Assessing Borrower Financial Performance (continued)
Projecting Future Performance
Unlike previous modules, which covered the subjective aspects of financial analysis, this module considers the objective evaluation of a company’s success in managing the critical key variables. Historical financial analysis is the primary tool used in the objective evaluation. This analysis includes income statement/balance sheet, comparative/ common size, ratio and cash flow analysis. The module also addresses the analysis of personal financial statements and tax returns.
Loan Structure and Support
Projections focus on quantifying the borrower’s ability to make future payments based on past financial performance. This module first explores the concept by describing the information and tools needed to prepare proformas, projections and cash budgets. The module then focuses on stress testing key assumptions to determine the potential volatility in earnings and cash flow and the impact on the borrower’s ability to service debt.
Previous modules have focused on understanding the borrower’s business and quantifying the borrower’s willingness and ability to repay debt. Equally important is structuring the loan to assure that the amount of the loan is appropriate, primary and secondary sources of repayment have been identified and the term of the loan is reasonable. While not a substitute for demonstrated ability to repay; loan support is useful in shoring up a loan that has a few potential weaknesses. This module defines loan support and identifies those situations where loan support may be required. It then presents four elements of loan support – collateral, guaranty, loan agreement and subordination agreement.