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Hampton Roads Association for Financial Professionals

Hampton Roads Association for Financial Professionals. December 14, 2010. Borrowing 101. A high level overview of why companies borrow and how they go about it.  Tips to help navigate where to turn, and what should be provided. Confidential – For Discussion & General Information Purposes Only.

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Hampton Roads Association for Financial Professionals

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  1. Hampton Roads Association for Financial Professionals December 14, 2010 Borrowing 101 A high level overview of why companies borrow and how they go about it.  Tips to help navigate where to turn, and what should be provided. Confidential – For Discussion & General Information Purposes Only

  2. Who borrows? Wide variety – type, size, credit profile • Public & Privately held • Government, Institutional, Non-Profits, Banks... • Start ups – early stage – emerging • Established – growing • Challenged – difficult times / cyclical, economic, industry • Event driven – ownership changes, mergers and acquisitions, buyouts

  3. Why do companies borrow? Short term needs • General working capital • Seasonal • To fulfill large orders • Dividends / distributions / taxes • Liquidity Long term needs • Capital expenditures • Technology equipment • Plant / distribution machinery & equipment • Real estate • Research and development • Expansion • Liquidity

  4. Capital Structure Basics: Debt vs. Equity Assets – Liabilities = Equity Investors • Owners • Public / shareholders • Cooperatives – members • Angel • Mezzanine • Private Equity Groups Equity • Owners’ equity or members’ capital • Retained earnings • Mezzanine / Junior Capital • Subordinated Debt

  5. Borrowings: Term, Tenor, Type • Secured vs. Unsecured • Collateralized / Cross-Collateralized • Structures • Revolving Lines of Credit • 364 day, 1 year, 2 year, 3 year, + • Borrowing base, non borrowing base • Term loans • 5-7 year • Loan to values, advance rates, formulas • Lease vs. Loan: obsolescence, tax impact, reporting • Mortgages • 10, 15, 20 year amortizations, bullets • Senior Notes / High Yields / Bonds • IPOs / Secondary Offerings • Tax Exempt Financing / Special Programs

  6. Borrowings… • Guarantors • Affiliated companies, parent companies • Owners • Collateralized guarantees • Covenants • Liquidity: earnings or profits, CA/CL, cash or excess availability • Net worth: tangible net worth • Leverage: TL/NW, D/TNW, Sr Debt / EBITDA • Coverage: Interest, Fixed Charge Coverage

  7. Time to Borrow: Starting Point Self Assessment • Amount needed • Sources – collateral, cash flow, other • Uses – What will proceeds be used for, and over what time period? • Financial statement condition • Business trends, outlook • Owner plans long term / strategy

  8. Time to Borrow: Where to Turn • Banks: local, regional, national, global • Commercial finance companies • Specialty lenders • Equipment finance providers • Factors • Asset based lenders • Purchase order finance providers • Investment bankers • Government backed programs / SBA

  9. Time to Borrow: Where to Turn (continued) • Trusted advisors – CPAs, Attorneys, Bankers • Other companies – referrals / testimonials • Industry associations • Signs / Media • Internet

  10. Be prepared: Questions Asked Company structure Ownership Key management team History Locations / domestic, international Operations: buys from, sells to, processes (sales, mfg, delivery) Internal vs. external contributors Contracts, Bids Financial performance / trends / past and future Competitors Differentiation / Niche / Strengths Weaknesses Outlook / strategy

  11. Be Prepared: Information Requested • You may be asked to provide: • Financial statements: 3 years, 4 years, more • Budgets or projections: 1 year or more, monthly/quarterly • Tax Returns • Personal financial statements: owners / principals • Top customers • Accounts Receivable • Accounts Payable • Inventory • Machinery & Equipment • Real estate / Locations • Appraisals

  12. Be Prepared: Ongoing Reporting Requirements • You may be asked to provide ongoing: • Financial statements – monthly, quarterly, annually • Financial statements preparation – compiled, reviewed, audited (firm utilized) • Covenant compliance certificates - monthly, quarterly • Borrowing base certificates - daily, weekly, monthly, quarterly • Asset listings / verifications • Collateral reports • Field exams / collateral audits or appraisals

  13. Be prepared: Questions to Ask • Fit / Match • Ability to address need • Culture, institution • Short term or long term solution • Solution Analysis • Is need provided for • What costs are involved • Can company continue to meet requirements: whether reporting, management interaction, covenant compliance • Approval Process • Steps involved • Who approves: signatures or committee • Timing • Closing Process / Funding • Documentation • Appraisals, Other • Timing

  14. Questions & Answers Susan L. Miller Vice President, Regional Business Development 804-697-6748 Office / 770-235-4488 Cell Susan.l.miller@wellsfargo.com Wells Fargo Bank, N.A. Eastern VA Regional Commercial Banking Office 440 Monticello Avenue, 11th Floor Norfolk, VA 23510-2372

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