Posted: 02/21/2012 10:11 am
Lenders are concerned that President Barack Obama’s proposed 2013 budget and the political scuffling in Congress may leave the U.S. Small Business Administration and U.S. Department of Agriculture with inadequate loan-guarantee authority to satisfy the needs of small-businesses owners. If that happens, and “guarantee coffers are low, the borrower needs to worry if their loan will be approved before the program runs out of money,” says Mike Rozman, co-president and chief strategy officer of BoeFly.com. The New York City-based company matches borrowers with lenders online. Of further concern, he notes that “there is still limited conventional financing for start-ups.”
Before the financial meltdown and the Great Recession, start-ups were able to get financing when the applicant had related experience, invested approximately 20-percent equity into the venture and pledged collateral. That has changed drastically and fledgling entrepreneurs are left with few, if any alternatives. For more mature companies, however, “we’ve seen an increase in conventional lending over the past six months for existing profitable businesses seeking to expand or refinance debt,” Rozman says.
Kraig Kramers, a management consultant and consummate entrepreneur who turned around such Fortune 500 Companies as Snapper-brand lawn mowers, has advice for surviving economic turmoil and a possible tightening of credit. “Stay close to lenders and prospective investors long before you need them,” Moreover he says, “You must have prior happy relationships with those who will provide the cash timely when you really need it.”
He also coaches business owners to drill down “into cash management with tools you can introduce into your business to accelerate incoming cash.” Additionally, “Delegate these tools to those managers and employees who can do the best with them.”
Borrowing an idea from “a Fortune 500 company,” he says, “Look at a detailed balance sheet, yes, to the penny.” As a result, “we found a half-million-dollar stock certificate that had been forgotten.” But the technique is not just for large corporations. Kramers also found “recapturable deposits in several smaller businesses this way.”
Equally as important, cleaning up your financial statements, footnoting the most important line items and highlighting key financial ratios, prepares you for making a loan application. Furthermore, include an extensive discussion telling the loan officer and her committee how you arrived at the forecast for the next 12-month’s proforma.
Rozman adds that if customers get the cold shoulder from their exiting bank, the borrowers will need to be “aggressively seeking alternatives.” BoeFly’s 1,500 participating lenders pay subscription fees in order to view applications from entrepreneurs seeking financing. In addition to conventional loans, some of the lenders make loans that are partially guaranteed by SBA and USDA and may consider start-ups — especially for franchises.
SBA’s 7(a) loans are suitable to finance real estate, equipment, machinery, working capital, and to purchase an existing business. The agency’s 504 program is for fixed assets and most suitable to build, expand or purchase real estate. More recently, SBA initiated a temporary 504 program to “rescue” borrowers who have existing loans with balloon balances coming due and find that take-out lenders are scarce.
The basic 504 program requires job creation or retention and does not include working capital. But the temporary refinancing program waives the job-creating requirement. And it also allows some working capital for projected operating expenses.
USDA’s Business and Industry Loan Program is similar to SBA’s 7(a) but the businesses must be in rural locations. Sometimes, sparsely populated locations on the fringe of urban areas are approved. Unlike SBA’s loan limits of $5 million for 7(a) and approximately $10 million for 504, USDA’s B&I program tops out at $25 million under certain circumstances. And the loans may go up to $40 million for rural cooperative organizations that “process value-added agricultural commodities,” according to USDA’s web site.
Small-business owners are holding their collective breaths as the Obama Administration’s proposed budget wends its way through the politically-charged Congress. It is as much the chief executive’s opening salvo, as it is his wish list. But if the budget that survives includes large reductions of SBA and USDA guaranteed loans, you need to be prepared.
To test the water, talk to your bank’s loan officer about your chances of getting financing. It is better to see if your loan officer tap dances and stutters now than before crunch time. And if you don’t get a positive reply, start looking for other funding alternatives.
Jerry Chautin is a volunteer SCORE business counselor, business columnist and SBA’s 2006 national “Journalist of the Year” award winner. He is a former entrepreneur, commercial mortgage banker, commercial real estate dealmaker and business lender. You can follow him at http://www.Twitter.com/JerryChautin
Copyright © 2012 Jerry Chautin — All rights reserved
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Thanks to a new kind of credit score, more borrowed money may end up in the hands of the increasing number of Americans who are sliding down the economic ladder.
The new CoreScore looks at financial records such as credit card borrowing, bank transactions and mortgage information, much like a traditional FICO credit score. The new rating also examines the kinds of transactions likely to occur at the lower end of the income scale. These include car and rental payments and payday loans. The CoreScore even examines the record for missed child support payments. If something can be financed, it seems, it can be linked to this new credit score.
CoreLogic, a financial data collector, made theCoreScore credit report available to lenders last week. The company said the new score creates an opportunity for borrowers and lenders alike, making credit available to those who have traditionally been shut out. However, consumer advocates are concerned that using a wider range of nontraditional information opens the door to justify even higher rates for down-and-out borrowers.
By including additional information like payday lending, which is notorious for high fees and interest rates, the financial picture of a potential borrower or job applicant is worsened, not improved, say consumer advocates. That could potentially lead to higher rates on everything from car insurance to borrowing.
“The companies don’t care if it’s accurate, or up to date, or what the consequences are,” said Marc Rotenberg, executive director at the Electronic Privacy Information Center, a public interest research center.
CoreLogic collects data from nearly 700 million residential property transactions and 50 million courthouse records. “We have resources in courthouses everyday,” said Debra Rothrock, vice president and product line management for CoreLogic. “Once a doc has been recorded at courthouse, it’s 23 days on average before data is updated in our system.”
From all this information, the company plans to boil down a consumer’s financial life into one number that can be used to supplement a traditional credit score. Rothrock said that the new score will also include the existing FICO score so lenders can see which direction a credit score is trending.
CoreScore supplements traditional credit reports from the three major credit reporting companies, the company said. Lenders of all stripes, including for mortgages, cars and credit cards can buy the new reports, which are scheduled to debut publicly in March. Currently one mortgage lender, which CoreLogic would not name, is using the CoreScore for its credit evaluations and several top lenders, including major banks, are planning to test the score soon, Rothrock said.
At least 100 million Americans will have a new CoreScore report, says CoreLogic, and that includes both people who have traditional credit scores, as well as those who have no prior credit history with TransUnion, Equifax or Experian. At least 200 million people have traditional reports, used to create a FICO score that lenders consult when deciding to approve a loan application or new financial account. Employers even use credit scores to evaluate job applicants.
For Americans who essentially live off the credit grid, either using cash or borrowing through informal channels, the new CoreScore could be a rude awakening. Rothrock did not identify how many of the 100 million people would be newly reported, but for those who have never had a report, the CoreScore may not be any help.
“Putting you in the system is not necessarily a benefit if you’re not going to get affordable credit,” said Chi Chi Wu, an attorney at the National Consumer Law Center, a public interest law group.
These new developments in credit reporting show lenders’ hunger to tap a deeper well of customers, who are outside of the traditional FICO box. “[The Core-Score] increases a lender’s understanding of a borrower’s financial obligations, assets, and history to identify previously hidden lending opportunities,” the company said in an email.
Falling wages, a dismal housing market and high unemployment have sent more Americans to the margins of borrowing in recent years. The problems is especially acute in American suburbs, where poverty is spreading. Meanwhile, alternative consumer financial tools have seen tremendous growth. For example, online payday lenders — high-interest short-term loans accessible only through the Internet — experienced 35 percent growth in revenue in 2010, according to a market report from Core Innovation Capital and Center for Financial Services Innovation, a think tank focused on financial service innovation for consumers who use banks minimally or not at all.
Rothrock said customers can request one free report each year through the company’s toll free number (877-532-8778); they also can dispute inaccuracies. But that raised additional concern from consumer attorney Wu, who said credit report disputes are hard to remedy.
“Your credit report has become your permanent financial record. A bad one is like a scarlet A for your economic life.”