Financial Models in Excel for the Best Financial Planning and Avoiding Bankruptcy

Financial planning is vital for any startup, particularly one exploring new, innovative business activities. It ensures that scarce capital is allocated responsibly, risk is managed effectively, and the company remains solvent long enough to discover sustainable revenue streams. Below is an overview of why financial planning matters for R&D, acquiring new customers, and a simple framework for avoiding bankruptcy.

Startup Financial Model for a Loan Securitization Platform or Facilitator

I've done a few different loan business startup models. Some for direct lenders and one for analyzing a single securitization deal, but now I've done something geared towards securitization facilitators and/or servicers (a middleman). This side of the business is a software platform and focuses on building out a network that connects institutions that have baskets of loans they want to liquidate and investors that want to invest in securitized products (secured by baskets of loans).

Business Plan Example for Loan Securitization Firm

Below is an illustrative (and simplified) example of a business plan for a loan securitization venture. The plan sketches out key components such as market opportunity, strategy, operations, unit economics, and a 10-year scale-up timeline. Keep in mind that real-world scenarios can be more complex, and this example is designed to provide a foundational framework.

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Here is an interesting loan securitization template to help illustrate some of the underlying mechanics of this industry. And I just finished this model that is for a loan securitization dealmaker (inspired by everything you see below).

General Business Concept

The loan securitization firm earns fees by acting as both an aggregator and a structurer of loan portfolios, transforming relatively illiquid loans into tradable securities. Concretely, it collects loan pools from lenders, conducts credit analysis and due diligence, arranges legal and regulatory documentation, and works with rating agencies to establish credit ratings. In addition, it orchestrates the sale and distribution of the resulting securities to institutional investors, managing all the complexities of the transaction—from compliance and investor relations to servicing oversight—thereby justifying the upfront and ongoing fees.

Potential Risks of Being the Aggregator / Structurer of Loan Portfolios

While a securitization firm often transfers most of the underlying loan default risk to investors, it still faces a number of other significant risks:

• Reputation and Liability Risk: If loans are misrepresented or improperly vetted, investors could sue the securitizer for breach of representations and warranties. Any high-profile default or improper structuring can also damage the firm’s reputation, jeopardizing future deals.
• Regulatory and Compliance Risk: Securitization firms must comply with evolving regulations (e.g., risk-retention rules in the U.S. requiring the securitizer to hold a percentage of the deal). Noncompliance, or an oversight in disclosures, can lead to fines or legal action.
• Warehouse/Bridging Risk: Before a pool of loans is securitized and sold to investors, the firm may have to temporarily hold those loans (often financed through a warehouse line of credit). If market conditions worsen or if they can’t place the securities, the firm could be stuck with these loans or face margin calls on its warehouse line.
• Operational and Structuring Risk: Errors in structuring (e.g., inaccurate modeling, flawed documentation) can lead to deal failures or legal disputes. Poor servicing oversight or inadequate reporting can also degrade investor confidence.
• Market and Liquidity Risk: Volatile interest rates or a sudden lack of investor appetite for certain asset classes can halt securitization pipelines, potentially leaving the firm with unsold loans or revenue shortfalls.

1. Executive Summary

Business Concept
Our firm, “Alpha Securitization Partners” (ASP), aims to become a leading aggregator and securitizer of loans across multiple asset classes (e.g., consumer loans, SME loans, or mortgage loans). We will originate relationships with lending institutions (both traditional and alternative lenders), bundle their loans into diversified pools, structure and sell asset-backed securities (ABS) to institutional investors, and manage ongoing securitization trusts.

Market Opportunity

• Banks and non-bank lenders often look to free up capital by offloading portions of their loan portfolios.

• Investors seek stable yield opportunities with diverse risk tranches.

• Securitization transforms relatively illiquid loan portfolios into liquid instruments, aligning with regulators’ and institutions’ balance sheet optimization goals.

Business Model

• Origination/aggregation: Acquire loans or partner with lenders to bundle them into portfolios.

• Structuring: Use internal legal, compliance, and financial modeling teams to structure securities.

• Placement/Distribution: Work with investment banks and broker-dealers to place securities with institutional investors.

• Servicing/Monitoring: Maintain oversight of the loan pools, payments, and credit performance.

Competitive Advantage

• Expertise in structuring deals across various loan types.

• Proprietary analytics platform that evaluates underlying loans for credit quality and return optimization.

• Strong network of originators and investors from the firm’s leadership experience in investment banking and structured finance.

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2. Market Analysis

1. Industry Landscape

   • The global securitization market has grown significantly post-financial-crisis due to revised regulations (e.g., Dodd-Frank risk retention rules), improving transparency, and a continued need for yield among institutional investors.

   • Growth areas: Consumer debt securitizations (credit cards, personal loans, student loans), residential mortgages (RMBS), and SME loan securitizations (especially from alternative lenders/fintechs).

2. Target Clients

   • Mid-size banks, credit unions, and fintech lenders with loan portfolios ranging from $50M to $500M who want to offload part of their balance sheet.

   • Institutional investors (pension funds, insurance companies, asset managers, etc.) looking for structured products that provide predictable cash flows and diversified risk.

3. Competitors

   • Large investment banks with established securitization desks.

   • Specialty finance companies that target niche asset classes.

   • However, many smaller or regional lenders prefer a boutique approach and specialized attention that large IBs often cannot provide, creating an opportunity for a focused securitization boutique.

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3. Products & Services

1. Loan Aggregation

   • Partner with lenders to identify and screen eligible loans for securitization.

   • Develop loan acquisition agreements that define the transfer, collateralization, and servicing processes.

2. Structuring & Issuance

   • Pool the loans into special purpose vehicles (SPVs).

   • Work with rating agencies for credit enhancement strategies.

   • Coordinate legal counsel, trustee services, and underwriting of securities.

3. Distribution & Investor Relations

   • Maintain a network of institutional investors seeking different risk-return profiles.

   • Issue multiple tranches of ABS with varying levels of credit enhancement and yield.

4. Servicing & Reporting

   • Oversee loan servicing performance metrics.

   • Provide ongoing surveillance, performance reporting, and investor updates.

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4. Operational Plan & Timeline

Phase 1 (Years 1-2): Setup & First Securitizations

• Finalize legal structure and compliance framework.

• Hire key staff: CFO, Head of Structuring, Head of Origination, Legal Counsel.

• Onboard initial clients (2–3 lenders) and secure first two securitizations.

• Target annual securitization volume: $100–$200 million in total notional value.

Phase 2 (Years 3-4): Scaling & Process Refinement

• Expand originator network: banks, credit unions, fintech lenders.

• Launch proprietary analytics platform to streamline loan assessment.

• Execute ~5-7 securitizations per year, covering different asset classes.

• Target annual securitization volume: $500 million–$1 billion.

Phase 3 (Years 5-7): Product & Geographic Expansion

• Introduce cross-border securitizations if market and regulations permit.

• Develop specialized verticals (e.g., auto loan securitizations, SME loan securitizations).

• Target annual securitization volume: $2–$3 billion.

Phase 4 (Years 8-10): Maturity & Market Leadership

• Mature product offerings with established track record across multiple asset classes.

• Potential listing or merger/acquisition for growth capital.

• Target annual securitization volume: $5+ billion.

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5. Organizational Structure

• CEO / Managing Partner: Oversees overall strategy, investor relations, and major client relationships.

• CFO: Manages financial operations, reporting, and compliance with regulations like SEC/FINRA, IFRS/GAAP, etc.

• Head of Structuring: Leads deal structuring, credit modeling, relationships with rating agencies.

• Head of Origination: Sources loan portfolios from partner lenders and negotiates terms.

• Legal & Compliance: Ensures all securitization structures meet legal and regulatory requirements.

• Analytics & Research Team: Builds models for credit risk, pool performance, and portfolio optimization.

• Investor Relations & Marketing: Maintains relationships with institutional investors and coordinates issuance roadshows.

As the company grows, additional junior staff, analysts, and servicing coordinators will be added to support higher deal flow.

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6. Unit Economics

While securitization economics can vary widely depending on asset class, credit quality, and market conditions, below is a simplified model for the typical fees and expenses in a single securitization:

1. Deal Size: $100 million (example)

2. Revenue Streams:

   • Upfront Structuring Fee: Typically 0.5%–1.0% of the notional amount (e.g., $0.5–$1.0 million).

   • Ongoing Servicing/Management Fee: Typically 0.1%–0.3% per annum on outstanding principal (e.g., $100K–$300K/year).

   • Placement/Distribution Fee: If the firm also handles placement, an additional 0.2%–0.5% can be earned.

3. Costs:

   • Rating Agency Fees: 0.05%–0.10% of deal size (e.g., $50K–$100K).

   • Legal & Structuring Costs: $200K–$400K for outside counsel and documentation.

   • Underwriting/Distribution: If using third-party underwriters, 0.15%–0.30% of deal size.

   • Operational Overhead: Salaries, software, office space, compliance, etc.

4. Gross Margin:

   • Upfront margins on each securitization typically hover around 30–50% after direct deal costs (rating, legal, underwriting).

   • Ongoing fees (servicing, monitoring) provide recurring income but are usually smaller percentage-wise.

5. Breakeven Analysis:

   • Estimate the firm’s annual overhead at $2–$3 million in the first couple of years (staff salaries, office, compliance).

   • With an average $100 million deal generating $700K–$1.5M in fees (before direct costs), the firm would need 2–3 deals per year initially to reach operating breakeven.

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7. Financial Projections (Years 1 – 10)

Below is a high-level, hypothetical financial trajectory.

Year 1 – 2

• Deals: 2 securitizations per year, $100M average each = $200M total.

• Total Revenues: $1.5M–$2.0M (assuming ~1% average fee & smaller distribution fees).

• Expenses: $2–$2.5M (staff + operational costs).

• EBITDA: Breakeven or slightly negative in Year 1; modest profit in Year 2.

Year 3 – 4

• Deals: 5 securitizations per year, $100M–$200M average each = $500M–$1B total.

• Total Revenues: $5M–$10M.

• Expenses: $4–$6M as staffing grows.

• EBITDA: $1M–$4M (more comfortable profitability).

Year 5 – 7

• Deals: 8–12 securitizations per year, $200M–$300M average each = $1.6B–$3.6B total.

• Total Revenues: $12M–$30M (including ongoing servicing fees from prior deals).

• Expenses: $8–$12M.

• EBITDA: $4M–$18M.

Year 8 – 10

• Deals: 15+ securitizations per year, $300M–$400M average each = $4.5B+ total annually.

• Total Revenues: $30M+ (in addition to growth in recurring servicing fees).

• Expenses: $15M–$20M.

• EBITDA: $15M+.

(Note: These figures are illustrative and depend heavily on market conditions, asset quality, deal types, and investor demand.)

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8. Risk Factors & Mitigation

1. Market/Interest Rate Risk

   • Mitigation: Diversify across loan types and maturities; use hedging strategies where feasible.

2. Credit/Default Risk

   • Mitigation: Robust underwriting standards, conservative credit enhancement, maintain relationships with reliable originators.

3. Regulatory Risk

   • Mitigation: Dedicated legal/compliance team; stay current with changes in banking and securities laws (e.g., Dodd-Frank, SEC regulations, EU securitization rules, etc.).

4. Operational Risk

   • Mitigation: Invest in secure IT infrastructure, robust internal controls, backup servicing arrangements.

5. Liquidity Risk

   • Mitigation: Prudent balance sheet management, credit lines with partner banks, stable cash flow from recurring fees.

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9. Growth & Exit Strategy

• Growth: Expand asset classes (e.g., auto, credit card, small business loans), geographic footprint, and eventually add risk retention vehicles for high-performing portfolios.

• Exit: Position for acquisition by a larger financial institution or private equity firm, or potentially go public to attract more significant capital for expansion.

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10. Conclusion

Alpha Securitization Partners seeks to capitalize on the strong and growing demand for structured finance solutions. By focusing on prudent underwriting, specialized asset-class expertise, and close relationships with both originators and investors, the company aims to build a profitable and sustainable securitization platform over the next decade. The combination of upfront structuring fees and ongoing servicing income provides a balanced revenue stream capable of scaling as ASP gains market presence and diversifies into new asset verticals.

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Note:

This plan is only an example outline. Real-world securitization businesses must customize their strategies based on specific asset classes (mortgages, consumer loans, etc.), target geographies, regulatory frameworks, and competitive dynamics. Detailed financial models, legal opinions, and robust operational frameworks would be essential to execute this plan successfully.

You may be interested in more direct lending financial models here. If you need help building a custom financial model, I offer my services here.

You can download SmartHelping's entire library of templates with the Super Smart Bundle.

Article found in Lending.

Net Operating Income (NOI) and Real Estate

 Net Operating Income (NOI) is a key financial metric in real estate that measures the profitability and performance of an income-producing property. It reflects the property’s ability to generate income after all operating expenses are taken into account but before financing costs (mortgage payments), taxes, depreciation, and amortization.

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Keep in mind I've had clients who tried to put principal and interest expenses as well as CAPEX before the net operating income line. That would be highly inaccurate and you'll see why below. If you want to utilize some of the best underwriting tools, here's my entire real estate models library.

1. Understanding Net Operating Income

NOI Formula:

$$\text{NOI}=\text{Gross Operating Income}-\text{Operating Expenses}$$

1. Gross Operating Income (GOI) generally starts with the potential gross rent (the maximum rent you could collect if all units/spaces are fully occupied at market rates) and then subtracts vacancy and credit losses as well as loss-to-lease while adding any other income (e.g., parking fees, laundry, vending, etc.).

Operating Expenses typically include:

• Property management fees
• Maintenance and repairs
• Utilities (if paid by the owner)
• Insurance
• Property taxes
• Advertising and marketing costs
• Landscaping and other day-to-day operational costs

Important Note: Mortgage payments and other debt service costs, owner’s personal expenses, capital expenditures (major property improvements or major repairs), depreciation, and income taxes are not part of operating expenses and are excluded from the NOI calculation.

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2. What NOI Is Used For

1. Property Valuation

   • Capitalization (Cap) Rate: The most common method to estimate a property’s value is using the cap rate formula:

     $$\text{Cap Rate}=\frac{\text{NOI}}{\text{Property Value}}$$

     Rearranging this formula, you can estimate the property’s value if you know its NOI and a relevant market cap rate:

     $$\text{Property Value}=\frac{\text{NOI}}{\text{Cap Rate}}$$

     Investors and appraisers often rely on this approach to get a quick estimate of a property’s worth based on its income-generating potential.

2. Comparing Investment Opportunities

   • By standardizing a property’s income and operating expenses (i.e., calculating NOI), investors can compare different properties on an “apples-to-apples” basis regardless of each property’s financing structure or tax situation.

3. Debt Service Coverage Ratio (DSCR)

   • Lenders often use NOI to calculate the Debt Service Coverage Ratio, which measures how comfortably the property’s income can cover its debt obligations:

     $$\text{DSCR}=\frac{\text{NOI}}{\text{Total Debt Service}}$$

     A DSCR above 1.0 indicates the property’s NOI is sufficient to cover its mortgage payments. Lenders typically want to see a DSCR of 1.2 or higher (depending on the property type and risk tolerance).

4. Measuring Property Performance

   • Tracking changes in NOI over time helps investors and property managers gauge whether operational changes, rent increases, or expense optimizations are effectively improving the bottom line.

5. Strategic Decision-Making

• Investors may look for properties with potential to improve NOI by:
• Reducing operating expenses (e.g., installing energy-efficient systems)
• Increasing rents or improving occupancy rates
• Adding amenities that can generate additional income
• An increased NOI can translate into higher property value and better returns on investment.

1. Forecasting and Budgeting

   • When creating pro forma statements (financial projections for a property), investors use anticipated NOI to plan for future financing needs, potential distributions, and the overall viability of a project.

2. Negotiating Property Purchases and Sales

   • Both buyers and sellers typically base their negotiations on the property’s current or pro forma NOI. A well-documented and stable NOI can command a higher sale price, while a lower or inconsistent NOI might reduce a property’s perceived value.

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3. Key Takeaways

• NOI Excludes: Mortgage payments, depreciation, personal expenses, income taxes, and capital expenditures.
• NOI Focuses: Purely on operating performance—rent and other income minus operating expenses.
• Uses of NOI: It’s crucial for property valuation, comparing investments, loan underwriting, measuring property performance over time, strategic decision-making, and negotiations in real estate transactions.

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In summary, Net Operating Income provides a clear picture of a property’s operating performance and profitability, independent of financing decisions or tax strategies. Real estate investors and lenders rely heavily on NOI (alongside other metrics) to assess a property’s health, market value, and investment potential.

Article found in Real Estate.

Finding an Edge in Multi-Family Real Estate Investing

The largest number of templates I've built for a single industry over my career is multi-family. I've come across people doing work in the billions as well as smaller 10s of millions shops. Everyone has their own thing that they like to use to try and find an edge so lets get into it and a model is just one part. There's a lot that goes into strategy.

Multi-Family Acquisition Model - Includes T12, Joint Venture, and Detailed Forward Assumptions

This is the most comprehensive and flexible real estate model I've built. I've spent the last few years doing a lot of modeling and template building in this space. My real estate template library is now even more comprehensive as you will find the features below incredibly useful. I'm excited for feedback.