The webinar is hosted by David Blain, Partner and Director of McKonly & Asbury’s Entrepreneurial Services Group, and Eric Fischer, Benefits Advisor at American Family Life Assurance Company of Columbus (Aflac). This webinar is a continuation of the first webinar hosted on May 30, 2019. This webinar focuses on debt covenant and leverage ratios most used and reviewed by banks and other lending institutions. The webinar also focuses on how banks and lending institutions view these ratios and how to best prepare and present your business for compliance with these ratios.

2. Introductions
David Blain, CPA, CVA
 Partner
 Director of Entrepreneurial Services Group
 Areas of Focus: Manufacturing and
Distribution, Construction, Retail and
Business Valuation
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3. Introductions
Eric Fischer, Benefits Advisor
 Specializes in commercial loan consultancy
and benefits advising for small businesses
 Specialty in government lending programs:
SBA 7a, SBA 504, USDA B&I, and PA
economic development loans
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4. Objectives of Today’s Webinar
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▰ The Five “C”s of credit risk
▰ Focus on ratios and business performance
measures that lenders use to test a businesses
ability to support debt financing and long term
ability to service the debt
▰ How lenders look at lending and the requirements
to complete a deal

5. The Five “C”s of Credit Risk
▰ Character
▰ Capacity
▰ Collateral
▰ Capital
▰ Conditions
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6. Character
▰ Without it, there is no loan!
▰ Are you somebody with who the lender
wants to do business?
▰ Personal integrity typically outweighs
personal net worth.
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7. Character, cont.
▰ How does a lender assess Character
 Personal credit report of 680+
 Due diligence i.e. references
 During interactions with client
• Honesty
• Detail in application and business plan
• Preparedness
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8. Character – Personal Credit Reports
▰ For small businesses, how the owners pay their personal bills
tells a bank how the business will pay its bills
▰ Personal credit scores are weighed very heavily by banks when
reviewing a business loan application
▰ What should you know about credit scores?
 TransUnion www.transunion.com
 Equifax www.equifax.com
 Experian www.experian.com
 FREE Credit Reports www.annualcreditreport.com
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9. Character – Personal Credit
Reports, cont.
▰ Scores range from 375 - 900
 750 + Very low credit risk
 680-749 Low credit risk
 620-679 Potential credit risk; explanations needed
 Under 620 Greatest credit risk; explanations +
▰ How do the bureaus come up with my score:
 Payment history 35% of your score
 Amounts owed 30% of your score
 Length of credit history 15% of your score
 New credit 10% of your score
 Types of credit in use 10% of your score
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10. Character – Management Ability
▰ Experience of the management team
▰ Some basic financial acumen
 Do you have a handle on the company’s books?
 How quickly can you provide information to the bank?
 Do you have a “dashboard” to monitor financials?
▰ Marketing ability
▰ Sales ability
▰ Business plan? Even for existing businesses!
 Projections / Budgets
▰ Credibility of management
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11. Capacity/Cash Flow
▰ Primary source of repayment
▰ Cash flow from operations
▰ Cash-to-cash cycle of the business
▰ Banks want to see
 Historical
 Projected
 Break-even – what sales level allows for a 1
to 1 coverage of debt ratio
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12. Capacity/Cash Flow –
Cash-To-Cash Cycle
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Receive materials; A/P
Make product; incur expenses
Sell your product; A/RA/P are due
Collect A/R
Distribute or reinvest

13. Capacity/Cash Flow –
Debt Coverage Ratio
▰ Debt Coverage Ratio (DCR)
(Net Profit + Depreciation + Interest Expense +
Amortization) / Debt Payments (P & I)
▰ Most banks will want this to be 1.20 or higher
▰ Historical/Projected
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14. Collateral
▰ Collateral is necessary as a secondary
source of repayment
▰ Banks will look at your business balance
sheet and your personal financial statement
(a “balance sheet” for you as a person)
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15. Collateral, cont.
▰ Where do banks run into obstacles?
 Securing working capital loans
 A/R and inventory don’t hold value like real
estate
▰ Collateral is always margined
 80% Real Estate, 80% New Equipment, 70%
Used Equipment, 70% Eligible A/R, 50%
Inventory, 95% Cash
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16. Capital
▰ The amount of cash into a project
 Banks will usually require at least 20% per guidelines
established by their regulators
 Will vary based upon what assets you are financing
 Some economic development financing may allow you to
put in as little as 10% (SBA, state, etc.)
▰ “Skin in the game”
 What reason do you have to get out of bed each morning to
make sure the venture is successful?
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17. Capital, cont.
▰ Net Worth on a company’s balance sheet
 Book value of the company’s equity
▰ Working Capital
 You can get started and turn on the key, but do you
have the capital to operate through the issues.
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18. Conditions
▰ Industry & market conditions
▰ National, state, local economic conditions
▰ Company specific conditions
 What’s the deal driver?
 WHY ARE YOU DOING THIS?
▰ Do you have a handle on all of the above?
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19. Personal Guarantees
▰ A Personal Guaranty shows owner willingness
to back the loan if the business borrower does
not pay
▰ Corporate guarantees may also be needed,
depending upon structure
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20. Key Lender Measurements/Ratios
(Typical)
▰ Working Capital/Current Ratio
▰ Debt/Tangible Net Worth
▰ Debt Service Coverage Ratio
▰ Personal Tangible Net Worth
▰ Personal Debt/Income
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21. Working Capital – Current Ratio
▰ Most important liquidity measure
▰ Ratio compares current assets to current liabilities
▰ This ratio indicates the number of times current
assets will pay off current liabilities.
▰ 2:1 ratio is considered most ideal. Most banks look
for a ratio greater then 1.2:1 when considering
ability to make monthly loan payments
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22. Working Capital, cont.
▰ The liquidity of a business is its capability to meet
current debt obligations. A reasonably sound
liquidity position enables an organization to obtain
the financing to take advantage of investment
opportunities and respond to operational
emergencies. Liquidity ratios measure how well a
corporation is able to meet its obligations.
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23. Working Capital, cont.
▰ Other Working Capital Measure reviewed by Lenders
 Average working capital - working capital values at the
beginning and ending of an accounting period/2.
 Working Capital Ratio = Sales/ Average WC
 Working Capital to Funded Debt - Average WC/Average
value of funded (or long term) debt.
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24. Debt to Total Net Worth
▰ Analyzed by lenders to determine borrowers ability to
collateralize and fund debt.
▰ Calculated as Total Debt / Total Net Worth of borrower.
▰ Lenders are looking for ratios less then 1:1. Any ratio
greater then 1 the borrower does not possess enough
net worth to fund and payoff existing
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25. Debt Service Coverage Ratio
▰ This ratio assesses an organization’s capacity to meet
scheduled debt service payments
▰ Debt service coverage ratio (DCR)
 Net Profit+Depreciation+Interest Expense-
Distributions/Debt Payments
▰ Lenders look for a ratio of 1.20 or higher
▰ Anything less then 1.20 raises concerns of ability to pay
debt back.
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26. Personal Tangible Net Worth
▰ Net Worth
 Calculated as difference between total assets available (both
corporate and personal) less outstanding commitments and
liabilities to be satisfied by borrower (both personal and
company).
 This usually requires the preparation of a personal financial
statement along with company financial data.
 Lenders review Net Worth for the borrowers ultimately liquidity to
repay debt if needed and ability to finance additional debt as
requested.
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27. Sizing Up the Risk
▰ Personal Credit History
▰ Liquidity
▰ Profitability
▰ Debt Service Coverage
▰ Financial Leverage
▰ Collateral
▰ Guarantors
▰ Other Conditions
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28. A Look Inside the Lending Process
1. Initial meeting; collect financial info.
2. Pull credit reports; spread financials; lender’s write-up
3. Follow-up meetings; answer questions; lender runs the deal past
somebody inside.
4. Term sheet; Discuss structure.
5. Lender gets approval.
6. Formal commitment letter; appraisals/environmentals ordered.
7. Schedule a closing; borrower gathers its documents (corporate
docs, insurance, title, etc.); bank prepares its loan docs
8. Closing and funding; controlled disbursement
9. Loan Servicing: financials, insurance, taxes, etc.
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29. What Kind of Questions Might a
Bank Ask Me?
▰ What’s driving the need for financing?
▰ How much are you looking for and what are you going to do with it?
▰ How is the business structured?
▰ How do you make money?
▰ What is your experience/background?
▰ What is your marketing strategy? Your target market?
▰ Who are your largest customers and do they account for more than 20% of your
revenue?
▰ What are your payment terms?
▰ Who is your competition? What do you know about them?
▰ Why did revenue and/or expenses go up or down over the past years?
▰ How much cash did you take out of the company? Salaries or distributions?
▰ What are the balances and monthly payments of all of your other business debt?
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30. What Information Should I Be
Prepared to Provide?
▰ Itemized project cost breakdown
▰ Copies of sales agreements or invoices; plans & specs for RE
▰ At least 3 years of company financial statements and tax returns
▰ Interim year-to-date financial statements – within the past 90 days
▰ Projected financial statements / budgets
▰ Business plan? Business expansion plan?
▰ Accounts receivable and accounts payable aging reports
▰ Work In Process & backlog reports (contractors)
▰ Current personal financial statements of the owners
▰ 3 years of personal tax returns of the owners
▰ Resumes of owners and management team
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31. Every Business Needs BAIL Services
▰ Banker
▰ Accountant
▰ Insurance
▰ Legal Services
▰ Lenders will want to know about these
▰ Your advisory team
▰ Take advantage of their expertise
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32. Things to Think About
▰ Meet with your banker at least annually
▰ Call the banker to bounce an idea off of her
 May be a future financing need
▰ Keep the lines of communication open
▰ Consider the timing needed to meet YOUR needs –
let the banker know it
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33. What If It’s Not Going Well?
▰ Talk to your banker EARLY!
 May be able to re-structure to provide relief
▰ Try not to let loans go 30 days late
▰ Keep all options open
 Selling, adding a partner, merging, closing
▰ Seek other assistance
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34. Live Q&A
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35. Questions?
David Blain
Partner
dblain@macpas.com
(717) 972-5722
Eric Fischer
Benefits Advisor
eric_fischer@us.Aflac.com
(717) 234-5110
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