Risk Mitigation for SBA & Franchise Lenders

By Carolyn Miller

YOU’RE APPROVED!!  These are two of the most exciting words for a new franchisee to hear and for a lender to say.  After painstakingly digging into the details, weighing the risks, crunching the numbers, and figuring out ratios, this milestone is the jumping off point that sets new wheels in motion. The ‘Happy Dance’ begins!

Unfortunately, sometimes those wheels can drive naïve franchisees right off a cliff.

National Franchise Institute

National Franchise Institute

The money that was borrowed to get their business open is often gobbled up by costly mistakes they had no way of knowing even existed:

  • The set-up of their company was done according to advice from well-intentioned friends or family members who may not have realized the tax ramifications. If the intended corporate structure does not match the actual registration, the Tax Man will cometh! Regardless of what the money was originally borrowed for, Uncle Sam will take his cut off the top (and seldom is that ‘just a little off the top’).  What remains may not be enough to actually get the doors open.  As the lender, how will you get paid back?
  • The Franchise Agreement has been signed – and now, so has a lease.  Without realizing the role that local zoning plays in areas such as permitted uses and utility requirements, this poor franchisee unknowingly gifted $75,000 of the bank’s money to its landlord because they didn’t know what they didn’t know.  With a signed lease comes the ties that bind. “I’m sorry” or “I didn’t know” won’t grant this franchisee a do-over.  With a $75K haircut, will this franchisee make it? As the lender, how will you get paid back?

Read More More

Share This
Twitter LinkedIn Digg Reddit StumbleUpon  

Fed Signals Rate Hike in June

The minutes of the Federal Open Market Committee (FOMC) meeting held on April 26-27, which were released after the regular three-week period, indicate that a rate hike is likely in the next FOMC meeting scheduled in June.

A day before the minutes were issued, three Regional Fed Presidents, John Williams, PercentDennis Lockhart, and Robert Kaplan indicated that a rate hike was a real possibility. The consistent improvement in the employment rate and the rise in retail sales by 1.3% in April are likely to give the FOMC the impetus it needs to announce a rate hike.

Currently, the overnight interest rate is in a range of 0.25% to 0.50% as a result of a quarter percent hike in December, the first in almost a decade. At that time, the expectation was that the Fed would announce four quarter-point increases in 2016 to take the rate up to 1.375% by year-end.

But as the year began, the slowing of the Chinese economy and volatility in international stock markets prevented the Fed from implementing its plans. The minutes of the April FOMC meeting point to a change in direction.

Read More More

Share This
Twitter LinkedIn Digg Reddit StumbleUpon  

Oil Woes at Banks’ Doorstep

In the first quarter of the year, Wells Fargo, Bank of America, and JPMorgan Chase have increased reserves by $500 million each on account of the financial condition of their oil industry borrowers. The banks have pointed out that their exposure to the energy sector is in the region of 2% of their total loan book resulting in the risk being within control.

Oil prices were in a downward spiral for the last 18 months, but have stabilized lately. In Oil Industryanticipation of losses from lending to energy companies, Well Fargo’s reserves for this sector now stand at $1.7 billion. Bank of America took a hit of $525 million for the quarter, while the corresponding figure for JPMorgan Chase is $529 million. The latter says that it may add another $500 million by year-end.

In a Forbes.com report, Wells Fargo chief risk officer, Mike Loughlin points out, “While substantially all of the loan portfolio continues to perform well, the oil and gas portfolio remains under significant stress due to low prices and excess leverage in this industry.”

The bank has a $17.8 billion loan portfolio to the energy sector. Additionally, there is an exposure of $25 billion in undrawn credit facilities. But energy losses have not significantly impacted the bank’s financial results. Wells Fargo recorded a 4% increase in quarterly revenues to $22.2 billion and a profit of $5.5 billion, a drop of 5% year-over-year. CEO John Stumpf attributes the bank’s results to its “diversified business model.”

Read More More

Share This
Twitter LinkedIn Digg Reddit StumbleUpon  

CFPB to Keep Tabs on Fintech Lenders

According to a recent report in the Wall Street Journal, the Consumer Financial Protection Bureau (CFPB) plans to start supervising the activities of online or “fintech” lenders by the end of next year. As a first step, the CFPB announced in March that it would start accepting complaints from consumers who encounter problems with loans from online marketplace lenders.

Alternative lenders are a growing force in the consumer and small business finance CFPBindustries. A Morgan Stanley report estimates that marketplace lending will expand to $122.1 billion in the U.S. by 2020. Most of this volume will come at the expense of banks. But online lenders are not subject to stringent regulations. Banks, on the other hand, are monitored by the Federal Deposit Insurance Corp., state or federal regulators, and subject to the Community Reinvestment Act among a host of other statutes.

The minimal supervision that online lenders are subject to is set to change with the CFPB preparing to expand its area of operations. Earlier, the CFPB had said that it would make a start by monitoring the activities of the largest installment and vehicle title lenders. When making this announcement, CFPB Director Richard Cordray said, “Today we are taking an important step toward ending the debt traps that plague millions of consumers across the country.

“Too many of short-term and longer-term loans are made based on a lender’s ability to collect and not on a borrower’s ability to repay. The proposals we are considering would require lenders to take steps to make sure consumers can pay back their loans. These common sense protections are aimed at ensuring that consumers have access to credit that helps, not harms them.”

Read More More

Share This
Twitter LinkedIn Digg Reddit StumbleUpon  

SoFi Seems to Make Lending Simple

SoFi, a fintech that started operations barely five years ago, has already made 150,000 loans totaling $10 billion and it currently underwrites $1 billion every month. Its default ratio is incredibly low. According to Co-Founder and CEO Mike Cagney, “Nobody has ever generated a credit book that looks like this. We run less than two basis-point [0.02%] annual default.”

How does it do this? Unlike banks, it doesn’t use depositor money for making loans, which Sofikeeps it outside the purview of the Federal Deposit Insurance Corp. and the Community Reinvestment Act. These regulations disallow banks from discriminating against low-income areas, a constraint that SoFi does not work under. Using this freedom, the company selects only those borrowers who it is sure will pay back.

A recent story in the Wall Street Journal has Mike Cagney pointing out that of the 100,000 student loans that have been refinanced, only 14 have defaulted of which seven were because the borrowers died.

Miniscule write-offs and its low overheads – there are no brick-and-mortar branches, all operations are online – allow SoFi to offer rock-bottom rates to borrowers. A report in Forbes.com says that the company estimates that it can save approximately $14,000 for a borrower who has a student loan refinanced. SoFi’s rates “start at 3.5% fixed and variable rates start as low as 1.9% [annual percentage rate] APR (with Autopay).”

Read More More

Share This
Twitter LinkedIn Digg Reddit StumbleUpon  

SBA Loan Volume Grows in First Seven Months of FY’16

Recently SBA published its monthly “Lending Statistics for Major Programs” as of April 30th, marking the end of the first seven months of FY 2016 loan approval volume. This report provides rolling year-over-year loan approval statistics for the 7(a) and CDC/504 loan programs broken down by the respective categories of policy-targeted penetration.

The 7(a) program continued to rise in FY 2016 with a robust showing of total loan approvals I love SBAof $12.87 billion, a jump of over 7% over the same period at 04/30/15 ($11.98 billion). Even more stark is to compare this volume to FY 2014, which began with a 17-day federal government shutdown. This year’s volume is almost 33 percent ahead of the YTD loan totals recorded that year ($9.69 billion), although leveling off from what the first 180 days of this FY were comparatively.

The number of approved 7(a) loans was 35,645 through the first seven months, almost 6% percent ahead of the number in YTD FY 2015, and 31 percent ahead the same period in FY 2014. And interesting that the YTD average loan size is $361,138, practically the same as it was last year.

A graphical illustration of all SBA monthly loan approvals is found at Capital Views.

Read More More

Share This
Twitter LinkedIn Digg Reddit StumbleUpon  

How Lenders Can Attract Quality Business Loan Applicants

By Joe Lawrence

According to an article in Forbes.com, banks are “facing a number of challenges from technology, regulation, and startups disrupting the industry.” And at a time when lenders are beginning to see the light at the end of the tunnel after the Great Recession, it’s more important than ever that they resume their role as the gatekeeper in the small business lending community.

After the crash of 2008 and the subsequent lending crunch, many business owners felt the

Best Practices Key Showing Improving Business Quality

Best Practices Key Showing Improving Business Quality

need to look elsewhere for their loan needs and fled to the rising ‘fintech’ lenders. But after years of exorbitant interest rates and misleading truth of funding offers, many entrepreneurs are turning back to their local banks.

In fact, a 2015 survey by the Federal Reserve Bank shows that smaller banks are approving 76 percent of business loan applicants, while the oft­touted easy access alternative lenders actually approve only 71 percent of funding applicants.

But let’s be honest—bank lenders and other finance lending channels have a long way to go on improving their efforts to attract quality borrowers and build much needed long ­term business relationships. Here’s four ways you might consider to make your company more appealing for small business borrowers to work with you.

What Small Business Loan Borrowers Want

To provide the best service, traditional lenders need to change the way they think about loan applicants, viewing them as a partner in the transaction rather than just a borrower. If you can approach the application and approval process from the business owner’s point of view, it will go a long way in helping you build long­term relationships with quality applicants. Here are my four ideas to do that:

  1. Don’t expect the applicant to start the process Entrepreneurs need facts in order to make the best decisions for their business, and that includes the details of the loan process. It’s unrealistic to ask a business owner to go through a tedious loan process and then “just wait to see what happens.” Instead, tell the applicant up front what underwriters look for in loan applications so they will have a better feel for their approval prospects ahead of the application process.
  1. Acknowledge the benefits of other lending channels, but point out the differences in the financing terms, especially the funding While it’s true that an applicant can get a loan in a day from an online lender, they may not be aware of the true repayment cost. If you want to build a lasting relationship with clients, take the time to explain the rate calculations and the sum they’ll actually be required to repay. That information will demonstrate how your loan terms can save them money.
  1. At the Summit for Small Business Credit Innovations, some panelists spoke about the importance of entrepreneurs to understand how their creditworthiness affects their ability to secure a loan. Another way to help your clients and build a lasting relationship with them is to provide them with the information they need to understand this critical aspect of the process and how to positively affect their future credit scores.
  1. A recent study conducted by Pega points out how important customer service is to people when doing business with a The study shows that almost a quarter of bank customers would begin searching for a better bank if they received poor customer service. The survey points out that banks would do well to consider implementing customer service programs that focus on the needs of bank customers. Obviously, it’s important that you and all the members of your staff do all you can to make your clients feel like they are appreciated and valued.

Small business lending is rapidly changing, and in order to remain a competitive and successful participant, you should begin looking at the process from your client’s point of view. And the partnerships you’ll form by doing so will likely result in many long­term profitable relationships.

­

Guest columnist Joe Lawrence is a New Jersey real estate investor, entrepreneur, and business credit coach who works closely with lenders and investors. He shares his expertise with other business owners through Business Credit Workshop.The favorite part of my job is when people tell me how much I’ve helped them–that’s what really makes it all worth it in the end.”

Share This
Twitter LinkedIn Digg Reddit StumbleUpon  

Existing Bank Customers: A Neglected Opportunity?

Every bank monitors its new business pipeline assiduously with regular reports on finalized deals, loan transactions awaiting credit approval and serious leads. Promotions, bonuses, and annual salary increases are closely linked to the number of new customers added to the financial institution’s client list by each business developer and to the volume of business generated by them.

But do banks track the number of loans that its existing customers take from other lenders?
Better SalespersonAre periodic statements prepared that show the dollar amount of business done by these clients with other banks? In most instances, even if such reports are prepared, they are patchy at best and lack real actionable information. The sense of urgency that a new client evokes is usually missing in the case of borrowers who have been with the bank for years.

Banks do not chase companies that are already on its client list as enthusiastically as they do prospective customers, for a variety of reasons, practically all of which are invalid. These include the following fallacies; “a customer who already has a relationship with the bank will not go elsewhere without first checking with us,”  “if an existing client needs a loan we will be told about it first,” and “our rapport with the client is very strong, they will never dream of going to another bank.”

Those bankers who live under such misconceptions are usually the first to see clients drifting away.

Read More More

Share This
Twitter LinkedIn Digg Reddit StumbleUpon  

Fountainhead Raises Capital for 504 Expansion

By Charles H. Green

Fountainhead Commercial Capital announced that alternative asset manager Magnetar Capital, through its affiliated funds, invested $23 million in a Series A round of equity financing, joining an affiliate of 20 Gates Management, a New York-based asset management firm, as the first two institutional investors in Fountainhead. The funding will enable the SBA 504 lender to expand its footprint to offer owner-occupied commercial real estate loans across the country.

“Magnetar is strategic partner that allows up to leverage our operations nationwide, as  we Fountainhead Capitalbuild a stronger position from which to provide credit for small business owners and advance our mission to become the leading SBA 504 lender,” said Chris Hurn, Founder/CEO of Fountainhead.

“Since launching last year, Fountainhead has used tech-enabled solutions to dramatically accelerate the traditional originating, structuring, approval and closing times for financing commercial real estate,” said Magnetar Capital Fixed Income Portfolio Manager Michael Henriques. “Fountainhead is filling a void in the market and will help provide credit to qualifying small business owners.”

“Commercial real estate ownership is an important wealth creation strategy, and we fully believe every healthy small business in America should consider it. Through the 504 loan, we are providing a compelling alternative during what is a challenging time in commercial banking. Expertise, speed, and competitive pricing and terms from commercial lenders are what is expected. Fountainhead delivers these, while banks and other lenders increasingly do not,” said Hurn. Read More More

Share This
Twitter LinkedIn Digg Reddit StumbleUpon  

U.S. Economy Loses Momentum in First Quarter

The economy expanded by just 0.5% on an annualized basis in the first quarter primarily as a result of a slowdown in consumer spending and of lower investments by companies in response to a weak global economy. In comparison, the previous quarter’s increase in gross domestic product had been a respectable 1.4%.

A lackluster energy sector and a strong dollar were also to blame for the poor showing. Net Economyexports pulled down GDP by 0.34% in the first quarter. This was the seventh time in the last nine quarters that trade proved to be a drag on the overall economy. The trade gap climbed further as exports fell 2.6% on an annualized basis coupled with an increase of 0.2% in imports.

Investment by companies was depressed and registered a sharp decrease. The amount spent on structures fell by 10.7% and equipment purchases slid by 8.6%. Fixed nonresidential investment witnessed a decline of 5.9%, reining in GDP by 0.76%.

Housing remained the one bright spot in the economy. In March, the sale of new homes went up by 1.5%, to a 511,000 unit rate. Mortgage rates slid down to a low of 3.5%, further boosting demand.

Read More More

Share This
Twitter LinkedIn Digg Reddit StumbleUpon