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Banking Services III

Banking Services III. April 3, 2012. Buying or Selling Stocks. Stock Market Game. March 5 – May 11 Partners/Teams: Kwaku and Reilly Lauren B. and Lauren C. Caleb and Jared India and Patrick Charlotte and Winnie Buying & Selling (10 Minutes):

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Banking Services III

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  1. Banking Services III April 3, 2012

  2. Buying or Selling Stocks

  3. Stock Market Game March 5 – May 11 • Partners/Teams: • Kwaku and ReillyLauren B. and Lauren C. • Caleb and Jared India and Patrick • Charlotte and Winnie Buying & Selling (10 Minutes): • Buying & Selling will take place on Monday, Wednesday and Friday during the first part of class. • Research company before making purchase

  4. Warm-up- 4/1 • What type of business loan is often packaged with a real estate loan? • What would a business finance with a term loan? • Most business short-term loans are for how long? • What is factoring? • Debt divided by Income = • What does a high DSCR (debt service coverage ratio) indicates that a company has? Add to existing warm-up We will meet in 5 minutes

  5. Student Learning Map – Commercial Lending Key Learning#3: • The purpose of the SBA Essential Question#2: • What is the purpose of the SBA and what are the loan options? Vocabulary: • Small Business Administration (SBA) • 7 (a) Loan Guaranty • SBA Express Loans

  6. Commercial Loans • Purpose of Commercial Loans: • Real Estate, Construction, Equipment, Operations • Types of Commercial Loans: • Term Loans, Short-Term Loans, Lines of Credit, Real Estate and Equipment Loans, Contract Financing, Bridge Loans, Leasing, and Asset-Based Loans • Types of Business that acquire Commercial Loans • Merchandisers – sell goods or services • Manufacturers – build items to sell to merchandisers

  7. Commercial Credit Analysis – take notes • Analysis of a business (all types/sizes) can repay their loan • Same general steps and ideas apply as consumer loans but with some modifications : • Assess individuals employment, Income • Current amount of debt to determine if loan can be repaid • Analyzing a business is far more complicated • Past financial statements are studied • Underwriters estimate the likelihood of the business future success • The relationship between the bank and company is vital

  8. Commercial Credit Analysis • Large corporations, very complex – lenders hire or employ financial analysts that carefully study a company’s financial position. • Whether large or small business the financial analysis for a loan is measured in three ways • The measurements determine whether the loan makes sense for the company • Read pages 272 Debt Ratio, 273 Loan-to-Value Ratio, 273 -274 Debt to Service Coverage Ratio

  9. Debt Ratio • Debt Ratio ~ is the total obligations (how much debt ) compared to the total income. (debt could be existing loans) • Formula for calculating Debt Ratio • Debt ratio = Debt / Income • Example: • Monthly income $3000 • Monthly debt $1500 • Debt ratio= $1500 / $3000 = .5 or 50% • Note: Lenders will usually not consider a business with a debt ratio above 40 percent. (above scenario?)

  10. Loan-to-Value (LTV) Ratio • Loan-to-Value (LTV) Ratio ~ the principal amount of the loan divided by the value of the securing property. • Formula for calculating LTV Ratio • Loan-to-value ratio = Principal / Market Value • Example: • Principal $500,000 • Market Value $1,000,000 • LTV ratio= $500,000 / $1,000,000 = .5 or 50% • Note: Lenders for commercial mortgages more conservative, look for a LTV ratio of 80% maximum and will not lend more than 60% than the appraised value. (above scenario?) Review another sample - Excel Can get complicated for business property such as equipment. Real estate usually appreciates while equipment loses value.

  11. Debt Service Coverage Ratio (DSCR) • Debt Service Coverage Ratio (DSCR) ~compares net operating income to the total cost of debt. • Net operating income is gross income minus expenses, taxes, insurance, utilities, etc. (It does not include debt for mortgages, equipment, services , etc.) • Cost of Servicing the debt, including all principal and interest, but not taxes or insurance • Used for commercial real estate, and looks at company’s overall position Not a simple task to compile these numbers

  12. Debt Service Coverage Ratio (DSCR) • Formula for Debt Service Coverage Ratio (DSCR) • DSCR = Net Operating Income / Total Debt Service • Example Small Business: • Net Operating Income $650,000 on a gross income of $1,000,000 (minus expenses, taxes, insurance, utilities, etc.) • Total Debt Service - $520,000 (includes principal, interest but not taxes or insurance) • DSCR = $650,000 NOE/ $520,000 TDS = 1.25 • Note: The lender prefers to see a high DSCR, the more net operating income is available for debt service. A ratio of 1.0 negative cash flow. Lenders except different ratios; however, never below 1.00. (above scenario?)

  13. Calculate the Ratios - Excel • File – Chapter 9 Math – Commercial Credit Analysis • Review calculations • Complete questions 1 and 2 using the existing formulas • Explain your results – print out and hand write results

  14. Other Evaluation • Lenders want full access to company’s financial records. • Very complex compared to individual lending • Lender must understand the true nature of a company’s financial position can a lender hope to make a sound decision • Lenders want to examine the following: • Federal and Income tax returns for three years • Year-to-date profit and loss and balance statements • Projected cash flow estimates for at leas the coming year • Valuations and appraisals for collateral used to secure the loan • Written business plan (for small business) • Personal financial statements of owners (for new or small business)

  15. 9.3 Activities Small Business Loan Programs • 9.3 Activities • SBA project/presentation • India, Caleb and Patrick

  16. Starting a Business – Use Credit Wisely • Website Activity ~ Understanding Business Credit • To help make good business decisions • Review of Project and Website…https://www.citicards.com/cards/wv/html/cm/business/index.html • 80 Process Points Questions 20 Product Points Presentation • Partners: Winnie & Patrick Lauren C. & Lauren C. • India & Jared Caleb & Charlotte Kwaku & Reilly • You will each be responsible for completing the project, each person must complete ½ or a section of the project – online activity • You will not receive the same points as your partner unless you equally share the workload • You will briefly explain your business to the class and discuss your loan criteria through the use of PowerPoint, 2-4 slides

  17. Starting a Business – Use Credit Wisely Business Development: • Now that you have the true understanding of business credit, commercial lending and the SBA, you and your partner must decide on a type of business. What is your business? • Provide a brief overview - purpose • Is it a manufacturing or merchandising business? • What do you produce a product or provide a service or both • What will you need to establish your business (building, equipment, etc)? • What will you need to run your business • What type of funding will you obtain, commercial loan – what type or SBA – what type? • What type of loans do you need to be successful • Will you lease instead of purchase

  18. Business Presentation Guidelines Project: 80 Process Points for Questions -20 Product Points for Presentation • Presentations 2-3 minutes, everyone participates • Slides – 2 to 4 slides • All questions should be answered • Make sure all information is relevant and related to your topic • Presentation format should be legible, include graphics, images, charts, etc. that represent you topic • Use of inappropriate graphics, etc. will result in loss of points for the entire group Note: Any changes made to the assignment must be discussed with Mrs. Marine prior to completion

  19. Rubric – Business Presentation • Project ___ ___ ___ (presented topic – answered all questions) • Presentation ___ ___ ___ (met time allocations, use of graphics/images) • Assignment ___ ___ ___ (Completed all parts of the assignment) • Stayed on Task ___ ___ ___ (Did not deviate from completing assignment, and finished in allotted time)

  20. Agenda • Monday • Using Credit Wisely • Developing your Business – answer all questions and prepare PowerPoint to share with the class • Tuesday • Turn in Using Credit Wisely • PowerPoint and Business Presentations to class • Study Guide • Review for test • Wednesday • Commercial Loans Assessment • Thursday • Mr. Terranova – Guest Speaker - Commerical Lending

  21. Study Guide • Complete Study Guide • 50 Process Points • Collecting before test • Review for test: (All papers returned) • Graphic Organizers • Activities • Study Guide, Student Learning Map • Taking books out? We will meet in 20 minutes

  22. Exit Ticket • How are consumers loans alike and how are they different Provide two reasons for each. (compare and contract graphic organizer)

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