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IEDC CEcD > Eco-Devo Credit Analysis & Finance > Flashcards

Eco-Devo Credit Analysis & Finance Flashcards

1
Q

What is the difference b/w public sector and private sector involvement with regard to financing economic development projects?

A

Public Sector - bridges gaps in the private sector financing market (leverages private lenders & investors)

Private Sector - 2 primary forms of financial capital - debt & equity financing

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2
Q

What is the primary role of public sector financing?

A

To invest in projects where the economic and social benefit outweigh the risks.

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3
Q

Public financing assistance should NOT engage in what types of projects?

A

Those that qualify for conventional lending in amounts adequate to meet their project needs.

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4
Q

Through what delivery mechanisms can economic development organizations provide financial assistance?

A
  • Lower cost of borrowing (Subsidize the difference b/w the market & the discount rate, reducing the interest rate)
  • Lower the credit risk of a company (guarantees a % of private sector loan against default)
  • Increase access to different investment products (establish lending programs to under-served groups)
  • Packaging loans (assist, facilitate & coordinate the loan process)
  • Providing direct loans (use funds controlled by EDO as either direct, subordinate or primary lender)
  • Providing technical assistance (teach entrepreneurs / business owners business finance, operations mgmt. marketing, etc.)
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5
Q

What expertise must an EDO have in order to provide financing programs?

A
  1. how to staff and manage programs
  2. understand how municipal finance relates to economic development
  3. mgmt skills - market analysis & program design
  4. oversight of investment transactions
  5. building partnerships to advance outcomes
  6. managing assets
    7 raising new capital
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6
Q

______ ________________ is the simplest type of business organization.

A

Sole Proprietorship

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7
Q

True or False

A General Partnership is not a taxable entity.

A

True.

The partners are taxed on their individual share of the partnership’s profits less expenses.

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8
Q

Define debt financing.

A

Capital investment typically made by a commercial lending institution that must be paid back within a specific period of time based on a pre-established schedule.

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9
Q

What are the 3 types of debt financing?

A
  1. loans
  2. transfer of capital
    3 bonds
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10
Q

Define equity finance.

A

Capital investment that does not obligate the repayment of the investment. In return for investment, equity investors receive partial ownership.

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11
Q

Why do businesses need financing?

A
  1. working capital needs

2. purchase fixed assets (plants / equipment)

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12
Q

Working capital focuses on the most _________ of assets used in the normal business operations and is used to meet current _____ _____________.

A

Liquid

Debt Obligations

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13
Q

Liquid assets are synonymous with current _________ and current ____________ on the balance sheet, and include which line items?

A

Assets & Liabilities

Cash, marketable securities, accounts receivable, accounts payable, accruals, short-term loans, inventory, prepaid expenses

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14
Q

Is Short-Term or Long-Term financing used for working capital needs? Why?

A

Short-Term

Working capital investment generally will generate an immediate income through sales of product/service.

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15
Q

Is Short-Term or Long-Term financing used to purchase fixed assets? Why?

A

Long-Term

Fixed assets are expensive and don’t generally generate an immediate increase in sales/income. Long-Term financing lowers the cost of financing by spreading the repayment over the life of the asset.

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16
Q

The financing needs of new businesses are largely met through _________.

A

Equity

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17
Q

True or False

Equity financing provides a capital base on which debt can be leveraged.

A

True.

The more equity a business has, the easier it is to secure a loan.

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18
Q

Why is it difficult for small businesses to obtain financing?

A
  1. Trade credit (through suppliers) not available due to lack of strong relationship
  2. Public equity markets (Stock Exchange) have a high cost of entry
  3. Venture capitalists require higher rate of return
  4. Commercial banks require a loan guarantee
  5. Located in Distressed Communities where weak markets don’t support growth
  6. Minority Firms have been redlined, have a lack of awareness or insufficient assets
  7. New Hi-Tech Enterprises are hi-risk investments due to pre-production stage, insufficient market demand, competition, etc.
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19
Q

Why is equity important to commercial banks?

A

The more equity (and less debt), the better chances of meeting regular debt requirements.
Equity is a source of collateral to back loans.

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20
Q

What obstacles do small businesses face when trying to finance fixed assets with longer-term loans?

A
  1. Many commercial banks don’t offer loans for less than $100K; Fewer consider less than $50K
  2. Commercial banks prefer not to lend for more than 10 years - most assets have a longer life than that making payments prohibitively large
  3. 25-30 year mortgage loan closely parallel the useful life of a fixed asset. Insurance companies are long-term lenders but tend to limits investments to $1M
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21
Q

Why do businesses encounter barriers in obtaining export financing?

A
  1. Small banks aren’t familiar with international banking transactions
  2. Large banks provide loans on large deals
  3. Perception of risk - from exchange rate losses, political instability or shipping accidents
  4. Info gaps about credit-worthiness of the foreign customer
  5. Credit risk in legal obligations of foreign company to pay US suppliers
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22
Q

_______ are the most common form of debt financing. What are the 4 main types?

A

Loans

  • Recourse (Debt holder has recourse to the personal assets of the borrower to satisfy payment)
  • Nonrecourse (Debt holder does not have recourse)
  • Secured (Loans backed by collateral)
  • Unsecured (Loans not backed by collateral - similar to a promissory note for specific assets)
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23
Q

Short-Term Loans are for less than 1 year and typically used for working capital. List the most common types.

A
  1. Accounts Receivable Financing - leverage unpaid invoices to customers for inventory buildup
  2. Inventory Loans - secured by inventory used to build up inventory
  3. Times Sales or Lease Sales Financing
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24
Q

True or False

Short-Term Loans are the most common loans issued by EDOs.

A

False.

Medium (3-7 years) and Long-Term loans are the most common loans issued by EDOs

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25
Q

What are the most common type of Medium and Long-Term Loans?

A
  1. Term Loans - secured by assets for 3-7 year timeframe
  2. Construction Loans - to finance building construction & secured by pledge of proposed structure / land; phased disbursement of funds throughout construction process
  3. Real Estate Mortgage Loans - secured by execution of promissory note and mortgage deed
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26
Q

What are the most common types of unsecured loans?

A
  1. Trade Credit - b/w supplier and customer where customer pays for goods/services at a future date
  2. Line of Credit - b/w borrower and bank where bank provides access to $$ up to max amt; borrower pays interest only on amt borrowed
  3. Commercial Paper - promissory note sold by corporations to investors to accumulate inventory or finance working capital
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27
Q

Define Bonds

A

Long-Term debt instruments sold publicly or through investment houses to raise capital.

Most are sold at less than face value of the bond

Secured Bonds - called collateral bonds
Unsecured Bonds - called debenture bonds

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28
Q

How are new issues of bonds sold?

A
  1. Competitive Sale (sold to underwriter through competitive bidding)
  2. Negotiated Sale (underwriter selected prior to sale and given exclusive right to purchase bonds)
  3. Private Placement (sold directly from business to investor; insurance companies main users)
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29
Q

What are the various types of Equity Financing?

A
  1. Seed Capital (occurs at pre-production phase)
  2. Grants (direct transfer of $$; no ownership transfer; no repayment)
  3. Limited Partnerships (partners invest funds in exchange for income and tax benefits)
  4. Venture Capital (expected high rate of return)
  5. Mezzanine Financing (expansions, IPOs, acquisitions)
  6. Common Stock Purchases (doesn’t promise dividends)
  7. Preferred Stock Purchases (fixed annual dividend; sold to raise funds)
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30
Q

Why do businesses need both short and long term financing when exporting?

A

Liquidity crunches are common

Long-Term financing for pre-export needs (staff, retooling equipment, large orders anticipated)

Short-Term financing for post-export needs (post-shipment, accts receivable)

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31
Q

True or False

The public sector is the largest provider of export financing.

A

False.

The private sector provides the majority of export financing through banks, angel investors, venture capitalists, export financiers

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32
Q

What are multilateral development banks?

A

Membership organizations for sovereign gov’ts charged with increasing international trade and development in lesser developed countries.

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33
Q

List the 3 types of financial statements used by creditors.

A
  1. Balance Sheet
  2. Income Statement
  3. Statement of Cash Flows
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34
Q

The balance sheet shows the financial position of a company when?

A

At a specific point in time

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35
Q

What is depreciation used for?

A

It determines an estimated useful life of an asset and allocates a cost of that asset to expense over uniform periods of its useful life.

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36
Q

True or False

Creditors have the legal first claim to the assets of a business before its owners.

A

True.

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37
Q

What is the basic equation of a balance sheet?

A

Assets = Liabilities + Equity

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38
Q

Define Retained Earnings.

A

Net income that isn’t distributed as dividends to investors (or money invested in the business as a result of profits)

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39
Q

Define Dividends.

A

The share of profits of a company distributed to its shareholders (or profits not reinvested into the company)

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40
Q

What does the income statement show?

A

The income, expenses & profitability over a specific period of time.

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41
Q

List the primary components of an income statement.

A 
Net Sales
Revenues
Cost of Goods Sold
Gross Profit
Other Income
Sales and Gen. Admin Expenses
Net Income
42
Q

The Statement of Cash Flows provides information on

A

A company’s cash receipts (inflows) & cash payments (outflows).

It shows the sources & uses of cash.

It classifies cash flows according to specific business activities (operating, investing, financing, etc.)

43
Q

What is the purpose of a credit analysis?

A

Determine if the borrower has the ability to make a profit & generate sufficient funds to meet other obligations.

Determine if the borrower can service the debt.

Ensure loans are going to businesses with potential.

Determine if private sector can finance the proposed project.

Determine if the venture is a good credit risk and the loan will be repaid.

44
Q

What 4 criteria do most commercial banks review for loan consideration?

A
  1. Management ability
  2. Repayment ability
  3. Collateral (1:1 ratio preferred)
  4. Equity in Business (debt to equity ratio 2:1 or less preferred)
45
Q

The management of _____________ _____________ is a primary determinant of cash flow and therefore, a determinant of debt service.

A

Accounts Receivable

46
Q

Days Receivable measures what?

A

The average # of days it takes to collect accts rec.

Days Receivable = (Accts Receivable/Net Sales) x 360

47
Q

Days Payable measures what?

A

The average # of days b/w purchase of goods/services and payment for them.

Days Payable = (Accts Payable/Cost of Goods Sold) x 360

48
Q

What is an accrual?

A

Money owed for which there isn’t an official billing process (i.e. payroll taxes, fringe benefits, rent, interest due on loans)

49
Q

What are liquidity ratios and what are the 2 common measures of liquidity?

A

Liquidity ratios measure a company’s ability to pay it’s current debt obligations without raising additional capital.

Current Ratio = Current Assets/Current Liabilities

  • most banks require 2:1 ration
  • the higher the ratio, the more liquid and better able to cover existing debt

Quick Ratio = Cash + Accts Receivable/Current Liabilities

  • focuses on cash, cash equivalents and receivables
  • banks require 1:1 ratio
50
Q

What is the Operating Cycle?

A

The time b/w acquisition of goods/services in mgf process and final sale.

The amount of hard cash that a company has tied up in operating assets.

The longer the cycle the more problems it can create for a company.

Cash Conversion Cycle = Days Accts Receivable + Days Inventory + Days Accts Payable

51
Q

What does the working capital ratio measure?

A

How well a business is managing its working capital (liquid assets) and whether or not cash is tied up for too long in current assets.

Working Capital = Net Sales/Working Capital

52
Q

What does a debt ratio evaluate?

A

How safe a loan is or the ability of the lender to recoup its investment if the business become insolvent.

Debt Ratio = Total Liabilities/Total Assets

The lower the debt ratio, the better the risk for the lender (prefer less than 60%)

53
Q

True or False

The higher the debt to equity ratio, the more the company has been financed with debt.

A

True.

Debt-to-Equity Ratio = Total Liabilities - Sub. Debt/Equity - Intangible + Sub. Debt

54
Q

Define Cost of Goods Sold.

A

Production related expenses.

COGS = Beginning Inventory + Purchases - Ending Inventory

55
Q

Why do lenders & investors look at a business’s pro forma?

A

It estimates what impact the economic, regulatory and competitive environment will have on a business in the future.

It demonstrates a business in making informed decisions.

56
Q

What 4 factors does a credit analysis consider?

A
  1. Debt Coverage Ratio
  2. Loan to Value Ratio (collateral)
  3. Validity of Guarantees
  4. Personal Integrity of the Borrower
57
Q

Debt Coverage Ratio (DCR) is used to determine what?

A

The largest loan that a borrower could afford given a particular income.

Lenders prefer DCR b/w 1.2 and 1.3 (less than 1 should be avoided)

DCR = Net Operating Income or Cash Flow/Total Debt Service

58
Q

Define Debt Service

A

The cash required in a given period (usually 1 year) for payments of interest and principal on outstanding debt.

59
Q

Loan to Value Ratio (LVR) measures what?

A

It establishes the ability of a lender to recapture a loan given the value of collateral put up by the borrower.

LVR = Loan Amount/Money Value of Collateral Assets

60
Q

True or False

The longer the maturity is, the less the risk involved in the loan.

A

False.

The longer the maturity, the greater the risk due to the risk of rising inflation.

61
Q

What are 3 questions to ask in determining market risk and the impact to a business?

A
  1. Who are the company’s competitors and how many are there?
  2. Is the market expanding or contracting?
  3. Is there a great deal of product differentiation in this market? Has the company capitalized on this?
62
Q

What are the 4 main functions in the lending screening process?

A
  1. Marketing - essential to successful public finance program; market to borrowers & to lenders
  2. Screening - initial conversation w/ customer; available services to meet their needs; program qualifications
  3. Underwriting - approving or denying loan & structuring the loan
  4. Loan documentation & servicing
63
Q

List the 5 C’s in structuring a loan during the Underwriting process?

A
  1. Cash Flow - Can it repay the loan?
  2. Character - Is borrower capable of repaying loan?
  3. Capacity - Do past records demonstrate ability to repay the loan?
  4. Collateral - Is adequate collateral secured?
  5. Conditions - How does the external environment impact the level of risk?
64
Q

What 2 decisions are needed when determining a loan’s interest rates?

A

What is the rate to be charged and is it fixed or variable?

What will the interest repayment schedule be?

65
Q

True or False
Comparison of a company to the overall market can be useful, but the company should also be compared to, & measured against it’s own industries and sectors.

A

True.

66
Q

True or False

Lending institutions rely primarily on a business’ ability to repay and only secondarily on the value of collateral.

A

True.

67
Q

How do Certified Development Companies (CDCs) assist in small business loans?

A

They are NPOs regulated by the SBA and provide SBA 504 loans for major fixed assets.

Long term, fixed rate financing provided in conjunction with a lender where the lender provides loans protected by 1st lien up to 50% of project costs; CDC provides loans secured by a 2nd lien up to 40% of project costs.

68
Q

Bank Community Development Corporations (CDCs) are subsidiary corporations to a bank for what purpose?

A

Conduct financial activities that promote economic development.

Make equity or debt investment in projects that directly benefit low and moderate-income.

They can purchase, construct or rehab property.

69
Q

Why is ‘seed capital’ hard to obtain?

A

It’s the earliest stages of venture capital, making it the most risky investment.

It’s invested before a product or revenue stream is produced.

The amounts required are smaller than many venture capitalists provide (typically $50K - $500K).

70
Q

What are the characteristics of a Venture Capitalist?

A

Professional financiers who seek companies with possibility of very substantial returns (40%+ in 3 - 7 years).

Invest in companies with proprietary information or technology and high growth product.

Provide equity capital and financing of $3 - 5M.

Require a voice in decision making and often require a Board seat.

71
Q

What are the attributes of direct lending provided by an EDO?

A
  1. greater flexibility in determining loan terms, structure and recipients
  2. must have capability to manage all aspects of the loan process including sufficient capital
  3. assume either a 2nd or 3rd lien position after private sector loans which reduces the risk to private investors
  4. Debt subordination in #3 attracts more private participation in loans
72
Q

Define a Revolving Loan Fund (RLF).

A

The repayment of loans made is recycled into future lending. As loans are repaid the principal and interest return to a loan pool and can be lent to other businesses.

The continuation of the fund depends on the collection of existing loans.

RLF performance is measured by the cost per job created, leverage ratio and loan default rate.

73
Q

What purposes does a Revolving Loan Fund (RLF) serve?

A
  1. Direct loans for start-ups
  2. Job Creation
  3. Improve decline in urban economic areas (renovation, employment, etc.)
  4. Provide gap funding b/w project needs and private capital provided
  5. Leverage funds from private sector
74
Q

List a few key benefits to a Revolving Loan Fund (RLF).

A
  1. If funded through a grant, those funds can contribute 100% to the program (not paid back)
  2. Unregulated status / Not subject to gov’t supervision
  3. Can be used for specific EDO issues / goals
75
Q

What 3 types of lending models are used in Micro-enterprise development programs (MEPs)?

A
  1. Peer group lending (several small businesses receive 1 loan; networking; peer support)
  2. Individual lending (most common; entrepreneurs who don’t qualify for traditional loans; longer-term and larger loans)
  3. Training-led (develops core business skills)
76
Q

What are the characteristics of a micro-loan program?

A
  1. Short-Term loans
  2. Max $50K
  3. Unsecured loans
  4. Made to people without the credit history to obtain a conventional loan
  5. Training & technical assistance provided
77
Q

Why would a public entity borrow money (via bonds) for a redevelopment project?

A
  1. To spread the cost of a project over its expected life span
  2. Communities rarely have the cash available to fund large-scale projects; Public debt (bonds) provide the ability to build now and repay debt later with future income.
78
Q

What is the difference b/w public and private use bonds?

A
  1. Public Bonds - intended to address ‘essential gov’t functions’; tax exempt; backed by the faith / credit of the public entity; cannot be controlled by private entities
  2. Private Bonds - issued by the gov’t for private purposes benefitting individuals or entities; either tax exempt or taxable
79
Q

What are the 2 types of public use bonds?

A

General Obligation (GO) Bonds - for projects that do not have a revenue stream (roads, schools); repaid with general revenue; require approval through voter referendum

Revenue Bonds - for projects that will generate a revenue stream (parking, utilities); repaid with revenue from project

80
Q

List 4 types of projects that qualify for private use bonds.

A
  1. Qualified redevelopment bonds (proceeds used for redevelopment purposes in designated blighted areas)
  2. Qualified exempt small issues (Industrial Development Bonds for mfg or 1st-time farmers)
  3. Enterprise zone bonds (commercial and mfg)
  4. Exempt facility bonds (tax-exempt facilities like airports, water or sewer facilities)
  5. Qualified nonprofit bonds (projects owned by NPOs)
  6. Qualified mortgage bonds (1st time home buyers)
  7. Qualified student loans
  8. Industrial Development Bonds (most common; tax-exempt; used for mfg or processing facilities & equipment; less than $10M; public benefit; building purchase stipulations; limits on total outstanding debt
81
Q

Why have taxable private activity bonds (PABs)?

A

While a taxable PAB is the same as regular financing, many projects would not move forward w/o public support.

Most projects receive private financing, but not enough.

Public support provides the necessary additional resources many projects need to succeed as well as the leverage banks require

82
Q

Tax-exempt financing may NOT be used to fund which activities?

A

Working capital
Inventory
Moving expenses
Conventional debt and mortgage refinancing
Rent or permanent financing for a building constructed prior to project approval

83
Q

True or False

Linked Deposits provide public fund deposits to banks for low-interest loans to targeted populations through the bank.

A

True

84
Q

How does a loan guarantee work?

A

Loan guarantees are like collateral in that they insure a portion of a loan against default and thus, lower the risk of the lender.

The Gov’t sets aside a % of funds to cover the guarantee. This deposit is forfeited in the event of a foreclosure of the loan. The guarantee is often limited for the initial few years of the loan term.

Example: $1M project costs valued at $1M; Lender provides 80% of project costs ($800K); Borrower supplies remaining 20% in equity ($200K); Guaranteeing Agency insures the riskiest 25% of the loan ($200) and the lenders exposure is then $600K; In the event of default, the lender has the first claim on collateral; any remaining amount goes to the guarantor.

85
Q

How is Tax Increment Financing used for economic development?

A

It captures future tax benefits of real estate improvements to partially pay for the present costs of those improvements.

TIF freezes the assessed value of the property at the value before the project begins. As the project begins and the property valuations increase, the frozen taxes continue to be distributed to all taxing entities while the incremental taxes generated are used to pay for infrastructure or capital improvement costs in the area.

86
Q

What are some programs states offer for economic financing?

A 
State Tax Credits
Development Authority loan funds
State Venture / Angel Fund Networks
State Trade / Export Promotion
State Export Grants or Loans or Credit Insurance
Foreign Trade Zones
Freeports
Income Tax Reductions
Technology Commercialization financing
87
Q

True or False

The Small Business Administration (SBA) will provide loans to start-up companies.

A

False.

SBA does not provide loans but guarantees a portion of loans made by 3rd party lending institutions

SBA does not provide funding for start-ups

88
Q

List the criteria to qualify for an SBA 7(a) loan.

A
  • Operate for profit
  • Be a small business
  • Do business in the US
  • Have invested equity
  • Use alternative (personal) financial resources prior to seeking assistance
  • Demonstrated need for loan
  • Use funds for sound business purpose
  • Not delinquent on other existing debt obligations
89
Q

What are the advantages of the SBA 7(a) program?

A
  • Extended repayment terms
  • Max loan amount of $5M
  • Interest rates negotiated b/w borrower and bank
90
Q

When would a company use the SBA 7(a) Export Working Capital Program?

A
  • they are an export-ready company
  • need working capital to support export sales
  • not able to secure loans through conventional means
  • have not finalized export contract
  • financial needs does not exceed $5M
  • will be able to pay off loan w/in 12 months
91
Q

What is the intent of the Economic Development Administration (EDA)?

A

To generate jobs
Protect existing jobs
Stimulate commercial and industrial growth in economically distressed areas of the US

92
Q

The 6 major functions of the Housing & Urban Development (HUD) programs are:

A
  1. Insure mortgages for single & multi family dwellings
  2. Channel funds from investors to the mortgage industry
  3. Make direct loans for elderly / disabled housing projects
  4. Provide federal housing subsidies for low & moderate income families
  5. Provide grants to states for community activities
  6. Promote and enforce fair housing and equal housing opportunities
93
Q

What are Empowerment Zones?

A

Designated economically distressed urban and rural areas eligible for federal tax breaks, grants, loans and technical assistance.

Financial support is to assist local residents and businesses implement cooperative revitalization programs.

94
Q

The US Dept. of Ag (USDA) financial programs are intended for what purpose?

A

To encourage growth and sustainability in rural areas.

95
Q

List some of the financial programs offered by the USDA.

A 
Business & Industry (B&I) Loan Program
Intermediary Relending Program
Rural Business Development Grants
Rural Economic Development Loans (Utilities)
Rural Micro-entrepreneur Program
Value-Added Producer Grants
96
Q

What is a Community Development Financial Institution (CDFI)?

A

Entities that provide affordable credit and investment capital to economically distressed area.

The CDFI fund certifies organizations as CDFIs who are eligible to receive funding through the various CDFI Programs.
i.e. Community Development Bank or Credit Union

97
Q

What is the name of the official export credit agency in the US?

A

Export-Import Bank of the United States

98
Q

What does the Ex-Im Bank provide?

A

It does NOT compete with private sector lenders

It does:

  1. provide financing to fill gaps in trade financing
  2. assumes credit and country risks the private sector is unwilling to accept
  3. matching financing that other gov’ts provide to their exporters
  4. provides working capital guarantees, (pre-export financing) export credit insurance and loan guarantees and direct loans (buyer financing)
99
Q

What is the purpose of Ex-Im Banks Export Credit Insurance?

A

To limit risk, provide credit to international buyers and open access to working capital funds.

Short-Term (up to 180 days)
Medium-Term (more than 180 days)

100
Q

List some of Ex-Im Banks financial programs.

A

Working Capital Financing
Export Credit Insurance
Financial Institution Buyer Credit Insurance Policy
Financing for Small Businesses
Global Credit Express Working Capital Loan
Ex-Im Bank’s Working Capital Guarantee

101
Q

Name 3 Federal Technology Transfer Programs.

A
  1. Cooperative Research and Development Agreement (CRADA)
  2. Federal Laboratory Consortium
  3. Small Business Technology Transfer Program (STTR)

IEDC CEcD (10 decks)

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