Preparing Your Company Preparing Your Company for the Next Level – for the Next Level –

Obtaining Bank FinancingObtaining Bank FinancingRobert LemaireVicky Richards

David Poillucci, CPAJesse Nash, Esq.

The material provided herein is for informational purposes only and is not intended as legal advice or

counsel.

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Please help yourself to food and drinksPlease let us know if the room temperature is too hot or coldBathrooms are located past the reception desk on the rightPlease turn OFF your cell phonesPlease complete and return surveys at the end of the seminar

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CBG Banking Division Cultivating a Relationship with a BankCultivating a Relationship with a Bank

Chose for the right reasons Integrity Professionalism Creativity

Have proper documentation available Corporate tax return for the past 3 years Personal tax returns for the past 3 years Financial statements for the past 3 years

(prepared by CPA) Business plan or executive summary Projected future performance Aged receivables

Build and nurture a relationship with your banker Meet with them at least twice a year Participate in social functions and community events hosted by your bank

Preparing your business (Thunder / Wonder / Blunder) Invest in a quality information and accounting system Invest the in right people to build your management team

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CBG Banking Division What Bankers are Looking ForWhat Bankers are Looking For

The 5 C’s of Credit

Character – refers to the borrower’s reputation

Capacity – measures a borrower’s ability to repay a loan by comparing income against recurring debts

Capital – a lender will consider any capital the borrower puts towards a potential investment because a large contribution by the borrower will lessen the

chance of default

Collateral – property or large assets helps to secure the loan

Conditions – interest rate and amount of principle will influence the lender’s desire to finance the borrower

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CBG Banking Division Typical Mistakes to avoidTypical Mistakes to avoid

5 D’s of Credit Divorce Drinking Drugs Dames Disingenuous activates > gambling

Top 3 Reasons You are Declined by a Lender Customer concentration Leverage Poor information systems resulting in bad or slow decision

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CBG Banking Division Description of Typical ProductsDescription of Typical Products

Deposit (Liability) Accounts / Cash Management Checking Money Market Remote Check Deposit (RCD) Investments Fraud Protection Lockbox

Loan (Asset) Accounts Commercial Mortgage Owner Occupied Mortgage Term Loans Line of Credit / Borrowing Base SBA

Trade / Foreign Exchange Import L/C’s FX - Spot and Forwards EXIM Bank Foreign A/R – Credit Insurance

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CBG Banking Division Description of Credit Review ProcessDescription of Credit Review Process

Important Financial Ratios

Debt Service (EBITDA - Cash Taxes – Distributions – Unfinanced Capital Expenditures) / (Current Maturities

of Long-Term Debt & Capital Leases plus Interest Expense)

Leverage Total Unsubordinated Liabilities / Tangible Net Worth

Current Ratio Current Assets / Current Liabilities

A/R and A/P Turnover A/R = (Net Accounts Receivables / Net Sales) x 365 A/P = (Accounts Payable / Cost of Goods Sold) x 365

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Assessing Your Company’s Borrowing Needs

Vicky Richards

The Alternative Board

White Eagle Partners

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Short Term Versus Long Term Funding

Short term funding fills the gap in daily cash flow – the goal is to provide liquidity for short term bumps that will pay off within a year. Examples:

– Receivable cycle longer than payable cycle– Seasonal inventory build– Payroll spikes– One time or quarterly payments

Long term funding is used to fund expenditures that will contribute to company growth and cash flow over time (equipment, acquisitions, new product development, real estate) OR to term out short term debt that isn’t paying down as projected; the goal is to optimize cash flow by spreading the debt service out over time

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Short Term Debt

Standard Options available to small businesses:– Line of Credit, Swing line, Purchasing card, Factoring

How Much Should You Have:– Review monthly cash flow history - chart the peaks and valleys – Analyze trends - Is your cash flow seasonal? Do you have specific

times during the year when working capital is building, draining cash? – Think about the changes over the next 12 months – are there any

changes in customer or vendor payment patterns? Any quarterly or annual payments that need to be accommodated?

– Size the line above the historic peaks, with margin for growth and accounting for anticipated changes in A/R patterns and unusual A/P

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Short Term Debt

What You Should Know:– Maturity: typically a 1 year maturity and MAY be due on demand– Potential Requirements/Covenants which you MUST comply with

to keep your line : Reporting Financial Restrictive Annual Clean Down

– Collateral: Blanket lien, personal guaranty – Borrowing base: not typical to average LOC

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Short Term Debt

What You Should Know:– Tools needed: 12 Month rolling cash flow forecast - in some ways

more important than a budget

– When to call the Bank: Relationship Maintenance/development Rollover Increase Problem

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Short Term Debt

Best Practices– Have a line in place – even if you think you don’t need it– Use it a few times a year – even if you think you can get by without it– Keep track of your seasonal peaks and valleys; know what your

cash flow cycle should look like. When it varies, find the source– Anticipate the need for an increase well in advance and pursue the

increase with 4-6 months lead time; ideally at the rollover– Meet with your banker (and the underwriter if possible) 2-4 times a

year and provide them with a holistic update on the company– Have your accountant help you prepare for the meeting and attend

at least once a year– Document your borrowing needs/projected repayment for the bank – Know what your covenants are and DO NOT violate them

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Long Term Debt

Standard Options available to small businesses:– Term Loan, Multi-year revolving credit, Mortgage, Lease, Seller

Paper/Earn Outs How Much Should You Have:

– Tied to underlying use of funds and measured against net worth and/or cash flow (leverage ratio)

– Size the funding and the repayment terms to the company’s projected cash flow over a 3-5 year period (for non-mortgage debt). If the company can’t service and repay the debt within 5 years, and still maintain all necessary investments, then equity is probably needed

Advance planning for your long term debt needs is an integral part of the Overall, multi-year, business planning process. You should not do one without the other.

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Long Term Debt

What You Should Know:– Maturity: Multi-year; 3-5 years for non-mortgage debt– Potential Requirements/Covenants, which you MUST comply with

to maintain funding: Reporting Financial Restrictive

– Borrowing Base: Typical for multi year LOC– Collateral: Typical for term loan – Relationship to short term debt: cross-default, cross-collateral– Tools Needed: 12 month rolling cash flow, 3 year strategic plan with

three year forecast and detailed assumptions, including debt service

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Long Term Debt

Best Practices:– If you have a good rate, your business is growing, and there are a few

good options for additional investment, do not pre-pay your term debt– Assemble a knowledgeable project team to develop the forecast and

to assist in the long term financing process – accountant, experienced attorney, controller, and key operations employee for bank meetings

– Meet with your banker (and the underwriter if possible) 1-2 times a year, with your accountant, and provide them with a holistic update on the company

– Be conversant on the company’s performance versus the projections you gave to the bank when you took on the long term debt

– Do not skip the planning process when making decisions about how much and what type of debt to take on

– Under promise and over deliver

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General Best Practices For Using External Funding

Cultivate relationships within your bank; don’t wait until you need it When you approach the bank for new money, an extension or

covenant relief:– Do your homework first; run the numbers, know the numbers, be

knowledgeable and articulate about all aspects of your business and about the request on the table

– Assemble and fully engage a good project team– Seek feedback and input from peers

Engage in the planning process annually:– Helps you to position your business for growth and success– Assures that you look at the fully loaded cost-benefit analysis before making a

commitment to action– Allows you to size your credit needs appropriately

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Key Elements of a Loan Request

Clear, concise, quantitative calculation of: Use of requested funds – all expenditures related to the proposed investment Historic (3 years back) free cash flow available for debt service, after

maintenance cap/ex (with supporting documentation) Projected (3 years forward) free cash flow available for debt service, after

maintenance cap/ex AND proposed investment/expenditure

Qualitative assessment/description of company strengths, weaknesses, infrastructure, market/competitive position and growth strategy, management bio’s

Financial statements, tax returns, disclosures Demonstrated ability to comply with key loan terms Track Record

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Case Study Examples

See Hand Out

Don’t Forget to Schedule Your 2011 Planning Session!!!

Preparing Your Company for Preparing Your Company for the Next Level – Obtaining Bank the Next Level – Obtaining Bank

Financing: Financing: The Legal PerspectiveThe Legal Perspective

Jesse P. Nash, Esq.

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A Few Common Pitfalls to A Few Common Pitfalls to Avoid Avoid

Invest preemptively in the Legal Infrastructure of your Company:– Keep entity documents current and in

order– Customer Contracts– Vendor Contracts– Key Employees– Employee Handbook

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• The Lender will assume your Company’s affairs are in order when issuing its commitment. You do not want to surprise them.

• Address outstanding judgments, liens and litigation head on.

• Keep accurate, completeand up to date corporate books and other entity documents.

Anticipate and Prepare for Anticipate and Prepare for the Lender’s Underwriting the Lender’s Underwriting

ConcernsConcerns

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Understand the role of your lawyer:•The loan documents are legal

documents with legal implications.•Legal issues vs. business issues. •Work with your attorney to manage

the functions he or she performs.

The Legal Opinion

Don’t Go It AloneDon’t Go It AloneThe importance of using competent The importance of using competent

professionalsprofessionals

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• The Commitment Phase is when the basic deal points are fixed. It is difficult to argue to the contrary later in the process.

• Its important to understand from the outset the operational impacts of key business points.

• Use your leverage wisely.• Shop the term sheet around.

Negotiate the Loan at the Negotiate the Loan at the Commitment PhaseCommitment Phase

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A well-drafted loan agreement will cover three main sets of terms: 1. Conditions of closing2. Covenants to apply post closing3. Events of Default/Bank

Remedies

Understand the Impact of Understand the Impact of Key Loan Document Key Loan Document

ProvisionsProvisions

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Get the Bank’s Perspective Get the Bank’s Perspective on the Pre-closing Processon the Pre-closing Process

With respect to: •Timing•Cost•Approach to Lawyering

Question & Answer Question & Answer SessionSession

Thank you for coming!