Summary of the application – ABC which was incorporated to in [year] and is trading in as a [industry]
is seeking a loan of [€m] to fund [the acquisition of DFG]. S.W.O.T. analysis. The analysis of the loan
application is organized as follows: Loan structure, affordability, viability, security, financial stability, capital
structure, track record management.
Loan Suitability – ABC has applied for [amount] amortized loan with interest and capital repayments starting in
[x year]. A capital repayment holiday in the first year will allow ABC to absorb the initial set-up costs. The interest
rate proposed is [x%]. + ANY ARRAGNEMENT FEE. The loan is suitable for the purpose the company needs it.
Affordability – Company’s ability to meet loan requirements in the short term. The company
generated profit before interest of [€x]. The interest payments of this loan are [€x for the year ended].
Given that the cash inflows for the year are [€x] it is/not fairly modest commitment.
The total interest payment forecast for the current loan origination year including existing borrowing is [€x].
Based on the year of the origination of the loan combine operating profit/gross profit is [€x] and assuming that
profits remain constant, this give a comfortable interest cover ratio (PBIT/Interest expense) of [x times].
The business appears to be capable of servicing the interest and capital repayments.
Compare current vs future profitability, margins and cash flows and if in line with the scenario
Viability – The business is well placed to repay the loan over [x years]. The repayment of the principal of
[€x 000] is due over [(x years) plus 1 year holiday payment]. ABC can easily pay off the [€x each year
(loan principal/x years)] as we can see from the cash flows). After the repayment of the principal
instalment the remaining cash flows for the year will enable to cover interest costs and other cash
expenses. If profitability and positive cash flows are maintained then the company will be able to cover the loan
capital.
Further measure which indicates the ability of ABC to repay debt from earnings is debt to income ratio (total
debt/ net profit) [compare without and with the new loan which is [x times (years)] which means
that the existing debt can be paid off in [x years]. Some caution is needed with this ratio as it is based on
profit rather than cash. Due to the debt to income ratio the ability of ABC to achieve additional finance for
investment may be restricted. Assurances from the management about their future expansion plans should
be get.
The gearing ratio (net debt/net equity) [compare without and with the new loan] is [x times] (more
than 70% is high risk). Assurance should be sought for the forecast accuracy
Any info on future plans and any changes in industry
Security – Collateral comprises assets pledged to secure a loan or guarantees to re pay the loan. ABC’s non-
current assets (or combined with DFG’s or acquired) are [€x] which cover the loan. (If it is not covered take also
current asset). This represents adequate security cover. To confirm that the existing current assets are
unencumbered a no objection certificate will be required. The company values its assets on the historical cost
basis, hence the fair value of the assets may be even higher, further adding security for the loan. There are also
further security options that the bank can consider such as securitizing receivables on the balance sheet. The
bank can also receive personal guarantees from the owners of the company which further secure the loan.
Financial stability – As per the cash flow figures after deducting the principal installment and the interest
paid each year shows that the company generates positive cash flows after paying its obligations. This means
that it will be in the position to meet the installments for the next [x years]. Sensitivity analysis should be
carried out for the cash flow forecast.
Receivables days have increased which means that the efficiently in collecting debts from customers was
worsen. Payables days have increased but it does not seems that the suppliers are given extended credit terms.
This means that the business does not pay its other obligations on time. Discuss with the management. If it
decreases the ability to pay the interest falls. Asses if in line with the scenario
Covenants restricting future dividend payments may help to prevent the reduction of capital after the loan is
granted if the interest cover fall. Comment also in revenue growth and sales. Dependency of the business on
suppliers/customers, reaction of customers/suppliers
Capital Structure - The forecast gearing ratio for the current year (net debt/ net equity) is [x times]. This is a
potential risk to the owners if the business fails and this provides a significant incentive to succeed. A significant
amount of profits are not distributed as dividends and are therefore retained to enable the business to grow. Fall
in dividends is bad signal for the shareholders leading to fall of the company’s share price. Leverage ratio (Net
debt/EBITDA) is [x times]. Comment on ownership structure and any future plans
is seeking a loan of [€m] to fund [the acquisition of DFG]. S.W.O.T. analysis. The analysis of the loan
application is organized as follows: Loan structure, affordability, viability, security, financial stability, capital
structure, track record management.
Loan Suitability – ABC has applied for [amount] amortized loan with interest and capital repayments starting in
[x year]. A capital repayment holiday in the first year will allow ABC to absorb the initial set-up costs. The interest
rate proposed is [x%]. + ANY ARRAGNEMENT FEE. The loan is suitable for the purpose the company needs it.
Affordability – Company’s ability to meet loan requirements in the short term. The company
generated profit before interest of [€x]. The interest payments of this loan are [€x for the year ended].
Given that the cash inflows for the year are [€x] it is/not fairly modest commitment.
The total interest payment forecast for the current loan origination year including existing borrowing is [€x].
Based on the year of the origination of the loan combine operating profit/gross profit is [€x] and assuming that
profits remain constant, this give a comfortable interest cover ratio (PBIT/Interest expense) of [x times].
The business appears to be capable of servicing the interest and capital repayments.
Compare current vs future profitability, margins and cash flows and if in line with the scenario
Viability – The business is well placed to repay the loan over [x years]. The repayment of the principal of
[€x 000] is due over [(x years) plus 1 year holiday payment]. ABC can easily pay off the [€x each year
(loan principal/x years)] as we can see from the cash flows). After the repayment of the principal
instalment the remaining cash flows for the year will enable to cover interest costs and other cash
expenses. If profitability and positive cash flows are maintained then the company will be able to cover the loan
capital.
Further measure which indicates the ability of ABC to repay debt from earnings is debt to income ratio (total
debt/ net profit) [compare without and with the new loan which is [x times (years)] which means
that the existing debt can be paid off in [x years]. Some caution is needed with this ratio as it is based on
profit rather than cash. Due to the debt to income ratio the ability of ABC to achieve additional finance for
investment may be restricted. Assurances from the management about their future expansion plans should
be get.
The gearing ratio (net debt/net equity) [compare without and with the new loan] is [x times] (more
than 70% is high risk). Assurance should be sought for the forecast accuracy
Any info on future plans and any changes in industry
Security – Collateral comprises assets pledged to secure a loan or guarantees to re pay the loan. ABC’s non-
current assets (or combined with DFG’s or acquired) are [€x] which cover the loan. (If it is not covered take also
current asset). This represents adequate security cover. To confirm that the existing current assets are
unencumbered a no objection certificate will be required. The company values its assets on the historical cost
basis, hence the fair value of the assets may be even higher, further adding security for the loan. There are also
further security options that the bank can consider such as securitizing receivables on the balance sheet. The
bank can also receive personal guarantees from the owners of the company which further secure the loan.
Financial stability – As per the cash flow figures after deducting the principal installment and the interest
paid each year shows that the company generates positive cash flows after paying its obligations. This means
that it will be in the position to meet the installments for the next [x years]. Sensitivity analysis should be
carried out for the cash flow forecast.
Receivables days have increased which means that the efficiently in collecting debts from customers was
worsen. Payables days have increased but it does not seems that the suppliers are given extended credit terms.
This means that the business does not pay its other obligations on time. Discuss with the management. If it
decreases the ability to pay the interest falls. Asses if in line with the scenario
Covenants restricting future dividend payments may help to prevent the reduction of capital after the loan is
granted if the interest cover fall. Comment also in revenue growth and sales. Dependency of the business on
suppliers/customers, reaction of customers/suppliers
Capital Structure - The forecast gearing ratio for the current year (net debt/ net equity) is [x times]. This is a
potential risk to the owners if the business fails and this provides a significant incentive to succeed. A significant
amount of profits are not distributed as dividends and are therefore retained to enable the business to grow. Fall
in dividends is bad signal for the shareholders leading to fall of the company’s share price. Leverage ratio (Net
debt/EBITDA) is [x times]. Comment on ownership structure and any future plans
