Breakout Session VI Community Advantage Using the In-house Model Studio D 1:30 pm 2:30 pm

Transcription

1 Breakout Session VI Community Advantage Using the In-house Model Studio D 1:30 pm 2:30 pm

2 Thank you to our Alliance Partners

3 Speakers Catherine Riddle, Chief Financial and Technology fficer CDC Small Business Finance Corporation Barbara A. Vohryzek, President & CE National Association of Development Companies

4 Community Advantage for CDC s Self-sourced (In-House) peration

5 Planning Mission Alignment Systems Community Advantage Strategy Market Reach Capital Availability perational Resources

6 Initial Considerations Mission alignment-reach more small businesses, diversify portfolio, bridge a gap in lending Availability and/or access to capital Market reach; business development capacity; referral network perational resources: existing/new hires/service providers Scale: target volume years 1-3 Systems: production, accounting, legal

7 Capital Requirements/Sources Loan Funds Requirement depends on whether CDC plans to retain or sell loans Cash from operations-economic development activity Bank LC: fund the guaranty portion and pay down upon sale of guaranty Bank Loan: term loan to fund the unguaranteed portion of loans Loan participations: alternative to a sale of the guaranty Loan Loss Reserves Requirement = 5% unguaranteed portion; 3% guaranteed portion Cash from operations Grant funds perating Funds Subsidize staff until break-even volume reached Investment in processing/legal/accounting system Cash from operations-economic development activity

8 perational Considerations In-House utsourced Build expertise Access to expertise Leverage existing skillset/capacity Higher short-term return Potential for higher long-term return Minimizes labor resources/variable cost Greater control over process Simpler start-up

9 CDC s Deciding Factors for Self-Sourcing CA Production Desire to scale up for volume of at least 50 loans per year in first full year and 100 loans by year 3 Control Existing capability and/or staff expertise, primarily in underwriting and servicing Existing business development staff specializing in micro-lending programs and outreach

10 Lessons Learned Building a referral network of banks and other ED firms has been essential to pipeline volume (continual management) Expectations regarding pull-through rate, approval and closing processes, and cycle times based on 504 experience were inaccurate Secondary market preferences impact pricing; market sale structure impacts accounting Higher than anticipated learning curve in underwriting working capital loans with minimal collateral

11 Pain Points Gathering required documentation from less sophisticated borrowers Setting expectations with borrowers regarding the process Closing Duration of funding multiple disbursement loans

12 Community Advantage Economics Average direct labor costs to produce a loan (based on CDC s annual cost study): $2,400 Average capacity per person: loans/year CDC Packaging Fees collected from Borrower: $500 for loans up to $50,000; $1,000 for loans between $50, ,000; 1% for loans over $250,000. (Fees over $2,500 must be itemized) Allowable interest rate charged to borrower: P + 6%, CDC Average: P + 3.5%

13 Income Statement Components Revenues Gain on Sale (Note, if sale categorized as secured borrowing, this revenue is deferred rather than recognized up-front) Interest Income (unguaranteed portion only following the sale) Servicing Income (If loans is sold and the gain on sale is recognized, a servicing asset is created and amortized over the life of the loan. If the loan is sold but treated as a secured borrowing, servicing income is recognized based on a monthly accrual) rigination/processing Fee Guaranty Fee (if applicable) Expenses Direct Labor-business development officer, underwriter, processor, closing staff, servicing Indirect Labor-management, accounting utside costs-legal, settlement services Direct Costs-credit, lien search, recording fees, transcripts verhead costs: marketing, office expense, office allocation Interest Expense if applicable Loan Loss Reserve Expense

14 Simplified Financial Comparison Comparison of infrastructure at capacity of 150 vs. LSP Model STAFF AT CAPACITY 150 Loans STAFF UNDER-UTILIZED 100 Loans Loan Volume 18,750,000 Loan Volume 12,500,000 Servicing Portfolio (sold guarantees) 20,500,000 2% Servicing Portfolio (sold guarantees) 18,500,000 2% Unguaranteed Balance 5,000,000 8% Unguaranteed Balance 4,450,000 8% Guaranteed Balance 2,000,000 8% Guaranteed Balance 1,400,000 8% Borrower Pkg Fee 1,000 Borrower Pkg Fee 1,000 LSP Packaging Fee 2,500 LSP Packaging Fee 2,500 LSP Closing Fee 2,500 LSP Closing Fee 2,500 LSP Servicing Fee 1% LSP Servicing Fee 1% Staffing need using LSP: 3 L, Coordinator Business Development via Referral Fees 2% In-House utsource In-House utsource Processing Income 150, ,000 Processing Income 150, ,000 Servicing Income 410, ,000 Servicing Income 370, ,000 Interest Income 560, ,000 Interest Income 468, ,000 Gain on Sale 1,481,250 1,481,250 Gain on Sale 987, ,500 Total 2,601,250 2,601,250 Total 1,975,500 1,975,500 Labor (direct--production and servicing) 958, ,000 Labor Expense 958, ,000 General verhead 95,833 41,000 General verhead 95,833 29,000 LSP Packaging and Closing 750,000 LSP Packaging and Closing 500,000 LSP Servicing 275,000 LSP Servicing 243,500 Total 1,054,168 1,476,000 Total 1,054,168 1,062,500 Net Income 1,547,082 1,125,250 Net Income 921, , ,832 8,332 *Does not include labor cost of managing program

15 CDC perating Results 3 Year Comparative Results Period Mos-2015 Budgeted Funding $ Volume 5,000,000 5,000,000 7,125,000 4,370,000 Actual Funding $ Volume 3,210,466 5,078,102 5,404,745 4,108,267 Growth 58.2% 6.4% 52.0% Average Premium Average Servicing Fee 1.9% 2% 2% 1.8% Loan Losses (Actual) 29,018 Labor Costs as % of Revenue 119% 122% 119% 127% (Includes indirect labor allocations & SRE) Current Staff Capacity (# Loans) 150

16 Additional Financial Considerations Sale of the guaranteed portion: SBA collects half of the premium over 110 Sales with excess servicing (typically over 1%) must be treated as secured borrowings rather than loan sales. While recognition of the revenue is deferred over a longer period, typically, the CDC will generate more cashflow within 2 years. It does adversely impact profitability in the short-term. (Comparison available upon request) Funds at risk Define risk tolerance Loan interest rate should reflect the loan risk

17 What s Up Next? 2:45 PM 3:45 PM General Session II Community Advantage and Economic Development Models for Success Grand Ballroom Salons 1-4 3:45 PM 4:45 PM General Session III Congress and the 504 Program: How to Communicate with Your Legislators Grand Ballroom Salons 1-4