All right, in this module that's coming up we're going to talk about financing and debt collection. We'll get into bankruptcy a little bit. So to kick things off, I'm here with Chip Jorstad from Busey Bank. Chip is the Regional President for Downstate Illinois, Busey Bank, and he is an expert on bank financing. So Chip loves the U of I as I do. He got his bachelors in finance here. He got an MBA from the College of Business. So I'm really, really thankful that Chip joined us today to talk a little bit about how bank financing works in the real world. because in these lessons, we're going to talk about the laws pertaining to financing, and guarantors, and sureties, and taking collateral for a loan, and that kind of stuff. But I thought it'd be helpful to have someone tell us, what does this really look like in the real world? So, Chip, thanks for being here, and maybe you can just start by telling us little bit about, your day-to-day life as a banker. And how you approach the process of providing funding for businesses. >> Sure, thank you. In the commercial loan side of the bank, what we try to do is we meet with prospects and with customers. And we identify banking opportunities. And what that might consist of is someone that's starting a new business, that would maybe need a million dollars loan for equipment and maybe $500,000 for a line of credit. And what we would do is, we would walk through the process with them of what their business is and what they're trying to do. And that's really kind of the initial meeting that takes place so that we can get our arms around the story and what the customer is trying to accomplish. From there, we request a set of financial statements from the customer. So if it's an existing business, we would get three years of business tax returns or financial statements. If it's a new business, it would be more based on business plan, pro forma financial statements, and then also the personal financial statements of the business owner. Because when we underwrite a business, we look first at the cash flow of the business opportunity. But then as kind of a secondary repayment source, we look at what the person or people have behind that. So that's kind of where we start from. >> Okay, so that brings up a good question. If a business is new and doesn't have that history of cash flows, or something like that, the bank isn't just going to give money for free most of the time. So when do you look at requiring like a co-signer or other sort of surety or guarantor on a loan? >> Sure, so we always want to underwrite the business at first. So if it's a new business, we're going to work with the borrower or the prospect on what does that business look like. So if they're purchasing equipment, it might be to finance a piece of machinery that, lets just say, that piece is $500,000. We would maybe loan 75% of that. So, we would expect that the business would be able to put down 25% capital. Whether it's cash from the owner or it's from outside investors, and then we would maybe loan 75% of that. And where we go from that is then we take their pro forma cash flows or their business plan, which has a built-in set of assumptions which we go through in quite a bit of detail to make sure we understand who's their market? Who they're trying to sell to, what generates the revenue? What are some ancillary products that might button onto that piece of equipment? Not only initially, but over a five-year period. So, we can get comfortable that that loan will get paid back. We always look at the primary source of repayment, which is cash flow from the business operations. The secondary source of repayment which would be from a guarantor. And a lot of times the business is owned in an LLC, or a partnership, or an operating company, and then we would have a guarantor of the owner. And then the third source would be bringing in an outside guarantor, a consigner. Because the last thing the bank wants to do is repossess the collateral or take that back because as a bank, our job is to take in deposits and loan out money. And that's where the bank makes its money. It's not selling client's assets. We're not very good at operating businesses, so we try to stay out of that name. Just be a financial partner for the business owners. >> And you say you're not a very good at operating businesses, but it sounds like you really do, really partner with the companies that you, I'm not going to say invest in, but you loan money to. I think a lot of times from a consumer perspective, we look at a bank as, they look at your credit score and if it's high enough, they'll give you some money. If not, they won't. But it sounds like you guys really do a lot of due diligence to investigate the companies that you work with, even brand new companies, to say does this seem like a viable business? Is this something that we feel like we can partner with for the long term, and invest in this company? >> Exactly. So, a lot of people's perspective of a bank is to get a home mortgage loan, or a car loan, or something of that nature. Which is a little more transactional, there's certain ratios that everybody kind of knows or certain loan of values. And that's what your credit is really based off of, your credit score and your payment history. But on the commercial side, we do have to take a deeper dive, because it's not just the person that we're underwriting. Character or the quality of the person who's standing behind it is something we do factor in. But ultimately, we're financing the business, so we have to be a good partner whether it's somebody out in Research Park, who has a new idea, or whether it's an established business that makes widgets, for a lack of better words. We have to understand that whole scope, because in order for us to get the loan approved, it's a human element, it's not just a computer system that's scoring it. >> Mm-hm, now you mentioned a couple of times that somebody might want to buy a big piece of equipment and it'll loan them a certain percentage of the value of that equipment to buy the equipment. Would you then usually take a security interest in equipment and take it as collateral? What types of collateral do you usually take? How does that process work if a company wants to pledge some asset as collateral for their loan? >> Yeah, so in either a line of credit or a business loan for equipment, we would file a UCC filing. So the Uniform Commercial Code is something that's regulated through the legal system. It's a public database that shows who the debtors are that are filed on that. So if it's Chip's manufacturing company, Busey would put a filing on Chip's manufacturing company. And that would be out there for anybody to see that was looking to do business with Chip's manufacturing company. And that filing would be on inventory, accounts receivable and equipment, and everything that's kind of in between there. And so then if someone else was looking to work with Chip's equipment company, Chip's manufacturing, then they would able to look and see that Busey has a first priority interest in those assets. So anybody that would come in after that would be in a second, third, or fourth position. And as the lead bank or the first bank, we actually prohibit typically the customer from getting outside that without talking to the bank. Because we're making our loan decision on a set of parameters that have provided to us and that's usually what is the existing situation and what is the customer looking to do. If there's becomes a lot more variables or unknowns outside of that, that's when things can get a little upside down. So it's not, we're not doing it to be restrictive to the customer, we're just doing it to make sure that the deal we all signed up for and agreed to is what's being done. >> I'm so glad you mentioned the UCC, because in the lessons that are going to be coming up in this module, we talk all about UCC Article IX, how it works to take a security interest in some form of collateral. Chip mentioned priority in the filing of financing statements and things like that, we're going to learn all about that in lessons that are coming up. And so that's one reason I wanted to have Chip here, just to kind of give us a little preview of what we're about to learn and help us understand how this stuff works in real life. Because we learn all these rules in a law class like this, but the reason we learn these rules isn't just to have the knowledge of the rules, it's to apply the rules. And so in real life if you own a business, if you get into banking, you're going to encounter UCC Article IX. You're going to deal with secure transactions. You're going to deal with cosigners, guarantors and sureties to loans, and things like that. So, Chip, thanks so much for joining me here today. I really appreciate your insight. >> Thank you, appreciate it. And good luck to everybody. >> Thanks.
