Financing your
enterprise
TiE Institute Series
IIIrd of VI
June 24, 2006
TiE Institute Knowledge Series
2006
29th
April
p
Developing informed entrepreneurs
through. . .
Experience
Training
Interaction
Exercise
Sustaining
growth
and
Enterprise
Maturity
6
30th
Sept
1
Characteristic
s of an
Entrepreneur
Walk-through
the entrepreneurial
lifecycle !!
2
27th
May
Concept
Managing
Human
Resources
26th
Aug
Organisation
5
Forming your
enterprise
Maturity
3
Marketing
and Scalingup!
29th
July
4
Financing 24th
June
your
Enterprise
Agenda
Approaching Finance . . . (pre-lunch)
I.
–
In the Business Plan
•
•
–
Ashwin Rathi – Deloitte Haskins & Sells
Moderated by … Shantanu Surpure, Economic Laws Practice (ELP)
In the Enterprise
•
•
•
Dr. Anand Patkar – Management Consultant & Trainer
Dr
Prof. Kanu Doshi, Dean – Finance, Welingkar Institute
Moderated by Ashok Jani, Chair TiE-Institute
Funding Options . . . (post-lunch)
II.
–
Private Equity
•
•
•
–
Angel Investing – Sasha Mirchandani, Imercius Technologies
Growth Stage Funding – Vipul Mankad, President, SIDBI Venture
Seed Funding & Moderated by … Mahesh Murthy, Pinstorm
T h l i
Technologies
Debt Funding
•
•
Sanjay Shirole – AGM, ICICI Bank
Prakash Kumar – DGM, SIDBI
Approaching Finance . . .
In the Business Plan
Presented by
Ashwin Rathi
Deloitte Haskins & Sells
Moderated by . . .
Shantanu Surpure
Economic Laws Practice (ELP)
Contents
• Business Plan
• Funding options
– Debt
– Equity
Business Plan
A business plan is a summary of how a
business owner, manager, or entrepreneur
intends to organize
g
an entrepreneurial
p
endeavor
and implement activities necessary and
sufficient for the venture to succeed. It is a
written explanation of the company's business
model.
Business Plan
• Business plans are used internally for management and
planning and are also used to convince outsiders such
as banks or venture capitalists to invest money into a
venture.
• Business plans are noted for often quickly becoming out
of date. One common belief within business circles is
that the actual plan may have little value
value, but what is
more important is the process of planning, through
which the manager gains a greater understanding of the
business and of the options available.
available
Business Plan
• A business plan can be seen as a collection of
sub plans including a marketing plan
sub-plans
plan, financial
plan, production plan, and human resource
plan.
• Specialized sections such as product research
and development,
p
, legal
g strategies,
g , marketing
g
research, or inter-company collaborations, are
added to deal with unique features or
characteristics of the business or its markets
Business Plan – Typical Format
• Executive summary - explains the basic
business model
model, gives rationale for the strategy
• Background
– gives short history of company (unless it is a new
company)
– provides background
g
details such as
• age of company, number of employees, annual sales figures,
location of facilities, form of ownership
– background of key personnel including – owners,
owners
senior management
Business
us ess Plan
a – Typical
yp ca Format
o at
• Marketing
–
–
–
–
–
–
–
–
the macroenvironment
the competitive environment
th iindustry
the
d t
the customer priorities
product strategy
pricing strategy
promotion strategy
p
gy
distribution strategy
Business
us ess Plan
a – Typical
yp ca Format
o at
• Production and manufacturing
–d
describe
ib allll processes
– production facility requirements - size, layout,
p
y, location
capacity,
– inventory requirements - raw materials inventory,
finished goods inventory, warehouse space
requirements
– equipment requirements
– supply chain requirements
– fixed cost allocation
Business
us ess Plan
a – Typical
yp ca Format
o at
• Finance
–
–
–
–
–
–
–
–
source of funds
existing loans and liabilities
assumptions
projected sales, costs, profitability
cash flow statement
break even analysis
ratios – ROI, CR, TOL/TNW, DE, DSCR etc.
sensitivity analysis
Business
us ess Plan
a – Break
ea even
e e a
analysis
a ys s
• Analysis of the behaviour of revenues & cost in
relation to volume to determine
– The level of activity at which revenues and costs are
equal (break-even point), and
– How profit varies with volume
• BEA is based on following assumptions
–
–
–
–
Costt classification
C
l
ifi ti – Fixed
Fi d & V
Variable
i bl
Constancy of unit selling price
Stability
Stab
ty o
of p
product
oduct mix
No change in inventory
Business
us ess Plan
a - Break
ea even
e e a
analysis
a ys s
• Break-even Quantity = (F + I) / (P – V); where
–
–
–
–
F = Fixed operating costs
I = Interest cost
P = Unit selling price
V = Unit variable cost
• Break-even Sales in Rupees = (F + I) / (1- V/P)
• Cash break Even = Depreciation is reduced from
the Fixed Operating cost
cost, thereby reducing the
break-even point
Business
us ess Plan
a – Ratios
at os
• Return on Investments (RoI)
– ROI = NOPAT / Investments; where
• NOPAT = net operating profit after taxes
• Investments = Owned capital + Long term borrowed capital
• C
Currentt R
Ratio
ti (CR) = C
Currentt A
Assets
t / Current
C
t Liabilities
Li biliti
• Total Outside Liabilities / Tangible Net Worth =
(TOL/TNW); where
– TOL = Long Term Loans + Short Term Loans + Current
Liabilities; and
– TNW = Owned funds – Miscellaneous expenditure
Business Plan – Ratios
• Debt equity ratio (DE) shows the relative contributions of
creditors and owners
owners.
– Debt consists of all debt, short-term as well as long-term
– Equity consists of net worth plus preference capital
• Debt Service Coverage Ratio = Σ PATi + DEPi + INTi
Σ INTi + LRIi
–
–
–
–
–
PAT = profit after tax
DEP = depreciation
INT = interest on long term loan
LR = loan
l
repaymentt iinstallment
t ll
t
i = period of the loan
Business
us ess Plan
a – Se
Sensitivity
s t ty Analysis
a ys s
• A technique of risk analysis which studies the
responsiveness
i
off a criterion
it i off merit
it lik
like nett
present value or internal rate of return, DSCR,
etc to variations in underlying factors like
etc.
selling price, quantity sold, operating costs, etc.
• Scenarios are generated wrt the base case:
– Sales reduced by x%
– Operating
p
g costs up
p by
y x%
– Mix of above two
Business
us ess Plan
a – Typical
yp ca Format
o at
• Human resources
–
–
–
–
–
–
–
assign responsibilities
training required
skills required
union issues
compensation
skills availability
new hiring
Business Plan – Typical Format
• SWOT Analysis
–
–
–
–
Strengths
Weakness
Opportunities
Threats
In a nutshell………
What is a Business Plan?
• Sets out your company’s plans
• Shows how those plans can be achieved
• Demonstrates that the planned outcome meets
the requirements of the reader
In a nutshell………
What purpose does a Business Plan serve?
• External use
– Fund raising application
• Internal use
– Own management
– Parent Co.
In a nutshell………
What do readers want to see?
• Grants
• Banks
– how much do you want to borrow?
– what do you want the money for?
– when will you be able to repay the borrowing?
– will you be able to pay the interest?
– could your company survive a setback in its plans?
– what security, if required is available for the lending?
• Venture Capital & Development Capital
– a substantial return
– they usually want an exit route
In a nutshell………
What does Venture Capitalist examine
• The track record of
– The Company
– The management
– The market
• The forecasts
– Are they achievable?
– What can go wrong?
• The critical factor
– Management
– How will the investors make an adequate return?
Practical Hints
•
•
•
Who should write the Business Plan? - Management
How long should it be? – as short as possible
Planning the Plan
– Understand what information should be included in the Business
Plan
– Decide on the section headings for your plan and prepare an index
– Decide who is to co-ordinate and write the plan
– Agree who is to provide the necessary information
information- management
or advisers
– Gather information for each topic and jot down the ideas
– Organize the information logically
– Start writing
– Challenge the assumptions
– Expect revisions
– Business plans are not written
written, they are re
re-written
written
Practical Hints
•
•
•
•
•
•
•
•
Do not use Jargon
Do not repeat yourself
Support your claims
Worried about Confidentiality
Do not be selective
A Second Opinion
First Appearances
pp
Count
Four Dos and one Don’t
–
–
–
–
–
Do provide and index
Do provide a summary
D number
Do
b each
h copy
Do show who the business plan is submitted by
Do not produce too many copies
Approaching Finance – Flow cart
Preparation of
Business Plan
10
Submission to
select investors
10
10
0
30 days
Identification
Project /
Implementation
Conclusion
Negotiation
10
5
Agreement
F db k
Feedback
10
Due Diligence
15
Term Sheet
Funding options
EQUITY
DEBT
Promoters Equity
Financial Institutions
Angel Funds
Banks
Seed Capital
International Funds
Venture Capital
Securitization
Private Equity
Debt Financing
• Long term
– Term Loans – Institutions, Banks
– Deferred p
payment
y
g
guarantees
– For fixed assets
• Working capital
– Fund Based – Current assets less current liabilities
– Non-fund based – bank guarantees, letter of credit
– For working capital
Equity Funding - Venture Capital
•
Venture Capital
p
- Financing
g for new businesses. In other words,
money provided by investors to start-up firms and small businesses
with perceived, long-term growth potential. This is a very important
source of funding for start-ups that do not have access to capital
markets. It typically entails high risk for the investor, but it has the
potential for above-average returns
•
Venture capital can also include managerial and technical expertise.
Most venture capital comes from a group of wealthy investors,
investors
investment banks and other financial institutions that pool such
investments or partnerships. This form of raising capital is popular
among new companies, or ventures, with limited operating history,
who cannot raise funds through a debt issue.
issue The downside for
entrepreneurs is that venture capitalists usually get a say in
company decisions, in addition to a portion of the equity.
Equity Funding - Venture Capital
• Angel Investor - A financial backer providing venture capital
funds for small start-ups or entrepreneurs
– Typically, angel investors are friends or family
members.
members
• Seed Capital
p
- The initial equity
q y capital
p
used to start a new
venture or business
– This initial amount is usually quite small because the venture is still in
the idea or conceptual stage. Also, there's a high risk that the venture
will fail
fail.
Initiating process of approaching
VC
• Business & Strategic Planning
– Well written business plan
• Effective networking
– Professional advisors
• Narrowing the field
– To be noticed amongst ‘000 of proposals
– Investment p
preference of the VC
Meeting with Venture Capitalists
•
•
•
•
•
•
•
•
•
•
Have a dress rehearsal
Have a mentor
Have a detailed game plan
Have your team available to meet the venture capitalist
Have passion but not rose-coloured glasses
Have a way to demonstrate your personal commitment to the
project
Have an open and honest exchange of information
Have a big market and a big upside
Have an understanding of what really motivates the venture
capitalist’s decision
Have an exit strategy
Term Sheet
• A non
non-binding
binding agreement setting forth the basic terms
and conditions under which an investment will be made.
• Term sheets are templates that are used to develop
more detailed legal documents
Term Sheet
•
•
•
•
•
•
•
•
Issuer
Investors/amount of investment
Type of security
Number of shares
Founders
Price per share
Capitalization of the company
Ri ht preferences,
Rights,
f
privileges
i il
– dividend provisions
– liquidation preference
– conversion
– Anti-dilution provisions
– voting rights
– protective provisions
•
•
•
•
•
•
•
Information and registration rights
– Information rights
– Demand rights
– Piggy
Pi
b
back
k registration
i
i
– Registration expenses
– Other registration provisions
Board representation
Use of proceeds
Employment relationships
Drag-along rights
Right of first refusal
T along
Tag
l
rights
i ht
Term Sheet
•
•
•
•
•
Confidential information and inventions assignment
g
agreement
g
The stock purchase agreement
Redemption
Voting agreement
Conditions of closing
– Completion of due diligence to the satisfaction of the Investors in
their sole discretion
– Execution by the company of a Stock Purchase Agreement and
related agreements satisfactory to the investors in their sole
discretion
– Compliance by the company with applicable securities laws
– Opinion of counsel to the Company rendered to the investors in
form and substance satisfactory to the investors
– Other material conditions, to be discussed
– Such other conditions as are customary for transactions of this type
– Execution by the founders of a Voting Agreement
Term Sheet
•
•
•
•
•
•
•
Expenses
Finders
Closing
Expiration of proposal
C fid ti lit
Confidentiality
Counsel to the investors
C
Counsel
l tto th
the company
Concerns - Company
•
•
•
•
•
•
•
Loss of management
g
controls
Dilution of personal stock
Repurchase of your personal stock in the event of employment
termination, retirement or resignation
Additional financing
Security interests being taken in key assets of the company
Future capital
p
requirements
q
and dilution of the founder’s ownership
p
and
Intangible and indirect benefits of venture capitalist participation,
such as access to key industry contacts and future rounds of capital
Concerns - VC
•
•
•
•
•
•
•
•
•
Your company's
p y current and p
projected
j
valuation
Level of risk associated with this investment
The fund’s investment objectives and criteria
Projected levels of return on investment
Liquidity of investment, security interests and exit strategies in the
event of business distress or failure (“Downside Protection”)
Protection of the firm’s ability to participate in future rounds if
company meets or exceeds projections (“Upside
( Upside Protection
Protection”))
Influence and control over management strategy and decision
making
Registration rights in the event of a public offering and
Rights off first
f
refusal
f
to provide future
f
financing
f
Concerns - both
• Retention of key members of the management
team ( and recruitment of any key missing links)
g the syndicate
y
• Resolution of anyy conflicts among
of investors (especially where there is a lead
investor representing several venture capital
firms)
• Financial strength of the company post investment
• Tax ramifications of the proposed investment
Due Diligence
In finance,
due diligence may refer to the process of research and
analysis that takes place in advance of an investment
investment,
takeover, or business partnership.
The potential investor generally uses in-house resources or
hires a consulting firm that specializes in due diligence and
corporate investigations to investigate the background and
principals
p
p
of the target
g company.
p y
Due Diligence
A due diligence
d ge ce assignment
ass g e t ge
generally
e a y includes
c udes reviewing
e e
g
press and listing filings, checking for regulatory and
licensing problems, identifying liens and judgments, and
uncovering civil and criminal litigation matters.
Sophisticated investigators will also search for conflicts of
interest, insider trading
g and p
press and p
public records that
identify problems that may have occurred under the
principal's "watch."
Due Diligence
g
The investigative results may be prepared in a "due
due diligence
report" that the investor uses to understand risks involved in
the investment.
In addition to identifying risks and implications of an
investment, due diligence may include data on a company's
solvency
y and assets.
The due diligence process is covered by confidentiality
undertakings
g and supported
pp
by
y warranties.
Building the Cross-Border Enterprise – Analysis and
Comparison of the Legal Issues of Venture Capital
Investing in the US and India
Shantanu Surpure
Partner, Economic Laws Practice
TiE Institute,
Institute Mumbai,
Mumbai June 24,
24 2006
ELP Venture Capital and Private Equity Practice
ELP Venture Capital and Private Equity Practice
Certain Fundamentals are Universal in Venture Investing
Product or Service
M k t
Market
Management Team
Ability to Execute Business Plan
Due Diligence
“One
One Hour Rule”
Rule has been broken
New Ecosystems
New Rules, New Structures, End to End Solutions
ELP Venture Capital and Private Equity Practice
Compare Legal Structures and Documents between Silicon Valley and India
Incorporation in the US
California or Delaware, Secretary of State, Department or Division of Corporations
More than 60% of Fortune 500 companies incorporate in Delaware
Can incorporate in a day or even hour, open until 9pm, accept faxed signatures, one shareholder, one director,
no minimum capital, board meetings by telephone, must qualify as a foreign corporation
Entity Selection – LLCs – hybrid between a partnership (flow through tax) and a corporation (limited liability)
S corporation, taxed as a partnership
C corporation, generally preferred, can create different classes of shares, par value is typically $0.0001 per share
Do not need to be a US citizen or a Delaware resident, appoint agent for service of process
Incorporation in India
Registrar of Companies, not critical which state, Company Law (Companies Act) is a Central subject unlike the
US where the Delaware General Corporation Law and California Corporations Code are state subjects
No LLCs, no LLPs, incorporate as a private company, Section 3(1) iii of Companies Act
Takes up to three weeks, forms in triplicate, require two shareholders and two directors, minimum capitalization
of Rs. 1 lakh, no telephone board meetings, par value is typically Rs. 10 per share
ELP Venture Capital and Private Equity Practice
Equity Instruments in the US
Common and Preferred Stock
Common Stock – typically founder’s
founder s stock
Preferred Stock – liquidation preference (sale of the Company is a liquidation event), anti-dilution
measures, redemption rights, participating preferred, dividend, conversion into Common upon
certain events, protective provisions, separate voting as a class
Morris v. American Public Utilities, 14 Del. Ch. 136, 122A. 696 (1923) and Rice & Hutchins, Inc.
v. Triplex Shoe Co., 16 Del. Ch. 298, 147A 317 (1929) – Unless a preferred stock is denied a
right to vote in the Certificate of Incorporation, it has such a right
Equity Instruments in India
Equity shares, Companies Act amendment in 2000 allows for voting rights, s86 of Companies
Act, differential rights as to dividend, voting, etc., enshrine these rights in the Articles of
Association;
Preference shares – quasi debt instrument, limited or no voting rights, instrument often used is
convertible preference shares
Q&A
Approaching Finance . . .
In the Enterprise
Presented
P
t d by
b
Dr. Anand Patkar
Management Consultant & Trainer
Moderated by . . .
Prof. Kanu Doshi,
Dean – Finance
Welingkar’s Institute
PURPOSE OF THE BUSINESS
Converting Resources to Results…..
RESULTS > RESOURCES
Value Addition
Creation Of Wealth
CORPORATE FINANCIAL OBJECTIVE
RETURN ON NET WORTH
OR
RETURN ON SHAREHOLDERS EQUITY
RONW = PAT/NW
PROFITABILITY COMPONENTS
RETURN ON NET WORTH
PAT
PAT
PBT
PBIT
X
=
X
X
NW
PBT PBIT
SALES
SALES
X
C.E.
PAT/PBT
PBT/PBIT
PBIT/SALES
: TAX MANAGEMENT
: INTEREST MANAGEMENT
: MARGIN ON SALES
SALES/C E
SALES/C.
E.
: INVESTMENT TURNOVER
C. E./NW
: LEVERAGE MANAGEMENT
C.E.
NW
TOTAL MANAGEMENT PERFORMANCE
FINANCIAL MANAGEMENT PERFORMANCE
PLUS
OPERATING MANAGEMENT PERFORMANCE
RETURN ON INVESTMENT
ROI = PROFIT/CAPITAL EMPLOYED
= (PROFIT/SALES) * (SALES/C. E.)
SALES COSTS
SALES-COSTS
SALES
SALES
C. E.
X
MARGIN X INVESTMENT TO
EFFICIENCY X EFFECTIVENESS
HOW WELL X HOW MUCH
QUALITY
X QUANTITY
HINDUSTAN LEVER LIMITED
1997
1998
1999
2000
2001
2002
2003
8343
10215
10918
11392
11781
10952
11096
580/1261
837/1713
1070/2103
1310/2488
1541/3044
1731/3659
1804/2139
46.0%
48.9%
50.9%
52.7%
53.9%
48.4%
82.8%
0.68
0.74
0.77
0.79
0.79
0.79
0.80
10.9%
11.9%
13.7%
15.7%
19.7%
20.1%
20.2%
SLS/CE
5.4
4.8
4.45
4.01
3.50
2.95
2.89
CE/NW
1.15
1.15
1.08
1.05
1.03
1.02
1.80
58 9%
58.9%
57 1%
57.1%
61 8%
61.8%
64 6%
64.6%
62 4%
62.4%
59 3%
59.3%
58 4%
58.4%
SALES
PAT/NW
RONW
PAT/PBT
PBT/SALES
ROI
VIDEOCON INTERNATIONAL LIMITED
90/91
91/92
92/93
PAT
26
46
48
63
86
NW
70
157
342
742
785
29%
14%
9%
11%
RONW 37%
93/94
94/95
VIDEOCON : ROI TRENDS
90/91
SALES 515
PBIDT
51
INVST 268
Margin 10%
Invs. TO 1.9
ROI
19%
91/92
689
85
372
12%
1.85
23%
92/93
727
98
632
13%
1.15
16%
93/94
915
99
1096
11%
0.83
9%
94/95
1137
123
1504
11%
0.76
8%
Superlative
Supe
at e Corp
Co p Performance
e o a ce
MANAGING MARGINS
MARGIN = PROFIT/SALES
PROFIT = S - VC - FE
= (P-V)X – FE
P = SELLING PRICE PER UNIT
V=VAR COST PER UNIT
V=VAR.
X = NO. OF UNITS SOLD;
P-V = CONTRIBUTION MARGIN PER UNIT,
(P-V)/P = MARGIN AS % OF SALES PRICE
MANAGERIAL IMPLICATIONS
Business profits are influenced by interplay
between V.C.
V C %,
% Margin per unit,
unit Product
mix, Sales volumes and Fixed expenses.
COMPANY PROFITS =
∑ Xi(Pi – Vi) – FIXED EXPENSES
Where
Products
Prices
Variable Cost
X1 ……….. Xn
P1 ………… Pn
V1 ………… Vn
THE C
CHANGING
G G PARADIGM
G
SALES = COSTS + PROFITS
PROFITS = SALES - COSTS
COSTS = SALES - PROFITS
PROFIT DRIVERS
SALES
VARIABLE COSTS
Contribution Margin
PRODUCT MIX AND QUANTITY
FIXED EXPENSES
Overheads Utilisation
p
and IT
ABC,, Process Optimisation
MANAGEMENT PERSPRCTIVE
Track costs by their behaviour rather than function
Cost plus margin based pricing no longer works
Total cost
cost” of a product is a myth
“Total
Manage for target cost.
PROFIT V/S CASH
PROFITS ARE FOR THE BOOKS
CASH IS FOR REAL
WORKING CAPITAL CYCLE
FINISHED
GOODS
RECEIVABLES
WAGES, SALARIES
WAGES
OVERHEADS
CASH
WORK IN
PROGRESS
MATERIALS
SUPPLIERS
FREE CASH FLOW - I
WHAT IT MEANS
Difference between Net Cash Flow generated
g
by operations and Net Cash required for
continuity and maintenance of normal
b i
business
(i l di normall growth).
(including
th)
FREE CASH FLOW - II
EXAMPLE : XYZ COMPANY
FIXED ASSETS : 70
WKG CAP : 80 TOTAL 150
NET WORTH : 70
DEBT
: 80 TOTAL 150
SALES
250
(NORMAL GROWTH 12%)
PBDIT
37
(15%)
DEPRN
7
(10% OF FIXED ASSETS)
INTEREST
12
( 15% OF DEBT)
TAX
4
PAT : 14
RONW 20%
FREE CASH FLOW - II
XYZ CO. …(CONTD)
CASH PROFIT AFTER TAX
14+7
OLD LOAN REPAYMENT,
1/7 OF DEBT,
DIVIDEND PAYOUT
PAYOUT,
1/3 OF PROFIT
PROFIT,
CASH AVAILABLE
(21 - 12 - 5)
NORMAL CAPEX,
10% OF FA
NWC GROWTH,
GROWTH
(12%,
(12% LIKE SALES)
TOTAL FUND REQD 17, OF WHICH OWN 50%
FREE CASH FLOW = A-B = 4-8 =
21
12
5
(A) 4
7
10
(B) 8
-4
FREE CASH FLOW FOR PROFIT
CENTRE
A. SALES
B. VARIABLE COSTS
(RMC, POWER, G+F, COMM., FC ON WKG. CAP.)
C. CONTRIBUTION PROFIT (A-B)
(A B)
D. FIXED EXPENSES
(MFG., SELLING & CORP. O’HEADS, FC ON FA)
E. CASH PROFIT (C
(C-D)
D)
F. NORMAL CAPITAL EXP.
G. CHANGE IN NET WORKING CAPITAL
H FREE CASH FLOW (E-F-G)
H.
FREE CASH FLOW DRIVERS
Sales Quantity
Product Mix and Net Contribution
Management of Overheads
Normal Capex
W ki Capital
Working
C it l (I
(Inventory
t
and
dR
Receivables)
i bl )
THE CO
CONTROL
O PROCESS
OC SS
MIS
BUDGET
ACTUAL
VARIANCE
ANALYSIS
REASONS
CORRECTIVE
ACTION
Q&A
THANK YOU
Networking Lunch
Agenda
Funding Options . . . (post
(post-lunch)
lunch)
–
Private Equity
•
•
•
–
Angel Investing – Sasha Mirchandani, Imercius Technologies
Growth Stage
g Funding
g – Vipul Mankad, President, SIDBI Venture
Seed Funding & Moderated by … Mahesh Murthy, Pinstorm
Technologies
D bt Funding
Debt
F di
•
•
Sanjay Shirole – AGM, ICICI Bank
Prakash Kumar – DGM, SIDBI
Funding Options . . .
Private Equity . . .
Angel Investing
S h Mirchandani
Sasha
Mi h d i
Imercius Technologies
Growth Stage Funding
Vipul Mankad
President - SIDBI Venture
Seed Funding & Moderated by …
Mahesh Murthy,
Pinstorm Technologies
Who is an ANGEL INVESTOR ?
Individual private investors who invest in private
companies are commonly and affectionately known as
“angel investors”
A “TYPICAL”
C
ANGEL
G
PROFILE
O
•
•
•
•
•
Income exceeds $100,000
$100 000
40-60 yrs old
Net worth in excess of $ 1 million
Previous successful entrepreneurial exp
Expects to hold on to investment for up to 5 to 7
yrs(some exceptions always there)
• Prefers to invest close to home
A “TYPICAL”
C
ANGEL
G
PROFILE
O
• Enjoys
j y advising
g the entrepreneur
p
and likes to be p
part of
the action
• Invests on average $150,000 but may participate in a
syndication
y
of other angel
g investors bringing
g g the total
investment to multiples of individual investments
• Refers deals to other private investors even if he/she has
chosen not to invest
• Likes to invest in a industry generally where he/she is
familiar
g referrals
• Sources deals through
EXIT MECHANISMS
C
S S
• Public offering on a public exchange
• Buy back of a investors shares by the principles of the
company
• Acquisition
A
i iti b
by a thi
third
d party
t
• Next round of funding
You could identify future purchasers of your business so
that angel has a sense of how the business might be
sold in the future
THE BIG
G C “CHEMISTRY”
C
S
• Angels are people who generally have entrereunial
experience and want to get involved rather than be
passive investors
– therefore it is crucial that the proper chemistry exists between
the angel and the entrepreneur.
• Tough issues should be dealt with upfront this can
hopefully help avoid nasty disputes that may come up in
the future
future.
WHEN DO ANGEL INVESTORS
USUALLY INVEST
• A angel investor usually funds a company when it is in
the start up or first stage of development.
• Angels also become involved in a company which is
underperforming and requires capital for a turnaround
turnaround.
• On the whole financing
g from angel
g investors p
precedes
any financing from venture capitalists and a good angel
often paves the way to subsequent infusion of venture
capital or other financing.
financing
THINGS THAT ANGELS BRING TO
THE TABLE
• The ideal angel will not only have entrepreneurial
experience but also relevant industry experience
• Among
A
other
th things
thi
that
th t an angell will
ill d
do are
– Refine your business plan
– Determine the needs of top management and help find
managementt personall
– Obtain key contacts for strategic partnerships
– Develop financing strategies and locate sources of funding
REFERENCE
C THE ANGEL
G
• What kind of industry contacts does the angel have?
• Was the angel
g able to make important
p
introductions to
prospective clients?
• Did the angel connect you to strategic partners?
• Did the angel help you recruit board members and
management?
ANGEL OR DEVIL?
• A
Angels
l can b
be quite
it d
demanding
di off your titime which
hi h iis a
very precious commodity and therefore “angel
management” is very important.
• At the time of investment it is very useful to agree upon
tthe
e manner
a e in which
c co
communication
u cat o will be co
conducted.
ducted
• It may be useful to settle upon monthly meetings on a
predefined date and time
time.
ABSENTEE
S
ANGEL
G
• You may be faced with a angel who is to busy with other
business obligations to help with your business.
• If it is your expectation to obtain a expertise from an
angel you should sit down with the investor before the
deal and be clear about the time commitment you desire
from him/her.
BE PREPARED
• Put together a solid management team
team.
– A solid management team is essential for any efforts
to raise money successfully.
• If you do not have a complete management team you
must identify areas where the team has gaps and
provide the angel with a realistic plan for doing so.
– Don’t fake it or tryy to cover anyy g
gaps
p up.
p
BE PREPARED
• Organize your financing in a sensible way taking into
account future rounds of investment.
– Big salaries and flashy perks turn off potential
investors.
• Prepare an effective business plan
plan-a
a good plan usually
states more than why the businesses is such a great
opportunity.
BE PREPARED
• Protect your intellectual property
property.
– This is getting more and more important as many companies are
now basing there success upon propriety intellectual property.
• Practice your pitch and do not get discouraged
THE LOCAL SCENE FOR ANGEL
INVESTORS
• Still scattered in Bombay
g
with p
people
p like
• Delhi has a band of angels
Raman Roy, Jerry rao, etc
putting
g together
g
a local band of angels
g
• We are p
which meets every month.
YOU
OU C
CAN FIND A ANGEL
G
• Best way to find a angel is through referrals
• Network Network Network:
– Networking is hard work it requires time energy and follow up.
– It is a long haul so be prepared.
CO C US O
CONCLUSION
• Be prepared
• Reference the Angel
g
• Network… Network…Network
• Be persistant
How to not get funded.
funded
The 10 commandments.
<seedfund>
1 Have a brilliant idea
1.
idea.
We don’t fund ideas. We fund
businesses A business is an execution of
businesses.
an idea that earns more money than it
costs, sustainably.
<seedfund>
2 Present a proven concept.
2.
concept
We fund un-proven concepts. The
“Indian version” of X will usually be
defeated by X itself.
<seedfund>
3. Come with estimates of
3
future market size from
Nasscom, KPMG, Deloitte,
Gartner and IDC.
Nobody can predict the future – least of
all someone in consulting who hasn
hasn’tt
worked in the real market. Their numbers
are bullshit, and we all know it☺
<seedfund>
4. Estimate, top-down, that
you’ll
you
ll capture,
capture conservatively
conservatively,
1% of the estimated market.
Why 1%? It might be 0.1%. Or 100%.
R
Revenues
d
depend
d on effort,
ff t human
h
execution, sales funnels, sales calls,
closingg - not some top-down
p
number.
<seedfund>
5. Come with detailed financial
projections for 5 years.
Again, no one can predict the future.
A 1 year or 18 month
th projection
j ti iis about
b t
the limit we can believe.
<seedfund>
6. Do all the research, have the
confidence that you know it all,
all
and know you just need money.
We don’t fund know-it-alls. We fund
companies we can actively help –
and who want to be actively helped.
<seedfund>
7. Have a great resume, with a
t E
top
Engineering
gi
i gd
degree
g
and
da
top MBA - be a superstar in the
making.
W fund
We
f d teams. Not
N iindividuals.
di id l W
We
don’t care for qualifications.
<seedfund>
9. Make a b-plan based on
market salaries.
We always want to see lower-thanmarket salaries.
<seedfund>
10. Have a plan B to pay the
bills while this works out.
We don’t want you to have any
other alternative. It HAS to work out.
<seedfund>
11. Plan to own a majority of
the equity.
Be ready to eventually have 25% or less.
B tt tto have
Better
h
1% off a 100 cr company
than 100% of a 1 cr company
<seedfund>
12. Hope to become a huge
success and a billionaire.
We know most of you wont. But the
pleasure is in the trying.
<seedfund>
13. Have a formal, professional
relationship with us.
We’re not stuck-up. We’d rather
work with people who treat us as
friends.
<seedfund>
14. Don’t trust a VC or investor.
Make sure every point in the
agreement is double-checked
by your lawyer.
We work on trust.
trust
<seedfund>
15. Prepare for hard work – get
ready to give up on all other
interests.
Hey, if you aren’t having fun – we
won’t☺
☺
<seedfund>
16. Send your plan to all
possible funders.
Send it to mahesh@seedfund.in:)
I’m at 98922 49969.
<seedfund>
F di Growth
Funding
G
th …
Vipull M
Vi
Mankad
k d
SIDBI Ventures
Presentation Outline…
• Funding Options - Overview
– Factors considered for Equity
• Sustaining Growth-Issues
• Venture Funding
– Approaching VC
– Evaluation Criteria
• VC as Partner
Financial Structuring..
• OWN FUNDS
– EQUITY
– INTERNAL ACCRUALS
• BORROWED FUNDS
– TERM LOANS
– DEBENTURES/ BONDS
– LEASE/ HP/ FD
Sources
Sou
ces … Equity
qu ty
• EQUITY
–
–
–
–
PROMOTERS
FRIENDS / ASSOCIATES
ANGELS
INSTITUTIONS
• VENTURE FUND
• PVT EQUITY
– PUBLIC
Factors to consider for Equity
q y…
• EQUITY
– Degree Of Dilution
• Present and Subsequent rounds of Funding
• Valuation
– Growth and Exit Possibilities
• Potential for Capital
p
Appreciation
pp
/ EPS / BV
Sou ces
Sources…
• Angel, HNIs
• Incubators
–
–
–
–
IIT-Mumbai , Delhi, Kanpur
IIM A
IIM-A
ISB
Nirma Lab
• Some
S
VC F
Funds
d
– State level funds promoted by SIDBI
• Other agencies
g
g
giving
g soft debt
– TDB, Spread etc
Sustaining
Susta
g Growth
G o t – Issues
ssues
•
•
•
Needs Growth Capital
– Sustain and increase Market share
– Maintain Competitive Advantage
Low Resource Base / Liquidity
– Constraints on debt raising capability
Management bandwidth
– Requires Strategic Inputs
– Building
B ildi T
Team / S
Systems
t
– Develop Growth Strategy
Venture Capitalist
p
-ap
partner that
provides “Value Added Investment”
Approaching
pp oac g VC…
C
• Evolve Long Term Growth Strategy
– Strong Value Proposition
• High probability of Commercealisation
– Scalable Business Model
• Prepare well thought-out Business Plan
–
–
–
–
Business Focus & Growth Strategy
Milestones
Realistic Projections
Exit Options
Approaching
pp oac g VC…
C
contd.
co
td
• Prepare to dilute
…Owning
O i Large
L
Part
P t off a Small
S ll Business
B i
or
Small Part of a Large one…
• Select a Partner (Strategic / VC) that …
– Shares Vision and Objective
– Provides Strategic
g Inputs
p
& Complementary
p
y
Relationship
BUSINESS PLAN - WHAT VCFs
LOOK FOR
SIMPLE -CLEARLY HIGHLIGHTING :
•
CORE STRENGTHS
– Promoters & Team
– Value Proposition, Competitive Advantage
– Key Customers,
Customers Market
Market,Growth
Growth Potential
•
•
•
•
•
GROWTH PLANS
STRATEGY & TIME FRAME TO ACHIEVE SET MILESTONES
FUND REQUIREMENTS & DEPLOYMENT PLAN
REALISTIC FINANCIAL PROJECTIONS
Exit Options
Investment
est e t C
Criteria
te a
Risk Analysis…
• Promoters Background / Quality of
Management
–
–
–
–
–
Vision
Experience
Ability to Innovate / Change Rapidly
Ability to Build Team
Marketing and Branding Skills
Investment
est e t C
Criteria
te a
- Co
Contd
td
• Product / Service / Idea
– Product Concept / Value proposition
– Stage of Development / Level of Acceptance
– Competitive Advantage and its sustainability /
Entry Barrier
– Scalability
Investment Criteria
- Contd.
• Valuation
– Revenue / Profit Multiple
– IPR
– Customer Base / strategic Relationships
• Exit Options
– Trade Sale
– Merger
– IPO
Value
a ue Addition
dd t o
• Implementation of Business Plan
– Using Network
– Team Building
– Resource Planning
• Implementation of Systems
– Corporate Governance
• Evolving Growth Strategy
• Provide Outside View
VC Expectation
… Post
P t Investment
I
t
t
• Transparency
p
y / Corporate
p
Governance
• Openness to Constructive suggestions
• Growth Appetite
– Organic / Non Organic Growth
• Build Team
• Build S
System
• Preparedness to dilute and facilitate Exit
Lessons
esso s Learnt…
ea t
• Customer acceptance takes long time
• Expenses tend to overshoot budget while
R
Revenues
ttrailil ttargets
t
• Need to deploy resources for upgrading product
on continuous basis
• Financial discipline very important
– Managing
M
i C
Cash
h and
dD
Debtors
bt
SIDBI/ SVCL
…VC Initiative
• Fund of Funds
– 22 Funds with total investment aggregating
gg g
g to Rs
300+ Crs
• Own Fund
• National Fund For Software and IT (NFSIT)
– Corpus Rs 100 Cr – contributed by SIDBI, IDBI & MIT
• SME Growth Fund - corpus
p of Rs 500 Cr .
NFSIT
S
• Focus :
– Software (Product /Service),
/Service) Communication,
Communication
Media, Training and Education, Internet, IT
Enabled Services
• National Focus
• Prefer SME Sector
• Investment range - Rs 1 to 5 crore
NFSIT
S
• Committed Rs 75 Cr to 29 units
– Software Products / Services , BPO, Internet
based services , Media , IT Training, Design,
Payment gateway,
gateway Speech Recognition….
Recognition
SME Growth
S
G o t Fund
u d
• Corpus Rs 500 Cr
• Focus on Growth sectors
• Committed investments in 9 Companies : Health
care and Pharma
Pharma, Retailing
Retailing, Auto Components
Components,
Service Infrastructure, Logistics, Alternative
Energy etc…
Thank You…
Visit us @ WWW.SIDBIVENTURE.CO.IN
Q&A
Funding Options . . .
Debt Funding.
Funding . .
Private Bank’s Perspective
Sanjay Shirole
AGM - ICICI Bank
Development Bank’s Perspective
P k h Kumar
Prakash
K
DGM - SIDBI
Development Bank’s
Bank s perspective
on Debt Funding
Presentation by
y
Prakash Kumar, DGM, SIDBI
SME Development Centre
133
Dev. Bank approach
pp
to Project
j
lending
g
•
Development banks main business is to lend for specific projects, carefully
selected and prepared, thoroughly appraised, closely supervised and
systematically evaluated
•
The concentration on project lending is directed at ensuring that banks
funds are invested sound, productive projects that contribute to the
development of the country
country’s
s economy as well as its capacity to repay
the loan.
SME Development Centre
134
What is Project
j
Appraisal
pp
•
C
Comprehensive
h
i and
d systematic
t
ti review
i
off allll aspects
t off a project
j t
•
Appraisal provides broad guidance to the institution to form its judgment
regarding future success of the project and work out the terms and
condition of the assistance
•
The main object of appraisal is to improve and revamp the project with the
co operation of the promoters
co-operation
•
Expediting the appraisal depends very much on the speed with which the
information is coming from the promoters
SME Development Centre
135
Various aspects
p
of Project
j
Appraisal
pp
• Management
• Technical
• Financial
Fi
i l
• Market
SME Development Centre
136
Management
g
Appraisal
pp
•
The entrepreneur
–
–
–
–
–
–
–
–
–
–
•
Character – honours his commitment
Involvement in the project
Resourcefulness
Competence – knowledge / experience
Initiative
Intelligence
Drive and Energy
Self Confidence
Transparency / frankness
Patience
Management set up
SME Development Centre
137
Technical Appraisal
pp
•
•
•
•
•
•
•
Location / Site
Technology / technical arrangement
Availability of Raw Material / Utility
Selection of plant and machinery
Implementation schedule
Environment
Statutory Clearances
SME Development Centre
138
Financial Appraisal
pp
•
•
•
•
Analysis of past working results in case of existing concerns
Cost of the project
Means of financing
Financial projections
SME Development Centre
139
Market Appraisal
pp
•
•
•
Industry Outlook
Competitive Analysis
Selling Arrangements / Tie Up etc
SME Development Centre
140
Typical
yp
components
p
of Project
j
Cost
1
Land and Site Development
2
Building and Civil Work
3
Plant and Machinery
4
Misc Fixed Assets
5
Preliminary and Preoperative expenses
6
Contingencies
7
Margin Money for Working Capital
Total
SME Development Centre
141
Typical
yp
components
p
of Means of Finance
1
Promoters capital
p
2
Unsecured Loan
3
Internal accruals
4
Capital Subsidy, if any
5
Term Loan
Total
SME Development Centre
142
Important ratios – term lenders perspective
•
Promoter s contribution ( % )
Promoter’s
- Promoter’s capital/ Total Project Cost
•
Debt Equity
q y Ratio ( DER )
- Total Long Term debt / Total equity
•
Debt Service Coverage Ratio ( DSCR)
-PAT+ depreciation and w/o +intt on term loan
installment of term loans + intt on term loan
•
Project Asset Coverage ratio
- Total Fixed Asset / Total Secured debt
SME Development Centre
143
Documents to be
generally submitted with application
•
•
•
•
•
•
•
Copies of MoA/ AoA/ Partnership Deed
Audited financial results for last 3 years for unit and associate concerns
I
Income
Tax
T / sales
l tax
t returns
t
for
f the
th pastt 3 years for
f the
th firm/
fi / company
and the promoters
Net worth statement of promoters / guarantors
Details of Existing Credit facilities / Copy of sanction letter from other bank/
FIs
Copies
p
of lease deed/ sale deed of unit land
Copy of title deed of collateral security and valuation report
SME Development Centre
144
Documents to be submitted (contd.)
•
•
•
•
•
NoC from PCB/ consent letter
List of existing machines/ Competitive quotations for machines/ MFA
C i off agreements
Copies
t with
ith Architect
A hit t / technical
t h i l consultants
lt t etc
t
Project Report
Market Survey report
SME Development Centre
145
SIDBI - Background
•
Established in 1990 under an Act of Indian Parliament.
•
Objective: Promotion, Financing & Development of SMEs and
coordinating Functions of institutions engaged in similar activities.
activities
•
•
Ownership : Public sector banks/FIs/Insurance Cos owned or controlled
by the Government of India
India.
•
Structural Linkage: With Ministry of Finance and Ministry of SSI.
•
Nodal Agency : For SME Schemes of GoI.
SME Development Centre
146
SIDBI : Sphere of activities
•
Direct Finance Operations : SMEs, Service sector, Infrastructure,
etc.
•
IIndirect
di
Fi
Finance
: Resource
R
support to Banks,
B k NBFCs,
NBFC SFCs,
SFC other
h
State & central financing/ development agencies.
•
Micro Credit operations : Pioneers in micro credit movement in the
country.
t Developed
D
l
d severall leading
l di MFIs.
MFI
•
Associate Institutions : SIDBI Venture Capital Ltd, SME Rating
Agency, TBSE & Credit Guarantee Fund.
•
Nodal Agency : For several GoI schemes like TUFS, NEF, CLCSS
etc
SME Development Centre
147
SIDBI : Scope of financing
•
Small : Investment in Plant & Machinery upto Rs 1 crore (Rs 5 crore in
select sectors).
•
Medium : Investment in Plant & Machinery upto Rs 10 crore.
crore
•
Service sector : All services activities viz Healthcare, Hospitality,
project
j
costs
leisure,, entertainment,, IT/IT enabled businesses,, etc. with p
upto Rs 250 crore.
•
Infrastructure sector :
infrastructure etc.
infrastructure,
etc
Power, Roads, Ports, Telecom, SME
SME Development Centre
148
SIDBI : Direct Scheme for SME segment
• Eligible entities:
i) SME Manufacturing units,
ii) Service sector entities e
e.g.
g hospitality & tourism
tourism, hospitals/nursing
homes, logistic support services, IT & BPO, etc.
• Eligible projects : New projects, modernisation, upgradation,
di
diversification,
ifi ti
expansion
i off wellll run units,
it etc.
t
• Assistance : Term loan not less than Rs.50 lakh for new project and Rs.25
lakh for existing units.
8.5
5 - 12.5%
12 5% based on credit rating
rating.
• Interest : Between 8
• Security : charge on assets/ personal guarantee/ collateral/ escrow (TRA)/
corporate guarantee/ pledge of shares/ etc
• Repayment : Min. 6 months to max. 8-10 years (incl. morat. of upto 18
months.)
th )
SME Development Centre
149
SIDBI- Norms for financing
•
•
•
•
Prom. Contr. – min .33% for new projects and 25% for existing
DER – Not exceeding 2:1
DSCR – Minimum 1.5 :1
Asset Converge : 1.4 - New , 1.3 - Existing
SME Development Centre
150
Credit Guarantee Scheme– Main Features
•
•
•
•
•
Facilitates a
availment
ailment of credit b
by SSI/Tin
SSI/Tiny units
nits / SSSBEs and units
nits
engaged in IT based activities from formal banking channel.
Lender should extend credit without any collateral / third party
guarantee
Maximum loan guaranteed by CGTSI is Rs.25 lakh per SSI/Tiny unit
for both fund based and non fund-based facilities.
Guarantee cover upto 75% of loan amount, i.e. Rs.18.75 lakh per
borrower.
Swift and simple settlement process.
SME Development Centre
151
Credit Guarantee - Eligible Loans / Fee
•
•
•
•
•
•
•
Both Term Loan and Working Capital (both fund based and non-fund
based) can be covered
Working Capital can also be covered at the time of renewal
Existing units can be covered for additional loan
loan, without extending
earlier collaterals.
One time Guarantee fee of 1.5% of the credit facility sanctioned
Annual Service fee of 0.75% of credit facility guaranteed
The guarantee cover shall run through the tenure of the term credit /
composite credit
Where working capital alone is financed – 5 years; to be renewed
thereafter.
SME Development Centre
152
SME Rating Agency
•
•
•
•
•
•
India’s first dedicated rating agency for SME segment.
Joint initiative of SIDBI, Dun & Bradstreet and CIBIL along with leading
PSU, Private and foreign Banks.
Launched on the 5th September 2005 by the Hon. Finance Minister, Shri P
Chid b
Chidambaram.
To provide ratings that are :
– Comprehensive
– Transparent
T
t and
d
– Reliable.
Would help SMEs in getting credit from banking sector on favourable
terms.
Would also help them in trade and commerce, both domestic and
international.
SME Development Centre
153
Benefits of Rating
g to SMEs
•can simplify lending norms
•collateral requirements
q
may
y be
relaxed
Simplified
Norms
Perception
•Information
asymmetry problems
reduced
•Greater willingness by banks
and financial institutions to
l d tto b
lend
better
tt credit
dit profile
fil
SME borrowers
Fund
Access
Speed
Credit
terms
•Quicker approval
•Faster disbursements
•Interest rates linked to rating of SME
•Higher rated customers can access
funds at lower rates.
•Lower transaction costs
SME Development Centre
154
Financing SMEs
June 24, 2006
Presentation to TiE
SME sector is vital to the economy
95% of all industrial units
40% of industrial output
SME Sector in
India
accounts for
45% of industrial employment
35 % of exports
Prime driver of new
employment
Source: SIDBI Report FY 2001.
Data pertains to SSI & SSE units within SME
Customer Survey & Insight
Characteristic of SMEs
Fragmented market
Scarcity of risk capital (equity and debt)
Few incentives for foreign equity funding
Limited abilities for economies of scale and scope
Prevailing policy initiatives focus largely on SSI’s*
Poor entrepreneurial attitude
*SSI – Small Scale Industries
Customer Survey & Insight
Challenges to Banks in SME financing
Evaluation of
credit risk
Cost to acquire
q
and serve
Other challenges
Lack of transparent credit information, access to
credit history
Limited sectoral data
Low capitalisation and collateral- high
impairment propensity
High cost of acquisition of new client
High cost of credit processing, services &
delivery coverage
Poor legal framework for collateral enforcement
No secondary market for SME loans
No clear exit route for private equity
Policy Environment
Survival of the most competitive
Policy
y/p
protection – too little too late
Just do it framework
Markets remain the best regulatory mechanism
Financing options for SME
SME
Lifecycle
Duration of
fi
financing
i
required
Suitable type
Creation
Long
Seed capital /
Subsidy
Start up
Upto
U
t
breakeven
Growth
Sustainable
growth
Maturity
Long
Long
Mid Term
Short term
Short term
VC / Angel investor /
Subsidy/
Tax incentive
Suitable Channel
Promoters
VC / Promoters
VC / Angel investor / Subsidy/
Tax incentive/
VC/ Angel
Investor /
Promoters
Loan/ Debt/ IPO
VC / Bank /
Promoters
Bank Finance /
Debt/ IPO
Public Debt/
Capital Market
VC / Bank / Debt
markets
Capital Market/
Debt markets
Debt financing
Type
Agency
Products
Startup/Seed
C it l
Capital
SIDBI, public
schemes
Equity / Capital
subsidy schemes
Long term
SFCs /FIs /investment
bankers
Project
P
j t loan
l
DPG
Term loan for capex
Commercial
Banks/NBFCs
Cash Credit/ODs
Pre-shipment finance
Post-shipment
finance
Bill Discounting
Short term
Banking Products
Corporate Financial Services
Deposits
Advances
Roaming Current
A
Account
t
Term Loans
Fixed Deposits
Working capital
Finance
Export
po t finance
a ce
Trade Services
Export / Import bill
collections
Insurance
CMS
Retail Loans
Inward/Outward
remittances
Export LC
advising/confirmation
Credit cards
Salary
y Accounts
Collections
Payments
y
Credit Assessment framework of Bank
Project / Company feasibility
•Technical, Economic
•Managerial , Financial
•Commercial , Regulatory
Debt profile v/s cash flows
•Cash flow projections
•Debt servicing capacity
•Escrow / cash flow
f
trapping
Credit Assessment framework of banks
Market linkages
•Linkages to supply chain
•Credit proxy of buyer
•Supply chain history
Promoter Resourcefulness
•Competency
•Capacity
•Character
•Collateral
Best Practices
•
Ensure your own professionalism & transparency
•
K
Know
what
h t your b
bankers
k
llook
k for
f
•
Demand transparency & fairness from bankers
Professionalism & transparency
•
Keep a detailed presentation on your business
•
M i t i complete
Maintain
l t accounting
ti
books
b k
•
Follow transparent accounting practices
•
Keep your banker informed – always, orders, ops
Know what bankers look for
•
Transparency
p
y in Balance Sheet / P & L Account
•
Proper valuation of stocks – disclosure of quality
•
Proper disclosure on book debts (provisioning)
•
Disclosure of contingent liabilities
•
Adequate Current Asset ratio (1
(1.10
10 – 1.33)
1 33)
•
Maintain healthy turnover in account (no diversion)
•
Maintain consistency in growth,
growth profitability,
profitability net worth &
assets
Do Not
• Window-dress
Wi d
d
accounts
t
• Divert short term funds for long term uses
• Do not use CC for non business purposes
• Maximise cash transactions
• Draw bills on fictitious firms
Demand fairness from banks
•
Demand that bank charges are clearly specified
•
Demand fair valuation & speed from credit officers
•
Balance need for collateral with adequate funding
•
Ensure banks understand your business
– Linkages
Li k
– Cash flows
– Industry
– Transaction history
•
Negotiate on strengths
Typical documents banks want
•
Profile of the company
•
Promoter profile
•
Annual Reports (past 2 years)
•
CMA – Financial Projections for next 2 years
•
Promoter networth profile
p
•
List of major suppliers / customers
•
Collateral details
•
Industry data
•
Balance sheet details / schedules etc
Typical ratios banks look at
•
EBIDTA / Sales – Gross Profitability
•
PAT/Sales – Net Profitability
•
Net Cash Accruals – Cash Flows
•
PBDIT/INTT – Interest Coverage
•
DSCR – Debt Service Coverage
g Ratio
•
Total Debt/NCA – Debt to Cash Accruals multiple
•
Current Ratio – Current Asset / Current Liabilities
•
TOL/ATNW – Total Liabilities / Adjusted Networth
•
Debt/Equity – Debt to Equity Ratio
Do Not
• Ask
A k ffor ffrequentt overdrawals/permit
d
l /
it irregularity
i
l it
• Withhold information from banker
• Fail to comply with terms of sanction
• Fail to update your banker with industry information
New products for SMEs
Securitisation of credit
card receivables
Book debt financing
Supply chain financing
Collateral backed loans
Unsecured small value
loans
Forex Derivatives
THANK
YOU !
Deloitte
Dr. Anand Patkar
Sasha
M h h
Mahesh
Vipul
SIDBI
ICICI Bank
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