Debt Financing Case Study

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The objective of bankers is to provide debt financing to their clients, in this case small to medium size companies, and make a return on their investments. Their goal is to attract as many clients as possible in order to maximize the amount of product sold i.e. debt granted, all of this in respect to their commercial objectives over a one-year period.
Moreover, they aim at starting with their clients an unlimited partnership without target end date.
The process of granting a debt financing can be done relatively quickly.

When evaluating an investment, the first point bankers analyze is the consistency “men/project”. In fact, they evaluate if the project of the person asking for a financing is in adequacy with his professional
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They also study the market in which the company is evolving, and realize a quick competitive analysis.
Then, they analyze all the forecasted financial statements such as the balance sheet or the income statement and particularly the cash-flow forecasts statements if they finance the creation of a company, and all financial statements and the forecasts, if there are any, for any other debt financing. They compute ratios such as the “payment ability” to evaluate if the company will be able to reimburse its debt each month. But as they have lots of clients to deal with, their analysis is synthetic and they focus on risk analysis. To do so, bankers also consider the credit rating, and credit scoring of the
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When evaluating an investment, first of all, Private Equity managers proceed in a due diligence of the company in order to make sure that they are making a good investment. There are three kind of due diligence, and PE managers can rely on consultants help them:
- Commercial due diligence: it is done at the beginning of the process. PE managers try to understand the dynamic of the industry the company is evolving in, relate the history of the company and try to understand how the company is managed. They try to state all major events that lead to the way the company is.
- Financial due diligence: confirms that all the financial information provided is accurate and helps PE firms understand some of the unique dynamics of the company from a financial reporting perspective. The firms typically hire accountants and/or auditors to review the
- Legal due diligence: focused on confirming that the target company is not subject to any future liabilities including regulatory issues, threatened or ongoing lawsuits, and unusual or onerous contract

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