How We Lend.

Community and Partner Outreach Part 2

Purpose

This presentation will provide the following information so you can feel comfortable speaking to local small business owners and community organizations: • Terminology• Eligibility• Loan Application Process• Loan Products• Additional Services• Case Examples and Knowledge Check

Terminology

Cash Flow: Analysis of monthly revenue and expense trend.

2:1 coverage: The monthly payment for an ACCION USA loan cannot be more than half of the client’s monthly income after expenses have been deducted.

Business Performance: Analysis of business trend.

Business Plan: A statement of business goals, why they are attainable, and the plan for reaching them.

FICO score: Credit score representing creditworthiness of a person and the likelihood of that person repaying his or her debts.

Eligibility

• Our loan guidelines are in place to ensure that clients do not incur proposed debts or a loan that they cannot repay.

• Our goal is to assist clients in accessing financing to achieve their business dreams and create prosperity for their families and communities.

• Loans are for business purposes only

• Social Security Number or ITIN

• All required business licenses and permits

• Commitment to the business

• Credit history that shows responsible financial behavior

• Cash flow that can comfortably support a monthly loan payment

Eligibility ACCION USA Basic Loan Requirements

Eligibility ACCION USA Basic Loan Requirements

To be eligible for a loan, a client must fulfill ALL of the following requirements:

• Have a credit score of 575 or more• Have not declared bankruptcy in the past 12 months or

foreclosure in the past 24 months• Have not had any late rent or mortgage payments in the past 12

months, • Be up-to-date on all bills• Not have more than $3,000 in past due debt, generally acquired

under emergency circumstances (such as layoff or illness)• Exhibit steady cash flow and the ability to support monthly loan

payments• Be able to provide a cosigner, if needed

Automatic Disqualifiers: • Credit score less than 575• Late on rent or mortgage in

last 12 months• Unpaid judgments, liens,

collections accounts, or past due accounts above $3,000

• Bankruptcy in last 12 months• Foreclosure or short-sell in

last 2 years• Paying mortgages on more

than 3 properties• Adjustable rate mortgages

(ARM) adjusting during the term of the loan

Eligibility Automatic Disqualifiers

• Borrowers cannot have a negative amortization or pick-a-pay mortgages with an option of negative amortization

• Some borrowers with adjustable rate mortgages (ARM) can be considered if terms adjust at least 12 months after the ACCION USA loan term matures

• Borrowers with interest-only mortgages are considered if they have strong cash flow

Eligibility Mortgage Guidelines

The following entities are not eligible for ACCION USA loans:

• Other lenders

• Non-profit organizations (unless they have non-grant revenue)

• Adult entertainment, firearms, real estate, and other related industries

• Multi-level marketing except Mary Kay and Avon

• Higher risk, but still considered: General Contractors, Transportation, Manufacturing, Arts, and Import/Export

Eligibility Ineligible Industries

• 3 months of personal & business bank statements

• 2 forms of government-issued ID• All necessary permits and licenses• Detailed description of how loan money will

be used in the business• Most recent utility bill from home and

business• Personal and landlord references• Profit and loss statements and last two

years of tax returns are required for loans above $10,000

Eligibility Required Documentation

EligibilityCo-signers

A co-signer is someone who guarantees that the loan will be paid if the borrower defaults on the loan.

ACCION USA requires a co-signer for start-up businesses, transition businesses, and some established businesses.

Co-signer must submit an application for credit check, and provide basic identification and income documentation. The automatic disqualifiers and cash flow guidelines apply to co-signers.

EligibilityCo-signer Requirements and Substitutions

• 18 years old• Minimum of 6 months of consistent,

reliable employment• Not a co-owner of the business• Submit proof of income or recent year’s tax

records (if business owner)• Borrowers with established businesses can

substitute co-signer qualification by choosing to pay a 5% nonrefundable fee upon disbursal

• If a co-signer is not required, providing one will lower the interest rate by 2%

Loan Application Process

Loan Application ProcessStart-Up Business versus Established Business

• There are different qualifications for assisting a newly started business versus an established business.

Loan Application ProcessStart-Up Business – Background Information

Entrepreneurs with six months of revenue-generating operations that are not yet profitable must meet the basic qualifications and all of the following requirements:

1. Possess an outside income source2. Secure a co-signer3. Assemble a market analysis plan

and 12 months of financial projections

4. Have a sufficient cash cushion to fund losses until cash flow break-even point

Loan Application Process – Start-Up Business Let’s Get Started: Example

Entrepreneur: Rose Montini

Business: Handbag Designer and Manufacturer

Time in Business: 6 months

Requested Loan Amount: $10,000

Purpose: Inventory and Marketing

Loan Application Process – Start-Up Business STEPS 1 & 2: General Questions

• The general questionnaire will ask preliminary questions regarding the client’s personal finances. • Personal Credit Information

• Mortgage details• Tax and legal questions

• Business-specific Information• Type of business• Investments• Profit generation

Loan Application Process – Start-Up Business STEPS 1 & 2: Co-signers - Start-Up Business

• Co-signers are required for all businesses that are not yet profitable.

• Rose was initially unsure who could be a co-signer, but eventually thought of her brother who is a mechanic.

Loan Application ProcessSTEPS 1 & 2: Assembling a Business Plan

• She had lists of the things she needed but lacked a formal market analysis plan.

• ACCION USA’s financial resources can assist with business planning.

Loan Application Process – Start-Up Business STEP 2: Filling Out the Credit Application

• Rose’s brother, Dominic, agreed to co-sign the loan.

• Both the borrower and the co-signer need to fill out the credit application.

• ACCION USA acknowledged receipt of the application and began the process of pre-qualification.

Loan Application Process – Start-Up Business STEPS 2: Pre-Qualification

• Rose and her brother were pre-qualified for a loan up to $11,000.

• Interest rate of 11.99%

Loan Application Process – Start-Up Business STEP 3: Interview with a Loan Consultant

After Rose has sent the complete loan application package, an ACCION USA loan consultant will contact the client for an interview.• The loan consultant will want to

understand her background, expertise in her industry, and clarify any questions regarding her loan application.

Loan Application Process – Start-Up Business STEP 4: Submit Application to Underwriter

• The loan consultant will submit Rose’s application to an ACCION USA underwriter.

• The loan consultant will represent Rose and negotiate loan details on her behalf.

• The underwriter will analyze and give final approval on the loan.

• If declined, the loan consultant will explain the reason for the decline.

• If declined, the loan consultant will help the borrower make an action plan to resolve the issues so that he/she may reapply in 3 months.

Loan Application Process – Start-Up Business STEP 5: Approval and Disbursement

• Rose was approved for $10,000.

• If the loan is approved, the client must do the following to receive the loan:

• Electronically sign the disbursement documents (sent via secure email) or sign the documents with a notary

• Set up ACH (Automated Clearing House) on bank account for electronic funds transfer of loan payments

Loan Application ProcessEstablished Business - Background Information

Some factors that influence the loan process:

If loan size is more than $10,000, then:

1. Borrowers must provide two most recent years of tax records.

2. Borrowers must provide profit & loss statements.

3. Active business partners (>20% shares) must apply as a co-borrower regardless of involvement.

4. Site visits are required for loans of $20,000 or more.

Loan Application Process – Established BusinessFunding an Established Business - Example

Michael Killian

Business: Restaurant

Time in Business: 5 years

Requested Loan Amount: $30,000

Purpose: Update restaurant with new kitchen equipment, furniture, and signage.

Loan Application Process – Established BusinessSTEPS 1 & 2: General Questions and Pre-Approval

Michael owns an established business. Therefore, the pre-approval process should go smoothly.

Michael has been prequalified for a $30,000 loan.

• He can now begin submitting documents to support a loan application.

• Michael is asking for a loan of $30,000. Therefore, more information will be required.

• ACCION analyzes the client’s cash flow to determine whether he or she can afford the monthly loan payments.

• Loan consultants will work with borrowers to:

• Examine sales versus expenses • Review business and personal bank

statements, internal records and/or tax returns

Loan Application Process – Established BusinessSTEP 3: Loan Application

Loan Application Process – Established BusinessSTEP 3: Loan Application – Credit Worthiness

• ACCION USA looks at the highest non-mortgage line of credit to help determine the loan amount. Michael’s highest amount is $10,000.

• Examples of non-mortgage lines of credit: • credit accounts with business suppliers.• credit card statements verifying a larger lending limit.

• Outside credit references not on the borrower’s credit report can be used to verify information.

ACME Paper Supplies 856-423-9300

Goya Foods 856-936-2711

Loan Application Process – Established BusinessSTEPS 4 & 5: The Approval Process - Important Qualifications

• Business partners with >20% interest must be a co-borrower and meet the same qualifications as the primary applicant.

• Must provide proof of all necessary operational licenses and certificates.

• Limited credit history can be strengthened by proof of other credit lines, such as suppliers.

• Income statements must show a 2:1 coverage.

• Since all the above qualifications were met, Michael was approved for a $30,000 loan at 11.99% Interest.

Loan Products

• Start-up Businesses that have been operating for more than 6 months, but are not yet profitable, can qualify for a loan up to $30,000

• Transitional Businesses can seek loans for the purchase of an existing business or change of business location for up to $30,000

• Established Businesses that are both profitable and have existed for more than 6 months can qualify for a loan up to $50,000

Loan Products: Rates

• Interest rates vary between 8.99% and 15.99%

• Closing fees vary between 3% and 6%

• $30 application fee for disbursed loans

• No pre-payment penalty

Loan Products: Terms

The term of the loan depends on the loan amount and loan purpose (these are approximations - final terms are based on individual client needs and circumstances): Loan Amount Term

$500 - $5,000 18 months

$5,000 - $9,999 24 months

$10,000 - $19,999

36 months

$20,000 - $34,999

42 months

$35,000 - $50,000

60 months

Additional ServicesResources for Small Businesses

www.accionusa.org

• Business training and technical assistance

• ACCION USA’s website has a variety of financial education resources including articles, worksheets and online webinars to help our clients help themselves.

Additional ServicesFinancial Education Resources

• Learn more about building and maintaining good credit with ACCION USA's interactive E-Learning course!

• The online course will walk you through the basics of reading a credit report, managing credit, and improving credit if it has been damaged.

• Play out different scenarios by answering questions throughout the course to see how much you know about credit, and learn what works best in various situations.

Take the Credit E-Learning courseAccess it at www.accionusa.org in the “Managing Credit” section of the website

Additional ServicesDebt Consolidation

• Consolidations must pay off the entire balance of the chosen account and the account may be closed.

• Revolving Debt: up to $10,000 if debt has a higher interest than an ACCION USA loan. Only one credit card may be refinanced per loan.

• Formal Business Loan: up to $20,000 if the loan has a higher interest rate than an ACCION USA loan.

Additional ServicesResources

Online loan application:

www.accionusa.org/apply

Financial Education Resources:

www.acciousa.org/financialeducation

Case Examples

Let’s Practice!

Question 1: Alejandro Let's Practice!

Alejandro Diaz has a used clothing sales business that has eight months in operation and is not yet profitable.

Alejandro is aware of the co-signer requirement. Which of the following individuals would make the best co-signer?

1. His cousin who is also a partner in the business.

2. His actively employed aunt.

3. His uncle who is currently unemployed and living with Michael’s grandmother.

Question 1: AlejandroLet's Practice!

If You Chose #1: His cousin who is also a co-owner of the business.

Not the best choice…

The co-signer needs to be someone outside of the business. The cousin will already be required to sign on as a co-borrower.

If You Chose #3: His unemployed uncle who is currently living with Alejandro’s grandmother.

Not the best choice…

Co-signers must demonstrate that they have the capability to cover the loan payment should the borrower be unable to pay. Additionally, co-signers must be able to demonstrate a minimum of 6 months of stable employment.

Question 1: Alejandro Let's Practice!

If You Chose #2: His actively employed aunt.

This is the best choice!

Alejandro’s actively employed aunt could be an ideal candidate to serve as a co-signer on this loan.

Question 2: Alejandro Let's Practice!

Alejandro hasn’t created a formal business plan for his used clothing sales business. What are his options?

1. Business plans are unnecessary for small businesses.

2. Create a list of reasons for which he wants the money and how he will use it.

3. Utilize ACCION USA’s online resources to craft a business plan.

Question 2: Alejandro Let's Practice!

If You Chose #1: Business plans are unnecessary for small businesses.

Not the best choice…

Business plans play an important role in the documents necessary to gain an approval for a loan.

If You Chose #2: Create a list of reasons for which he wants the money and how he will use it.

Not the best choice…

This is a good start, but what Alejandro needs to do is assemble a business plan.

Question 2: Alejandro Let's Practice!

If You Chose #3: Utilize ACCION USA’s online resources to craft a business plan.

This is the best choice!

This is an important document that ACCION USA will want to see prior to approving the loan. ACCION USA’s online resources are very helpful for new borrowers.

Question 1: EmekaLet’s Practice!

Emeka owns a phone accessory business and would like to purchase more inventory before the holiday season to expand his business. • Emeka’s business has been

operating for four years.• He has two partners in the

business and each of the partners owns an equal share in the business.

• The loan is for $12,000. • The business’s monthly cash flow

has been inconsistent.

Question 1: EmekaLet’s Practice!

Emeka has two cousins who are co-owners in the business. Who must apply?

1. Only Emeka, as long as he securitizes the loan.

2. Emeka and one cousin, because only one co-borrower is required.

3. Emeka and both cousins.

Question 1: EmekaLet’s Practice!

If You Chose #1: Only Emeka as long as he securitizes the loan.

Not the best choice…

Since the business is established, Emeka does not require a co-signer to securitize the loan. Any partner in the business who owns 20% or more must apply.

If You Chose #2: Emeka and one cousin, because only one co-borrower is required.

Not the best choice……

ACCION USA stipulates that all partners with more than a 20% interest must apply as a co-borrower. There is no limit to the number of co-borrowers.

Question 1: EmekaLet’s Practice!

If You Chose #3: Emeka and both cousins.

This is the right choice!

Since each cousin owns 1/3 of the business, they must each apply as co-borrowers and meet all of the credit qualifications.

Question 2: EmekaLet’s Practice!

Emeka’s business has had cash flow issues. Revenue and expenses have been inconsistent and the business has reported a loss in certain months. Can he get the loan?

1. He has no chance. Cash flow must be spotless.

2. Yes, if he can demonstrate a current 2:1 ratio of covering the monthly loan payment.

Question 2: EmekaLet’s Practice!

If You Chose #1: He has no chance. Cash flow must be spotless.

Not the best choice…• An income statement, which is reviewed by loan officers,

will evaluate the cash flow situation.

• Cash flow is only one of the components in evaluating the ability to repay the loan.

Knowledge Check

True or False?

Co-signers are not required to formally apply and have their credit reviewed.

Knowledge Check

Which of the following will automatically disqualify potential borrowers from receiving an ACCION USA loan?

A. Credit Score of less than 575B. Late payment on rent or mortgage in last 12 monthsC. An adjustable rate mortgage (ARM) that will adjust during the term of the loanD. All of the above will disqualify potential borrowers

Knowledge Check

What is the first step you will take with your borrower?

A. Examine financial documents for credit worthinessB. Prepare a business plan and financial projectionsC. Complete the first page of the loan application to

determine if borrower is eligible for a loan

Knowledge Check

How many days does a borrower have to submit their documentation before they will need to

reapply?

1. 302. 453. 604. 90

Congratulations!

Now you are ready to begin ACCION USA community outreach!