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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


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


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


Eligibility Issues

No Multilevel Marketing – Pyramids

- Amway

- Mary Kay No more than 30% of Revenues From Gambling No Pornography


Borrower RequirementsGood Character – based on personal

credit report No outstanding judgments or liensNo delinquent child support or student

loansNo open BankruptcyLPR Status


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%)


What Caused This?

A Perfect Storm: Tightened credit by lenders Declining creditworthiness Reduced demand for loans


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


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


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


Provided Base-Rate Option with LIBOR

SBA added the option of the London Interbank Offered Rate as the base rate for SBA guaranteed loans


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


Provided Grants for Veterans

Provided $450,000 in Veteran Assistance and Services Grants to Small Business Development Centers


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.


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 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


SBA Microloans Application requirements are low,

underwriting standards are high Up to $35,000 Allowed: Furniture, Fixtures, Equipment,

Working Capital Disallowed: Debt Refinance


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


Credit Scoring 35% Payment History 30% Amounts Owed 15% Length of Credit 10% New Credit 10% Type of Credit


“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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Documents

credit crunch

credit markets

targeted credit

credit availability

business premier

small business owners

minimum credit scores

banks banks