Hampton Roads Association
for Financial Professionals
Borrowing 101
A high level overview of why companies borrow and how they go about it. Tips
to help navigate where to turn, and what should be provided.
December 14, 2010
Confidential – For Discussion & General Information Purposes Only
Who borrows?
Wide variety – type, size, credit profile
 Public & Privately held
 Government, Institutional, Non-Profits, Banks...
 Start ups – early stage – emerging
 Established – growing
 Challenged – difficult times / cyclical, economic,
industry
 Event driven – ownership changes, mergers and
acquisitions, buyouts
Eastern VA Regional Commercial Banking
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Why do companies borrow?
Short term needs
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General working capital
Seasonal
To fulfill large orders
Dividends / distributions / taxes
Liquidity
Long term needs
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Capital expenditures
Technology equipment
Plant / distribution machinery & equipment
Real estate
Research and development
Expansion
Liquidity
Eastern VA Regional Commercial Banking
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Capital Structure Basics: Debt vs. Equity
Assets – Liabilities = Equity
Investors
- Owners
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Public / shareholders
Cooperatives – members
Angel
Mezzanine
Private Equity Groups
Equity
- Owners’ equity or members’ capital
- Retained earnings
- Mezzanine / Junior Capital
- Subordinated Debt
Eastern VA Regional Commercial Banking
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Borrowings: Term, Tenor, Type
 Secured vs. Unsecured
 Collateralized / Cross-Collateralized
 Structures
- Revolving Lines of Credit
•364 day, 1 year, 2 year, 3 year, +
•Borrowing base, non borrowing base
- Term loans
• 5-7 year
• Loan to values, advance rates, formulas
• Lease vs. Loan: obsolescence, tax impact, reporting
- Mortgages
• 10, 15, 20 year amortizations, bullets
- Senior Notes / High Yields / Bonds
- IPOs / Secondary Offerings
- Tax Exempt Financing / Special Programs
Eastern VA Regional Commercial Banking
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Borrowings…
 Guarantors
- Affiliated companies, parent companies
- Owners
- Collateralized guarantees
 Covenants
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Liquidity: earnings or profits, CA/CL, cash or excess availability
Net worth: tangible net worth
Leverage: TL/NW, D/TNW, Sr Debt / EBITDA
Coverage: Interest, Fixed Charge Coverage
Eastern VA Regional Commercial Banking
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Time to Borrow: Starting Point
Self Assessment
- Amount needed
- Sources – collateral, cash flow, other
- Uses – What will proceeds be used for, and over
what time period?
- Financial statement condition
- Business trends, outlook
- Owner plans long term / strategy
Eastern VA Regional Commercial Banking
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Time to Borrow: Where to Turn
 Banks: local, regional, national, global
 Commercial finance companies
 Specialty lenders
 Equipment finance providers
 Factors
 Asset based lenders
 Purchase order finance providers
 Investment bankers
 Government backed programs / SBA
Eastern VA Regional Commercial Banking
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Time to Borrow: Where to Turn (continued)
 Trusted advisors – CPAs, Attorneys, Bankers
 Other companies – referrals / testimonials
 Industry associations
 Signs / Media
 Internet
Eastern VA Regional Commercial Banking
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Be prepared: Questions Asked
Company structure
Ownership
Key management team
History
Locations / domestic, international
Operations: buys from, sells to, processes (sales, mfg,
delivery)
Internal vs. external contributors
Contracts, Bids
Financial performance / trends / past and future
Competitors
Differentiation / Niche / Strengths
Weaknesses
Outlook / strategy
Eastern VA Regional Commercial Banking
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Be Prepared: Information Requested
 You may be asked to provide:
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Financial statements: 3 years, 4 years, more
Budgets or projections: 1 year or more, monthly/quarterly
Tax Returns
Personal financial statements: owners / principals
Top customers
Accounts Receivable
Accounts Payable
Inventory
Machinery & Equipment
Real estate / Locations
Appraisals
Eastern VA Regional Commercial Banking
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Be Prepared: Ongoing Reporting Requirements
 You may be asked to provide ongoing:
- Financial statements – monthly, quarterly, annually
- Financial statements preparation – compiled, reviewed,
audited (firm utilized)
- Covenant compliance certificates - monthly, quarterly
- Borrowing base certificates - daily, weekly, monthly,
quarterly
- Asset listings / verifications
- Collateral reports
- Field exams / collateral audits or appraisals
Eastern VA Regional Commercial Banking
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Be prepared: Questions to Ask
 Fit / Match
- Ability to address need
- Culture, institution
- Short term or long term solution
 Solution Analysis
- Is need provided for
- What costs are involved
- Can company continue to meet requirements: whether reporting,
management interaction, covenant compliance
 Approval Process
- Steps involved
- Who approves: signatures or committee
- Timing
 Closing Process / Funding
- Documentation
- Appraisals, Other
- Timing
Eastern VA Regional Commercial Banking
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Questions & Answers
Susan L. Miller
Vice President, Regional Business Development
804-697-6748 Office / 770-235-4488 Cell
Susan.l.miller@wellsfargo.com
Wells Fargo Bank, N.A.
Eastern VA Regional Commercial Banking Office
440 Monticello Avenue, 11th Floor
Norfolk, VA 23510-2372
Western Mid-Atlantic Commercial Banking
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