Debt Financing Sources for Types of Businesses

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Debt Financing Sources for Types of Businesses
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Debt Financing Sources by Term of Financing
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Sources of Debt Financing
The principal SOURCES OF BORROWED CAPITAL include

• Chattel mortgages and equipment loans
• Conditional sales contracts
• Plant improvement loans
• Commercial finance companies
• Factoring
• Leasing companies

• Trade credit
• Commercial bank financing
• Line of credit loans
• Time-sales finance
• Term loans

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Key Steps in Obtaining a Loan
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How Your Banker Interprets the Income Statement
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Personal Guarantees and the LoanPart A When to
Expect Them

WHEN TO EXPECT THEM

1. If you are under collateralized.
2. If there are shareholder loans or lots of due
   to and due from officer accounts.
3. If you have had a poor or erratic performance.
4. If you have management problems.
5. If your relationship with your banker is
   strained.
6. If you have a new loan officer.
7. If there is turbulence in the credit markets.
8. If there has been a wave of bad loans made by the
   lending institution, and a crackdown is in force.
9. If there is less understanding of your market.

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Personal Guarantees and the LoanPart B How to
Avoid Them and How to Eliminate Them
Transparency Master 16-6B
HOW TO AVOID THEM
HOW TO ELIMINATE THEM

1. Good to spectacular performance.
2. Conservative financial management
3. Positive cash flow over a sustained period.
4. Adequate collateral.
5. Careful management of the balance sheet.

1. See How to Avoid Them.
2. Develop a financial plan with performance targets
   and a timetable.
3. Negotiate elimination upfront when you have some
   bargaining chips, based on certain performance
   criteria.
4. Stay active in the search for backup sources of
   funds.

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TLC of a Banker

Tips to improve your relationship with your
banker

1. Your banker is your partner, not a difficult
   minority shareholder.
2. Be honest and straightforward in sharing
   information.
3. Invite the banker to see your business in
   operation.
4. Always avoid overdrafts, late payments, and late
   financial statements.
5. Answer questions frankly and honestly. Tell the
   truth. Lying is illegal and undoubtedly violates
   loan covenants.
6. Understand the business of banking.
7. Have an Ace in the Hole.

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Total Present Value
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Jiffy Lube InternationalOverhead 1
Transparency Master 16-9
1985 1986 1987 1988 of Service
Centers 208 348 561 823 Total Sales
(millions) 14.5 29.5 44.1 78.2 Net Income
(000s) 603 1,212 3,466 6,909 Earnings per
Share 0.09 0.16 0.28 0.44 Total Assets
(millions) 34.2 50.7 102.4 225.8
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Jiffy Lube International, Inc.Overhead 2
Transparency Master 16-10
1985 1986 1987 1988 Working Capital .375
4.5 2.8 11.98 Long-term Sub-debt 10.2 19.7 26
.7 79.2 Capital Lease Obligations 2.3
9.6 19.0 36.1 Stockholders Equity 4.5
6.8 39.5 79.4 Max. Stock Price
n.a. 18.00 36.00 25.25 (in millions)
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Jiffy Lube International, Inc.Overhead 3 Free
Cash Flow Characteristics
FREE CASH FLOW CHARACTERISTICS
3/31/86 3/31/87 3/31/88 Net Income
1,212 3,466 6,909 Plus Interest
1,197 1,362 2,138 Plus Taxes
720 3,333 5,003 Earnings Before Interest
and Taxes 3,129 8,161 14,040 Earnings
Before Interest After Taxes 1,689 5,386
9,266 Plus depreciation and amortization
1,140 1,261 2,773 2,829
6,647 12,309 Change in Working Capital
4,492 2,760 11,983 Present Working Capital
(357) (4,492) (2,760) (Current
Assets less Current Liabilities less prior
fiscal Year working capital Change in Working
Capital 4,135 (1,732) 9,223 Less
Change in Working Capital (4,135) 1,732
(9,223) Less Capital Expenditures
(14,695) (42,077) (83,886) Less Change in Other
Assets (2,338) (10,466) (17,468)
(18,339) (44,164) (98,518) tax rate assumed are
34 percent for 1988 and 1987, and 46 percent for
1986.