Dealing with Your Banker

1
Dealing with Your Banker

• Budgets, Projections, and Relationship Building

2
Pecking Order

• Financing generally follows a pecking order
• Acquire cash where it is the most accessible and
  least expensive.
• Always consider goal risk (D/E)
• Equity first, debt secondcosts and ownership
• Know how much you need
• Projected income
• Projected Balance Sheet
• Projected Growth (to be discussed next lecture)

3
Debt Structure

• Short-term
• Intermediate
• Long-term
• How much do you need
• How long do you need the money for
• More accurate predictions lead to a more
  efficiently run business that is more likely to
  survive
• Different types of assets require different types
  of debtcost and benefits.

4
Debt Structure (2)
5
Debt Structure (3)

• Short-Term Debt
• Collateral A/R, fixed assets, your home?!
• Can factor A/R, but very expensive
• Intermediate Debt
• Difficult to monitor, often requires no payments,
  but must be closely managed.
• Long-Term Debt
• Should be reserved for fixed assets
• Covenants
• Restrictions on company actions as part of the
  debt contract. Can have profound effects on the
  operations of the business.

6
Interest Rates

• Risk Level of the business
• Cost of funds to the bank (risk-free interest
  rate)
• Term of the loan (longer term are generally
  higher risk with greater interest rates)
• The amount of the loan (underwriting costs)
• Collateral (depends on the amount and form of
  collateral)
• The average balances that you maintain in your
  accounts (the more you maintain, the lower your
  rate)
• The supply and demand of loanable funds (market
  affects)
• The Competition
• Interest rates are not often debatable, however,
  relationships can dramatically affect the rate.

7
The Five Cs of Credit

• Character
• Honesty and integrity
• Capacity
• Must have the capacity to repay the loan.
• Well thought out and planned projects
• Capital
• Sufficient base of capitalD/E or risk
• Collateral
• Collateral does not get you the loan, but it
  helps. Strong, well-run, and financially stable
  businesses get loans. Collateral helps secure
  the loan.

8
Business Organization and Ownership

• Example H-P
• ? Family Ownership
• ? Public Ownership
• Example Ben and Jerrys
• ? Dual Ownership
• ? Single Ownership
• Example Small, local business
• ? Single Owner/employee

9
Three Most common forms of Business Organizations
(1)

• ? Sole proprietorship
• o Company is owned by one person who is the sole
  investor of capital in the company
• o Generally small companies that do not require
  large amounts of capital
• o Taxed at the individual tax rate
• o Unlimited Liability owner is liable for ALL
  debts
• o limited life

10
Three Most common forms of Business Organizations
(2)

• ? Partnership
• Two or more individuals who invest capital
• Consider
• ? Investment of each partner
• ? of ownership
• ? allocations of income
• ? decision makers
• ? steps for exiting ownership
• Agent a person who acts for another
• Unlimited liability Owners are liable for ALL
  debts

11
Three Most common forms of Business Organizations
(3)

• ? Corporations
• a separate legal entity that is separate from its
  owners
• Stock holders own the company ownership units
• Managers are not necessarily owners
• A Board makes the decisions
• Board seats are often a function of ownership
• Corporate tax is 35 and then individuals are
  taxed on their earnings at the individual tax
  rate!
• Limited Liability

12
Other Corp.

• Closely held corporation small number of
  investors, the stock is NOT publicly traded.
• Generally small, although anomalies such as Mars
  and Hallmark
• Publicly held corporations a result of an IPO
  in which the stock is publicly traded on the
  secondary market (NYSE, NASDAQ).
• For Public Corporations, and many smaller
  corporations, Audits are required to confirm the
  reliability of accounting information.

13
Earnings in Corps.

• Equity in Corporations
• ? Capital Stock
• Ownership in units of the corporation
• ? Common general ownership
• ? Preferred different rights than common stock
• Par Value has NO relationship to the value of
  the stock
• Additional paid in Capital difference between
  selling price and par value
• ?Retained Earnings
• Total net income that is reinvested into the
  company (not distributed as dividends)
• ?Earnings Per Share (EPS)
• Net Income/Total Outstanding Shares