Credit Analysis and Finance

Question 1

What are EDO financing goals and programs?

Answer 1

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

Question 2

Economically targeted investments

Answer 2

direct funds to opportunities that earn competitive financial returns while producing economic development benefits

Question 3

working capital is synonymous with what on the balance sheet

Answer 3

current assets and current liabilities

Question 4

working capital

Answer 4

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.

Question 5

fixed assets

Answer 5

longer-lived assets such as plant, property, and equipment

Question 6

as a firm grows what does it need more of?

Answer 6

working capital and fixed assets to accommodate the higher volume of demand.

Question 7

four main types of loans

Answer 7

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

Question 8

short-term secured loans

Answer 8

typically less than a year, used for working capital

Question 9

medium and long-term secured loans

Answer 9

3-7 years (medium) used to fund assets such as permanent increases in receivables and inventory and fixed assets

Question 10

what are the three types of trade credit

Answer 10

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

Question 11

bonds can be secured or unsecured; also known as

Answer 11

collateral bonds or debenture bonds

Question 12

new issues of bonds can be sold in what 3 ways

Answer 12

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)

Question 13

equity finance

Answer 13

capital investment in exchange for partial ownership in the venture

Question 14

what are the three financial statements that are used by creditors, equity investors and others to evaluate the strength of a business

Answer 14

the balance sheet
the income statement
the statement of cash flows

Question 15

The Balance Sheet

Answer 15

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

Question 16

The Income Statement

Answer 16

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

Question 17

cost of goods sold

Answer 17

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

Question 18

The Statement of Cash Flows

Answer 18

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

Question 19

what general criteria do banks use to evaluate borrowers?

Answer 19

management ability
repayment ability
collateral
equity in business

Question 20

accounts receivables

Answer 20

amount of money owed to the company by its customers who have purchased the company’s goods or services.

Question 21

accounts receivables turnover

Answer 21

net sales divided by accounts receivables

Question 22

days receivable

Answer 22

measures the average number of days it takes for a firm to collect its accounts receivable.

(accounts receivable divided by sales) x 360

Question 23

inventory turnover ratio

Answer 23

measures the average number of times inventory was sold over the period.

COGS for period divided by inventory for period

Question 24

average days inventory

Answer 24

measures average number of days it takes to sell inventory.

(inventory / COGS) x 360

Question 25

notes payable

Answer 25

money borrowed from a bank or other investor on a short-term basis, such as a line of credit.

Question 26

accounts payable

Answer 26

monies owed to suppliers for services and inventory

Question 27

days payable

Answer 27

measures the average length of time between purchase of goods and payment for them. (accounts payable / COGS) x 360

Question 28

accruals

Answer 28

money owed to providers of goods and services for which no official bill exists. payroll taxes wages

Question 29

current ratio

Answer 29

current assets / current liabilities. the higher the current ratio the more solvent the business. depends on type of business

Question 30

quick ratio

Answer 30

cash & accounts receivable / current liabilities focuses on the most liquid of assets

Question 31

cash conversion cycle

Answer 31

days accounts receivable + days inventory - days accounts payable

Question 32

working capital

Answer 32

current assets - current liabilities working capital does not pay bills; only cash does.

Question 33

working capital ratio

Answer 33

net sales / working capital

Question 34

debt ratio

Answer 34

total liabilities / total assets the lower the debt ratio, the better the risk for the lending institution

Question 35

debt to equity ratio

Answer 35

(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.

Question 36

COGS

Answer 36

Beginning inventory + purchases - ending inventory

Question 37

operating margin

Answer 37

operating income / net sales

Question 38

return on sales

Answer 38

net income / net sales

Question 39

return on assets

Answer 39

net income / average total assets

Question 40

return on equity

Answer 40

net income / average total equity

Question 41

debt coverage ratio

Answer 41

net operating income or cash flow / total debt service compares cash flow income of a business to the cost of a loan

Question 42

the lending screening process involves what four major functions

Answer 42

``` Marketing (one-on-one meetings are best) Screening (clarify eligibility early on) Underwriting or approving loan structuring the loan Loan documentation and servicing ```

Question 43

Marketing a loan program

Answer 43

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

Question 44

when screening applicants what should the lender examine

Answer 44

economic feasibility, financial statistics (debt to equity ratio), management

Question 45

underwriting process key objectives

Answer 45

1. provide assessment of whether the business has the ability to repay the loan; 2. applicant's business and financial risks need to be evaluated; 3. produce financing plan that addresses applicants needs; 4. establish checks and balances to minimize errors 5. document all decisions

Question 46

what role does an edo play in underwriting process

Answer 46

be an advocate for business. | build effective working relationships with lenders; meet one-on-one.

Question 47

underwriting is based on 5 C's of credit which are

Answer 47

``` cash flow character capacity collateral conditions ```

Question 48

when structuring the loan; what should be included?

Answer 48

``` fees (admin) interest rates security (collateral pledge) maturity (length or term of debt repayment period) repayment conditions ```

Question 49

loan documentation and servicing

Answer 49

lender must write letter of commitment and qualify the security and liens of a loan. loan servicing entails monitoring compliances and sending payment notices

Question 50

financial analysis

Answer 50

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

Question 51

community development venture capital

Answer 51

uses equity finance to build businesses that benefit low-income people and distressed communities

Question 52

direct lending

Answer 52

should only provide gap financing. include revolving loan funds and microloans

Question 53

RLF

Answer 53

performance measured through the cost per job created or retained. report a large job creation and retention impact

Question 54

microloan program

Answer 54

max of $50k to new and existing small businesses. short-term and unsecured.

Question 55

micro-enterprise programs

Answer 55

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.

Question 56

what are the three models used in MEPs

Answer 56

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.

Question 57

What is the bond process?

Answer 57

research professional consultation approval

Question 58

tax-exempt financing may not be used to fund what activities

Answer 58

working capital inventory moving expenditures conventional debt and mortgage refinancing

Question 59

loan guarantees

Answer 59

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

Question 60

foreign trade zones

Answer 60

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.

Question 61

504 program

Answer 61

provides long-term, fixed rate financing to small businesses for major fixed assets, such as land, buildings, and equipment. provided by the CDC

Question 62

Microloan program

Answer 62

used for purchase of machinery and equipment, furniture and fixtures, inventory, supplies, and working capital

Question 63

debt finance

Answer 63

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.

Question 64

equity finance

Answer 64

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.