800-777-8908 Experts in Rural Finance 800-777-8908 Experts in Rural Finance Project Financing

Farm Credit C O L O N I A L 800-777-8908 www.colonialfarmcredit.com

Experts in Rural FinanceFarm Credit C O L O N I A L 800-777-8908 www.colonialfarmcredit.com

Experts in Rural Finance

Project Financing




Agenda

Introduction

Factors That Affect Financing

How Do Lenders Evaluate a Request?




The Farm Credit System

Nationwide group of financial cooperatives.

Created by Congress in 1916.

$160 billion in loans to over 500,000 borrowers.

Owned by customers.




Colonial Farm Credit

$700 million in loans to 6,000 customers.

45 counties in eastern Virginia and 5 counties in southern Maryland.

81 Employees.




Our Purpose

“The core purpose of Colonial Farm Credit is to make farmers, agribusinesses and rural residents successful.”




Colonial Farm Credit Locations





Size of the project

Purpose and complexity of the project

Economic conditions





Size of the project– Lenders must meet minimum capitalization

requirements

– As loan volume increases, the lender’s capital (equity) must increase

– Large loans require increased capital not just because of loan volume increase, but because of risk concentration: 1 - $ 10 million loan vs. 100 - $100k loans





Size of the project

– If the project increases the debt level in a lending relationship above the institution’s hold limits, the lender may bring in other lenders to participate in the deal




Factors That Affect Financing: Size

$2.0 million project pushes the total debt with the lender to $12.0 million

Lender’s hold limit is $10.0 million

Lender sells a $2.0 million participation to another institution

This type of arrangement is typical for business lenders. Often transparent to the borrower.




Factors That Affect Financing: Project Purpose

Does the project enhance the efficiency of existing operations?

– Example: Take advantage of a byproduct

– Lender focus: What is the project cost and what is the efficiency gained?

– Risk assessment fairly straightforward




Factors That Affect Financing: Project Purpose

Is it an entirely new strategy for the business?

– Example: New product, e.g. value added products

– Lender focus: Does it impact efficiency (internal factors)? Does it entail marketplace development (external factors)?

– More complex




Factors That Affect Financing: Complexity

As the size and complexity of a project increase, the lender’s due diligence increases




Factors That Affect Financing: Complexity and Due Diligence

Financial Statements:

– Type: Historical, pro forma, budgets, projections

– Quality:

• Internally Prepared

• CPA Prepared: Compiled, Review, Audit





Verifications– Contracts: Project construction, key suppliers,

key customers, etc.

– Supplier relationships: A/P aging

– Customer relationships: A/R aging

– Banking Relationships: credit history, asset balances





Industry Expertise of the Lender

– Specialization: Lenders may develop a niche financing to a particular industry

– Peer comparisons: What are the financial standards for this industry? What makes this project a better risk / return proposition?




Factors That Affect Financing: Economic Conditions

From the lender’s perspective: the type of market in which the borrower conducts business. Ex. expanding, steady, contracting, volatile, stable, etc.

From the borrower’s perspective, consideration must be given to the lender’s commitment to a particular industry and the health of credit markets.




How Do Lenders Evaluate a Request?




Evaluating a Request

Loan Structure

Balance Sheet (Capital Position)

Income Statement and Cash Flow (Capacity)

Collateral

Management




Loan Structure

Duration and repayment plan Funds may be used for:

– Equipment purchases

– Land and land improvements

– Buildings

– Inventory

– Operating Expenses, etc.




Loan Structure: Four Types of Loans

Term

Seasonal

Evergreen

Bridge




Balance Sheet

Sufficient liquidity to pay obligations as they come due?

Sufficient equity to handle adversity?

Leverage: How sensitive is the operation to fluctuations in profit margin and sales volume?

High leverage: When things are good, they’re really good. When things are bad……




Income Statement

Sufficient profits replace assets as they wear out?

Sufficient profits to maintain equity and liquidity?

Can the business grow on its own?

Sufficient return to owners?




Cash Flow

Sufficient to pay all obligations within terms?

Can the owners take the desired draw?

Can “quick assets” be grown to cover short term volatility?

Can growth be funded internally?




Cash Flow Behavior

Seasonality of sales

Sales growth

Customer payment performance




Customer Payment Performance: Base Situation

Annual Sales $2,000,000

Sales per day $ 5,479

Receivable Days 60

Accounts Rec. Balance $ 328,767




Base Situation

Accounts Receivable– Customers owe the company $328,767.

– Customers are paying cash 60 days after sale on average.

– Owner invests or company borrows $328,787 to cover expenses while waiting for customers to pay.




Situation 2: Faster A/R Turnover

Annual Sales $2,000,000

Sales per day $ 5,479

Receivable Days 30





Situation 2: Faster A/R Turnover


– Customers are paying 30 days faster on average

– $164,384 less tied up in A/R. These funds could be used to pay down debt, purchase production assets, pay a dividend, etc.




Collateral

How specialized are the facilities / products?

Location: typical for the area?

Durability, maintenance requirements

How marketable is the collateral?




Management

Short and long term planning

Adaptability: what’s the right strategy?

Customer relations

Lender communication




Typical Loan Officer Questions

How long have you operated?

How much production capacity do you have?

What are your most profitable items?

How has the business changed over the past five years?




More Loan Officer Questions

What are your sales growth plans?

Do you have a business continuity plan?

Who is your competition?

Where do you see your operation in five years?




Items for the borrower to consider

How important is the lender relationship to the success of the project?

– Size

– Complexity

– Economic conditions




How does a borrower ensure a strong relationship with a lender?

Research

Communication

Responsiveness

Ongoing planning




Questions?

Documents

800-777-8908 Experts in Rural Finance 800-777-8908 Experts in Rural Finance Project Financing