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  • 1. Chapter Three: Accessing Capital From Financial Institutions Overview The purpose of this information is to assist you and your organization in accessing capital from financial institutions to support the upfront costs and cash flow needs of an Employment Network (EN) participating in the Ticket to Work and Self-Sufficiency Program. The Ticket program is an outcome-based payment program. Employment and support services provided to Ticket holders in many situations will need to be financed by the EN in part or full to cover start up and continuing operational costs before the Social Security Administration provides reimbursement for payment of agreed upon performance milestones and measures. For all nonprofit organizations access to funding to respond to mission-driven human service delivery activities is a constant challenge. Most organizations have cultivated and nurtured relationships with government funders and the philanthropic community (foundations and corporate giving programs). Most organizations have ongoing, organized fundraising campaigns including individual and business solicitations and special events. However, there is another critical strategy that merits equal attention. It is the identification, development, and maintaining of relationships with financial institutions and entities that advance and lend money or invest in businesses with a social purpose. The purpose of this information is to increase your awareness and understanding of the world of private capital. The information has been divided into six sections to help you and your organization increase your understanding about the different types of financial institutions, what will be expected of you in seeking access to capital, the differences in the terms negotiated with the lender, and strategies that will improve your chances of success. In preparing this information for you, we talked directly to financial institutions and reviewed loan application forms and procedures. We discussed with lenders the Ticket program and their possible interest in making capital available. Finally, from the information reviewed and analyzed, we have identified and developed: a. resource links where you can continue to learn more about access to private capital; b. a glossary of key terms to help decipher the language of finance; and, c. a set of ten action steps to better prepare and advance your participation in the world of private capital. It is our expectation that this information can help demystify for you and your organization the perceived “different” and “complex” rules of finance and credit relationships with lenders and venture capitalists. It is our hope that at a minimum this information can move you forward to recognize the possibilities and opportunities of
  • 2. private capital that will become a part of your organization’s funding strategy in the future. Getting In The Game Before you make an appointment to talk with a lender and discuss your capital needs, there is a crucial preliminary step that requires your time and attention. You and your organization have done the necessary research to complete a business plan. To get in the game with a serious discussion with a bank, a credit union, a community development financial institution (CDFI) or a venture capital fund, there will be an expectation that you have developed and are ready to share with them a comprehensive business plan. There are three reasons your organization should take the time to create a business plan for your new activities as an Employment Network (EN). • First, the process of putting a business plan together requires you and your organization to step back from day-to-day service delivery challenges to take an objective, critical and unemotional look at the EN and systematically evaluate all the major components of the enterprise. • Second, having a business plan creates a finished product that can be used as an operating guide to help you manage the business and provides a means to measure your progress against projections overtime. • Third, a properly prepared business plan provides the information that is essential for a serious discussion with a lender or investor before a credit decision is made. There are many resources available to help you develop and format a comprehensive business plan. There are many books and now multiple websites to guide you through a planning process. There are also numerous agencies and centers operated or funded by the Small Business Administration nationwide and the U.S. Department of Agriculture in rural areas that offer free and low-cost assistance in business plan development. At the end of this section is a list of resources for you to consider. Regardless of which resource you may turn to for assistance, there is general agreement a comprehensive business plan must include the five C’s: 1. Concept 2. Capacity 3. Customers 4. Competition 5. Cash Flow As an EN, or an organization considering applying to become an EN, you probably have thought through with your staff and/or Board the compelling reasons why you want to reach out and provide services to Ticket holders. The 5 C’s of business 2
  • 3. planning will now assist you to structure and organize your thinking in a way that is clear and understandable to someone who is not in the business of human services. The completed plan is a reflection on you and your organization. To the lender, it must present a compelling, objective plan of action in response to favorable market conditions that does not need your further explanations. It is research-based and sells the merits of the enterprise as a fiscally sound investment, based on the described business strategy and who you are in terms of past track record of success individually and as an organization. The lenders’ or investors’ first question will always be “Do you have a plan on how you expect your business to turn out?” In the world of private capital, mission driven ideas and dreams are not enough. The discussion will not begin without a comprehensive business plan. The following suggestions will provide you a more detailed explanation of the five C’s of business planning: Concept The business plan begins with a concise description of the business you want to start or you have started but now intend to grow. You should answer these five questions: 1. What product and/or services will you offer and in what market? 2. What is unique/important about your products and/or services in the defined market? 3. What are your goals for the business? 4. How will you achieve these goals? 5. Why is this business the right business at this time and in this market? As a nonprofit operating an EN, lenders will also expect for you to define the relationship between the Employment Network and the organization. Are you creating a separate or related corporate entity? Will it be operating as a nonprofit or a for profit corporation? As an EN, is this a joint venture with other organizations? If so, what are the legal relationships and management structure agreed to? Questions should also be answered about the selection of the market. What factors influenced the decision to provide service to Ticket holders in the selected market, i.e., a two-county area, or the entire state or all 50 states? What are the growth opportunities within the market? The final part of the concept section should be to clearly and concisely answer why you want to be in this business. Capacity 3
  • 4. The Capacity section describes your management and staffing plans that will facilitate the success of your business. You should answer at least these four questions: 1. How is the business organized and staffed to appropriately meet the goals of the business? 2. Do the members of the management team possess the requisite business skills and industry-specific skills and experience to successfully operate the proposed enterprise? 3. What are your current personnel needs? 4. What are your plans for recruitment, hiring, training, and developing a quality workforce? It takes a wide range of skilled managers and front line staff to meet the individualized employment and support service needs of Ticket holders. Key members of the successful EN team will also need to include skilled individuals with proven experience in marketing and financial management. The Capacity section of the business plan should also include background information on these team members. Customers A business plan should demonstrate a solid understanding of who your customers are and what they want or need. You should answer at least these five questions: 1. Who will be your targeted customers? Describe them in terms of where they live, age, gender, preferences, expectations about service, and other defining characteristics? 2. How do you know a sufficient customer base exists? 3. What will your customers expect from you? (types of services, access to services in terms of time and location, home visits, other) 4. How do you plan to attract, hold and expand your market share? 5. What local, regional, and national trends and other forces will impact the business? Competition Hundreds of ENs have been formed in the first year of the Ticket program. Some ENs have limited their market to Ticket holders in one state. Other ENs are national in scope. Lenders will expect the business plan to explain to them the nature of the competition and your strategies to effectively compete. You should answer in this section at least these five questions: 4
  • 5. 1. Who will your business be competing with? 2. How does your competition compete? This would include marketing strategies, different business model to deliver services or other ways Ticket holders would learn about and consider working with another EN. 3. What is the strength of your competitors? 4. What is your competitive edge? 5. Is there room in the market for a new entrant? If so, why? Cash Flow To a lender, this section of your business plan will be scrutinized more than any other section of the plan. You may have presented a strong case for your concept and that you have a competitive edge in your defined market as a result of your business model backed up by a strong organizational plan, talented and experienced managers, and a well-thought through and researched marketing strategy. However, this section of the plan must detail projected costs for the proposed business model against projected revenues. The projections must be realistic, based upon past experiences for a similar type of service delivery and supports to the targeted customers and/or actual experiences of other ENs or companies engaged in a similar model. This final section of the plan must at least answer these six questions: 1 What are estimates of expenses defined by cost centers over a five-year period? 2 What are revenue projections defined by source over the same five-year period? 3 Are the costs reasonable and consistent with business necessity and norms? 4 Are the revenue estimates based on past experience or justified by some other similar business in the same or similar markets? 5 Exactly how much money are you requesting and how will it be used? 6 If there is more than one source of capital to help achieve the proposed business model, please provide letters of commitment. For example, provide letters of commitment from the organization that is contributing funds, and the funding that is committed from grants or contracts funding from other lenders or investors. The Cash Flow analysis is expected to detail over a five-year period by month, projections on reimbursement payments from SSA for Ticket holders who have met performance milestones or measures and any other possible sources of funds. These revenue projections would be in a spreadsheet compared to expense projections during 5
  • 6. the same time period until a break even point and then continue with profit projections. The Cash Flow analysis will be a critical piece of information for evaluation of any requests for a loan. This analysis will be the major topic of discussion with lenders to enable them to evaluate risk to make a decision about a loan request or establishment of a credit line and access to capital. What A Financial Institution Looks For In A Business Plan Lenders are responsible for assessment of the degree of risk involved in each request for capital. The lender reviews a request for funds by analyzing six key factors: 1. the nature of the business; 2. the purpose of the loan; 3. the amount of the loan; 4. the ability of the applicant to repay the loan; 5. the character/management skills of the leadership team; and 6. the track record and financial history of the organization. The lender must be satisfied that the loan can be repaid by the borrower while still allowing the business to operate profitably. The lender will not only expect the business plan to cover the five C’s but also be organized in a logical way that makes critical information easy to find. Figure I, located on the next page, offers an example of a way to organize a business plan for an Employment Network that would be well received by a lender: 6
  • 7. Figure I Employment Network Business Plan Format Cover Sheet: Always the first page of the plan, the cover sheet includes the name, address, and phone number of the business and the same for all owners or officers. Executive Summary: Typically written after the main components of the business plan are completed, the Executive Summary reviews the content of the business plan. The Executive Summary states the loan request and specifies how the loan proceeds will be used. Identify sources of other funding already committed. Organizational Plan: Complete with a business description, and information about the legal structure, management, and personnel. The Organizational Plan also identifies the key staff’s background, technical preparedness and general qualifications to successfully operate the business. Specify the relationship of EN business to the nonprofit. Marketing Plan: Three simple questions form the basis for the marketing plan: How many? (customers in each target market); How much? (will they spend for your product or service); How often? (will they purchase your product or service). Coupled with a detailed marketing strategy for a twelve to twenty-four month period, the marketing plan proves market need and establishes a plan for capturing and keeping customers. Financial Plan: Considering the market information, the Financial Plan translates customer information into a financial format and includes a detailed loan request, sales projections, and a break-even analysis – at a minimum. The Financial Plan should include a sound realistic budget that defines the amount of funds needed to open the business (start-up costs) and the amount needed to keep it running (operating costs). The start-up budget should include personnel costs (prior to opening), legal and professional fees, licenses and permits, equipment, insurance, supplies, advertising, accounting, and travel expenses. The operating budget would include the cost of running the business including all salaries/wages, benefits, insurance, professional fees, marketing and miscellaneous expenses. The projected income statement and cash flow projections would include a five-year summary, detail by month for the first year, and detail by quarter for subsequent years. The financial plan would also explain the accounting system and a system to track inventory. Your financial plan should include an explanation of all projections. Figure II, on the next page, provides a simple example of an estimated cash flow forecast chart. 7
  • 8. Figure II ESTIMATED CASH FLOW FORECAST Jan Feb Mar Apr May Jun etc Cash in bank (1st of month) ___ ___ ___ ___ ___ ___ ___ Petty cash (1st of month) ___ ___ ___ ___ ___ ___ ___ Anticipated revenue (SSA) ___ ___ ___ ___ ___ ___ ___ Other sales receipts ___ ___ ___ ___ ___ ___ ___ Total cash & receipts ___ ___ ___ ___ ___ ___ ___ Disbursements for month (rent, loan payments, utilities, wages, etc.) ___ ___ ___ ___ ___ ___ ___ Cash balance (end of month) ___ ___ ___ ___ ___ ___ ___ Resources The U.S. Small Business Administration (SBA) is the leading source of information on most business start up and management topics. The SBA has offices throughout the country. There is a toll free answer desk you can call at 1-800-U-ASK-SBA (827-5277) to locate the office nearest you or you may choose to visit their web site at www.sba.gov. SBA provides funding to a national network of organizations that can provide free and low-cost assistance in your development of your business plan. Each of the following four networks has offices in your state: 1. Service Corps of Retired Executives (SCORE) There are over 13,000 business executives who volunteer their time and provide free counseling and training to prospective and existing small businesses. See www.score.org. 2. Small Business Development Centers (SBDC) There are 58 SBDCs with over 1,000 service locations nationwide affiliated with colleges and universities, nonprofit groups, and government. They provide assistance and training to individuals who are starting or trying to grow a small business. See www.sba.gov/SBDC. 3. Women’s Business Centers SBA has helped create a nationwide network of centers that provide assistance and training in finance, management, marketing, procurement, and small 8
  • 9. business start up and planning. WBCs are also affiliated with colleges, nonprofit community-based groups, and state and local government. See www.sba.gov/womeninbusiness. 4. Business Information Centers (BICs) BICs offer state-of-the-art technology, information, and training on site for start up and expanding businesses. See www.bic.org. The U.S. Department of Agriculture (USDA) offers assistance to individuals and organizations in rural America on business start-up and growth. The Rural Business Cooperative Service (RBS) offers financing to help private business enterprises located in areas outside of cities with 50,000 or more people. To learn more about their programs, visit www.rurdev.usda.gov/rbs. Web sites of interest you may wish to explore are: 1. http://www.business-plan-guide.biz/checklist.htm. This provides a comprehensive business plan checklist. 2. http://www.uwlax.edu/bdc/businessplan-checklist.htm. Another business plan checklist 3. www.sba.gov/starting/checklist.html. This is a checklist provided by SBA for those interested in going into business. 4. www.sba.gov/starting/suchecklist.html. This is a checklist that helps you evaluate start-up costs for your business. 5. www.tulenko.com. This site is updated weekly with success tips for small businesses, including creating your own business, avoiding destructive pitfalls, naming your business, etc. 6. www.quicken.com/small_business/start. This site has a Business Plan Center (with sample business plans), checklists for startups, and information on topics like marketing, taxes, accounting, and legal issues. 7. www.webcom.com/seaquest/sbrc/welcome.html. Provides free reports and links on financing, writing a business plan, franchising, advertising, and operating a home-based business. 8. www.knowx.com. This site will help you do Business Research. They locate people, research businesses, run background checks, and do other searches in order to give you the facts you need before you make a decision. 9. www.lowe.org. This site allows users to search a huge database of articles and books about all aspects of running a business. Many items are free; others can be downloaded for a small charge. 10. http://www.frontier.businessweek.com. Users will find ideas for small business in the Small Business section of this site. 11. http://www.insure.com. If you have an insurance question, this site appears to be an unbiased source of information, serving up comprehensive resources. There is a special section for small business. 12. http://www.toolkit.cch.com. The CCH Business Owner’s Toolkit contains resources for the small business owner. There is a lot of advertising on this site, but you can “Ask Alice” any question and get an answer. Previously 9
  • 10. asked questions and her answers are available. The site links to free SCORE E-mail counseling. 13. http://www.nolo.com. This self-help law center has under Small Business an encyclopedia of subjects, such as Small Business Legal Structures, Choosing a Business Location, Choosing a Business Name and many, many more. 14. http://www.onlinewbc.org. (Women’s Business Center site sponsored by the SBA). Includes sections on starting, growing, expanding and running your business. A Marketing Mall provides facts on training resources. An information exchange lets you swap information and advice with other business owners. 10
  • 11. Where Do You Look For Private Capital Based on the business plan’s cash flow projections, you and your organization have defined your need for funding both in a start-up phase and for operations over a period of time. You may be able to meet some of your funding needs through existing government grants and contracts, your own cash on hand built up over the years through fundraising and operation margins, and even a small grant from a Foundation. However, your cash flow projections still identify a need for additional capital. The answer to your financial needs may be access to private capital. Access to private capital is not a new experience for many of us or our organizations. As individuals, access to private capital has become a routine way to buy a car or a home. Rather than pay in cash at the time of purchase, we enter into a loan agreement with a bank, a financial institution, or the company/or individual from whom we purchased the product. A loan is a transaction between two parties in which one (the creditor or lender) supplies money, goods, or services in return for a promised future payment by the other (debtor or borrower). Nonprofit organizations borrow money to purchase vehicles, lease equipment, or build or rehabilitate housing, service centers, and locations for core administrative staff. Access to capital to meet funding needs for an EN for start-up or to help with cash flow may involve new discussions with financial institutions that you have preexisting relationships with as a result of past or current loan obligations. It may also involve seeking out new financial partners that may be sources to access private capital in your local community, your state, or region of the country. There are four options for you and your organization to consider in devising a successful strategy to access private capital: 1. regulated financial institutions in your local community; 2. community development financial institutions,; 3. small business lenders; and, 4. other state or national resources. Regulated Financial Institutions In Your Local Communities The Community Reinvestment Act (CRA) was enacted by Congress in 1977 to encourage banks and federally regulated financial institutions to help meet the credit needs of all segments of their communities including disadvantaged populations and low and moderate income neighborhoods. The Office of the Comptroller of the Currency (OCC) every three years must assess the record of each bank in helping fulfill their obligations to their community. The CRA is intended to encourage banks to adopt more flexible credit underwriting standards and make substantial commitments at a local level to increase lending to underserved segments of local economies and populations. Failure to meet a satisfactory CRA rating from OCC can block a bank merger, expansion to new locations, 11
  • 12. or in extreme cases continued charter to operate in a particular state. Banks must involve the local community in seeking comment and review of a strategic plan to meet CRA requirements. At the end of a CRA evaluation process, all depository institutions receive a rating of performance that is either outstanding, satisfactory, needs to improve, or substantial noncompliance. All banks by city and state have their ratings published on the Federal Reserve Board site at www.federalreserve.gov/dcca/cra/crarate. To promote public involvement and input into the examination process, the revised CRA regulations require the publication of the next quarter’s schedule of upcoming reviews that can be obtained by calling the Federal Deposit Insurance Corporation (FDIC) office at 1-800-276-6003. The schedule is also available on line at www.fdic.gov/regulations/community/exam. The CRA evaluation system and community investment requirements can help shape new discussions with your local federally regulated bank or thrift institution. Consider making an appointment with your local financial institution with which your organization currently has a banking relationship to inquire about: a) their current CRA plan, b) their current rating, c) if there is a federal evaluation expected in the next 12 months, and d) mutually beneficial opportunities (related to CRA requirements) to become involved to help capitalize the upfront costs of the EN. Consider sharing your business plan. Make sure it clearly makes the case statement on what it will do for underserved populations and your local community. In addition to your current banking relationship, consider whether any members of your Board either work for a local financial institution or through their business and professional relationships have a strong relationship with a financial institution. They could help you schedule a meeting with their bank’s high level staff to discuss the EN business plan and its potential to meet CRA requirements. For all nonprofit organizations, having a strong relationship with a local bank is an important part of good business practices and essential to financial stability. Lending decisions always take into account not only you and your organization’s credit history but also the “intangibles” of personal relationships. The CRA requirements gives you additional reasons to cultivate and nurture a local banking relationship that could help finance your EN funding needs. Community Development Financial Institutions (CDFI) A CDFI is a private sector organization that has been established to promote community development with a specific emphasis on meeting the needs of low-income communities. They are market-driven, locally controlled, private sector, finance-led organizations. CDFIs get capital from public and private sources. Corporations, individuals, government, and private Foundations have contributed capital to CDFIs. In turn, CDFIs provide an array of financial services to economically disadvantaged individuals and communities including loans, training and technical assistance services, and equity investments. One crucial source of support to CDFIs is the federal CDFI Fund 12
  • 13. administered by the U.S. Department of the Treasury. The CDFI makes awards on a competitive basis to CDFIs for organization capacity building and capital which is done on a one-to-one match basis: one federal dollar is provided for each private sector dollar invested in a CDFI up to a maximum of $5 million. There are over 500 CDFIs currently operating nationwide. The size and type of organizations vary. CDFIs exist in all 50 states and range in capital size from less than $160,000 to more than $700 million. Nationwide, the total capital under management is in excess of $1.8 billion. The total number of businesses being assisted financially is over 15,000 and the total number of community service organizations being assisted financially is 2,200. There are four types of CDFIs that deserve the attention of your nonprofit organization. First, there are Community Development Banks that provide needed capital to help rebuild economically distressed communities, second, there are Community Development Credit Unions that provide financial assistance to low-income and minority communities. Community Development Credit Unions (CDCU) are regulated by the National Credit Union Administration (NCUA). By being designated as a community development credit union, a majority of its membership must earn less than 80 percent of the national median household income. There are over 600 credit unions with the low-income designation out of a total of 11,800 credit unions nationwide. CDCUs serve over 2 million members annually out of over 70 million Americans participating in other types of affinity membership credit unions across the country. CDCUs have their own trade association that is headquartered in New York City. The National Federation of Community Development Credit Unions (NFCDCU) advocates for and provides financial, technical, and human resources to CDCUs. Their web site www.natfed.org provides a full list of CDCUs nationwide. A credit union is a member-owned and directed financial cooperative organized to provide services and benefits to its membership. They are nonprofit entities. Excess funds collected are returned to the membership in the form of lower interest rates on loans, and higher dividends on savings. There are also Community Development Loan Funds that typically raise funds from socially responsible investors at below market rates and then relend the money to nonprofits who seek to support disadvantaged populations and finally, there are Community Development Venture Capital Funds that provide start-up capital for new business development in economically distressed areas. Community Development Venture Capital Funds (CDVC) seek to tap the proven approach of traditional venture capital but for a different purpose. The traditional bottom line of positive financial return for investment of funds in a new venture is complemented by an intent to achieve positive social benefits for disadvantaged populations and communities. There are now over 50 funds in place that have invested over $140 million in new enterprises. CDVC Funds have now formed their own trade association, the Community Development Venture Capital Alliance to promote best practices and use the 13
  • 14. tolls of venture capital to create jobs, entrepreneurial capacity and wealth to advance the livelihoods of low-income people. Their web site, www.cdvca.org provides a full list and links to the CDVC funds currently operating on a defined geographic area or nationwide. The National Community Capital Association (NCCA), an association for CDFIs has a web site that enables you to locate CDFIs by type, geographic location, or financing focus. From the NCCA web site www.communitycapital.org you can be linked directly to most CDFIs nationwide to get more information on requesting a loan or investment. CDFIs are different than the typical bank or thrift institution you are probably aware of or with whom you have a financial relationship. CDFIs differ in two significant ways. First, their primary mission is community development and support to disadvantaged populations. Second, CDFIs make loans and investments and provide basic services to people and institutions, which for various reasons are unable to get these services from conventional financial institutions. Many CDFIs will work with community-based organizations to help develop a long-term plan for their business. This serves two purposes. It makes it more likely that the CDFI will be repaid on a loan and it is more likely the business will be a success. Figure III on the next page offers a comparison of each of the four types of CDFIs. We have selected one CDFI from each category for illustration purposes to help increase your understanding of the many options that are available to you and your organization for access to capital that may meet your EN startup and operation funding needs. 14
  • 15. Figure III CDFI COMPARISON CHART To Qualify For Organization Who Can Borrow Emphasis Type of Loans Loan or Services/Assistance Investment New Mexico Community Nonprofits, Help low-income Small business Reasonable credit Preloan business Development Loan Fund Individuals who people start-up history; advice www.nmcdlf.org want to start their Assist businesses Bridge financing Rejected for a Assistance with own business that provide to nonprofits bank loan; Business Plans positive social against awarded Non profit Legal and tax benefits private and public business will referrals Unable to access contracts provide social Completing loan loans from benefits; application traditional sources Demonstrate Post loan business ability to repay; advice Nonprofit status Must be in New Mexico; Up to $100,000. Vermont Development Business start-ups Helping low- Working capital Reasonable credit Develop a strong Credit Union Established income Vermont Equipment history; business plan www.vdcu.org businesses residents purchase Ability to repay; Targeted counseling Nonprofits Counseling – Debt consolidation Must be in Action Plans Individuals based lending Small business Vermont; Individual Checking start-up Loans range from and Savings Plans $50-$80,000. 90
  • 16. To Qualify For Organization Who Can Borrow Emphasis Type of Loans Loan or Services/Assistance Investment Louisville Community Individuals Loans to new or Installment loans Business must Financial Development Bank Organizations expanding small lines of credit for have a reasonable Management www.morethanabank.co businesses in the business chance of success; Strategic Plan m inner city start up and Collateral is Development Link neighborhood growth required as well as One-on-One residents to career personal guarantee Business path employment of borrowers; Consultation Must be in one of 12 inner city neighborhood of Louisville, Kentucky; Up to $250,000. Maine Coastal Ventures Businesses Equity investments No loans Sound business Management Limited Partnership in new businesses Invests in new plan; Assistance that provide social business Job creation Marketing and benefits for projections; Financial distressed Qualified Planning communities management team; Investments up to $500,000; Social benefit analysis. 91
  • 17. Small Business Lenders The U.S. Small Business Administration (SBA) is mandated by Congress to assist individuals and for profit organizations obtain small business loans. The SBA does not make loans. However, the SBA 7(a) loan guarantee program allows banks and other lenders to make loans to individuals and organizations with the majority of risk for default by a borrower being accepted by the Federal Government. There are more than 5,000 lenders making SBA guaranteed loans. Last year, the SBA guaranteed over 20,000 loans. Approximately 60 percent of the loans for small business start up and expansion were for less than $150,000. The SBA guarantee program is another strategy to consider in discussions with your bank. Your bank may decide that your request for funds to finance your E.N. start up with its outcome-based reimbursement system is too risky when it applies their loan standards. However, it may be willing to consider the loan if it was approved for an SBA guarantee. Please be aware that the SBA guarantee program is only for small businesses that are independently owned and operated and must be operated for profit. In the development of your business plan, you and your organization need to weigh the advantages and possible disadvantages of structuring your EN as a for profit business. The lender will be required to certify that it could not provide funding on reasonable terms without an SBA guarantee. For loans greater than $150,000 the maximum guarantee is 75 percent. For loans of less than $150,000, the SBA will provide a maximum guarantee of 85 percent of the loan amount. Effective December 2000, the maximum loan amount under the SBA guarantee program is two million dollars. SBA backed loans may be used for most business purposes. These may include start-up working capital, acquisition of equipment, and cost of operations. The SBA web site at www.SBA.gov/financing/fr7aloan can provide you additional information about the loan guarantee program and help identify for you nationwide participating lenders. Many lenders are not limited to a local community or state. In addition to exploring relationships with SBA participating lenders in your local community you may want to consider lenders who market nationwide such as Wells Fargo (www.wellsfargo.com/biz/products) or Business Loan Express (www.alliedcapitalexpress.com). Both of these lenders allow and encourage application on line for a small business loan backed by the SBA guarantee. Other State and National Resources Each state has an agency dedicated to economic development. Each state government has a website. The federal government (firstgov.gov) website has links to each state’s website or you can type in your state’s name in a search engine, such as google.com. Once you are in your state government’s website you will find information that will guide you in obtaining information about your state’s economic development agency. Many states have created their own capital access initiatives to assist businesses that may be struggling to obtain financing. In California, there are two initiatives. The California Capital Access Program (CalCAP) is for businesses in the state that have been 92
  • 18. otherwise unable to obtain financing for equipment purchases, other capital projects, and working capital. The maximum loan amount is $250,000. There is also the California Economic Development Lending Initiative (CEDLI) that is a colending program of the state in partnership with banks to provide working capital for small businesses. The CEDLI will finance small for profit and nonprofit business start-ups. Both of these programs are exclusively for in state and for profit and nonprofit enterprises (www.startupepa.org ). Many states have similar programs that deserve your exploration. Eligibility requirements and loan assistance will vary by state. There are also several national organizations that provide financial assistance directly or indirectly to small businesses and nonprofit organizations. The Local Initiatives Support Corporation (LISC) provides grants, loans, and equity investments to Community Development Corporations (CDCs) for neighborhood redevelopment that includes creation of jobs and business start-up and growth. With funds from Foundations, corporations, and individuals, LISC assists CDCs in 38 communities across the country with business and job creation. At their web site www.liscnet.org, there is a direct link to each of these 38 targeted community development initiatives. If you or your organization is in one of these communities, consider contacting LISC and the local CDC about your business plans. Make an appointment to discuss the possible relationship of the E.N. to their community development activities. In 1995, LISC launched rural LISC to expand its reach beyond urban areas to include rural communities. Rural LISC has more than 70 partner organizations across the country that are focused on rural community development. For a full list, please visit www.ruralisc.org/aboutus. A second national organization with a similar mission is the NCB Development Corporation (NCBDC). NCBDC is an affiliate of the National Cooperative Bank and is involved in economic and community development activities nationwide targeted to disadvantaged communities. In 2001, NCBDC established the National Disability Institute (NDI) to identify opportunities to advance the social and economic independence of Americans with disabilities. It is currently evaluating possible strategies to provide financial and technical assistance to nonprofit organizations that are certified as Employment Networks and in need of start-up capital. To learn more about this organization visit their web site at www.ncbdc.org and for NDI, visit their website at www.nationaldisabilityinstitute.org. Any request for a loan or type of financial assistance would require submission of a business plan. An additional important national resource is the Federal Home Loan Banks (FHL Banks). The FHL Banks are privately owned wholesale banks that provide low-cost funding, known as advances, and other products to over 7,900 member banks, credit unions, and savings institutions. There are 12 regional banks in the FHL Bank system with over 760 billion dollars in assets. Since 1990, these FHL Banks have provided over 20 billion dollars through a Community Investment Program (CIP) to its members to fund community and economic development projects. The CIP is a lending program that provides below market rate loans that enable member banks to extend long term 93
  • 19. financing for economic development that benefits low- and moderate-income families and neighborhoods. A similar program, Advances for Community Enterprise (ACE) funds projects that must result in the creation or retention of jobs and other benefits for low- or moderate-income households and communities. Consider contacting the FHL Bank in your region to learn more about their ACE and CIP activities to support economic development in your state and local community. Your regional FHL Bank will be able to identify member bank, credit unions, and savings institutions in your state that are participating in ACE and CIP and provide you contact information. Visit their website at www.fhlbanks.com. Finally, there is also the Federal Reserve System, known as the “Fed”, which is the central bank of the United States. There are 12 regional Federal Reserve Banks located in major cities throughout the United States. Each of the 12 Federal Reserve Banks in the Federal Reserve System has a Community Affairs Office that provides financial institutions and others with information on the Community Reinvestment Act, community and economic development, and issues related to credit access. The Community Affairs Offices also provide resource information, technical assistance, and regulatory guidance to community-based organizations, government entities, and a wide variety of other organizations engaged in community and economic development. Community Affairs fosters collaboration and provides information for the improvement of communities and the lives of the people who live in them. Each Federal Reserve Bank Community Affairs Office (CAO) develops specific products and services to meet the informational needs of its regional market. These information products and services fall into three major areas: Publications: The CAOs issue a wide array of publications. These include newsletters that highlight community reinvestment activities, profiles that assess the credit needs of communities and identify programs that help banks meet those needs, and special publications that cover topics such as fair lending and small business technical assistance. Conferences, Training and Presentations: The CAOs sponsor and participate in a variety of public forums that provide information and guidance on CRA-related requirements, community investment and development opportunities, and model programs and resources from around the country. Technical Assistance: The CAOs provide a wide range of technical information on community and economic development, including information on the creation of multi- bank community development corporations, public/private affordable housing development partnerships, and small business lending. 94
  • 20. Consider visiting the website for the Federal Reserve Bank Community Affairs Office in your region to learn about technical assistance and lending activity that might be helpful to your EN start-up and development. Figure IV on the next page indicates the Federal Reserve Districts and contact information. 95
  • 21. Figure IV The Twelve Federal Reserve Districts Addresses and phone numbers Banks Branches RCPCs Boston New York Philadelphia Cleveland Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco Board 1. Boston 6. Atlanta 11. Dallas www.bos.frb.org www.frbatlanta.org www.dallasfed.org (617) 973-3227 (404) 589-7200 (214) 922-5286 2. New York 7. Chicago 12. San Francisco www.ny.frb.org www.frbchi.org www.frbsf.org (212) 720-5215 (312) 322-8232 (415) 974-2978 3. Philadelphia 8. St. Louis www.phil.frb.org www.stls.frb.org (215) 574-6458 (314) 444-8646 4. Cleveland 9. Minneapolis www.clev.frb.org www.mpls.frb.org (216) 579-2846 (612) 204-5075 5. Richmond 10. Kansas City www.rich.frb.org www.kc.frb.org (804) 697-8447 (816) 881-2687 96
  • 22. The Loan Application Process You and your organization have a business plan for the EN. You have calculated the costs of start-up and operating expenses. You have developed a business model with cash flow projections you can justify to your Board and any potential lender or investor. After review of your funding commitments from all possible sources, you conclude that you need additional capital. You have identified a prospective list of potential lenders and/or investors as a result of following up on leads discussed in the section entitled “Where Do You Look For Private Capital.” Request For Information You want to be fully prepared for a meeting with the identified lender or investor. Most banks, credit unions, and other sources of private capital have web sites. Before your visit, review the identified lender or investor’s web site for information about their loan or venture capital program, the application process, and timelines for decision making. When applying for a loan from a Community Development Bank, a Credit Union, or other type of Community Development Financial Institution (CDFI), there will be common elements to the process that you should be prepared for to improve the possibilities of success. Many financial institutions now allow you to begin the loan application process on line. Whether responding on line or submitting your application in hard copy through the mail, the approval of the loan request depends on how well you present yourself, your business, and your financial needs to the lender. All lenders are looking for answers to three important questions: 1. How much do you need to borrow? 2. How will you use the loan? 3. How will you repay the loan? A typical loan application will ask for information that can be divided into five categories. In the general information, the lender will request the business name, name of principals, social security number for each principal, and the business address. You will be requested to explain what the loan will be used for and why it is needed. You will need to specify the amount of the loan needed to achieve your objectives. The second category of information is a business description. You will be asked to describe the history and nature of the business including details on the number of employees and current business assets. It will be important to explain the ownership structure and the legal relationship to the nonprofit organization. The third category of information is a management profile. You will be expected to provide a brief statement on each principal in your business that includes background on education, experience, specific skill areas and accomplishments. 97
  • 23. The fourth category of information is about your targeted market. You will be asked to explain the EN’s business model in term of services offered and the markets you are targeting. You will need to identify your competition, including public and private and for profit and not for profit enterprises. You will have to explain how your business competes in the marketplace. Finally, you will need to profile current and expected customers in terms that again define and differentiate your business model. The fifth category of information is financial information. Your organization will be expected to submit audited financial statements for the past three years. You will also be expected to submit personal financial statements on yourself and any other principal owners and/or managers to play a lead role in the business start-up and operations. Nonprofits are also routinely asked to submit a full roster of their current officers and Board members that also provides information on their occupation and place of employment. The financial information for a start-up activity like an EN will require also a balance sheet and income statement. If you are pledging collateral to secure the loan, you will be asked to provide detailed information on your ownership interests. Figures V and VI on the next set of pages include examples of the NCB Development Corporation Loan Application For Economic Development, and the NCB Capital SBA Guarantee Loan Application. Factors in Decision Making The clear, cohesive business plan previously discussed will enable you and your organization to reply accurately and effectively to the lender’s request for information. When reviewing your loan application, the lender is very focused on evaluating your ability to repay the loan. Most lenders will not finance 100 percent of your capital needs. Your information will be reviewed to identify whether you have invested savings or personal equity in the proposed business that is at least equal to 25 percent of the requested amount of capital. A substitute for individual investment will be organization investment of capital. The lender will review the credit history of the organization and principals in the proposed EN business. If there is poor credit history, the lender will be interested in learning more about the circumstances regarding any credit problems such as consistent late payments, any defaults, or judgments against the organization and/or principals. The cash flow projections will be closely reviewed both on the expense and revenue sides. For an EN business model, an effective plan would identify additional revenue sources from fees for services and products in addition to the outcome-based reimbursements from the Social Security Administration. The lender must be convinced from your cash flow projections that you and your organization have sufficient cash flow to make the monthly payments to pay back principal and interest according to the loan terms. The review of financial information is only one factor in the evaluation of a loan application. The lender will evaluate carefully the background of the principals and management team. The information provided must demonstrate that the management 98
  • 24. team has sufficient experience and training to operate a successful business in the defined market. The organization’s history and documented success in the provision of employment services to persons with disabilities will also be evaluated. The lender will review the business plan to evaluate understanding and commitment to the success of the business model for the EN. First time business owners will be scrutinized more closely than a leadership team with documented successful management and industry experience. The combination of financial and management strength can compensate for what may be perceived as substantial risk involved in capitalizing an EN start-up. Do not hesitate to talk with the lender. Although you have worked hard to provide effective answers to all the questions on the loan application, consider the benefits of a face-to-face meeting. There are intangible factors in all lending decisions. The EN business model is a part of local community and economic development. The majority of loans will require collateral and a personal guarantee of all principal partners. You want to let the lender know first hand the serious commitment you and your organization are making to the EN start-up and operations. Most loan decisions are made within 30 days of submission of a completed application. The completion of the paperwork and the signing of obligations between lender and borrower at what is called a closing is usually achieved within 30 to 90 days. Terms Of The Loan Loans for working capital purposes typically do not exceed seven years. Interest rates are negotiated between the borrower and lender. Loans guaranteed by the SBA have interest limits to protect small business owners. In some cases, a lender will extend the term from seven to ten years to help make the business model work and make it easier for the borrower to meet cash projections. Once a loan is approved, it moves to the closing process. You and your organization will receive all your final terms of the loan at closing. This will include payment obligations, and the terms and conditions of the loan. Interest rates may be fixed or variable. Fixed interest rates lock in a rate of borrowing capital for the full length or term period of the loan. Variable interest rates will fluctuate either monthly or annually based upon an agreed relationship to some economic indicator such as the prime lending rate set by the Federal Reserve system. All loans are typically subject to a variety of fees that relate to the origination and servicing of the loan. The loan disclosure documents that will be signed at closing will indicate all fees and terms of the agreed upon financial relationship. Some loans include a prepayment charge if you or your organization have the ability and choose to pay back to the borrower all that is owed in advance of the agreed upon maturity date. 99
  • 25. The variability in fees and the terms of the small business loan are important reasons to talk to more than one financial institution. The lower the interest rate and the longer the period to pay will produce the lowest monthly cash payment. Always ask the lender about any options in fees, rates, and terms that might further help your cash flow needs including the advantages and disadvantages of each loan or a line of credit arrangement. A line of credit is a different type of financial arrangement like a loan except the financial institution is not providing a lump sum of capital at closing. Instead you have the option to draw funds up to an agreed dollar limit when needed. The line of credit will also have a variable of fixed rate of interest and will be secured by some type of asset (building) you and your organization may own. Whether a loan or a line of credit, both provide access to a specified amount of capital that could be the missing piece to effectively capitalize your EN business model. Many lenders will indicate to you that your needs and financial status will affect the terms of the loan. The strength of your relationship complemented by a strong business plan anchored by an excellent leadership team will make a difference. 100
  • 26. Questions and Answers from a Lender’s Perspective To help you and an organization understand the challenges of lending from an insider’s perspective, we asked professionals from the Community Investment Group at NCB Development Corporation and Small Business Services at the National Cooperative Bank to answer a series of questions. These questions and answers are provided to you and your organization to help you think further about and develop an effective approach to accessing private capital. Q1. Do you make small business loans? A1. Yes, we make start up and business expansion loans. Q2. Do you make loans to non-profits? A2. Yes. Q3. What is the lending application process? A3. There are different lending applications for different types of loans we offer (e.g. SBA Guarantee loans vs. conventional loans). The application process consists of the borrower providing the specific data that is requested by the lending institution, completing the appropriate application for their particular loans and then submitting it to underwriting/loan officer to analyze the received data and determine if a loan should or should not be granted. NCB does offer on-line applications. NCB has and will send to a potential customer, per their request, loan applications via the internet/email. As do most lending institutions. Q4. What information will be required? A4. You will be expected to provide a credit history, financial audit, a business plan, and identification of possible collateral to secure the loan. We may ask for additional information on experience in the specific business field. Q5. What timelines are there from application, review, and decision? A5. Depending on the type of loan and the circumstances associated with the gathering all the required data, the underwriting process and the closing process—the timeline is variable. However, most loan closings fall within the rage of 30 to 90 days. Q6. What are the factors in decisions to approve a loan? A6. Depending on the deal at hand, particular factors may need to be weighed more heavily than others. The core factors are: collateral (amount, liquidity, reliability), capacity (reserves, access to cash during tight times, ability to operate profitably), character (applicable expertise of borrowers, consistency and reliability of information, management depth, willingness to incur and repay debt), capital (for most of NCBDC’s borrowers the other factors need to be strong enough to outweigh the fact that capital is not strong and there is not typically an easy way to grow capital), conditions (things like the economy, political and fiscal changes, cyclical businesses, community issues). What 101
  • 27. is listed is typically called the 5 C’s of credit. All loans of this type operate utilizing the 5 C’s of credit. Q7. What are the possible loan terms? A7. The customers’ needs and financial status will effect the terms of the loan. Q8. After approval of the loan, what are the next steps? A8. Once a loan is approved it moves to the closing process. This is the due diligence activity that takes place to ensure that all aspects of the loan are legal for the borrower and lending institution. Once this has been completed the funds are issued to the borrower and booked as an outstanding loan at the Bank. The customer receives all the final terms of the loan (e.g. payment obligations, term, conditions, etc.) at the closing. Q9. What suggestions do you have for an individual or organization trying to develop an effective relationship with a lender? A9. It depends on each loan situation. Having a positive, mutually beneficial relationship with a lender-customer benefits all parties associated with a borrowing- lending situation. If possible, it is helpful to meet and learn more about each other. Always provide open and honest answers to questions and providing timely and accurate information is also important. Q10. Why would a person or a business come to you vs. a similar lending institution? A10. Each potential customer has its ideas as to how it is going to determine its needs and satisfaction for the selection of a lending institution. It is the task of the lending institution’s Small Business Service team to learn what these specific needs are, and cater to them to ensure a “win-win” arrangement for the customers and the Bank. SBS does not try and sell fixed products to potential customers. Banks ask potential customers how can we best help you? And, then determine if we can tailor a loan product from internal or external sources that does just that….best helps the customer. Q11. What kinds of loans do you look for and why? A11. Loans that make good business sense for the potential customer and the Bank. 102
  • 28. Simple Strategies to Success In the previous four sections, you and your organization have been provided information to understand and take advantage of the opportunities for accessing private capital. In this section, we have put together an “action plan” of what you have learned into ten simple strategies for success. ACTION STEPS 1. Develop a comprehensive Business Plan that makes the compelling business case for funding and investing in your Employment Network. Identify SBA supported organizations in your area that can help you develop the plan. (SCORE, SBDC’s, WDC’s). Build a strong management team for the EN that will meet the “character test” that will be applied by all lenders and includes management, marketing, financial, and human services expertise. 2. Justify your cash flow projections on both the revenue and expense side with realistic explanations and documentation based on facts. Also, be able to explain to any potential lender what funds you and your organization will invest to make the EN a financially viable enterprise. 3. Make the case for the relationship between the EN and local community development activity that responds to the needs of low income and disadvantaged populations. 4. Make an appointment to meet with your bank or financial institution that you have a current relationship with to discuss the EN and your financial needs. 5. Make an appointment to see at least two other local financial institutions that you are introduced to by members of your Board who have personal and/or professional relationships. Ask that your Board member attend the meeting with you to talk about their support of the EN business. 6. Discuss with each of these financial institutions their current CRA plan, their current CRA rating, when is their next scheduled review, and how the EN business meets CRA requirements. 7. Identify three CDFIs to contact in your state and region. Make an appointment to discuss the EN business and its relationship to their goals and objectives as a CDFI. Do your homework first. Learn more about their lending history and procedures. 8. Identify three Community Venture Capital Funds, to target for at least a phone appointment to learn more about possible interests in the EN that match their social objectives. 103
  • 29. 9. With any and all of these selected financial institutions, build and nurture a relationship. There is some discretion each lender has regarding approval of an application for funding and setting the terms of the loan. The relationship cultivated will make a difference. 10. Don’t miss any opportunities to access private capital. Identify possible economic initiatives on your states home page. Consider contact with one of the identified national resources involved in capital development. Visit your states Small Business Development Center (SBDC), contact SCORE, and talk to your area SBA office and area USDA (Department of Agriculture) office. Any and all of these contacts may put you in touch with a source for capital that embraces your EN objectives. 104
  • 30. Glossary of Terms The following explanation of key terms has been prepared in order to help you and your organization better understand the vocabulary of the world of lending, credit, and finance. Accounts Payable Is money that a company owes to vendors for products and services purchased on credit. This item appears on the company's balance sheet as a current liability, since the expectation is that the liability will be fulfilled in less than a year. When accounts payable are paid off, it represents a negative cash flow for the company. Accounts Receivable Money that is owed to a company by a customer for products and services provided on credit. This is treated as a current asset on a balance sheet. A specific sale is generally only treated as an account receivable after the customer is sent an invoice. Accounts Receivable Aging A periodic report showing all outstanding receivable balances, broken down by customer and month due. Asset Any item of economic value owned by an individual or corporation, especially that which could be converted to cash. Examples are cash, securities, accounts receivable, inventory, office equipment, a house, a car, and other property. On a balance sheet, assets are equal to the sum of liabilities, common stock, preferred stock, and retained earnings. Balance Sheet Is a quantitative summary of a company's financial condition at a specific point in time, including assets, liabilities and net worth. The first part of a balance sheet shows all the productive assets a company owns, and the second part shows all the financing methods (such as liabilities and shareholders' equity). Also called statement of condition. Business Planning Advance A product offered by NCB Development Corporation, a Business Planning Advance is a quasi-loan product used to help organizations evaluate the feasibility of the project, pay for due diligence reports, etc. An applicant must have components of a successful business (i.e. business plan, site control, approval for grant money, etc.) in place to qualify for funds. Buy Down Is a cash payment made by any party to reduce a borrower's monthly loan payment. For small business startup loans, the borrower typically does not have cash to use for this reason, and a buy down could only occur if there was a pool of grant money accessible by the borrower to use to buy down the rate. Also called an Interest Rate Buy Down. Capital The net worth of a business, i.e. the amount by which its assets exceed its liabilities. Cash flow A measure of a company's financial health. Equals cash receipts minus cash payments over a given period of time; or equivalently, net profit plus amounts charged off for depreciation, depletion, and amortization. 105
  • 31. Cash Flow Projection A forecast of cash funds (cash, checks or money orders, paid out or received) a business anticipates receiving, on the one hand, and disbursing, on the other hand, throughout the course of a given span of time, and the anticipated cash position at specific times during the period being projected. Character Loan A loan based on the reputation and/or personal credit history of a borrower, rather than collateral. Collateral Assets (money, inventory, equipment, property, etc.) pledged by a borrower to secure a loan or other credit, and subject to seizure in the event of default. Also called security. Collaterized Loan Obligation CLO is a debt security backed by a pool of commercial loans. Community Development Credit Union (CDCU) CDCUs provide financial assistance to low-income and minority communities. CDCU’s are regulated by the National Credit Union Administration (NCUA). By being designated as a community development credit union, a majority of its membership must earn less than 80 percent of the national median household income. There are over 600 credit unions with the low-income designation out of a total of 11,800 credit unions nationwide. CDCUs serve over 2 million members annually out of over 70 million Americans participating in other types of affinity membership credit unions across the country. CDCUs have their own trade association that is headquartered in New York City. The National Federation of Community Development Credit Unions (NFCDCU) advocates for and provides financial, technical, and human resources to CDCUs. Community Development Financial Institution (CDFI) A CDFI is a private sector organization that has been established to promote community development with a specific emphasis on meeting the needs of low-income communities. They are market-driven, locally controlled, private sector, finance-led organizations. CDFIs get capital from public and private sources. Corporations, individuals, government, and private Foundations have contributed capital to CDFIs. In turn, CDFIs provide an array of financial services to economically disadvantaged individuals and communities including loans, training and technical assistance services, and equity investments. One crucial source of support to CDFIs is the federal CDFI Fund administered by the U.S. Department of the Treasury. The CDFI makes awards on a competitive basis to CDFIs for organization capacity building and capital which is done on a one-to-one match basis: one federal dollar is provided for each private sector dollar invested in a CDFI up to a maximum of $5 million. Commercial Loan A short-term renewable loan used to finance a company's immediate working capital needs. Covenant Is a clause in a contract that requires one party to do, or refrain from doing, certain things. Often, a restriction on a borrower imposed by a lender. Also called restrictive covenant. Credit History A record of an individual's or company's past borrowing and repaying behavior. It will list personal or corporate information, credit lines currently in the person's or company's name, and risk factors like late payments or a recent bankruptcy. Credit Union Is a non-profit financial institution that is owned and operated entirely by its members. Credit unions provide financial services for their members, including savings and lending. Large organizations and 106
  • 32. companies may organize credit unions for their members and employees, respectively. To join a credit union, a person must ordinarily belong to a participating organization, such as a college alumni association or labor union. When a person deposits money in a credit union, he/she becomes a member of the union because the deposit is considered partial ownership in the credit union. Debt A liability or obligation in the form of bonds, loan notes, or mortgages, owed to another person or persons and required to be paid by a specified date (maturity). Debt service Is the series of payments of interest and principal required on a debt over a specific period of time. Default Is a failure to make required debt payments on a timely basis or to comply with other conditions of an obligation or an agreement. Delinquent Failing to make a required payment on time. Earnings Report See Profit and Loss Statement Expense Any cost of doing business resulting from revenue-generating activities. Five C's of credit The five key elements a borrower should have to obtain credit: character (integrity), capacity (sufficient cash flow to service the obligation), capital (net worth), collateral (assets to secure the debt), and conditions (of the borrower and the overall economy). Fixed-rate Loan Is a loan in which the interest rate does not change during the entire term of the loan. For an individual taking out a loan when rates are low, the fixed rate loan would allow him or her to "lock in" the low rates and not be concerned with fluctuations. On the other hand, if interest rates were historically high at the time of the loan, he or she would benefit from a floating rate loan, because as the prime rate fell to historically normal levels, the rate on the loan would decrease. Income Statement Is an accounting of sales, expenses, and net profit for a given period. Interest Rate Interest per year divided by principal amount, expressed as a percentage. Interest Rate Buy Down See Buy Down. Letter of Credit A document issued by a bank that guarantees the payment of a customer's drafts for a specified period and up to a specified amount. It transfers the collection risk from the “loan provider” to the letter of credit provider. Liability Is a financial obligation, debt, claim, or potential loss. 107
  • 33. Liquidity Is the ability of an asset to be converted into cash quickly and without any price discount. Loan An arrangement in which a lender gives money or property to a borrower, and the borrower agrees to return the property or repay the money, usually along with interest, at some future point(s) in time. Usually, there is a predetermined time for repaying a loan, and generally the lender has to bear the risk that the borrower may not repay a loan (though modern capital markets have developed many ways of managing this risk). Loan Pool A pool of funds created through the investment of, typically, multiple lenders. It is a way of combining resources of several lenders into one “pool.” The pool usually has a stated purpose and uses for the funds as well as the terms. Market Rate Is the prevailing interest rate available at any given time. Net worth Is the total assets minus total liabilities of an individual or company. For a company, also called owner's equity or shareholders' equity or net assets. Obligation Is any debt, written promise, or duty. Operating Costs/Expenses The day-to-day expenses incurred in running a business, such as sales and administration, as opposed to production. Prime Rate The interest rate that commercial banks charge their most creditworthy borrowers, such as large corporations. The rate is a lagging indicator. Profit and Loss Statement Is an official quarterly or annual financial document showing earnings, expenses, and net profit. Pro Forma Description of financial statements that have one or more assumptions or hypothetical conditions built into the data. Often used with balance sheets and income statements. Reliability Is ability to pay loans on time. See Credit History. Restrictive covenant Is a clause in a contract that requires one party to do, or refrain from doing, certain things. Often, a restriction on a borrower imposed by a lender. Also called covenant. Revenue Total dollar payment for goods and services that are credited to an income statement over a particular time period. Revenue figures will usually be net of discounts or any payments that are returned to the customer or client. By subtracting expenses from revenue, a company's net income can be calculated. In terms of reporting revenue in a company's financial statements, the question of when revenue should be considered received (or "recognized") is sometimes not clear. For example, revenue could be recognized when the deal is signed, when the money is received, when the services are provided, or at other times. There are rules 108
  • 34. specifying when revenue should be recognized in different situations, and in general, companies should recognize revenue only when the good or service is fully transferred over to the customer/client, and when the amount of revenue to be received can be reliably determined Risk Capital See Venture Capital. Security See Collateral. Startup Is a new business venture in its earliest stage of development. Statement of Condition See Balance Sheet. Tax Credit The direct dollar-for-dollar reduction of an individual's tax liability; compare with tax deduction, which reduces an individual's tax liability only in proportion to his/her tax bracket. Venture Capital (VC) Funds, such as the Community Development Venture Capital Alliance) made available for startup firms and small businesses with exceptional growth potential. Managerial and technical expertise is often also provided. Investors consider the number of quality jobs that will be created and the business’ impact on a low-income community. Also called risk capital. Conclusion All organizations that have chosen to participate in the Ticket to Work and Self- Sufficiency Program have made a commitment to entrepreneurial activity with a social purpose. The leadership teams are investing human and financial capital to support an Employment Network that represents a significant departure from past traditional fee for service relationships with local and state government. The EN Business Model that is outcome performance driven offers a unique opportunity to expand existing and to cultivate new financial relationships. The information provided should assist you and your organization to identify and develop effective strategies to meet your working capital needs. Access to private capital to enhance community development should become a part of your organization’s funding strategy for the future. 109
  • 35. APPENDIX I NCBDC LOAN APPLICATION ECONOMIC DEVELOPMENT Mail to: NCB Development Corporation 1725 Eye Street, NW, Suite 600 phone: (202) 336-5463 Washington, DC 20005 fax: (202) 336-7804 Attn: Rhonda Jones COMPANY PROFILE Legal Name of Organization/Business Date and Place of Incorporation Address City State Zip Contact Person Phone Federal Tax ID E-mail Fax How did you hear about NCBDC? Are you a 501(c ) 3? If not, please explain corporate and capital structure. PROJECT OVERVIEW Describe the Project/Financing Need Amount of loan requested Terms Requested Who will be responsible for When will you need the loan? Project? Purpose of loan (equipment, working capital, construction, mortgage, leasehold improvements) Sources and Uses of funds for the Project Sources Amount Uses Amount a. a. b. b. c. c. d. d. e. e. Total Sources Total Uses 110
  • 36. INFORMATION ON YOUR ORGANIZATION What is your organization’s mission? What areas do you serve? Are you located in, or do you serve a low-income area? What type of technical assistance or funding for business, commercial, or workforce development do you offer? What other community needs does your organization serve? What level of impact (e.g., jobs created, retail developments completed, housing units built) has your organization achieved? What is your organization’s annual operating budget? 111
  • 37. Describe relationships with major funders (government and private), including amounts and terms of funding. ATTACHMENTS (TO BE SUPPLIED WITH THIS APPLICATION) a. Resumes of key staff including principal and founders b. Names and occupations of board members c. Copy of Articles of Incorporation and Bylaws d. Most recent annual report e. Last three years of financial statements, if available f. Most recent year-to-date interim financial statement g. Copy of budget for the current fiscal year h. Proformas over the next five years, if applicable i. Strategic plans and/or expansion plans j. Copy of lease, if applicable k. Demographic analysis of target market 112
  • 38. SIGNATURE AND AUTHORIZATION The undersigned applicant does hereby represent and warrant that the information contained on this form, and any attachments submitted in conjunction with this application, is complete and correct. Furthermore, the applicant authorizes National Cooperative Bank, and/or any of its subsidiaries or affiliates, to obtain credit references and credit reports on the business and to release credit information to others. All applications are subject to final credit approval. Signature _________________________________________________________________ Date _______________ Title_________________________ 113
  • 39. APPENDIX II NCB Capital SBA Guarantee Loan Application (This pdf file can be accessed via the web.) 114