bad credit small business financing

Small Business Credit Risk October 16, 2007 Seminar Agenda  About Sum2  Recent Credit and Market Events  How Credit Events Effect Lenders  What Can a Small Business Do About Sum2  Building Sound Practice Foundations for Businesses and Industries  Sum2 is dedicated to the commercialization of sound practices that address risk management, corporate governance, shareholder communications and regulatory compliance  Founded 2002 Product Suite  SMB 360°, Small and Mid-Size Business Risk Assessment and Management Tools  PACO™, Patriot Act Compliance Officer  AlphaSource, Portfolio Risk Analysis  Value Added Distributor Some Partners and Clients 2007 Raging Bulls  Markets Awash in Liquidly  Premium Asset Valuations  Money Chasing Deals / Leverage Buying EBITDA  Kramer Going Wild  Kudlow and Goldilock’s America’s Cutest Couple  China and India Driving Demand Signs of Froth Appear  Stephen Schwarzman’s Birthday Party  TXU, Equity Office, First Data, Sallie Mae and other Mega PE & LBO Deals  IB’s Buying Cash Flow Businesses  Hedge Funds Go Public  Dow Crosses 14,000 What Goes Up Submerged Risks Against Backdrop Of  Rising Interest Rates  Declining $ / Balance of Trade  Commodities Rising  Oil  Gold  Geo-Political Risk / War  Deteriorating Housing Market  Ballooning Deficit Spending CRB Index Monthly Price Chart Credit Market Problems  Sub Prime Mortgage Crisis  Commercial Paper Market  Contagion to Hedge Funds  Securitization : Structured Finance / CDOs  Funding Sources : Risk Aversion / Liquidity  Housing Crisis: Housing Bubble or Lending Bubble?  Change in Valuation Metrics/Psychology  Credit Default SWAPS / Level 3 Assets Banks Assuming Higher Credit Risk Kamakura Reports Fourth Consecutive Monthly Decline in Global Credit Quality Kamakura Troubled Company Index Rises to 8.0% in September Anecdotal Observations  Report: More Than 300K Ohioans Trapped In Payday Lending Debt (More than 300,000 Ohioans are trapped in a cycle of debt to payday lenders and are paying more than $318 million in payday loan fees each year)  Private Student Loan Bubble Could Burst  New Century Financial Chapter 11 Filing  Bank Earnings and Write Offs Pascack Valley Hospital Impact of a Credit Default Event  Systemic Event  $100mm Debt  $20mm Outstanding Payables  $80mm In Bonds Outstanding  Shut Down Of Services  Layoff Notices To 700 Employees Pascack Valley Hospital Closure  Pension’s  Local Businesses  Vendors  Spouses of EE’s  Housing Inventory  Mortgage Defaults  Community Tax Revenue Where's Goldilocks?  Recession  Inflation  Deflation  Stagflation  Dollar Based Assets  Corporate Earnings  Taxes, Deficits, Trade  Yield Curves and Equities Bernanke Goes Greenspan Federal Funds Rate Sources of SMB Funding  Existing Shareholders And Directors Funds (“owner financing”)  Overdraft Financing  Trade Credit  Equity Finance  Business Angel Financing  Venture Capital  Factoring And Invoice Discounting  Hire Purchase And Leasing  Merchant Banks (medium to longer term loans) SME Finance Sources  Self Financing  Loans  Bank Loans  Credit Card Debt  People to People  Investment Capital  Grants SME Self Funding Existing Cash Flow Assumes Strong Cash Management Predicable Consistent EBITDA Predictive Cost of Sales Margins and Pricing Power Receivables and Factoring Assumes Clients Good Credit Risk More Exacting Factoring Standards Strong Credit Risk Management Culture SME Self Funding Personal Capital 401K Investment Portfolio Home Equity Risk Premium On Collateral Valuation And Market Risk Private Equity  Angels  Capital Adequacy  Private Equity  Secure Funding Sources  Credit Risk Premium  Exacting ROI Discipline Banks Response  More Stringent Credit Guidelines  Credit Risk Management Response  Capital Allocation Requirements  Regulatory Response  Consolidation and Rationalization  Market Response Small Business Scoring Solution SBSS 6.0 Fair Isaac SBSS 6.0 Empirically Derived Scores For Startup Businesses Credit Offer Index  Size Of Loan Indexed To Industry Experience Divergence And Kolmogorov-Smirnoff (K-S)  Profiling, Identifying And Scoring Bad And Good Accounts 60 Other Models That Use Application Data, Sector, SIC And Other Derived Elements Capital Allocation Requirements Regulatory Response Capital Adequacy Define Risk Characteristics Of Business Lines And Market Segments Allocate Regulatory Capital To Fund That Risk SMB 360° Product of Basel II SME Initiative FDIC Chart: Capital Adequacy Regulatory Capital to Cover Loan Losses Banking Market  Community Banks Under Pressure  Competitive Landscape  S&L For Retail  Bulge Bracket Banks Commercial  Brokers For Wealth Management  Private Equity  Mortgage Brokers Market Consolidation Rationalization Sum2’s NJ Community and Russell 2000 Bank Study  Acute Competitive Pressure  Concentrated Regional Risk  Slowing Earnings Momentum  Rich Valuations High P/E’s (M&A)  Regulatory And Economic Capital Strain SBA Study Our statistical analysis finds that small businesses receive less credit on average in regions with a large share of deposits held by the largest banks, irrespective of how debt is measured. Notable details about this primary finding are that: When access to credit is measured by credit limits, reductions in lending in response to greater market share by large banks is larger than when credit access is measured by actual credit balances. This means that the market for un-accessed lines of credit is potentially most affected by banking consolidation. Credit reductions appear more severe in total when access to credit is examined through the dichotomous decision to obtain credit, than when the amount of debt as a share of assets is used as a measure. Thus banking consolidation is more likely to affect the decision, by either the small business borrower or the banking institution, to borrow, rather than affect the actual level of debt. *Credit reductions in areas dominated by large banks are found to occur both for firms with positive, and with negative, equity. Bank credit reductions are found to be more SBA Study *Most importantly, we find that non-bank financial institutions are making up part of the credit reduction in terms of the level of credit conditional on borrowing, but not completely in the case of access to credit. *The activity of the non-bank financial institutions appears to be especially important for firms with negative, rather than with positive, equity. These findings are essentially mirrored when we look at the individual credit instruments of lines of credit, and other loans, although with some important exceptions. As we find for total credit limits, non-bank institutions are not able to compensate for lines of credit access reductions resulting from a greater share of large banks. Additionally, non-bank institutions are not able to make up for shortfalls in credit limit levels. In other loans, however, we find that non-bank institutions do compensate for reductions in bank credit, although the finding is stronger for credit levels than credit access. One set of small firms that therefore seems to be affected by banking consolidations are those that use lines of credit for assurances to customers and suppliers, rather than as a source of loan funds. It is possible, therefore, that these small businesses are finding it more difficult to conduct their business with a reduced ability to access credit. This concern is accentuated because we find credit reductions are more significant for firms with positive equity, than with negative equity. Conversely, it is also possible the changes we observe in the market for small business credit do not fully reflect the market for financial insurance needed to conduct some businesses, and another market mechanism rather than traditional lines of credit has arisen which allows small business firms to fully conduct their business in competition with large and established firms SBA Study The Impact of Bank Consolidation on Small Business Credit Availability By Steven G. Craig and Pauline Hardee Houston, TX For SBA under contract number SBAHQ-02-M-0459 Release Date: SMB 360° Risk Assessment & Management Tools Score and Manage Business Threats  Business Strategy & Targets  Business Market & Competition  Business Capability  Business & Financial Planning  Business Risk Management 360° View of Risk and Opportunities Template 1: Template 2.1: Template 2.2: Template 2.3: Template 2.4: Template 3.1: Template 3.2: Template 3.3: Template 3.4: Template 3.5: Template 3.6: Template 3.7: Template 4: Template 5: Template 6: Template 7: Template 8: Template 9: Market and Competition Assessment Product Service Grouping, Customers Product Service Grouping, Suppliers Product Service Grouping, Competition Product Service Grouping, Market Dynamics General Management Sales/ Marketing Management Operations and Production Management Facilities Management Financial Management Planning and Information Management People and Human Resource Management Financial Ratios Business and Financial Plan Assessment Scoring Specific Critical Success Factors Scoring Generic Critical Success Factors SWOT Analysis STEEPLE Analysis Engagement Tools for Bankers and CPAs  Why Did You Choose Them?  Transparency  Good Risk Management  Able Management  Critical Assessment  Understand Business Process  Confidence in Product and Strategy  Risk Factors are Known Why Do SMBs Choose You?  Differentiators  Communication  Shared Goals  Understanding  Delivering Value Add  Prescient Tools  Relevance Steeple Analysis S T Social (e.g. changes in social behavior that might impact product / service selection); Technological (e.g. rapid development in cheaper components that will affect product prices or performance); Economic (e.g. non-US exchange rates affecting key imported supplies); Environmental (e.g. waste re-cycling legislation and penalties on producers); E E P L E Political (e.g. government directives on certification or subcontracting); Legal (e.g. changes in employment laws) Emerging (Domestic Regulatory or International) (e.g. NAFTA, or World Trade Organization agreements affecting market dynamics and competitors) Steeple Analysis Social Risks Columbus parade in Lodi and Garfield Canceled Because Of Pulaski Conflict Steeple Analysis Technological Risks  Lucent Technologies Over Reliance On Central Switching Long Lines Business  VOIP and Wireless  Offset Printers, Film Developers Steeple Analysis Economic Risks    Outsourcing Manufacturing IC/Barriers to Entry  Cost of Capital  Weak Dollar  Energy Costs  Recession  Macro/Micro Steeple Analysis Environmental Risks  DEP Releases Ranks Top Risks to New Jersey's Environment and Human Health  Land Use Change Poses a Major Environmental Threat to State, indoor and outdoor pollution, and invasive species as major threats to New Jersey’s environment and people.  United Water’s product has high sodium content due to salt spreaders  Climate Change Opportunities & Threats Steeple Analysis Political Risks  Local Level  Zoning, Community Standards, Education Taxes, Infrastructure, Immigration Trade and Stability  National Level   International Level  Steeple Analysis Legal Risk  Sarbanes Oxley, Patriot Act, HIPPA, OSHA, DEP, EOE  Product Liability Feds Demand N.J. Tire Importer Pay For Recall Chinese Manufacturer Denies Responsibility Steeple Analysis Emerging Risks  CAFTA and NAFTA  Climate Change  Regime Change  Laissez-faire / Regulation  Globalization and Market Stability Sum2 is dedicated to the commercial promotion of sound practices. Sum2’s objective is to assist businesses to implement corporate sound practices that add exponential value for shareholders, employees, clients and to the communities in which they operate and serve. Sum2 identifies its core competency to be the creative application of sound practice principles to the industries and businesses that we serve. Sum2’s SMB 360 is a clear example of this creative application of sound practices to an industry need. Sum2 is dedicated to corporate responsibility, ethical business practices, customer service excellence and delivering to our clients a unique and essential value proposition. We uphold these values in all our work and continually strive to deliver on the commitments that we make to our clients. All products marketed by Sum2 are focused on risk mitigation. We look to creatively package and bundle solution suites that address targeted client and industry market segment requirements. All product marketing activities and business development initiatives are guided by and conform to a clearly identified industrial application of sound practices. We appreciate your business and look forward to hearing from you about our products and how we can improve it. PO Box 184 Little Ferry, New Jersey 07643 201.440.1173 customer.service@sum2.us Citations Dow and Nikkei http://www.the-privateer.com/chart/us-jpn98.html 300,000 Ohioans http://www.starbeacon.com/local/local_story_263024729.html FDIC Key Aspects of the Proposed Rule on Risk-Based Capital Standards: Advanced Capital Adequacy Framework http://www.fdic.gov/news/news/financial/2006/fil06086a.html Yardeni http://seekingalpha.com/article/16521-housing-crisis-housing-bubble-or-lending-bubble Columbus and Pulaski http://www.northjersey.com/page.php?qstr=eXJpcnk3ZjczN2Y3dnFlZUVFeXkzNTcmZmdiZWw3Zjd2cWVlRUV5eTcxOTk3NDAmeXJpcnk3ZjcxN 2Y3dnFlZUVFeXkz NJ DEP Study http://www.nj.gov/dep/newsrel/releases/03_0106.htm NJ Tire Distributor http://www.consumeraffairs.com/news04/2007/06/china_tires03.html