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LOAN ORIGINATION take, they are costlier for the

company.
- Identifies those eligible for bank financing; ensures
 Securitization – similar with factoring.
completion nof financing.
Difference is there are multiple
- Offer Sheet
parties and longer term receivables.
- Can offer Credit Line and Overdraft
- Pricing depends on type of credit facility.
o Credit Line
- Based on reference rate + credit spread of the
 Cash Credit and Overdraft – allows to
borrower.
withdraw funds more than its
deposits. DUE DILIGENCE
 Interest rate is paid to the amount
- Evaluates all aspects of a project applied for
withdrawn.
financing. Ideentifies feasibility and credit eligibility.
 Size and interest is a function of
- Borrower’s Risk Rating (Credit Score)
credit score/ rating.
- Management, Financial and Industry Analysis.
o Short-term Loans
o Credit Analysis – a process of drawing
 Revolving Promissory Note Line
conclusions from available data regarding the
 Can be secured or not depending on
credit – worthiness of an entity, and making
credit rating.
recommendations regarding the perceived
 Size of facility depends on WC
needs and risks.
Requirements.
o 5C’s of CREDIT
o Trade Finance Lines
 Character – experience in work,
 Letters of credit – a bank guarantees
industry and personal credit history.
the payment from the company to
Personal integrity and those tied with
the supplier.
the business’ success.
 Purchase Order/ Sales Invoice –
 Credit History
advanced form of borrowing with
 Discrete checkings/ inquiries
respect to the company’s future A/R.
 Experience Level
 A/R Credit: funds purchase orders of
 Market Opinion
local companies.
 Capacity – ability of the borrower to
 Factoring – company sells A/R at a
service the loan from the profits
discount. Removes A/R from FS and
generated by his investments.
fills in cash needs.
 Capital – indicator of how much the
o Term Loan
borrowerer is at risk of the business
 Defined by amount, tenor and
fails.
repayment schedule.
 Collateral – security that the
 T&C depends on cashflow of
borrower provides to the lender, to
company.
appropriate the loan in case it is not
o Bridge Loan – typically short term. Borrowed
repaid from the returns as
for an interim period as company waits for
established at the time of availing the
long term financing approval.
facility.
 Can be repaid using bank loans, notes
 Conditions – the interest rates,
and equity financing.
amount of principal, influence the
 LT Notes – typically unsecured. To
lender’s desire to finance the
compensaate for the enhanced credit
borrower.
risk that the lenders are willing to
 Refer to how the borrower intends to Positive percentage means that the company
use the money. is able to pay for their obligations, while negative
 Lenders may consider conditions that means that the company has inadequate cash flows.
are outside the borrower’s control The company may opt to borrow funds or raise
like the state of the economy, money through investors in order to keep operations
industry trends and pending going.
legislataive charges.
 Return on Assets – (Net
o Sample Scorecards
Income/ Total Assets)x100
 Profitability Ratios
 EBITDA Margin = Reveals how much after-tax profit a company
((EBITDA/Sales)x100) generates or every one dollar of assets it holds.
Identifies asset intensity of business. Lower profit
Represents the profitability of a
per dollar, higher asset intensive. Highly intensive
company before interest and taxes. It is easy
companies require big investments to purchase
to compare it to other companies since it
machinery and equipment in order to generate
excludes volatile and discretionary expenses.
income.
Negative side: It is different from net
 Return on Equity – (Net
profit and actual cash generation which are
Income/ Total Equity)x100
better indicators of company performance.
Watched by stock analysts and investors. A
 Operating Profit Margin
high ratio is cited as a reason to purchase a
 Operating Profit Margin –
company’s stock. High ROE are capable of generating
((EBIT/Sales)x100)
cash internally and therefore less dependent on debt
High Operating Profit are generally financing.
more well-equipped to pay for fixed costs
 Liquidity Ratios
and interest on obligations, have better
 Current Ratio - CA/CL
chances to survive an economic slowdown,
 Acid Test Ratio (CA –
and are more capable of offering lower prices
Inventories)/CL
that their competitors that have a lower
 Cash Ratio – Cash and
profit margin.
Equivalents/ CL
 Net Profit Margin  Operating Cash Flow Ratio =
 Net Profit Margin - ((Profit Operating Cash Flow/ CL
After Tax/Sales)x100)  Leverage Ratios
 Debt Ratio = TL/TA
Shows how profitable a company is
 D/E Ratio = TL/SHE
after all expenses including interest and taxes
 Interest Coverage Ratio =
and have been taken into account. It takes
Operating Income/Interest
everything into account.
Expenses
 Cash Flow Margin  Debt Service Coverage Ratio
 Cash Flow Margin – = Operating Income/ Total
((Cashflow from Operating Debt Service
Activities/Sales)x100)  Efficiency ratios
 Asset Turnover Ratio = Net - The determination of these terms of the package
Sales/ TA leads to the appropriate establishment of interest
 Inventory Turnover Ratio = rate in the loan.
COGS/ Avg. Inventory
Periodic Payment – (Outstanding Loan x Rate of Interest x (1
 Receivables Turnover =
+ Rate of Interest)^no. of periods)/[(1+rate of interest)^no. of
Sales/ Avg. AR
periods -1]
 Working Capital Turnover=
Sales/ Avg. C. Average Loan Maturity – avg. number of years until each
 Cost to Income Ratio principal repayment is due, weighted by the principal
 Cash Conversion Cycle repayment amount.

Average Loan Maturity = Sum of Weighted Repayments/ Sum


LOAN PACKAGING of Total Repayments

- Prepares all pertinent documents for loan approval Financial Projections – estimates future financial
- Layout of T&C based on information gaqthered from performance of the business.
the preceeding stages.
- Financial model that links income statement, balance
o T&C is set after evaluation, market
sheet and cash flow statement. Foundation on which
competition and the bargaining power of the
more advanced financial models are built such as
customers demand that we adjust certain
discounted cash flow, mergers and acquisitions,
procedures without sacrificing controls.
leveraged buyout, and various other financial models.
LOAN IMPLEMENTATION, MONITORING AND MANAGEMENT
General Forecasting Principles
- Loan release, account ratings, monitoring of
- Produce reliable and realistic expectations.
collection, clearances from authorities. Conducts
o Unbiased – neither conservative nor
visits, business performace. Modified T&C.
optimistic.
Restructuring.
- Forecasts should not manifest wishful thinking.
COMPANY REPORT - Forecasts should be comprehensive.
o Include all expected future activities.
State specific purpose of financing. Where the fund
- Assumptions must be internally consistent.
will be allocaated and what the company’s goal is with the
- Forecasts must rely on externally valid assumptions.
use of the fund.
o Assumptions should pass the test of common
Working capital (CA-CL) sense.
o Impose reality checks.
NET Working Capital (CA-CL-C-CE-STI)
Steps in building a 3-statement model.
Tenor – period at which the loan will be paid off.
1. Input the historical financial info
Grace Period – the provision that allows payment to be
a. Historical inouts must be balanced.
received for a certain period, no late fees are charged and the
b. Link 3 statements.
late payment does not result in default or cancellation of the
2. Determine the assumptions that will drive the
loan.
forecast
- This is determined through the results of financial a. Calculate revenue growth rate, gross
projections. margins, variable and fixed costs, AP days,
inventory days.
b. Quality will depend on assumptions
3. Forecast I/S
a. Principal business activities
b. Consider firm and industry conditions.
c. % growth rate, vision moving forward, anddd
current state of the firm and
market/industry.
d. Fixed vs Variable components.
i. Does cost change proportionately to
sales?
ii. Careful of the “relevant range”
iii. Industry knowledge.
4. Forecast Capital Assets
5. Forecast Financing Activity
6. Forecast the Balance Sheet
7. Complete the Cash Flow Statement

Sensitivity Analysis

- Can be used to assess the impact of new


announcements from the firm.
- Assess sensitivity of firm’s liquidity and leverage to
key assumptions.
- Helps react quickly and efficiently to new
announcements.