Transcript What Lenders Want in a Credit Crunch

The “Credit Crisis”
What Should a Borrower Expect
in Today’s Debt Market?
CEBI – Spring Summit 2008
Mike Flynn
Member FDIC
What’s Happening?
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Record Real Estate Foreclosures
Banks experience liquidity problems
Federal Reserve Intervening
Investors are panicking
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Why is this Happening?
• Adjustable Rate Mortgages adjusted upward
• Sub Prime Borrowers can’t handle higher
mortgage payments
• Housing values are dropping
• Housing starts have hit record lows
• Supply of homes exceed demand
• Securitization Market is Pushing Back
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Why did this happen?
• Loans to Sub Prime Borrowers
increased to a record $600 billion
• Basic underwriting standards were
ignored
• MBS and CDO were purchased by the
billions much riskier than was
understood
• Major banks and investment banks
have experienced record losses
• As a result Housing markets tumbled
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Effect on Credit Industry
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Consumers are not willing to buy homes
Lenders are obligated to improve their due diligence
Lenders have tightened their lending standards even
to traditionally strong borrowers
Investors are not willing to take the risk of purchasing
securities which are exposed to mortgages
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Fed has dropped short term interest rates
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What should borrowers expect in 2008?
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Underwriting process could take longer
Credit requirements may seem more stringent
Terms and conditions may seem more stringent
Competition for your business may seem less
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How to survive the crunch?
• Be honest with yourself! If there is a problem, don’t keep
putting it off. It won’t take care of itself
• Find help in a turn-around expert. Ask for referrals from
attorneys and accountants. The good ones pay for
themselves
• If you feel you can handle this on your own:
– Increase your cash position
• Stay on top your accounts receivable, start calling early and
often
• Make the most of your accounts payable – stretch it as far as
you can without hurting your relationships
• Make sure your inventory levels are rational -- eliminate the fluff
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How to survive the crunch?
– Reduce your more expensive interest rate debt first
– Reduce your fixed expenses, outsource where you
can
– Don’t forget about friends and family financing
– Start your banking search earlier
– Let time take care of this situation
– Don’t panic!
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What are the banks looking for?
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Some banks are just not lending at the moment because
of their own business issues
Be right up front with the banker to quickly determine if
they are interested in new business
If after 3 banks say “no”, consider finance companies,
asset-based lenders and accounts receivable factors
Banks are looking for tighter structures
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Smaller advance rates on collateral
Strong cash flow coverage ratios
Shorter maturities
More equity
Stronger profits
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Underwriting Criteria
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Cash flow
Collateral
Conditions
Capacity
Character
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Yes
Capacity
Debt Service
Coverage > 1.20
EBITDA (Earnings Before Interest, Taxes, Depreciation
and Amortization)
divided by
CMLTD (Current Maturity of Long-Term Debt)
plus interest
Profitability
Company is profitable in the current year
Company has been profitable at least 2 of the last 3
years.
Capital
Debt/Equity <4:1
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Total Liabilities divided by Tangible Net Worth (Net worth
minus intangible assets, prepaid expenses, goodwill,
deposits, other assets)
No
Yes
Collateral
Accounts
Receivable (A/R)
Bad debt has been minimal
No one account makes up more than 10% of A/R
All international A/R is insured
Inventory (Can the
inventory be easily
sold?)
Not on consignment
Commodity, not specialized
Raw Materials or Finished Goods
Machinery &
General equipment with broad application
Equipment (Can
these Fixed Assets
be easily sold?)
Real Estate
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Owner occupied
Environmentally safe
Property located in bank’s natural market
No
Yes
Conditions
Purpose of loan.
Size of Loan
Type of Loan
Age of business
Marketplace
Economy
Business purpose – not to make distributions
Loan is not “too big” or “too small” for bank
Fits within bank’s niche 3 or more years
Growing
Stable
Character
FICO > 700
Referral from a trusted source.
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No
If you have any questions:
Mike Flynn
American Chartered Bank
[email protected]
Cell: 630-302-3729
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