Commercial Business Underwriting steps through the entire analytical process for a commercial credit decision. At the end of the eight online sessions, participants will know precisely how to sort through and analyze company background information and financial statements, assess management and the competitive environment in which it operates, project likely financial performance, identify sources of cash to meet debt service, identify risks to those cash sources, consider covenants to mitigate the risks, and present their conclusions and recommendations in a generic credit write-up format.
Target Audience
Analysts and lenders interested in exploring and mastering the analytical tools essential in identifying and assessing a commercial borrower's prospects for meeting its interest-bearing debt service.
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1. Analytical Decision Tree and the Credit Write-Up
Purchase
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Currently there are no live presentations on the calendar.
Recording
... four essentials you shouldn't forget
In the first webinar session, participants identify the four essential issues that must be addressed in every credit write-up and explore the sequential analytical steps in the credit decision process. They examine the financial statements for a prospective borrower, assess interview comments by a second prospective borrower, explore the personal characteristics necessary for business success, and identify the generic sources of competitive advantage for a business.
Target Audience:
Analysts and lenders interested in exploring and mastering the analytical tools essential in identifying and assessing a commercial borrower's prospects for meeting its interest-bearing debt service.
Prerequisites:
Familiarity with accrual financial statements and accrual financial statement terminology.
Objectives:
By the end of the webinar session, participants will be able to:- State and explain the four essential analytical issues that must be addressed in every credit write-up, regardless of borrower, business organization, industry, or proposed credit facilities.
- State and explain the sequential analytical steps that assure each of the four essential issues are addressed in the analytical process leading to a credit decision.
- Identify areas of concern that may emerge from examination of a set of financial statements for a real estate developer and determine the apparent severity of the risk issues and their implications for company management.
- Identify areas of personal and business concern that emerge from an audio interview with the CEO of a flooring design and installation company and determine the apparent severity of the risk issues.
- State the generic sources of competitive advantage and identify the specific sources of competitive advantage, if any, for the flooring business.
- Assess the personal qualities, competitive advantages, and apparent financial risk issues in establishing an initial acceptable or unacceptable risk profile for a borrower or prospective borrow.
Materials and Preparation for this Course:
- Credit Refresher on The Credit Write-Up
- "The Junkyard Dog" and "Strategy" from Shockproof! 6 Essentials for Business Success in Good and Bad Times
- Financial Statements for Sequoia Properties
- Transcript of Initial Interview with Larry Crevin
- Exercise for the Session 1 Webinar
- Webinar Presentation Slides
- Webinar Poll Questions
Preparation
As preparation for the webinar session, please:
- Read the Credit Refresher.
- Read the two chapters from Shockproof! 6 Essentials for Business Success in Good and Bad Times.
- Review the financial statements for Sequoia Properties.
- Read the transcript of the initial interview with Larry Crevin.
- Complete as many of the steps in the exercise as time allows prior to the webinar.
Commercial Business Underwriting
2. Financial Statement Review and Ratio Analysis
Purchase
Options
Currently there are no live presentations on the calendar.
Recording
... not all ratios are equal
In the second webinar session, participants examine a borrower's financial statements to identify risk issues. They calculate and interpret key performance ratios to develop an assessment of borrower financial status and shifts in its risk profile, assess likely cash flow performance and identify the borrower's likely source of cash to service interest- bearing debt, and determine how well or poorly management controlled the Business Drivers in the last historical period.
Target Audience:
Analysts and lenders interested in exploring and mastering the analytical tools essential in identifying and assessing a commercial borrower's prospects for meeting its interest-bearing debt service.
Prerequisites:
Familiarity with accrual financial statements and accrual financial statement terminology, as well as completion of Session 1.
Objectives:
By the end of the webinar session, participants will be able to:- Identify obvious risk issues that emerge from a review of specific accounts on a borrower's financial statements prior to the computation and assessment of key financial ratios.
- Identify the similarities and differences between and among Subchapter C corporations, Subchapter S corporations, partnerships, limited liability companies (LLCs), and sole proprietorships.
- Compute a range of key financial ratios and assess their use in helping to establish the risk profile of a business, including implications for borrowing causes, repayment sources, and risks to repayment sources;
- Identify the role of the Business Drivers - a subset of key financial ratios - in reflecting management's competence in pursuing profitability and positive cash flow;
- Understand the analytical reasons and perform the associated computations necessary to adjust reported net income for non-Subchapter C corporations to actual business income in assessing whether a company satisfies the first necessary condition for business success.
- Understand the analytical reasons and perform the associated computations necessary to adjust reported EBITDA for non-Subchapter C corporations to actual EBITDA after fully accounting for all owner compensation in the form of distributions and owner loans.
Materials and Preparation for this Course:
- Terms and Concepts - Business Organizations
- Credit Refresher on Accounting Profit and Business Profit
- Terms and Concepts - Financial Risk Indicators
- Financial Statements for Total Coverage, Inc.
- Exercise for the Session 2 Webinar
- Webinar Presentation Slides
- Webinar Poll Questions
Preparation
As preparation for the webinar session, please:
- Read Terms and Concepts - Business Organizations.
- Read the Credit Refresher on Accounting Profit and Business Profit.
- Review "Business Drivers" in Terms and Concepts - Financial Risk Indicators.
- Peruse the financial statements for Total Coverage, Inc.
- Complete as many of the steps in the exercise as time allows prior to the webinar.
Commercial Business Underwriting
3. Cash Flow Analysis and Borrowing Causes
... happiness is truly positive cash flow
In the third webinar session, participants review and identify the financial documents and information necessary to manually construct a UCA cash flow statement. They engage in the actual manual construction of a UCA cash flow statement and use the resulting statement to identify the borrowing causes, the source of cash to service interest-bearing debt, the cash impact of related party transactions, the financing requirement, and the sources of cash to satisfy the financing requirement. In addition they identify the implications for future cash flow problems and likely debt service difficulties, if any, from messages that emerge from the construction and review of the UCA cash flow statement.
Target Audience:
Analysts and lenders interested in exploring and mastering the analytical tools essential in identifying and assessing a commercial borrower’s prospects for meeting its interest-bearing debt service.
Prerequisites:
Some familiarity with an accrual income statement and balance sheet for a commercial business, as well as completion of prior sessions in the Credit College.
Objectives:
By the end of the webinar session, participants will be able to:- Review the construction and use of traditional "cash flow" - net income plus depreciation - and determine whether traditional "cash flow" identifies borrowing causes, cash repayment sources, possible repayment risks, and the financing requirement or surplus;
- Review the construction and use of an abbreviated UCA cash flow statement and determine whether it identifies borrowing causes, cash repayment sources, possible repayment risks, and the financing requirement or surplus;
- Review the construction and use of a full and comprehensive UCA cash flow statement and determine whether it identifies borrowing causes, cash repayment sources, possible repayment risks, and the financing requirement or surplus;
- Examine the full UCA cash flow statement to identify the dollar amount of outside cash required to run Total Coverage, Inc.;
- Examine the full UCA cash flow statement to identify the sources of cash to service interest-bearing debt as well as to meet the financing requirement; and
- Examine the full UCA cash flow statement to determine if the borrower satisfied the second necessary condition for business success.
Materials and Preparation for this Course:
- Exercise 3
- Credit Refresher on The ABCs of Cash Flow
- Financial Statements for Total Coverage Inc.
- Presentation Slides
- Presentation Polls
Preparation
Prior to the session, please a) read the Credit Refresher on The ABCs of Cash Flow and b) complete as many steps in the exercise as time allows prior to the webcast.
It will be very useful to have the exercise, worksheets, and financial statements available during the session. To follow along and take notes, you may wish to print the presentation slides.
Commercial Business Underwriting
4. Management Assessment, Projected Cash Flow, and the First Way Out
... management makes it happen
In the fourth webinar session, participants review the competitive forces at work that management must influence and control to assure sufficient profit and cash flow in servicing interest-bearing debt. Based on all the information at their disposal and an assessment of management competence, they identify the most likely projection values for the Business Drivers. They manually create a projected UCA cash flow statement using a Cash Flow Snapshot worksheet to translate projection assumptions to results. Based on the projected performance, participants identify the likely future sources of cash to service interest-bearing debt, given the loan request and associated debt service requirements.
Target Audience:
Analysts and lenders interested in exploring and mastering the analytical tools essential in identifying and assessing a commercial borrower's prospects for meeting its interest-bearing debt service.
Prerequisites:
Some familiarity with an accrual income statement and balance sheet for a commercial business, as well as completion of prior sessions in the Credit College.
Objectives:
By the end of the webinar session, participants will be able to:- Identify management capabilities that must be in place and working effectively for a company to succeed in both good and bad times.
- Identify the competitive forces at work in the borrower's market and assess their likely impact on key Business Drivers and subsequent financial performance.
- Shape pragmatic assumptions about future Business Driver values in both a "most likely" and "worst case" projection scenario.
- Identify borrowing causes, cash repayments sources, likely repayment risks, and possible mitigants to those risks based on the projected UCA cash flow statement.
- Identify the likely amount of additional short and long term interest-bearing debt required by the borrower and compare those amounts with the borrower's requests based on the projected UCA cash flow statement.
- Determine if the borrower will satisfy both the first and second necessary conditions for business success and, if not, what limitations may be applied to assure business success based on the projected UCA cash flow statement.
Materials and Preparation for this Course:
- Credit Refresher on Competitive Forces and Cash flow
- Credit Refresher on Forecast Assumptions and Cash Flow
- "The Junkyard Dog" in Shockproof! 6 Essentials for Business Success in Good and Bad Times
- Financial Statements for Total Coverage, Inc.
- Transcript of Follow-Up Call on Larry Crevin
- Exercise for the Session 4 Webinar
- Webinar Presentation Slides
- Webinar Poll Questions
Preparation
As preparation for the webinar session, please:
- Read the two Credit Refreshers.
- Review “The Junkyard Dog” in Shockproof! 6 Essentials for Business Success in Good and Bad Times.
- Read the transript of the follow-up call on Larry Crevin.
- Complete as many of the steps in the exercise as time allows prior to the webinar.
Commercial Business Underwriting
5. Guarantor Analysis and the Second Way Out
... ready cash is everything
In the fifth webinar session, participants construct a personal cash flow statement from personal financial statement and personal income tax return information. In so doing, they identify the areas of greatest uncertainty about the validity of financial information used in the construction process and assess the implications for the accuracy and validity of the completed personal cash flow statement. Based on the resulting cash flow statement, participants estimate the amount of personal cash flow available to support business debt service in good times and in a cash flow crisis. In addition, they estimate the amount of ready cash support from the guarantor in a business cash flow crisis and explore the benefits and limitations of applying global cash flow techniques in reaching a credit decision.
Target Audience:
Analysts and lenders interested in exploring and mastering the analytical tools essential in identifying and assessing a commercial borrower's prospects for meeting its interest-bearing debt service.
Prerequisites:
Some familiarity with an accrual income statement and balance sheet for a commercial business, as well as completion of prior sessions in the Credit College.
Objectives:
By the end of the webinar session, participants will be able to:- Identify the cash and non-cash amounts of revenue and expenses recorded on personal income tax returns, including information on the Schedule K-1.
- Construct a personal cash flow statement using personal financial statement information and personal income tax return information.
- Determine from the resulting personal cash flow statement the likely amount of personal cash flow available to support business debt service in good times;
- Identify the amount of ready cash available to a guarantor from business-related cash flow and from the liquidation of personal assets in a cash flow crisis and evaluate the estimate of ready cash against the cash needed to support the guarantor's life style and personal living expenses.
- Determine whether the guarantor can offer any significant cash support to help service business interest-bearing debt in a cash flow crisis and, therefore, assess the financial value of the guarantee
- Identify the critical assumption underlying the concept of global cash flow and explore the benefits and limitations of applying global cash flow techniques in reaching a credit decision.
Materials and Preparation for this Course:
- Credit Refresher on Personal Cash Revenue
- Credit Refresher on Global Cash Flow vs. Global Cash Support
- Financial Statements for Total Coverage, Inc.
- Personal Financial Statements and Excerpts from Personal Income Tax Returns for Larry Crevin
- Exercise for the Session 5 Webinar
- Webinar Presentation Slides
- Webinar Poll Questions
Preparation
As preparation for the webinar session, please:
- Read the two Credit Refreshers.
- Peruse the personal financial statements and excerpts from the personal income tax returns for Larry Crevin.
- Complete as many of the steps in the exercise as time allows prior to the webinar.
Commercial Business Underwriting
6. Non-Financial Red Flags and Performance Implications
... Today's non-financial red flag may be tomorrow's financial disaster
In the sixth webinar session, participants explore the distinction between financial and non-financial red flags. They review and assess the significance of numerous non-financial red flags that borrowers frequently encounter. They examine specific financial statement information, borrower background information, and borrower comments to identify non-financial red flags and trace their existing and potential impact on borrowing causes, cash sources of repayment, and risks to cash repayment sources. In addition, participants explore possible mitigants that may be put in place to limit the risks from non-financial red flags.
Target Audience:
Analysts and lenders interested in exploring and mastering the analytical tools essential in identifying and assessing a commercial borrower's prospects for meeting its interest-bearing debt service.
Prerequisites:
Some familiarity with an accrual income statement and balance sheet for a commercial business, as well as completion of prior sessions in the Credit College.
Objectives:
By the end of the webinar session, participants will be able to:- Identify the distinction between financial and non-financial red flags.
- Identify the existing and potential impact on borrower performance from a series of non-financial red flags that borrowers frequently encounter.
- Identify the most useful and reliable sources of information about non-financial red flags, such as the borrower, the borrower's financial statements, and the borrower's suppliers and competitors.
- Identify specific non-financial red flags based on borrower background and borrower financial statements and trace their existing and potential impact on borrowing causes, cash sources of repayment, and the risks to cash repayment.
- Identify non-financial red flags that emerge from an interview with a borrower and trace their existing and potential impact on borrowing causes, cash sources of repayment, and risks to cash repayment sources.
- Identify possible loan covenants that may be imposed by the lender to contain or eliminate the risks represented by specific non-financial red flags.
Materials and Preparation for this Course:
- Credit Refresher on Non-Financial Red Flags
- Financial Statements and Background Information for Sacramento Distributors, Inc.
- Financial Statements for Total Coverage, Inc.
- Transcript of Follow-Up Call on Larry Crevin
- Exercise for the Session 6 Webinar
- Webinar Presentation Slides
- Webinar Poll Questions
Preparation
As preparation for the webinar session, please:
- Read the Credit Refresher.
- Review the transcript of the follow-up call on Larry Crevin.
- Read the background information about Sacramento Distributors, Inc. and peruse the company's financial statements.
- Complete as many of the steps in the exercise as time allows prior to the webinar.
Commercial Business Underwriting
7. Identifying and Mitigating Repayment Risks
... a little support may be very useful
In the seventh session, participants identify relevant financial and non-financial risks to the primary, secondary, and tertiary cash sources of repayment. They examine a range of possible risk mitigants from possible self-regulating risk mitigants implemented by the borrower to mitigants imposed by the lender in the form of debt service covenants and associated limitations on cash outflows. They explore and assess the value of the financing gap ratio designed to control cash outflows from movements in operating balance sheet accounts such as receivables, inventory, payables, and accruals. In addition, participants address the benefits and limitations of covenants if properly constructed and monitored.
Target Audience:
Analysts and lenders interested in exploring and mastering the analytical tools essential in identifying and assessing a commercial borrower's prospects for meeting its interest-bearing debt service.
Prerequisites:
Some familiarity with an accrual income statement and balance sheet for a commercial business, as well as completion of prior sessions in the Credit College.
Objectives:
By the end of the webinar session, participants will be able to:- Identify the critical issues that must be addressed in the use and application of loan covenants.
- Identify the key elements and considerations that determine loan structure.
- Compute and apply the Business Profit Coverage ratio designed to assure sufficient business profit to service interest-bearing debt.
- Compute and apply the Financing Gap ratio designed to limit cash outflow from movements in operating asset and liability accounts on the balance sheet.
- Identify all relevant risks to cash sources of repayment for two specific borrowers in different business activities with different loan requests.
- Structure and apply loan covenants to mitigate some or all risks to the cash sources of repayment for two specific borrowers.
Materials and Preparation for this Course:
- Credit Refresher on Covenants and the First Way Out
- Financial Statements for Sacramento Distributors, Inc.
- Financial Statements for Total Coverage, Inc.
- Exercise for the Session 7 Webinar
- Webinar Presentation Slides
- Webinar Poll Questions
Preparation
As preparation for the webinar session, please:
- Read the Credit Refresher.
- Complete as many of the steps in the exercise as time allows prior to the webinar.
Commercial Business Underwriting
8. The Credit Write-Up Again
... back to four unforgettable essentials
In the eighth and final webinar session, participants review the essential analytical issues that must be addressed in a credit write-up. They present the elements of a credit write-up for two specific borrowers, which, based on all prior analysis, identifies and highlights the borrowing causes, the likely sources of repayment that range from business cash flow to liquidation of business and guarantor assets, relevant risks to each source of repayment, and practical mitigants to those risks sufficient to conform to the lender's level of risk tolerance.
Target Audience:
Analysts and lenders interested in exploring and mastering the analytical tools essential in identifying and assessing a commercial borrower's prospects for meeting its interest-bearing debt service.
Prerequisites:
Some familiarity with an accrual income statement and balance sheet for a commercial business, as well as completion of prior sessions in the Credit College.
Objectives:
By the end of the webinar session, participants will be able to:- Properly identify the projected borrowing causes, likely cash repayment sources, risks to the cash sources of repayment, and mitigants to those risks for two specific borrowers.
- Identify and assess a range of arguments in favor of the respective loan requests, based on the analytical conclusions for the two borrowers.
- Identify and assess a range of arguments against the respective loan requests, based on the analytical conclusions for the two borrowers.
- Identify the single most persuasive argument in favor and the single most persuasive argument against the loan requests for the two borrowers.
- Properly identify the sequence of the analytical decision process and key purpose of each step in the process
- Understand the rationale and critical importance of each of the four analytical essentials that every credit write-up must address in reaching a credit decision.
Materials and Preparation for this Course:
- Credit Refresher on The Credit Write-Up
- Solutions for Session 7
- Financial Statements and Background Information for Sacramento Distributors, Inc.
- Personal Financial Statement and Personal Income Tax Information for Melvin Ho
- Financial Statements for Total Coverage, Inc.
- Exercise for the Session 8 Webinar
- Webinar Presentation Slides
- Webinar Poll Questions
Preparation
As preparation for the webinar session, please:
- Review the written solutions for Session 7.
- Review the background information about Sacramento Distributors, Inc.
- Complete as many of the steps in the exercise as time allows prior to the webinar.
Commercial Business Underwriting