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Using Key Indicators as a Tool to Communicate with Your Lender … or, How to Keep Your Loans in Place in 2007 Jeff Baldwin Emma Shinn. Multiple Choice Quiz: 1. When your banker asks you for your plan, the best approach in communicating with your banker is to:
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1. When your banker asks you for your plan, the best approach in communicating with your banker is to:
2. When you are about to miss your plan, the best approach in communicating with your banker is to:
Topics include …
1. Builder Financing 101 … a few basics about capital requirements and sources
2. The Lender’s Point of View … your capacity to service debt
3. Key Indicators Used by Lenders … how they evaluate your health
1. Builder Financing 101
Builders often need financing for:
Ask yourself the following questions:
How will the funds be used?
How much financing is needed?
What collateral is available?
How quickly is financing needed?
Who provides financing of this size and duration?
REMEMBER! Don’t finance long-term assets with short-term debt!
What sources are most easily approachable?
REMEMBER! Investors take a long time to decide!
What sources of financing do/do not require collateral?
What sources of financing provide funds for this purpose?
And avoid the common mistake of financing a long term need, such as land development, with short term borrowing
Management & Staffing
Sources of Funds
Revenue & Expenses
Users of Funds
… and include the key performance indicators
In order to obtain the most appropriate financing, the builder needs to understand the concerns of the lender.
Banks usually consider the big picture …
Sources: Government publications and bank policy
Sources: Internet, databases, regional news services and industry specific publications
Sources: Business plan, site visit and meetings, industry expertise
“… what do you look at for home builder loans that is different from the past?”
Many respond with two words:
Note that all of these are balance sheet indicators – which many builders ignore
The single most important factor in the bank’s decision to lend, is the company’s …
Capacity to service debt
Lender’s often evaluate this by looking at several key indicators.
Key indicators are criteria that help to evaluate the financial condition, or health, of a company.
These criteria include both financial ratios and other signs that point to the health - or sickness - of a company.
Lenders examine key indicators related to these areas:
Debt to Equity
Net Profit Margin
Return on Assets
Return on Equity
Current Assets / Current Liabilities
Sales / Total Assets
Total Liabilities / Net Worth
Net Profit / Sales
Net Profit / Total Assets
Net Profit / Total Equity
Key Financial Indicators
Definitions of the most common financial ratios:
The primary financial ratios used :
The secondary financial ratios used:
Other financial ratios sometimes used:
Your lender is likely to have their own criteria – talk to them to find out what they are looking for.
Your lender is your most important “Strategic Alliance” …
Get them in the loop, and keep them there.