Sbdc lenders san marcos 8 25-10
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Borrowing Money in 2010(it’s a jungle out there)
“Success seems to be largely a matter of hanging on after others have let go.”
-William Feather
Sam Thacker512-990-8756 [email protected]
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Goal of Presentation
1. Provide basic understanding of how various types kinds of bank and non-bank business financing work and how they can be used best for business.
2. Have each participant leave today with a practical understanding of the lending landscape in today’s environment.
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Lenders - Unique Personalities Every lending institution has a different
personality and appetite
Capital is available for credit worthy borrowers, but they may have to try several institutions
Working with a lending organization that looks at your whole picture is best
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Chart that will make you dizzy!
Number of SBA 7 (a) loans made in Central Texas (pop 1.5 mil) for federal FY 2009. Top four lenders. On the bottom, the largest bank in the U.S. made a total of 4 SMB SBA loans in Central Texas (a huge market for them) with an average loan of $36,250.
Type of Lender # of Loans Total Volume Average LoanCredit Union 149 $ 8,560,000 57,450$ Mega Bank 66 $ 20,495,300 310,535$ Regional Bank 58 15,129,100$ 260,847$ Community Bank 39 11,530,150$ 295,645$
Goliath National 4 145,000$ 36,250$
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Three “C”s of Lending
Character Collateral Capacity
Is borrower’s character strong enough that repayment is reasonably assured?
Is there enough collateral to support the loan the borrower is requesting?
Does the company have sufficient cash flow / resources to repay the loan?
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Types of Banks
Mega Banks The top 50 banks in the country
Regional Banks Over $1 billion in assets (but not top 50)
Community Banks Less than $1 billion in assets Community based – relationship focused
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Mega Banks
Like to make a few big loans or many small ones
The largest 50 banks in U.S.
Bank fees can be high Some are not SMB
friendly Goliath National Bank
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Regional Banks
Empty commercial office building Las Vegas - 2010
Small and mid-sized businesses use them
Some are highly vulnerable to real estate assets
Strong & weak ones More to fail in 2010
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Community Banks
7,500 in U.S. Serve local /
state geographic market
Community banks offer best chances of loans
Community banks are regaining market share
lost last 10 years
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Credit Unions Fairly new to
business lending
Only 30% of U.S. credit unions make business loans
Great resource for small loans (<$50,000)
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Community Lenders
People Fund
Acción Texas
Big Austin
Texas Mezzanine Fund
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Community Lender Criteria
Create jobs for community
Serve minority and underserved businesses
Max loan $250,000
Hands on and helpful
Look at entire picture
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Concept of “Micro-Lending”
Generally loan amounts small ~$50k
Community based
Create Jobs
Often help minority businesses or businesses that employ over 50% minorities
Often located in low income area
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Matching Assets with Loans
Examples of Short-Term Assets Matched to Loan
Inventory *varies
Accounts Receivable Match to A/R turn
Contract Mobilization 1 year or no longer than contract term
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Matching Assets with Loans
Examples of Long-Term Assets Matched to Loan
Real estate 15-30 year fixed rate
Equipment (Computers) 36 month lease
Equipment (long life) 5-15 years variable rate or lease
Vehicles/trucks 5-7 year loan or lease
Furniture and Fixtures 5-7 year loan or lease
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SBA Loans for Long-Term Assets
Two programs 7(a) 504
7(a) Proceeds used to
buy long-term assets
Terms depend on assets financed
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SBA Express Loan up to $300k Lender flexibility Can be used as
term loan or line of credit
Lower docs and quicker turn-around
Can be used for working capital
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Other SBA Loan Considerations
Tip: While SBA loans are very good vehicles for financing long-term assets, the standard practice of SBA lenders is to file a “blanket” UCC-1 on all assets (including short-term assets).
Only a small amount of an SBA loan can be used for working capital purposes, so if working capital is a strong need, negotiate the loan so accounts receivable and inventory are not included in SBA loan collateral before the loan is made.
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Working Capital Loans
Very hard to get through traditional banks right now
Easier to get from commercial finance companies
Buyer beware – commercial finance companies are unregulated
Many good finance companies helping businesses
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Why Use Alternative Lending?
Uneven profitability
Seasonal business
Rapid growth
Cyclical businesses
Need more leverage of assets
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Factoring’s Reputation
Number of companies who use factoring has grown
exponentially during last 10 years.
Factoring industry has become more respectable as it has grown.
Competition in factoring has caused cost to client to significantly decline.
In most cases today, debtors do not assume that because a company is factoring, it is in trouble.
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Cost of Working Capital
Self-funded Bank LOC
ABL Factoring
0%APR 8-12%2.75% 11-14% 16+%
Often unavailable
Equity often used better for other purposes
Depletes cash reserve
Most appropriate for mature, slow growth businesses
Low leverage of assets
Usually has call provision
“knee jerk” reactions
Easy to “evergreen”
Must have strong historical financials
Not for fast-growing businesses
Borrowing base of A/R, Inv, Equip
Often private lenders (non-regulated)
Good for rapid growth
Good for recapitalization
Min size $750m consistent borrowing
High leverage of A/R (avg 80%)
Often private lenders (non-regulated)
Excellent for rapid growth
Can have losses, tax liens, neg. retained earnings
$20,000-$3 million
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The Cash Flow Cycle
PURCHASES
CASH
INVENTORIESSALES
RECEIVABLES
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Cash Flow Warning Signs
Five Warning Signs of CF Trouble: Decreased Liquidity Missed Trade Discounts Late Vendor Payments Slow Collections Less safety cash in bank
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Create a Cash Flow Forecast
A cash flow forecast will assist you managing through the period of tight cash.
A good (free) cash flow Excel based cash flow forecast with directions can be downloaded here:
http://www.lesliethacker.com/resources.htm
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Asset-Based Lending (ABL)
• B2B sales
• Borrowing base of A/R, Inventory, equipment
• $1MM line min, $750m consistent borrowings
• General working capital uses
• Excellent for recapitalization
• Isolated losses – balance sheet deterioration
• Excellent for rapid growth
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Sm Business Owner’s Strategy
Don’t focus on the credit score
Focus on the underlying credit report
Get all three credit reports every year
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Strategy - Continued
Look for lenders who look at the entire credit report instead of just a FICO score
Look for a “commercial lender”
If you use personal credit cards for business – understand that your credit score may be negatively affected
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Conclusion and Q & A
For more information contact:
Sam or Leslie ThackerBFS-USA Group LLC