Non Traditional Underwriting Approaches

Tim HatfieldLFA Summit11/15/2014

Traditional UW

• Bank statements• Credit Reports• Taxes• Application• Collateral• Character

Appropriate Risk Yes

NO

Alternative UW

• Bank statements + Log(s) and interviews

• Credit Reports Little to nothing• Taxes Not filed or not accurate• Application• Collateral • Character AND context • Alternative data sources

Maybe

What is in a credit report?

• Personal Credit– FICO/ Vantage Scores– Public Records

• Lacks personal context– Not a perfect proxy for character

• Business Credit

Application

• Let the client guide• Rough idea of sales• Checks and a baseline• Contact information

Collateral

• Leverage to talk• Mission confusion• Cost vs. Benefit• Loan Term

Alternatives:

Traditional:

Why documents aren’t always correct

• Limit tax liability• Difficult process to follow• Cash based businesses• Family nature of finances • Different cultural views on money

(ROSCAs) • Remittances

Piecing together a cash flow

• Relationship and rapport– Fine line between information and advice

• Listening and reconciling • Logs• Receipts• Margins• Alternative Data• Context

Questions ?

Determining Affordability

• How to find the right size of a loan • Standard Products• Ladder style

Case - Guessing Educated-ly

• Maria and Jose have a taco cart• They sell on the corner of campus for lunch

5 days a week and Thursday, Friday, and Saturday nights

• Maria also runs a daycare during the day• 1 bank account for the couple• They asked for $10K for working capital to

grow

HOW MUCH CAN THEY AFFORD?

Potential Sources

• Bank Account• Square statements• Application• Bottom up approach– Receipts and questions– Site Visit

• Contextual Margins• Yelp, Facebook, Twitter

Example

• $2 per taco cost• Number of customers–% paying with card?– Yelp reviews– Count and average (day and night)– Order Number– Number of tortillas used

• Total Sales

Take Home

• Total Sales• Logs? Application stated number?• Approximate shopping for business• Fixed costs- propane, commissary,

labor• 10% net for restaurants• Debts• Sales Tax?

Additional HH Considerations• Additional income– Bottom up from kids and per week

• Other family members• Remittances in both directions• ROSCAs

Total HH Capacity

• Debts- formal and informal• DSCR vs. DTI

Business Income + Personal IncomePersonal Debt Payments + Business Debt Payments + Proposed Payment

Decisioning

• Cash Flow:– Yearly DSCR- >1, >1.25 is bank standard

• Character: Qualitative • Collateral: Most likely no• Credit: FICO, adjusted• Just enough to fail?• Match timing

Questions ?

Tim Hatfield

timphatfield@gmail.com