Fundrise: An Investment Platform for Commercial Real Estate
Business Financing | Capital One | Doing Business 2.0
1. Borrowing to Fund Business Growth
Presented by:
Ken Rosenberg, Vice President
Jamila Braithwaite, Vice President
2. Capital One Bank
Today, Capital One Bank is one of the top 10 banks in the country,
with a network of more than 1,000 branch locations across NY, NJ,
CT, TX, LA, DC, MA and VA
2
3. Objectives
• Identify and explain key aspects of debt financing
• Understand the key elements of successful borrowing
• Discuss the key aspects of evaluating a company’s
creditworthiness
• Review financial ratios
3
5. Cash Flow Is the Gas in the Engine That Powers
an Entity’s Growth
$
$ $ $
$ $
Bus ine s s g ro wth fund e d by Bus ine s s g ro wth fund e d by
o p e ra ting c a s h flo w e x te rna l s o urc e s o f c a p ita l
External sources of capital often accelerate
and support growth
13. 5 Cs of Credit
• Does the borrower demonstrate a commitment to honor
Character his or her transactions and keep promises even under
Character adverse circumstances?
• Does the business demonstrate the capacity to apply the
loan funds? Does management have a business plan?
Capacity
Capacity Are the plant and equipment sufficient? Are marketing
and product delivery well developed?
• What are the economic and market conditions that could
Conditions impair the company’s ability to service the debt and repay
Conditions the loan? Does the company recognize these risks and
have plans to mitigate them?
• Does the company have sufficient net worth to absorb
Capital
Capital normal business risk?
• Is the collateral sufficient as a secondary source of
Collateral repayment? If the collateral must be liquidated, is the
Collateral realizable value enough to repay principal and outstanding
interest, and
cover the bank’s administrative costs of liquidation?
13
14. Be Prepared
• Evaluate your business by considering the following:
• Strengths and opportunities
• Weaknesses and challenges
• Current financial situation and needs going forward;
be realistic and try to avoid subsequent unplanned
credit request that can jeopardize credit standing and
overall relationship
• Develop information that can be shared with prospective
lenders.
14
15. Build an Effective Dialogue
• Build an open and honest dialogue:
• Provide an understanding of the company’s current state and
vision for the future
• Discuss key objectives, acknowledging key risks and related
remediation plans
• Gain an understanding of the lender’s loan products or
alternative solutions and related requirements
Sta rt e a rly : I us ua lly ta ke s o ne m e e ting to g e t the be s t
t
bo rro wing s o lutio n.
15
16. The Loan Application
• Ensure that the loan application is complete and accurate
• Core loan application information often includes:
o Historical business financial information (2 years)
o Business and owner’s personal tax returns (2 Years)
o Personal Financial Statement
o Interim financial statements of the business and its owner for
the current & prior year, along with accounts receivable and
payable aging reports
Maintain open, balanced and responsive communication throughout
the process
16
20. The Importance of Metrics in the Application Process
KEY RATIOS &
RELATED GUIDELINES
21. Key Ratios
Lenders typically look at ratios, focusing on the sufficiency
of cash flow to fund debt service as well as the overall level
of debt relative to invested capital (equity)
21
22. Business Debt Service Coverage Ratio
Cash Flow Debt Service
• To ta l So urc e s o f Ca s h • To ta l De bt Se rv ic e (inte re s t &
• N t p ro fit (lo s s )
e p rinc ip a l; e x is ting d e bt p lus re q ue s te d
• De p re c ia tio n & a m o rtiz a tio n a m o unt)
• I re s t e x p e ns e • M rtg a g e
o
nte
• O the r (i. e . , re nt e x p e ns e • A lo a ns /le a s e s
uto
if s wa p p ing re nta l • Te rm lo a ns
fo r o wne rs hip ) • Line s o f c re d it
Business Debt Service Coverage Ratio is a measurement of an entity's
ability to produce cash to cover its debt payments; a higher ratio suggests
the business is better able to fund additional debt obligations
22
23. Business Leverage Ratio
Total Liabilities Equity + Subordinated Debt
• To ta l Lia bilitie s • Eq uity
• Lia bilitie s m inus • Eq uity p lus
s ubo rd ina te d d e bt s ubo rd ina te d d e bt
Business Leverage Ratio is an indicator of the level of investments
made by the business owner(s) versus lenders; a lower ratio
generally indicates lower level of default risk
23
24. Personal Debt to Income Ratio
Personal Debt Personal Income
• To ta l De bt Se rv ic e (inte re s t & p rinc ip a l) • To ta l So urc e s o f I o m e
nc
• M rtg a g e
o • Wa g e s , s a la rie s , e tc .
• A lo a ns /le a s e s
uto • I re s t & d iv id e nd s
nte
• N te s p a y a ble /te rm lo a ns
o • Pe ns io ns & a nnuitie s
• Line s o f c re d it & re vo lving c ha rg e • Re nta l inc o m e
o blig a tio ns • O the r
• O the r d e bt
Personal Debt to Income Ratio is a measurement of the sufficiency of
an individual's ability to fund its existing debt payments; a lower ratio
suggests the individual is better able to fund additional debt obligations
24
25. Ratio Guidelines
• Thresholds for ratios vary by lender; the nature, type
and amount of financing requested; the level of
collateral/security provided; and the industry of the
applicant. Typical minimum levels are:
N te : A a p p lic a nt’s lo w Pe rs o na l De bt to I o m e ra tio m a y be ta ke n
o n nc
into c o ns id e ra tio n whe n c o ns id e ring bus ine s s -re la te d ra tio s (De bt
Se rv ic e & Le v e ra g e )
25
As businesses shift their focus on growth, their needs for cash will likely increase. Among the key needs for cash are the following: Working capital – this is particularly true for business with long/extended cash conversion cycles Expansion – this encompasses a broad array of cash outlays, from purchase of new equipment, enlarging facilities as well as investing in new information systems all of which are often integral to business growth Work Force and other – additional employees often increase cash needs in terms of office equipment, funding initial investments in training, etc.
Profitable operations are a key source of a company’s cash flow … … however, operating cash flow may not be sufficient to fund the investments needed to fuel growth Thus, many businesses will/should seek external sources of funding to accelerate and support growth while maintaining a solid financial position enabling them to sustain normal business risk/downturns that may occur in the future
The two alternatives for obtaining external capital include Debt Equity Both have their advantages and disadvantages. Established businesses with cash flows that can fund debt repayments seek debt financing – its cheaper, it results in no dilution in ownership and control. Businesses with no or limited operating history or those with exceptionally high capital needs may best to seek equity financing The key attributes are outlined on the slide The remainder of this course will focus on debt financing.
There are various types of debt financing options. It is important to consider what the needs of the business are and which option(s) best suit the company’s needs
Like anything else, some planning and getting started early will pay dividends and increase the likelihood of a successful borrowing effort. Remember, a potential lender should be viewed as an important business partner. Developing and maintaining an open, honest and direct dialogue will optimize a businesses chances of success and broaden its options in terms of funding alternatives available to it.
Your client’s should take stock of their current situation and its future plans. Developing and sharing information with prospective/existing lenders helps them understand your situation and needs and how they can best assist you achieve your objectives.
Like many other things in business, relationships and good communication are critical. Don’t wait to the moment you need the funds to get started. Some up front investment in relationship building will go a long way in the long term and optimize a business’ ability to raise capital when/if needed
The extent and nature of information needed for the loan application varies by loan type and amount Often, 3 years of historical financial information is needed Financial information of the owner(s) is needed for small businesses and those closely held by one or few shareholders Also, open and candid discussion of a businesses challenges and risk is important for banks to better understand these issues and avoids surprises that can be damaging going forward
Cash Flow from Operations. This is the primary source of repayment. The question: is the company making enough money to repay its debts? must be answered satisfactorily to obtain approval. Guarantor Support. This is the secondary source of repayment. The questions: does the borrower have enough capital to support their business? And does the borrower have other sources of income to support the business? must be answered satisfactorily to obtain approval. Collateral / Security. This is the tertiary source of repayment which the bank would look to in a worst case scenario. The question: would the bank be able to liquidate enough collateral to cover its position? must also be answered satisfactorily to obtain approval.
These are representative questions that lenders consider when assessing the applicant’s ability to generate/maintain cash flows sufficient to repay borrowings.
These are representative questions that lenders consider when assessing the guarantor's financial condition along with the adequacy and accessibility of collateral/support that an applicant will pledge.
Note: the guidelines outlined herein are illustrative and vary by lender and the type/amount of borrowings.