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 Officesam@lesliethacker.com

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.

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

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$

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?

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

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

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

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

Credit Unions Fairly new to

business lending

Only 30% of U.S. credit unions make business loans

Great resource for small loans (<$50,000)

Community Lenders

People Fund

Acción Texas

Big Austin

Texas Mezzanine Fund

Community Lender Criteria

Create jobs for community

Serve minority and underserved businesses

Max loan $250,000

Hands on and helpful

Look at entire picture

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

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

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

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

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

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.

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

Why Use Alternative Lending?

Uneven profitability

Seasonal business

Rapid growth

Cyclical businesses

Need more leverage of assets

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.

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

The Cash Flow Cycle

PURCHASES

CASH

INVENTORIESSALES

RECEIVABLES

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

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

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

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

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

Conclusion and Q & A

For more information contact:

Sam or Leslie ThackerBFS-USA Group LLC

512-990-8756sam@lesliethacker.com