Bank Credit Officers Questions Who is customer, customers character, purpose of transaction, capacity of customer to repay (fund payment,

logistics, likelihood, bank protection), projected return commensurate with risk, credit extension structuring Collateral enforces prior willingness to pay off loan Loans that support normal business ops. (Capital loan) given priority over speculative loans

Repayment sources a) Conversion of assets to cash (inventory etc.) b) On-going Business Earnings/CFs (in term loan, delivery van to sell goods) c) Injection of new capital d) Transfer of loan to other lender (takeout loan) - R/E Development: LTA financed by LT loans (commercial mtg. from Life Ins. Co) Repayment programs - Op. purposes or seasonal needs (salaries, A/R, inventories, raw materials - Revolve: outstanding balance fluctuates U/D at discretion of borrower (sets ceiling) - Clean-up each year (decreases interest expense, use financial metrics Evaluation of collateral - Value of collateral = f(type of collateral, ease of re-possessing, valuators opinion, insurance) - Want to be in 1st position if need to call on collateral - Personal guarantees: small business owners Term: repayment schedule with frequent repayment dates - Balloon/Bullet: pay back almost entirely at maturity Types of Credit Extension a) Advance of funds: demand loan, term loan, substitute income debenture, mortgage, lease b) Advance of Commodities: loan of metal to mine, securities to Inv. Dealer c) LOC, guarantees, acceptances d) Purchase/Sale/Exchange of funds or commodities (buyer/seller relationship) e) Commitments to do: a. Uncommitted lines b. Committed lines of credit c. Note issuance facilities (bank purchases, unmarketable short-term notes)

Structuring: follow naturally from customers request to meet needs; provide degree of safety and profitability required by bank - 6 factors: o Amount (reflect real needs?) o Currency (appropriate? FX risk?) o Pricing (reflect risk/term/policy?) o Term/Repayment (op. needs? Adequate CF?) o Collateral (security matched to type of credit) o Conditions (realistic, met now/future, satisfactory reporting conditions) Conditions: reporting requirements, freedom of customer/borrower to take actions in business (disposal of assets/collateral or impairment), min/max financial ratios, definition of default, definition of material adverse change, include cross-default clause Bank Commercial and Corporate Lending Factoring: receivables are sold to a bank as a factor Blanket lien: gives lender a general claim against inventory of borrow Trust receipt lending (floor planning): claim on specified inventory items

Credit Decisions: minimize credit loss, but create the most value - Character: borrowers desire to repay the loan as promise - Capacity: amount of CF in relation to loan payments, stability - Collateral: assets that can be sold if customer defaults/collection fails Common Conditions on Loans - Margins (based on levels of operating assets) - Net working capital (current ratio) - Debt ratio (limited to total assets or equity) - Dividends, repurchases - Salaries - Personal Guarantees Five Principles to Find Best Lender for Your Company 1. Know lenders business philosophy 2. Make sure lender really wants to make the loan 3. Make sure lender has adequate depth and capacity 4. Look for a relationship, not just a transaction 5. Consider all costs Four Hurdles of Commercial Lending 1. Is borrower honest? Moral obligation to fulfill contracts/pay debts 2. How will loan proceeds be used? WC, fixed asset purchase, speculative

3. Source of repayment? CF< Asset sale, outside capital injection, borrowing elsewhere (interim construction loan) 4. Back-up Source of Repayment? Future positive CF backed up by reliable secondary sources Structuring Business Plan Presentation for Bank Loan Application - Introductory Section > Description (History/Background, Management, Marketing, Financial Plan, Operational Data, Conclusion) > Appendices The Credit Process - Application > Evaluation > Structuring > Authorization > Set-up/Advance> Maintenance Bank Loan Covenants Control potential credit-impairing activities Ensure unfavorable events subsequent to granting of loan do not go undetected by the bank

Positive Covenants: submit financials, A/R collection experience, periodic certificates, maintain corp. existence, maintain insurance/costs, payroll taxes, inform bank of material adverse change Negative Covenants: protect bank, but do not impair business ability to achieve mission 1. CF Control (ICR, FBCR, CF-Debt, Min. Net Working Capital, Current Ratio) 2. Strategy Control (capital exp., bond/stock investments, outside loans, M&A) 3. B/S Maintenance: current ratio, NWC minimum 4. Asset Preservation: limit disposal of non-inventory assets or negative pledge clause 5. Loan repayment triggers: right to recall loan (credible threat), events of default Small Business/Knowledge-Based Firm Lending Get Financing You Need - Summary (how much used, when repay) > Business (ownership/legal structure) > Products/Patents/Sales > Size/Market Potential > Facilities > Proof of Sufficient CF > Capital Needed/Why Build Strong Ties with Bank - Character > Capability/Experience/Invested Capital > State of Industry, Coverage Available > CF/ability to repay > Amount of Collateral

6 Challenges in High-Tech Lending: 1) Collateral: less tangible assets (knowledge, people, networks) 2) Obsolescence: must manage inventories well 3) Reporting: more frequent, supply/orders/pricing on monthly basis 4) Complexity: hire independent consultant 5) Receivables: without support for software, customers unwilling to honor 6) Risk: loan losses no greater than other businesses, but must sell business