The Lender's Three Cs vs the Marginal Borrower
                                or
   Why Small Non-profit Corporations Without Share Capital Have
                    Trouble Negotiating Loans


THE THREE Cs

Lenders traditionally qualify the funds they lend through an
analysis of the borrower's rating for Collateral, Cashflow, and
Character. It is my intention here to explain these and their
structurally related concepts to show why it is difficult to
secure financing. It should be noted that I am not an
expert in this area but I do feel I understand enough of the
basic principals to share what I have learned.

Cashflow

The lender will want to know if the borrower has enough money
coming in to cover all its expenses (including some contingency)
and loan repayments.

A cashflow is constructed using an 'income statement and
'budget'. An income statement shows cumulative totals for each
revenue and expense account for a fiscal year to date. It also
indicates the difference of revenue over expenses which is called
"income". A budget shows *all* monies going out of and into the
organisation. This would include proposed purchases of assets,
paying down liabilities, etc., not shown on an income statement.

As a 'rule of thumb' lenders like to see the ratio of total debt
repayment (principle plus interest) to total revenues in the
range of 33% to 40% or less. Lenders will also want to analyse
the nature of the borrower's income or revenues.

An individual with a steady job with a steady employer will
present a lower risk than someone who is self-employed. In the
situation of a corporation the lender will want to know how the
borrower obtains revenue. Do they actually sell something - if
so how long have they done this and is there continuing demand
in the 'market' for their goods or services. What is the market
share? Do they have a monopoly? Some organisations receive funds
by statute (cities and towns). Some receive steady and secure
government funding (universities, colleges, etc.).

Character

The character of the borrower can be determined by how well it
has 'performed' in paying back its previous or current loans. In
essence the borrowers credit history is analysed to determine its
'credit rating'. This is hard to establish if the borrower is
making its first loan. If the borrower is a corporation the
lender may want to examine the financial character of its Board
of Directors. If the Board members as a whole are young, have no
steady job, have no credit history, no assets etc.
this resulting rating would be lower than that of a Board that
owned houses, had borrowed money and paid it back, was older,
etc. This is because the 'managers' of the proposed loan have had
little or no experience in handling debt. The board of directors
of a corporation are not personally liable for the debts of the
corporation which they serve unless specifically stated in the
loan agreement.

Collateral

The last "C" is collateral. This is property which could be
pledged as guarantee for repayment of of the proposed loan.
A lender will want to look at the applicant's most recent balance
sheet.

The Balance Sheet shows assets, liabilities and equity. Assets are
things that are owned by the organisation which increase its
value. Liabilities are amounts owed to other people which
decrease the value of the organisation. Equity is what the
organisation is worth. The formula is therefore;

                  Assets = Liabilities + Equity
or
                  Equity = Assets - Liabilites

Lender's like to see the ratio of Liabilites to Equity in the
region of 50%. In the case of an individual buying a house,
however, lending institutions are allowed by law to lend up to
75% toward the purchase of the property.

DEFINITIONS, MOTIVES and STRUCTURAL CHARACTERISTICS of SMALL
NON-PROFIT CORPORATIONS WITHOUT SHARE CAPITAL

Definition of a corporation

"A corporation is an artificial being, invisible, intangible, and
existing only in the comtemplation of law."
(Chief Justice Marshall)

This definition indicates that one of the most significant
characteristics of the corporation is its separate legal entity.
The corporation is regarded as a legal person, having continous
existence apart from its owners. By way of a contrast a
partnership is dissolved by the death or retirement of any one of
its members, whereas the continuous existence of a corporation is
in no way threatened by the death of one of its members.

Limited Liability

Creditors of a corporation have a claim against the assets of a
corporation, not against the personal property of the owners of
the corporation. In a corporation with shares and stockholders, the
stockholders have no personal liability for the debts of the
corporation, they can never lose more than the amount of of their
investment. In corporations without share capital the members
lose nothing but their ability to be members and therefore the
privileges associated with membership.

With Share Capital.

Ownership in a corporation incorporated for the purposes of
making a profit is often constructed through the issuance of
shares. The necessary monies (capital) to start the business are
gathered together and in exchange for cash the shareholders
jointly own and control the corporation. The degree of control an
individual shareholder has is evidenced by the percentage of
voting shares they have in the corporation.

Without Share Capital.

Corporations without share capital are non-owned entities and do
not have shareholders or investors. The membership of a non-share
corporation effect their will at duly constitued meetings of
members and elect a board of directors.

Non-profit

Generally speaking, non-share corporations are conducted without
pecuniary gain to their members (ie. non profit), and it is so
provided in their Letters Patent, the members do not receive
dividends or other monetary gain.

The essential problem for lenders is risk. The interest charged
for a loan pays the the lender for the risk assumed as well as
the opportunity cost for the funds used.

Lenders want to make sure that they will be able collect on the
loan a real living breathing person is therefore able to borrow
where a corporation without share capital (no stockholders) is
seen as ill defined and difficult to collect from should it cease
to exist.

                                              JKMuir 20 March 1987