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#Written by David Tam, 1999. #
#davidkftam@netscape.net Copyright 1999#
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Financing Assignment
APS 424S
Tuesday, March 23, 1999.
David Tam
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Bank: CIBC
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Branch: Spadina and College, Transit # 00402
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Address: 268 College Street, Toronto, Ontario, M5T 1S1
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Name: Marlene Silva
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Title: Small Business Personal Banker
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A brief interview was conducted with Marlene Silva using the financial data
in my business plan (Handheld Solutions, Inc.). Handheld Solutions is a
computer consulting and integration firm specializing in the integration of
handheld computers, such as the Palm III, into existing corporate computer
networks. The attached preliminary balance sheet, income statement, and
estimate of cash flow were presented to Ms. Silva.
To my surprise, Amit Aggarwal had previously contacted Ms. Silva in regards
to this assignment. Despite the awkward situation that arose, I pressed on with
the interview, promising to be very brief. Although the preliminary financial
data had been presented, Ms. Silva wanted to see a detailed description,
analysis, and justification of the target market. Ideally, she wished to see a
copy of the complete business plan before she could accurately answer any
questions regarding methods, terms, and conditions of a banking arrangement.
Therefore, only very general information on a banking arrangement as specified
in the hand out sheet could be obtained. That arrangement included (1) a loan
secured by accounts receivable, (2) an equipment lease arrangement secured by
machinery, (3) financing of inventories, (4) and working capital. However, in
the situation of Handheld Solutions which is a service-based firm, equipment
leases and inventory financing are not needed due to the trivial equipment
needs and little or no inventory.
In realty, a lot of information is required before any significant banking
arrangement can be made. As listed in the attached application entitled "CIBC
Business Loan Application", a comprehensive business plan, resumes of key
principals, projected income and expenses statement, projected balance sheet,
projected cash flow, conformation of income from principals, and target market
description, analysis, and marketing strategy are all required before the
application is processed.
Specific to Handheld Solutions, which only required a $25,000 operating
line of credit, I asked if such an arrangement could be theoretically made with
the bank. At first, she asked about what collateral or security was available,
such as plant, equipment, or fixed assets. Since the company is a consulting
company, this type of collateral or security was not available. However, given
that the company would have a $65,000 start-up capital on the opening balance
sheet this would serve as adequate security. The arrangement would very likely
be approved. The risk rating for this arrangement would be a 5 or 6, on a scale
of 1 to 8, with 1 being the lowest risk and 8 being the highest risk.
The procedure for approval takes 24 hours to process as the information is
relayed to the head office and officially approved. Ms. Silva noted that the
amount of funds requested could be for either an operating line of credit or a
term loan. If a term loan was to be requested, it would have a 3 year term.
However, if a $50,000 operating line of credit or loan was required, a personal
guarantee would be required to secure it. Since I am only a student, my parents
would likely need to personally guarantee the loan.
The terms and conditions of the arrangement include the following. An
administration fee between $30 - $60 is charged monthly. A detailed and
extensive review of the arrangement will be conducted annually at a cost of
$100 - $150. An amendment fee of $100 - $150 is charged for any changes made to
the arrangement, if approved. Interest would be charged at prime rate + 1.25 %
to 3 %. Since the prime rate as of Friday, March 19, 1999 was 6.75 %, interest
would be between 8 % to 9.75 %. Three very important conditions that must be
met are that the working capital ratio must be kept above 2 : 1 at all times,
otherwise the loan is at risk of being called. However, a meeting with the
banker is usually held to attempt to resolve the situation first. If it can not
be remedied, the loan is then called. Accounts receivables must be reported
every three months and must meet projections to a reasonable extent. Such a
requirement emphasizes the fact that the loan can be secured by the accounts
receivable. As well, revenue figures follow the same requirements. Other
ratios must also be maintained, but Ms. Silva did not have the information
available.
Since these were only approximate numbers, she suggested I speak to Mr.
Neil Salmon, a financial adviser at the branch. He is a more senior member of
the branch and would be able to give more detailed answers given the amount of
information I had available about the business venture. He would also be able
to provide information about equipment leasing and inventory financing although
these services are not required by Handheld Solutions. However, he was out for
the day and I was not able to contact him before this assignment was due.
From the information received in the brochures, it is interesting to note
that a loan can be guaranteed by the government, in which case the bank has the
loan fully secured. This arrangement falls under the Small Business Loans Act
(SBLA) and is called a SBLA loan. Use of the funds is limited to land or
equipment purchases and premise improvements. Funds can not be used for
purposes such as purchasing of shares, paying off debt, and acquiring working
capital such as inventory or accounts receivable. Use is strictly on fixed
assets. A maximum of $250,000 may be borrowed, with terms up to a maximum of 10
years, using monthly payments. Interest rates may be floating or fixed. A one
time service fee of 2 % of the amount loaned is required.
(
geocities.com/siliconvalley/campus/9640/4thYear) (
geocities.com/siliconvalley/campus/9640) (
geocities.com/siliconvalley/campus) (
geocities.com/siliconvalley)