Funding Your Small Business During a Credit
Crunch
December 3, 2008
Welcome To:Welcome To:
Financing Your Small Financing Your Small Business During A Credit Business During A Credit
CrunchCrunchPresented by:Presented by:
Bill McDevittBill McDevitt
Group Vice PresidentGroup Vice President
Business Banking Business Banking
Chevy Chase BankChevy Chase Bank
Sponsored by:Sponsored by:
Business PremierBusiness Premier
And theAnd the
Washington, DC Washington, DC
Economic PartnershipEconomic Partnership
AGENDAAGENDA
The Credit Crunch: How REAL is it?The Credit Crunch: How REAL is it?
How a Bank Views Your Business How a Bank Views Your Business
Funding Your Small Business TodayFunding Your Small Business Today
How Real is the Credit Crunch?How Real is the Credit Crunch?According to an August 2008 survey by the According to an August 2008 survey by the National Small Business Association, 67% of National Small Business Association, 67% of small business owners are affected by credit small business owners are affected by credit tightening compared to 55% in February tightening compared to 55% in February 2008.2008.
55%
67%
0
10
20
30
40
50
60
70
Feb-08 Aug-08
The Credit Crunch: The Credit Crunch: In PerspectiveIn Perspective
ALERT: ALERT: a virus by the name “Acute Viral Nasopharyngitis” is a highly contagious, viral infectious is a highly contagious, viral infectious disease that attacks the upper respiratory tract and is disease that attacks the upper respiratory tract and is spreading. It has no known cure, targets infants and young spreading. It has no known cure, targets infants and young children and we are all at risk of contracting it.children and we are all at risk of contracting it.
The Credit Crunch is The Credit Crunch is as REAL as as REAL as
The Common ColdThe Common Cold
JUST LIKE A COLD… JUST LIKE A COLD…
You WILL BE affected, directly or indirectly, You WILL BE affected, directly or indirectly, by the credit crunch if you have not been by the credit crunch if you have not been alreadyalready
We each react to it in different ways based We each react to it in different ways based on our company’s immune systemon our company’s immune system
The best defense IS a strong immune The best defense IS a strong immune systemsystem
Watch what you eat (Discipline your Spending)Watch what you eat (Discipline your Spending)
Exercise and keep your strength (Network & Grow)Exercise and keep your strength (Network & Grow)
Take vitamin C – but not too much (Credit)Take vitamin C – but not too much (Credit)
Origins of the Credit Crunch Origins of the Credit Crunch
Think back to tech bubble bust of late 1990sThink back to tech bubble bust of late 1990sStock market declines in 2000 - RecessionStock market declines in 2000 - Recession
Fed lowers rates sharply to limit damage Fed lowers rates sharply to limit damage
Mortgage payments more affordableMortgage payments more affordable
Millions refinance and buy homesMillions refinance and buy homes
To keep pace with rising home prices, new “Sub-To keep pace with rising home prices, new “Sub-Prime” products were born to approve larger Prime” products were born to approve larger mortgages to less qualified borrowers mortgages to less qualified borrowers
Defaults and delinquency begin to rise over timeDefaults and delinquency begin to rise over time
Hedge funds loaded with bad mortgages fail Hedge funds loaded with bad mortgages fail
Failure is Not an Option Failure is Not an Option Failure or takeover of Bear Sterns, Fannie Mae, Failure or takeover of Bear Sterns, Fannie Mae, Freddie Mac, Indy Mac, WaMu, Lehman Freddie Mac, Indy Mac, WaMu, Lehman Brothers, Merrill Lynch, AIG, and banks too! Brothers, Merrill Lynch, AIG, and banks too!
Commercial paper devalued– a vital form of short Commercial paper devalued– a vital form of short term borrowing for banks term borrowing for banks
Banks no longer willing to lend to each otherBanks no longer willing to lend to each other
Stock market continues to fall on confidence Stock market continues to fall on confidence
House & Senate pass $700 billion Troubled House & Senate pass $700 billion Troubled Assets Relief Program or T.A.R.P. ) October 3Assets Relief Program or T.A.R.P. ) October 3 rdrd
Instead, banks use money for Instead, banks use money for ccapital apital rrelief and elief and aacquisition cquisition pprograms to bolster their balance rograms to bolster their balance sheets and acquire other banks. sheets and acquire other banks.
Home owner defaultsHome owner defaultsDelinquencyDelinquencyForeclosureForeclosureHousing market collapseHousing market collapseBank lossesBank lossesRelated industry risk Related industry risk (construction, contractors, suppliers, etc.)(construction, contractors, suppliers, etc.)
Targeted credit tighteningTargeted credit tighteningFinancial services confidence lost Financial services confidence lost Continued stock market lossesContinued stock market lossesScarcity of market capitalScarcity of market capitalIndustry wide job losses Industry wide job losses Economic slowing – RecessionEconomic slowing – RecessionWide scale credit tighteningWide scale credit tightening
(For general industries)(For general industries)
EFFECT On CREDIT AVAILABILITY EFFECT On CREDIT AVAILABILITY
Banks asking for additional collateralBanks asking for additional collateralBe prepared to put up your primary residence Be prepared to put up your primary residence
Increased rates on new and in some cases Increased rates on new and in some cases existing loansexisting loans
Increased minimum credit scores. What Increased minimum credit scores. What used to be 650 now could be as high as 700 used to be 650 now could be as high as 700
Certain industries now considered “too risky” Certain industries now considered “too risky”
Need more money down on a building you Need more money down on a building you wish to purchasewish to purchase
Banks are likely to want 2 years in business Banks are likely to want 2 years in business
What Could This Mean to ME?What Could This Mean to ME?
THE MEDICINETHE MEDICINE
Arm yourselves with knowledge & surround Arm yourselves with knowledge & surround yourselves with knowledgeable peopleyourselves with knowledgeable people
Mentors / Peers in your industry / NetworksMentors / Peers in your industry / Networks
Your attorneyYour attorney
Your Accountant/ CPAYour Accountant/ CPA
A good Business BankerA good Business Banker
COMMNICATE! COMMNICATE!
THE MEDICINETHE MEDICINEWhere you are on the borrowing spectrum?Where you are on the borrowing spectrum?
Higher rates and fees in exchange for higher risk. Often asset based. No deposit services.
May accept less than one year of operations
Generally minimum of 18 months in business
Take lower risk & offer lower rates and fees. Often cash flow based decisions. Regulated & obligated to depositors.
Serves as a bridge for eligible businesses by offering guarantees to lenders to take on additional risk
And other guarantee And other guarantee programsprograms
Non-Traditional Funding Traditional Funding
HOW A BANK VIEWS YOUR BUSINESSHOW A BANK VIEWS YOUR BUSINESS (Generally for loans $50,000 or more)(Generally for loans $50,000 or more)
CharacterCharacterPersonal creditPersonal creditWillingness to personally guarantee the loanWillingness to personally guarantee the loanExperienceExperiencePreparedness – know where you’ve been and where your Preparedness – know where you’ve been and where your going going Personal integrityPersonal integrity
Capacity - Capacity - Historical profits show ability to repayHistorical profits show ability to repayCollateral - Collateral - Assets that could be converted to cashAssets that could be converted to cash Capital Capital
What you have put into the businessWhat you have put into the businessConditionsConditions
Industry factorsIndustry factorsEconomic factorsEconomic factors
Non-Traditional Funding OptionsNon-Traditional Funding Options Personal Sources to get startedPersonal Sources to get started
Business Purpose Home Equity LoansBusiness Purpose Home Equity Loans
Disciplined use of personal credit cardsDisciplined use of personal credit cards
Specialty lenders / BrokersSpecialty lenders / BrokersNiche markets: i.e. Dry Cleaners, FranchisesNiche markets: i.e. Dry Cleaners, Franchises
Hard Money LendersHard Money Lenders
LeasesLeases
Business Acquisition FinancingBusiness Acquisition Financing
Poor Credit / low cash flow / high debt scenariosPoor Credit / low cash flow / high debt scenarios
Receivable financing (Factoring)Receivable financing (Factoring)
Other SourcesOther SourcesBusiness Credit CardsBusiness Credit Cards
Merchant Capital ProgramsMerchant Capital Programs
ALTERNATIVE FINANCING ALTERNATIVE FINANCING RESOURCESRESOURCES
SBASBA (Of course you should start here) (Of course you should start here)www.SBA.govwww.SBA.gov
D&B for Small BusinessD&B for Small Business www.allbusiness.comwww.allbusiness.com
Horizon CapitalHorizon Capital / / BrokerBrokerwww.Horizon-capital.comwww.Horizon-capital.com
Merchant Capital FundingMerchant Capital Fundingwww.firstdata.comwww.firstdata.com
SUMMARY & CLOSINGSUMMARY & CLOSINGWe’re all affected by the credit markets but in We’re all affected by the credit markets but in different ways:different ways:
You still have funding choices based on where you are in the You still have funding choices based on where you are in the borrowing spectrumborrowing spectrum
Stay disciplined and focused on what you do bestStay disciplined and focused on what you do best
Surround yourself with the best advisors Surround yourself with the best advisors
Bank underwriting reflects economic uncertainty Bank underwriting reflects economic uncertainty Banks are reviewing portfolio performanceBanks are reviewing portfolio performance
How do you stack up against the 5 C’s of credit?How do you stack up against the 5 C’s of credit?
Yes, non-traditional funding alternatives are Yes, non-traditional funding alternatives are available even in this economyavailable even in this economy
Get the Cart Before the Horse?Get the Cart Before the Horse?
Business Owners sayBusiness Owners say, , ““banks only give you an banks only give you an umbrella when the sun is umbrella when the sun is shining”shining”
Lenders say, Lenders say, ““Get an umbrella before it Get an umbrella before it starts raining”starts raining”
Washington Metropolitan Area District OfficeWashington Metropolitan Area District Office
Washington Metropolitan Area District OfficeWashington Metropolitan Area District Office
How the SBA Loan Process Works
Borrower applies to Qualified Lender for a Business Loan
Lender approves loan subject to SBA Guaranty Lender submits guaranty request to SBA
Washington Metropolitan Area District OfficeWashington Metropolitan Area District Office
Eligibility Issues
Must be for profitMust be small Must have an eligible purpose:
- no investment
- no speculation
- no lending
- must be a legal activity
EligibilityEligibility
Washington Metropolitan Area District OfficeWashington Metropolitan Area District Office
Eligibility Issues
No Multilevel Marketing – Pyramids
- Amway
- Mary Kay No more than 30% of Revenues From Gambling No Pornography
Washington Metropolitan Area District OfficeWashington Metropolitan Area District Office
Borrower RequirementsGood Character – based on personal
credit report No outstanding judgments or liensNo delinquent child support or student
loansNo open BankruptcyLPR Status
Washington Metropolitan Area District OfficeWashington Metropolitan Area District Office
Where Are We?
From Fiscal Year 2007 to Fiscal Year 20087(a) Loan Program
99,606 to 69,434 (-30%)$14.3Billion to $12.7Billion (-11%)
504 Loan Program10,669 to 8,883 (-17%)$6.3Billion to $5.3Billion (-16%)
Washington Metropolitan Area District OfficeWashington Metropolitan Area District Office
What Caused This?
A Perfect Storm: Tightened credit by lenders Declining creditworthiness Reduced demand for loans
Washington Metropolitan Area District OfficeWashington Metropolitan Area District Office
How Has SBA Responded? Encouraged lenders to work with borrowers Acted to improve liquidity in the SBA
secondary market Provided base rate option with LIBOR Worked with Congress to reduce the tax
burden on small business Provided Grants for Veterans Offered new online training for small business
exporters Accelerated the launch of the Small Rural
Lender Advantage Program
Washington Metropolitan Area District OfficeWashington Metropolitan Area District Office
Encouraged Lenders to Work With Borrowers
SBA contacted every participating lender and strongly encouraged them to:
Work with borrowers on a case-by-case basis
Defer SBA guaranteed loan payments by up to 3 months
Washington Metropolitan Area District OfficeWashington Metropolitan Area District Office
Acted to Improve Liquidity in the SBA Secondary Market
Worked with Federal Reserve Board to create $200 billion lending facility
Changed the rate structure for secondary market loan pools
Changed base rate to same rate that investors use for their capital purposes
Washington Metropolitan Area District OfficeWashington Metropolitan Area District Office
Provided Base-Rate Option with LIBOR
SBA added the option of the London Interbank Offered Rate as the base rate for SBA guaranteed loans
Washington Metropolitan Area District OfficeWashington Metropolitan Area District Office
Worked with Congress to Reduce the Tax Burden on Small Business
Small businesses can expense up to $250,000 in property purchased in 2008
Small businesses will have a 50% depreciation bonus + standard depr. Write-off
Washington Metropolitan Area District OfficeWashington Metropolitan Area District Office
Provided Grants for Veterans
Provided $450,000 in Veteran Assistance and Services Grants to Small Business Development Centers
Washington Metropolitan Area District OfficeWashington Metropolitan Area District Office
Offered New Online Training for Small Business Exporters
If you go to www.sba.gov/training, you will find a brand new online course for small business exporters
This is important because more than 97% of all U.S. exporters are small businesses.
Washington Metropolitan Area District OfficeWashington Metropolitan Area District Office
Accelerated the Launch of the Small Rural Lender Advantage
Program Provides small volume lenders training
and assistance in the SBA lending process
Provides these lenders with expedited loan processing within 3-5 days
Washington Metropolitan Area District OfficeWashington Metropolitan Area District Office
Washington Area Community Investment Fund
Celebrating 21 Years
A Bridge to Better Communities
WACIF’s Clients and Services
Small BusinessesAffordable Housing DevelopersChildcare CentersCommunity OrganizationsFinancial and Credit Literacy Training
Free Technical AssistanceFree SeminarsAlmost Free SBA Microloans
How does WACIF help?
WACIF’s Products for Small Businesses
WACIF’s Products for Small Businesses
SBA Microloans Application requirements are low,
underwriting standards are high Up to $35,000 Allowed: Furniture, Fixtures, Equipment,
Working Capital Disallowed: Debt Refinance
WACIF’s Products for Small Businesses
SBA Microloans Strong character Strong cash flow Stellar credit not necessary (but there
should at least be a good story) Some form of collateral needed
WACIF’s Advice on Credit Repair During a Credit Crunch
www.annualcreditreport.com Free to see Equifax, Experian, and/or
TransUnion reports once a year $7.95 to see actual score
Correct Inaccurate Information Gather evidence Present your case Await verdict
WACIF’s Advice on Credit Repair During a Credit Crunch
Credit Scoring 35% Payment History 30% Amounts Owed 15% Length of Credit 10% New Credit 10% Type of Credit
WACIF’s Advice on Credit Repair During a Credit Crunch
“Nuclear Option” - Protect your resources Secured versus Unsecured
No better time than the present Credit repair is cheap Cash versus Credit
Schedule of debts Household Business
WACIF’s Advice on Financing Your Business During a Credit Crunch
Surprise! Cash is still KING! Cash is getting deals done Think about investors if you are running low
Prudence is never out of style Budgeting is not sexy but it works
Household Business
Washington Area Community Investment Fund
Celebrating 21 Years
(202) 529 – 5505
www.wacif.org
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