LOAN ORIGINATION take, they are costlier for the

company.
- Identifies those eligible for bank financing; ensures
 Securitization – similar with factoring.
completion nof financing.
Difference is there are multiple
- Offer Sheet
parties and longer term receivables.
- Can offer Credit Line and Overdraft
- Pricing depends on type of credit facility.
o Credit Line
- Based on reference rate + credit spread of the
 Cash Credit and Overdraft – allows to
borrower.
withdraw funds more than its
deposits. DUE DILIGENCE
 Interest rate is paid to the amount
- Evaluates all aspects of a project applied for
withdrawn.
financing. Ideentifies feasibility and credit eligibility.
 Size and interest is a function of
- Borrower’s Risk Rating (Credit Score)
credit score/ rating.
- Management, Financial and Industry Analysis.
o Short-term Loans
o Credit Analysis – a process of drawing
 Revolving Promissory Note Line
conclusions from available data regarding the
 Can be secured or not depending on
credit – worthiness of an entity, and making
credit rating.
recommendations regarding the perceived
 Size of facility depends on WC
needs and risks.
Requirements.
o 5C’s of CREDIT
o Trade Finance Lines
 Character – experience in work,
 Letters of credit – a bank guarantees
industry and personal credit history.
the payment from the company to
Personal integrity and those tied with
the supplier.
the business’ success.
 Purchase Order/ Sales Invoice –
 Credit History
advanced form of borrowing with
 Discrete checkings/ inquiries
respect to the company’s future A/R.
 Experience Level
 A/R Credit: funds purchase orders of
 Market Opinion
local companies.
 Capacity – ability of the borrower to
 Factoring – company sells A/R at a
service the loan from the profits
discount. Removes A/R from FS and
generated by his investments.
fills in cash needs.
 Capital – indicator of how much the
o Term Loan
borrowerer is at risk of the business
 Defined by amount, tenor and
fails.
repayment schedule.
 Collateral – security that the
 T&C depends on cashflow of
borrower provides to the lender, to
company.
appropriate the loan in case it is not
o Bridge Loan – typically short term. Borrowed
repaid from the returns as
for an interim period as company waits for
established at the time of availing the
long term financing approval.
facility.
 Can be repaid using bank loans, notes
 Conditions – the interest rates,
and equity financing.
amount of principal, influence the
 LT Notes – typically unsecured. To
lender’s desire to finance the
compensaate for the enhanced credit
borrower.
risk that the lenders are willing to
  Refer to how the borrower intends to
use the money.
 Lenders may consider conditions that
are outside the borrower’s control
like the state of the economy,
industry trends and pending
legislataive charges.
o Sample Scorecards
 Profitability Ratios
 EBITDA Margin =
((EBITDA/Sales)x100)
Represents the profitability of a
company before interest and taxes. It is easy
to compare it to other companies since it
excludes volatile and discretionary expenses.
Negative side: It is different from net
profit and actual cash generation which are
better indicators of company performance.
 Operating Profit Margin
 Operating Profit Margin –
((EBIT/Sales)x100)
High Operating Profit are generally
more well-equipped to pay for fixed costs
and interest on obligations, have better
chances to survive an economic slowdown,
and are more capable of offering lower prices
that their competitors that have a lower
profit margin.
 Net Profit Margin
 Net Profit Margin - ((Profit
After Tax/Sales)x100)
Shows how profitable a company is
after all expenses including interest and taxes
and have been taken into account. It takes
everything into account.
 Cash Flow Margin
 Cash Flow Margin –
((Cashflow from Operating
Activities/Sales)x100)
Positive percentage means that the company
is able to pay for their obligations, while negative
means that the company has inadequate cash flows.
The company may opt to borrow funds or raise
money through investors in order to keep operations
going.
 Return on Assets – (Net
Income/ Total Assets)x100
Reveals how much after-tax profit a company
generates or every one dollar of assets it holds.
Identifies asset intensity of business. Lower profit
per dollar, higher asset intensive. Highly intensive
companies require big investments to purchase
machinery and equipment in order to generate
income.
 Return on Equity – (Net
Income/ Total Equity)x100
Watched by stock analysts and investors. A
high ratio is cited as a reason to purchase a
company’s stock. High ROE are capable of generating
cash internally and therefore less dependent on debt
financing.
 Liquidity Ratios
 Current Ratio - CA/CL
 Acid Test Ratio (CA –
Inventories)/CL
 Cash Ratio – Cash and
Equivalents/ CL
 Operating Cash Flow Ratio =
Operating Cash Flow/ CL
 Leverage Ratios
 Debt Ratio = TL/TA
 D/E Ratio = TL/SHE
 Interest Coverage Ratio =
Operating Income/Interest
Expenses
 Debt Service Coverage Ratio
= Operating Income/ Total
Debt Service
 Efficiency ratios
  Asset Turnover Ratio = Net
Sales/ TA
 Inventory Turnover Ratio =
COGS/ Avg. Inventory
 Receivables Turnover =
Sales/ Avg. AR
 Working Capital Turnover=
Sales/ Avg. C.
 Cost to Income Ratio
 Cash Conversion Cycle
LOAN PACKAGING
- Prepares all pertinent documents for loan approval
- Layout of T&C based on information gaqthered from performance of the business.
the preceeding stages.
o T&C is set after evaluation, market
competition and the bargaining power of the
customers demand that we adjust certain
procedures without sacrificing controls.
LOAN IMPLEMENTATION, MONITORING AND MANAGEMENT
- Loan release, account ratings, monitoring of
collection, clearances from authorities. Conducts
visits, business performace. Modified T&C.
Restructuring.
COMPANY REPORT
State specific purpose of financing. Where the fund
will be allocaated and what the company’s goal is with the
use of the fund.
Working capital (CA-CL)
NET Working Capital (CA-CL-C-CE-STI)
Tenor – period at which the loan will be paid off.
Grace Period – the provision that allows payment to be
received for a certain period, no late fees are charged and the
late payment does not result in default or cancellation of the
loan.
- This is determined through the results of financial
projections.
- The determination of these terms of the package
leads to the appropriate establishment of interest
rate in the loan.
Periodic Payment – (Outstanding Loan x Rate of Interest x (1
+ Rate of Interest)^no. of periods)/[(1+rate of interest)^no. of
periods -1]
Average Loan Maturity – avg. number of years until each
principal repayment is due, weighted by the principal
repayment amount.
Average Loan Maturity = Sum of Weighted Repayments/ Sum
of Total Repayments
Financial Projections – estimates future financial
- Financial model that links income statement, balance
sheet and cash flow statement. Foundation on which
more advanced financial models are built such as
discounted cash flow, mergers and acquisitions,
leveraged buyout, and various other financial models.
General Forecasting Principles
- Produce reliable and realistic expectations.
o Unbiased – neither conservative nor
optimistic.
- Forecasts should not manifest wishful thinking.
- Forecasts should be comprehensive.
o Include all expected future activities.
- Assumptions must be internally consistent.
- Forecasts must rely on externally valid assumptions.
o Assumptions should pass the test of common
sense.
o Impose reality checks.
Steps in building a 3-statement model.
1. Input the historical financial info
a. Historical inouts must be balanced.
b. Link 3 statements.
2. Determine the assumptions that will drive the
forecast
a. Calculate revenue growth rate, gross
margins, variable and fixed costs, AP days,
inventory days.
 b. Quality will depend on assumptions
3. Forecast I/S
a. Principal business activities
b. Consider firm and industry conditions.
c. % growth rate, vision moving forward, anddd
current state of the firm and
market/industry.
d. Fixed vs Variable components.
i. Does cost change proportionately to
sales?
ii. Careful of the “relevant range”
iii. Industry knowledge.
4. Forecast Capital Assets
5. Forecast Financing Activity
6. Forecast the Balance Sheet
7. Complete the Cash Flow Statement

Sensitivity Analysis

- Can be used to assess the impact of new

announcements from the firm.
- Assess sensitivity of firm’s liquidity and leverage to
key assumptions.
- Helps react quickly and efficiently to new
announcements.