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Governor’s Housing Conference Creating & Financing New Business. September 27, 2013. 6 C’s of Credit Evaluation. Character Capacity (cash flow) Capital Collateral Conditions Common Sense. Character (Personal Credit).

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governor s housing conference creating financing new business

Governor’s Housing Conference Creating & Financing New Business

September 27, 2013

6 c s of credit evaluation
6 C’s of Credit Evaluation
  • Character
  • Capacity (cash flow)
  • Capital
  • Collateral
  • Conditions
  • Common Sense
character personal credit
Character (Personal Credit)
  • Integrity of the borrower
  • Personal payment history
  • Willingness to repay.
character personal credit con t
Character (Personal Credit) Con’t.
  • Fair Isaac Corp. (FICO) is the company that originally developed the credit scoring methodology we use today.
  • On the next slide below are the financial behaviors and related factors along with the percentage weighting that each contributes to an overall credit score
  • 35% - An individual's history of making credit payments on time
  • 30% - The total amount of debt being carried along with available credit
  • 15 % - The age of an individual's open credit lines (more history is better)
  • 10% - The frequency with which someone applies for new credit
  • 10% - Wild card factors such as the types of credit lines
capacity cashflow
Capacity (Cashflow)
  • Borrower’s ability to repay loan
  • Debt to equity(leverage) ratio
  • Net excess (cash reserve)
  • Macro and micro economic environment
  • Industry conditions & trends
  • Owners experience and length of time in industry
conditions con t
Conditions, Con’t.

Porter’s 5 Forces

  • “3 forces” from “horizontal” competition:
    • Threat of substitute products
    • Threat of established rivals
    • Threat of new entrants
  • “2 forces” from “vertical” competition:
    • The bargaining power of suppliers
    • The bargaining power of customers.
  • Secondary source of repayment
  • Commercial or residential property…..(with unencumbered equity)
  • Business assets (i.e.: account receivables, inventory, FF&E)
  • Cash value life insurance or marketable securities
collateral con t
Collateral, Con’t.
  • Example: Commercial or Residential Property
  • Market Value of Property = $1,000,000
  • 80% of Market value = $800,000
  • Current Mort. Balance = $500,000
  • Available for Collateral = $300,000
collateral con t1
Collateral, Con’t.
  • Account receivables aging less than 90 days – 50 to 80% advance rate.
  • Business assets (i.e.: office equipment, vehicles, and inventory) – 20 to 60% advance rate.
matching capital to the corporate life cycle
Matching Capital to the Corporate Life Cycle









Maximum Opportunity







Individual Investors

Venture Capital

Private Equity

Strategic Alliance



Asset-Based Working Capital Lines/Bank Debt

Mezzanine / Subordinated Debt

Internally Generated Cash Flow

Cash Flow Based Term Debt


The Push-Pull Dilemma - Balancing Risk and Cost

To Lender/Investor

Least Flexibility

Lower Cost

To Company

Lower Risk

Higher Risk

Senior Debt


Lower Risk



Most Flexibility

Higher Cost

providers of capital
Providers of Capital
  • Commercial banks are only one source of capital for businesses. Borrowers should have a balanced mix.
    • Owner’s equity
    • Vendor credit
    • Equipment leases
    • Landlord concessions
    • CDC financing – US SBA 504 program
    • Seller financing
corporate cash flow template con t
Corporate Cash Flow Template, Con’t.

Typically, we look to see global cash flow coverage of 2.00:1 as that indicates that there is sufficient cash flow not only to service existing and proposed debt levels (corporate and personal), but to continue a reasonable lifestyle.

cash flow takeaways
Cash Flow Takeaways
  • Business should be able to cover its debt service on a standalone basis – typically like to see at least 1.25:1 business cash flow coverage.
  • 3-years of historical cash flow coverage is preferred – an indication of sustainability
  • If the owner takes a substantial sum out of the business in salary and/or distributions, banks will look at personal income as well – called Global Cash Flow analysis.
personal income analysis
Personal Income Analysis
  • In cases where the owner is taking a substantial amount of income from the business in salary and/or distributions, Bank’s will do “Global Cash Flow” analysis which incorporates the owner’s / Guarantor’s income (and personal debt service). This is typical in many medical and legal practices.
  • Personal debt service is considered for this calculation.
  • The following personal income is considered:
    • Salaries and wages
    • Interest income
    • Dividend / Distribution income
    • Net operating income (NOI) on rental properties (add back depreciation and amortization as well as interest expense).
contact information
Contact Information

Sonja Sanders Wells

Vice President

Sr. Relationship Manager