Developing financing proposals for road contractors.

Module 5: Session 3

M5S3 1

Training objective:Developing financing proposals for road contractors

Training outcome:

1)By the end of the session trainees should be able Identify the major types of information required in preparing financial proposals in order to access bank services.

2)They should be able to develop a fundable proposal acceptable to financing institutions

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Piecing the puzzle together

• Financing is a puzzle with many pieces • Developing a proper structure for a proposed

financing program is critical to successfully completing the puzzle

• This proposal can be used as a stand-alone document or can be included as a separate section of the business plan itself

•

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Key components

Uses and extent of fundsSources and nature of funds Proposed security Business and financial assumptionsIncome and cash flow projections Historical statement of income and cash flow

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Uses and extent of funds Uses of funds – what is the funding for?Here the strategies outlined in the business plan are

summarized and quantified to demonstrate the use and extent of funding.

The cost of additional inventory, equipment, asset purchases, acquisitions, refinancing, working capital, and so on, are identified and quantified.

M5S3 5

Sources of funds Not all lenders or all products are fit for all

purposes.A tiered or layered approach to financing uses

multiple and/or niche lenders to fill the gaps in a financing program.

Identify and match the uses of funds to the most appropriate products and lender(s) Match Purpose to the product Product to the asset Asset to the lender Lender to the industry

Industry-specific niche lenders can often provide more flexible credit arrangements with better terms and conditions than traditional lending sources

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Tiered financing schemeIllustrative example of a tiered financing scheme:

 

Use of funds: Sources of funds:

Purchase of equipment shs 40 Capital lease shs millions 25

Operating lease 10

Term loan — secured 5

40

 

Inventory/Accts receivable shs millions 50 Line of credit — secured 10

Line of credit — unsecured 5

Factoring facility 12

Letter of credit 8

Suppliers’ credit 15

50

Working capital 80 Sub-debt term loan — unsecured 10

Term loan — unsecured 20

Line of credit 18

Sale lease-back 12

Asset-based financing 20

80

Purchase real estate 100 Commercial mortgage 60

Collateral term loan 40

100

Total shs millions 270 shs Million 270

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Proposed security Deserves to be properly addressed and identified Security should not be assumed but rather proposed

upfront Assist the lender in making a favourable decision

about the financing proposal Some assets can be the security for the financingFunding will only be given for a percentage of the

value of the security (50 - 60%)Banks may require personal guarantees in addition

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Business, financial assumptions and predictionsState the major assumptions made about the future

of operations and general assumptions about the industry, the economy and competition

Demonstrate knowledge of the business and why the business will succeed

Make reference to past performance Show capacity for good leadership and the presence

of a winning team that can be trustedOutline the challenges and the threats

M5S3 9

Statement of income and cash flow• The purpose of this section is to restate income and

cash flow on a normalized basis to show available operating cash flow, given a normal operating environment and circumstance.

• Show the company’s ability to generate cash flow on a normalized basis and to service the facility.

• An income statement will list sales and expenses and indicate potential for profitable operations

Provide projected cash flows

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Statement of income and cashFirst-year projections should be done on a monthly

basis. Provide summarized annual projections to cover the

period of the facility Proposed financing amortization and costDemonstrate the ability to service the facility Where possible, derive ROI and IRRAttempt some sensitivity analysis of key

assumptions

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Summary • In today’s business environment, a properly

structured financing program is key to the success of any business

• At the core of this approach is the financing proposal; matching purpose to product, product to asset, asset to lender, and lender to industry

• By providing lenders with a financing proposal structured to the lender’s requirements, the chances for success in obtaining financing are greatly increased.

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Group discussion1. Describe the main components of a financing proposal

2. Identify the qualities and the benefits of a good financial proposal.

3. Discuss Common basic questions every lender will require to be answered.

4. Discuss the Dos and Don’ts in loan utilization and servicing.

5. Identify the key challenges in preparing a financial proposal and suggest how they can be addressed.

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