions for S-Corp taxes; Prior Period net income is basis for analysis

• (e) Rent payments; EPC

• (f) Owner’s Draw; and/or • (g) Assessment of impact on cash flow to/from any

affiliate business Is my business owner Warren Buffet or Bernie Madoff?

IS IT DIFFICULT?

Constructing Global Cash Flow

• Borrower Cash Flow + related entities+ personal guarantors=Global Cash Flow

• Business EBITDA • Related Entities EBITDA (for ownership greater than 50%)

• Guarantors Excess cash flow surplus Must be formulaic

• EPC Rent add back-Triple net lease? Excess rents? Can be incorporated into Guarantor analysis

Deducting Living Expenses

• Should be supported and utilized by the institution

• RMA has articles and information to refer to if in doubt

Operating Company-income statement

(000's omitted) 1 % 1 % 2 % 0 %DATES: 12/31/10 12/31/11 12/31/12 11/30/13STATEMENT TYPE: 4 4 5 4Sales $13,568 100.0 $16,114 100.0 $13,248 100.0 $13,856 100.0Other Income $0 0.0 $0 0.0 0.0 $0 0.0Total Income $13,568 100.0 $16,114 100.0 $13,248 100.0 $13,856 100.0 100.0%Cost of Goods Sold $10,424 76.8 $13,116 81.4 $10,950 82.7 $10,704 77.3Depreciation Expense included in COGS** $697 5.1 $764 4.7 $778 5.9 $771 5.6Gross Profit $3,144 23.2 $2,998 18.6 $2,298 17.3 $3,152 22.7 100.0%Officer Compensation and Employee bonus $0 0.0 $0 0.0 $0 0.0 $0 0.0Depreciation and Amortization Expense** $116 0.9 $23 0.1 $24 0.2 $101 0.7Interest Expense** $323 2.4 $180 1.1 $157 1.2 $134 1.0Rent Expense** $25 0.2 $25 0.2 $19 0.1 $108 0.8S G & A Expenses $2,043 15.1 $2,345 14.6 $2,250 17.0 $2,836 20.5Other (Income) Expense net $320 2.4 ($15) -0.1 ($65) -0.5 ($28) -0.2Other Operating Expenses $0 0.0 $0 0.0 $0 0.0 $0 0.0Net Income Before Dist/Withdrawals $317 2.3 $440 2.7 ($87) -0.7 $1 0.0 0.0%

Distributions/Withdrawals $0 0.0 $504 3.1 $219 1.7 $228 1.6Taxes taken at 30% or actual paid $0 0.0 $0 0.0 $0 0.0 $0 0.0

Net Income After Dist./Tax $317 2.3 ($64) -0.4 ($306) -2.3 ($227) -1.6

INCOME STATEMENT

Operating Company-Balance Sheet

(000's omitted) Year-End % Year-End % Interim % %DATES: 12/31/10 12/31/11 12/31/12 11/30/13Cash $151 1.6 $216 2.3 $90 1.0 $18 0.2A/R $2,102 21.7 $1,870 20.2 $2,043 22.0 $2,631 27.0Inventory $1,180 12.2 $1,421 15.4 $1,918 20.6 $2,267 23.3Work In Process $0 0.0 $0 0.0 $0 0.0 $0 0.0Investments-Long term $0 0.0 $0 0.0 $0 0.0 $0 0.0Other Short Term Assets $302 3.1 $271 2.9 $103 1.1 $25 0.3Current Assets $3,735 38.5 $3,778 40.9 $4,154 44.7 $4,941 50.7 0.0%Net Fixed Assets (P,P&E and Rental Inv.) $5,546 57.1 $5,001 54.1 $4,712 50.7 $4,216 43.2Prepaids $72 0.7 $51 0.6 $58 0.6 $115 1.2Security Deposits $35 0.4 $35 0.4 $35Software $17 0.2 $24 $23Other $300 3.1 $300 3.2 $300 3.2 $340 3.5INTANGIBLES $0 0.0 $55 0.6 $21 0.2 $136 1.4Total Assets $9,705 100.0 $9,244 99.7 $9,303 99.4 $9,748 100.0

Accounts Payable $929 13.1 $963 19.8 $1,399 26.9 $2,223 37.8Accured Liabilities $269 3.8 $223 4.6 $162 3.1 $231 3.9Current portion of long term debt $4,606 64.9 $455 9.4 $543 10.4 $450 7.7Line of credit $1,250 17.6 $1,700 35.0 $1,949 37.5 $1,994 33.9Note Payable - $21 0.3 $34 0.7 $88 $85Short Term Loan - Bank $0 0.0 $0 0.0 $0 0.0 $144 2.4Interest payable $0 0.0 $0 0.0 $0 0.0 $0 0.0Current Liabilities $7,075 99.7 $3,375 69.5 $4,141 77.9 $5,127 85.8 0.0%Long Term Debt*** $0 0.0 $1,463 30.1 $1,049 20.2 $643 10.9Capital Lease Obiligations $24 $19 0.4 $14 $108Other Long Term Liabilities (Deferred Comp) *** $0 0.0 $0 0.0 $0 0.0 $0 0.0Other Long Term Liabilities*** $0 0.0 $0 0.0 $0 0.0 $0 0.0Other $0 0.0 $0 0.0 $0 0.0 $0 0.0Total Liabilities $7,099 72.8 $4,857 52.5 $5,204 54.0 $5,878 57.0 Net Worth $2,606 26.9 $4,387 47.5 $4,099 44.1 $3,870 39.7 0.0%Total Liabilities and Net Worth $9,705 99.7 $9,244 100.0 $9,303 98.0 $9,748 96.7

BALANCE SHEET

Debt Schedule

(000's omitted) Amount Term (Months) Rate (%) Annual pymtProposed New Debt $3,350 144 5.00% $372Proposed New Debt $250 60 5.00% $57Line of Credit $1,250 999 4.50% $58Note payable $0 0 0.00% $0Note payable $0 0 0.00% $0Other $0 0 0.00% $0

$0 0 0.00% $0

$0 0 0.00% $0Total $4,850 $486Less existing and/or refinanced debt on B/S Debt used in Leverage Calculation $4,850

COMMENTSReview Based Statements

DEBT SCHEDULE

Guarantor Balance Sheet

PFS DATE(S): 20-Dec-13 Assets Liabilities Monthly PaymentCash $31 Real Estate $513 $4Marketable Securities $110 Secured Indebtedness $179 $6Retirement $0 Revolving $0 Home $950 Installment $50 $0Other Real Estate $522 Other $0 $0Autos/Other Personal Property $249 Total Liabilities $742Business Ventures $1,317 Net Worth $2,437Total $3,179 Total Liab/NW $3,179

OUTSIDE NET WORTH $1,120

PFS-OUTSIDE GUARANTOR NET WORTH

Guarantor Cash Flow

Guarantor PFS DATE(S): 12/20/2013YR OF 1040 TR 12/31/2012(000's omitted) Salary $112Investment $2Net Rental Income $0Net Business Income $228Other-Spouse Salary $58Other $0Gross Adj. Personal Income $400less 50% $200Personal Income $200

Less contractual obligationsHome Mortgage/Rent $51Home Equity Line $0Installment Loans $0Revolving/Open Credits $0Real Estate Taxes $8Insurance $2Other Scheduled Debt $0TOTAL CONTRACTUAL DEBT $61

Net Adj. Personal Income $139

GUARANTOR ANALYSIS

Donald Trump Analysis

RENTAL REAL ESTATE FROM SCHEDULE E Net Income Depreciation Interest Debt ServiceProperty Address 1 $0 $0 $0 $0Property Address 2 $0 $0 $0 $0Property Address 3 $0 $0 $0 $0Property Address 4 $0 $0 $0 $0Property Address 5 $0 $0 $0 $0Property Address 6 $0 $0 $0 $0TOTAL $0 $0 $0 $0

INCOME FROM RENTAL PROPERTY $0

Global Cash Flow Results

DATES: December-10 December-11 December-12 November-13CASH FLOW FROM OPERATIONSNet Income After Dist./Tax $317 ($64) ($306) ($227)Depreciation and Amortization Expense** $813 $787 $802 $872Interest Expense** $323 $180 $157 $134Rent Expense** $25 $25 $19 $108Cap Ex at 20% Depreciation ($163) ($157) ($160) ($174)Cash Available to Cover Debt Service $1,315 $771 $512 $713Excess Personal Cash Flow $139 $139 $139 $139Total available to cover D/S $1,454 $910 $651 $852Debt Service $486 $486 $486 $486Debt Service Coverage - Traditional 2.71 1.59 1.05 1.47Debt Service Coverage - Global 2.99 1.87 1.34 1.75

Three Year Global Average 2.07

CASH FLOW AND DEBT SERVICE COVERAGE ANALYSIS

Analysis

12/31/10 12/31/11 12/31/12 11/30/13Current Ratio - Bus 1 0.53 1.12 1.00 0.96Working Capital - Bus 1 -$3,340 $403 $13 -$186Current Ratio - Bus 2 0.00 0.00 #DIV/0! 0.00Working Capital - Bus 2 $0 $0 $52 $0

Traditional Debt/Tangible Net Worth - Bus 1 2.72 1.12 1.28 1.57Proposed Debt/Tangible Net Worth - Bus 1 4.59 2.24 2.47 2.87Traditional Debt/Tangible Net Worth - Bus 2 0.00 0.00 0.00 0.00Proposed Debt/Tangible Net Worth - Bus 2 0.00 0.00 0.00 0.00 Global Leverage 2.10 1.03 1.13 1.36Proposed Global Leverage 3.41 1.92 2.06 2.36

Personal Debt to Income Ratio - Guarantor 1 0.15Personal Debt to Income Ratio - Guarantor 2 0.00Personal Debt to Income Ratio - Guarantor 3 0.00Personal Debt to Income Ratio - Guarantor 4 0.00

Aggregate Business Liquidity $90Aggregate Personal Liquidity $141TOTAL LIQUIDITY $231

G1 G2 G3 G4CREDIT SCORES 0 0 0 0NET WORTH OUTSIDE OF BUS. $1,120 $0 $0 $0NET WORTH $2,437 $0 $0 $0

B1 B2BUSINESS SCORE 0 0

LIQUIDITY AND LEVERAGE CALCULATION

Questions?

Good Luck with your brackets!