Capital One spoke at the WDCEP's Entrepreneur Road Map's Starting a Non-Profit seminar held at Venable (9/10/14).

1. Lending: From A BBaannkkeerr’’ss VViieewwppooiinntt

2. 2
Sources of Repayment

3. • Does the borrower demonstrate a commitment to honor his or her
transactions and keep promises even under adverse
circumstances?
• What are economic and market conditions that could impair the
entity’s ability to service the debt and repay the loan? Does the
entity recognize these risks and have plans to mitigate them?
3
5 C’s of Credit
CChhaarraacctteerr
• Is the collateral sufficient as a source of repayment? If the collateral
must be liquidated, is the realizable value enough to repay principal,
outstanding interest and cover the bank’s administrative costs of
liquidation?
CCaappaaccitityy
CCoonnddititioionnss
CCaappititaall
CCoolllalatteerraall
• Does the entity demonstrate the capacity to apply the loan funds?
Does management have a business plan? Are plant and equipment
sufficient? Are marketing and product delivery well developed?
• Does the organization have sufficient assets to absorb normal
business risk?

4. The Loan Application
• Ensure that the loan application is complete and accurate
• Core bank loan application information often includes:
o Historical business financial information (2 years)
o Form 990, Return of organization exempt from income tax (2 Years)
o Interim financial statements along with accounts receivable and
payable aging reports if applicable
• Alternative (micro) loan application is similar, but often allows
some flexibility – ask questions!
4

5. Industry Dynamics
5
Underwriting Pillars
Financial Condition
• An organization’s
financial condition
determines the
borrower’s ability to
generate enough cash
to repay the debt
• Three items in
particular are
evaluated:
• Cash Flow
• Liquidity
• Leverage
Management
Quality
• It is necessary to
determine the
competence and
integrity of key
individuals running
an organization
• A weak management
team not only
endangers the
second source of
repayment, but
opens the doors for
additional problems
Collateral /
Security
• The bank will
determine the realistic
level of control over
any collateral pledged,
including its likely
liquidation value or
net present value
• Inability to realize or
“call” collateral
threatens the third
source of repayment
• Analysis of the
industry focuses on
the particular industry
of the borrower and
the borrower’s
position within the
industry
• Weaknesses in the
industry foundation
can negatively impact
a borrowers ability to
repay

6. Underwriting Pillar – Deeper Dive on Financial Condition
6
Important to
Remember
• Cash flow
• Determine trends
(revenue/expense)
• Industry comparison
• Total administrative costs
Cash Flow
Provides a better
understanding as
to how much
excess income the
organization will
generate and the
factors that
influence income
EBIDA Debt Service
Coverage (EDSC)
Calculation:
(Net income + interest expense +
depreciation + amortization) / (Current
portion long term debt (prior period) +
Interest Expenses)

7. Underwriting Pillar – Deeper Dive on Financial Condition
Liquidity
7
The ability to
quickly convert the
organization’s
assets into cash
Important to
Remember
• Evaluate integrity of
creditor support
(adequate asset
protection for liabilities)
• Evaluate current asset
quality and aging of
receivables (A/R > 90)
• Variety of funding levels
from different sectors
including corporate
foundation, individual, or
government grants

8. Thank you for attending…