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May 30, 2013
What is C&I Lending?• C&I is secured lending based on a formula
applied to commercial accounts receivable and inventory to generate immediate working capital.
• Typically receivables less ineligibles are included in the borrowing base at 75% to 85% of invoice total.
• Typically raw materials and finished goods inventory are included in the borrowing base at not greater than 50% of cost or liquidation value.
• The borrowing base is adjusted on a periodic basis via a Collateral Loan Report.
May 30, 2013
What is C&I Lending?What it Is: A Lending Product that requires a Disciplined Approach
What it is Not: A Lending Product with Unmanageable Risk
Properly Underwritten and Monitored, C&I Lending carries no more risk than other loan products.
May 30, 2013
What is C&I Lending?Benefits to Bank• Relationship Based• If you Control the Line of Credit, You Control the
Customer• Treasury Management Accompanies the Line of
Credit• Less Price Sensitive than Real Estate or other
Lending Products• Less Relationship Turnover• Less Competitive, Both from a Pricing and
Institution Standpoint
May 30, 2013
What is C&I Lending?
Key Differences Between C&I and Other Lending Products • Relationship Based v. Transaction Based• Consultive and Advising v. Price Base Sales
Process• Establishing Creditability with Management is Key• Business Analysis, Credit and Underwriting Skills
are Imperative
May 30, 2013
Cash Flow Cycles of C&I are determined by the relationships between A/R Turns, Inventory Turns, & A/P Turns.
May 30, 2013
Tools for General Evaluation of Accounts Receivable:• Who is the Receivable from?• What are the terms?• Is the sale complete?• Is there the possibility of dispute of the
receivable?• How long is the collection cycle (A/R
turnover)?
May 30, 2013
Application of Tools:• Who is the Receivable from?– Large, Well Capitalized Company - Most
Desirable– Company in Financial Distress -
Least Desirable
• What are the terms?– Standard Terms or Less -
Most Desirable– Extended or Unusual Terms - Least
Desirable• Dated Receivables (Seasonal)• Consignment / Guaranteed Sale
May 30, 2013
• Is the sale complete?– Complete with Documentation (Bill of Lading, Verification, Etc.) -
Most Desirable
– Lacks Shipment or Additional Work to Be Complete - Least
Desirable• Percentage Billings (payments based on %
completed)• Progress Billings (payments made at set intervals
until completion)
May 30, 2013
• Is there the possibility of dispute of the receivable?– No Dispute, Sale Complete and Verifiable - Most
Desirable
– Possibility of Dispute due to workmanship or Completion of Sale - Least Desirable
May 30, 2013
• How long is the collection cycle (A/R turnover)?– Consistent with or Better than
Industry Averages - Most Desirable
– Extended Collection Cycle, Higher than Industry Averages -
Least Desirable
May 30, 2013
Standard Ineligible Categories for Accounts Receivable:• Accounts Over 60 or
90 Days from Invoice Date
• Cross Aged Receivables
• Receivable balances over predetermined credit limit
• Contra Accounts
• Credit Memos• Governmental
Accounts• Foreign Accounts• Intercompany or
Affiliated Accounts• Progress Billings• Guaranteed Sales
May 30, 2013
Receivables Availability
• Total Accounts Receivable minus Ineligible Accounts Receivable = Eligible Receivables
• Eligible Receivables multiplied by Receivables Advance Rate = Receivables Borrowing Base
• Receivables Borrowing Base plus Inventory Borrowing Base = Total Borrowing Base
• Total Borrowing Base minus Outstanding Principal = Availability
May 30, 2013
Rules of Thumb in Establishing Account Receivable Advance Rates:• Accounts Receivable Advance Rates typically
range from 65 to 90%. The most typical advance rate is 75-85%.
• The higher the quality of Accounts, the higher the advance rate.
• A general formula for estimating A/R advance
rates = 100% minus (past due percentage + 10%) or 100% minus (dilution percentage + 10%)
May 30, 2013
Clients to Avoid
• Construction Receivables• Medical A/R• Progress bill A/R• Sub-contract bill A/R• International Receivables• Inventory at numerous locations• Inventory in transit from foreign
countries• Foreign inventory
May 30, 2013
Editorial Comment: “Underwriting Accounts Receivable is a Science. Underwriting Inventory is Witchcraft.”
May 30, 2013
Tools for General Evaluation of Inventory:• What makes up the Inventory?• How is it accounted for?• How is it valued?• Is there a ready market for the Inventory?• What must be done to prepare Inventory for
sale?• How long is Inventory sales process?
May 30, 2013
Application of Tools:• What makes up the Inventory?– Commodity Good - Most Desirable
–Components of Manufactured Goods -
Least Desirable
• How is accounted for?– Perpetual, real-time inventory accctg. -
Most Desirable– Periodic count, count-based acctg. - Least
Desirable
• How is it valued?– Price Set By Exchange - Most
Desirable– Market Driven - Least
Desirable
May 30, 2013
• Is there a ready market for the Inventory?– Large Number of Potential Buyers - Most
Desirable– Limited Number of Industry Competitors -
Least Desirable
• What must be done to prepare Inventory for sale?– Completed and Ready for Shipment -
Most Desirable– Assembly Required - Least
Desirable
May 30, 2013
• How long is Inventory sales process?– Immediate Buyers Available - Most
Desirable– Extended Sales Process -
Least Desirable
May 30, 2013
Standard Ineligible Categories for Inventory:• Work in Process • Inventory in remote locations• Consignment Inventory• Obsolete Inventory
May 30, 2013
Inventory Availability
• Total Inventory minus Ineligible Inventory = Eligible Inventory
• Eligible Inventory multiplied by Inventory Advance Rate = Inventory Borrowing Base
• Accounts Receivable Borrowing Base plus Inventory Borrowing Base = Total Borrowing Base
• Total Borrowing Base minus Outstanding Principal = Availability
May 30, 2013
Rules of Thumb in Establishing Inventory Advance Rates:• Inventory Advance Rates typically are much
less than against accounts receivable. Typical ranges are 25-50%.
• The more liquid the Inventory the higher the Advance Rate.
• The more commodity in nature the Inventory, the higher the Advance Rate.
• The more control a lender may exercise over the inventory, the higher the Advance Rate.
May 30, 2013
The Ultimate Structure of the Line of Credit Should Reflect:
• Collateral Risk which should be collectible in a
liquidation• Appropriate Advance Rates based on prudent
underwriting of the collateral• Availability which allows the borrower to accomplish its
business plan• The Credit Risk Profile of the Bank
May 30, 2013
Issues to Consider in Accounts Receivable Availability
• Dilution• Concentrations (Both Historical and Seasonal)• Reserves • Seasonality of Business
May 30, 2013
Issues to Consider in Inventory Availability
• Seasonality• Maximum Exposure (both seasonal and non seasonal)• Limits on Inventory Advances
‐ Hard Dollar‐ Percentage of A/R Availability• Seasonal needs
May 30, 2013
Protecting the Downside: Inventory Caps and Limits
Hard Dollar Cap are the absolute maximum dollar amount of exposure the lender is willing to take on certain inventory under any circumstances. Example: $1,000,000 line of credit, with an 80% advance on eligible A/R and a 40% advance on Inventory, with an Inventory Cap of $300,000.
May 30, 2013
Percentage of A/R Limits reduce the inventory exposure to a percentage of what a borrower can access to a percentage of accounts receivable availability. Example: $1,000,000 line of credit, with an 80% advance on eligible A/R and a 40% advance on Inventory, limited to 50% of accounts receivable availability.
May 30, 2013
The best way to protect your downside is with a structure which references both. Example: $1,000,000 line of credit, with an 80% advance on eligible A/R and a 40% advance on Inventory, limited to the lesser of $350,000 or 50% of accounts receivable availability.
May 30, 2013
Special Situations• Seasonal Inventory Build Periods‐ May waive or modify Inventory Caps or Limits for a period of time. Always limit to specific amounts and time frames. Do not make the exception the structure.
• Seasonal Extended A/R Terms (Datings, etc)
‐ May waive or modify A/R eligibility for a period of time. Always limit to specific amounts and time frames. Do not make the exception the structure.
May 30, 2013
The Collateral Loan Report is the primary document used to monitor a C&I or ABL Loan.
The quality of information provided in the Collateral Loan Report is critical to the collectability of the loan.
May 30, 2013
The Collateral Loan Report is a reconciliation of all changes to the
Collateral Base; that brings Borrower and Lender up to the present.
May 30, 2013
The Collateral Loan Report Should Reflect:
A) The collateral underlying the Loan at a point in time and
B)What changes have occurred in the collateral base since the last report.
May 30, 2013
The Collateral Loan Report is meaningless without appropriate supporting documentation. The Report should always be supported by the following:
May 30, 2013
Frequency of ReportingThe Frequency of Reporting should be determined based on:
• Percentage Line Utilization• Quality of Collateral• Strength of Credit (earnings, leverage,
etc.)• Quality of Accounting Function• Most bank C&I Loans require monthly
reporting, but do not hesitate to require more frequent
reporting.
May 30, 2013
Frequency of Reporting RecommendationsMonthly Reporting: • Business Profitable• Strong Balance Sheet• Vendors within Terms• Collateral Performing• Line usage at 70% of total availability
May 30, 2013
More Frequent Reporting should be considered if:• Business is having profitability issues (get on this early!)• Balance Sheet is weakened by a specific event or is
weakened over time.• Vendor payable turnover is increasing, or there are signs
of vendor pressure.• The collateral performance (turnover of A/R and
Inventory) is weakening.• Line usage is increasing .
May 30, 2013
Documentation of C&I Loans should reflect:• What the Loan Is• Conditions to Lending • Security for the Loan• How the Loan is to Work Operationally• Rights of the Lender to the Collateral• Financial and Other Covenants as Warranted• Events of Defaults and Remedies
May 30, 2013
Security for the Loan should be what you are intending to advance against plus additional collateral to support the loan. If you are lending against Accounts Receivable you also in most cases must take a security interest in both A/R and Inventory.
May 30, 2013
How the Loan is to Work Operationally means that the advance rates, collection provisions, float days, reporting must be defined in the Documents. You should also be able to modify this at the Lender’s discretion.
May 30, 2013
Rights of the Lender to the Collateral – due to the nature of the Collateral for the Loan, the Lender needs rights to inspect, verify, and possess collateral in the event of Lender’s insecurity.
May 30, 2013
Standard Financial Covenants in C&I Lending• Debt to Worth• Fixed Charge Coverage• Limits on additional debt
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