Credit Analysis and Finance Flashcards
What are EDO financing goals and programs?
EDOs can
lower the cost of borrowing
lower the credit risk of a company
increase access through different investment products by packaging loans, providing direct loans, guaranteeing loans, or providing technical assistance
Economically targeted investments
direct funds to opportunities that earn competitive financial returns while producing economic development benefits
working capital is synonymous with what on the balance sheet
current assets and current liabilities
working capital
focuses on the most liquid assets used in the normal operation of an entity. Also used to meet current debt obligations and to cover other unexpected expenses.
fixed assets
longer-lived assets such as plant, property, and equipment
as a firm grows what does it need more of?
working capital and fixed assets to accommodate the higher volume of demand.
four main types of loans
recourse: loans in which the debt holder has recourse to the personal assets of the borrower to satisfy payment
nonrecourse: does not ^
secured: backed by collateral
unsecured: not backed by collateral. similar to promissory notes
short-term secured loans
typically less than a year, used for working capital
medium and long-term secured loans
3-7 years (medium) used to fund assets such as permanent increases in receivables and inventory and fixed assets
what are the three types of trade credit
an arrangement between a goods or services supplier and its customer, whereby the supplier does not demand advance payment for its sales
open account
notes payable
trade acceptances
bonds can be secured or unsecured; also known as
collateral bonds or debenture bonds
new issues of bonds can be sold in what 3 ways
competitive sale; issuer sells bonds to underwriters through bidding process
negotiated sale; underwriter is selected prior to the bond sale and is given a right to purchase at an agreed upon price
private placement; bonds sold directly from the business to an investors (mainly insurance companies)
equity finance
capital investment in exchange for partial ownership in the venture
what are the three financial statements that are used by creditors, equity investors and others to evaluate the strength of a business
the balance sheet
the income statement
the statement of cash flows
The Balance Sheet
Made up of assets, liabilities and equity. shows the financial position of a company at a specific point in time; typically monthly
Assets= Liabilities + Equity
Assets = current assets (cash and cash equivalents, accounts receivable, inventory, pre-paid expenses) non-current assets (plant, equipment, machinery, leasehold improvements.
Liabilities = current liabilities (current portion of long-term debt, accounts payable, accrued expenses) long-term liabilities (long-term debt)
equity = common stock, retained earnings at beginning of year, net profit, retained earnings
The Income Statement
also called a profit and loss statement. Summarizes the income and expenses and profitability of a business over a specific period of time.
Net Sales
- cost of goods sold
= gross profit
- operating and admin expenses (general and admin + selling expenses)
= Net operating income
- other expense interest expense (income before income taxes)
- income taxes expense
=Net income
cost of goods sold
direct costs associated with the generation of revenue. includes raw materials, labor, shipping, for merchandising it involves the price of goods purchased for their inventory
The Statement of Cash Flows
provides info on a company’s cash receipts and cash payments; shows use of cash.
operating activities: cash receipts (collected from customers) and cash payments (paid to suppliers)
investing activities: payments to acquire equipment and to purchase securities
financing activities: proceeds from borrowing, repayment of amount borrowed, dividends paid to stockholders
what general criteria do banks use to evaluate borrowers?
management ability
repayment ability
collateral
equity in business
accounts receivables
amount of money owed to the company by its customers who have purchased the company’s goods or services.
accounts receivables turnover
net sales divided by accounts receivables
days receivable
measures the average number of days it takes for a firm to collect its accounts receivable.
(accounts receivable divided by sales) x 360
inventory turnover ratio
measures the average number of times inventory was sold over the period.
COGS for period divided by inventory for period
average days inventory
measures average number of days it takes to sell inventory.
(inventory / COGS) x 360
notes payable
money borrowed from a bank or other investor on a short-term basis, such as a line of credit.
accounts payable
monies owed to suppliers for services and inventory
days payable
measures the average length of time between purchase of goods and payment for them.
(accounts payable / COGS) x 360
accruals
money owed to providers of goods and services for which no official bill exists.
payroll taxes
wages
current ratio
current assets / current liabilities.
the higher the current ratio the more solvent the business. depends on type of business
quick ratio
cash & accounts receivable / current liabilities
focuses on the most liquid of assets
cash conversion cycle
days accounts receivable + days inventory - days accounts payable
working capital
current assets - current liabilities
working capital does not pay bills; only cash does.
working capital ratio
net sales / working capital
debt ratio
total liabilities / total assets
the lower the debt ratio, the better the risk for the lending institution
debt to equity ratio
(total liabilities - sub. debt) divided by (equity - intangible + sub. debt).
should not exceed a debt ratio of 3:1. closer to 1:1 the better.
COGS
Beginning inventory + purchases - ending inventory
operating margin
operating income / net sales
return on sales
net income / net sales
return on assets
net income / average total assets
return on equity
net income / average total equity
debt coverage ratio
net operating income or cash flow / total debt service
compares cash flow income of a business to the cost of a loan
the lending screening process involves what four major functions
Marketing (one-on-one meetings are best) Screening (clarify eligibility early on) Underwriting or approving loan structuring the loan Loan documentation and servicing
Marketing a loan program
There needs to be a marketing strategy and annual plan.
maintain a strong referral program
foster awareness among key stakeholders
track where new clients learn of their service
when screening applicants what should the lender examine
economic feasibility, financial statistics (debt to equity ratio), management
underwriting process key objectives
- provide assessment of whether the business has the ability to repay the loan;
- applicant’s business and financial risks need to be evaluated;
- produce financing plan that addresses applicants needs;
- establish checks and balances to minimize errors
- document all decisions
what role does an edo play in underwriting process
be an advocate for business.
build effective working relationships with lenders; meet one-on-one.
underwriting is based on 5 C’s of credit which are
cash flow character capacity collateral conditions
when structuring the loan; what should be included?
fees (admin) interest rates security (collateral pledge) maturity (length or term of debt repayment period) repayment conditions
loan documentation and servicing
lender must write letter of commitment and qualify the security and liens of a loan.
loan servicing entails monitoring compliances and sending payment notices
financial analysis
examination and interpretation of a businesses past and current financial performance for the purpose of predicting its future viability and ability to repay its debts
community development venture capital
uses equity finance to build businesses that benefit low-income people and distressed communities
direct lending
should only provide gap financing.
include revolving loan funds and microloans
RLF
performance measured through the cost per job created or retained.
report a large job creation and retention impact
microloan program
max of $50k to new and existing small businesses. short-term and unsecured.
micro-enterprise programs
serve both individuals seeking to create a new business and existing small firms with 5 or less employees, thus providing credit and business development assistance.
what are the three models used in MEPs
peer group lending; lender brings together several independent businesses under the umbrella of a single loan.
individual lending; provides loans on an individual basis
training-led; recognizes training as the primary tool to foster micro-enterprise development.
What is the bond process?
research
professional consultation
approval
tax-exempt financing may not be used to fund what activities
working capital
inventory
moving expenditures
conventional debt and mortgage refinancing
loan guarantees
similar to collateral; insures all or a portion of a loan against default, thereby lowering risk incurred by potential lenders.
advantage: no cash outlays
disadvantage: complex to implement
foreign trade zones
free trade zones or export zones. secure areas in which foreign and domestic merchandise can be stored and shipped deferring U.S. duties and excise taxes.
504 program
provides long-term, fixed rate financing to small businesses for major fixed assets, such as land, buildings, and equipment. provided by the CDC
Microloan program
used for purchase of machinery and equipment, furniture and fixtures, inventory, supplies, and working capital
debt finance
capital investment typically made by commercial banks that must be repaid within a specific time period based on a pre-established schedule.
banks, credit unions, and savings and loan institutions are the most common.
equity finance
capital investment that does not obligate the repayment of the investment. in return for the investment, equity investors receive partial ownership in the venture.
venture capitalists, angel investors, private investors.
