Alternate Financing Public

8/8/2019 Alternate Financing Public

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Dan Bolton, Editor-in-Chief Coffee Fest Minneapolis

Specialty Coffee Retailer June 4, 2010

[email protected]

(415) 839-5063

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When Banks Say No

THE GREAT RECESSION


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When Banks Say No

Commercial Banking Crisis

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Banks made it difficult to finance small business ventures long beforethe current financial crisis. In 2006 when credit was flowing, banksdenied 5 million small business loan applicants because of low

personal credit scores and lack of collateralregardless of cash flow.

The Mortgage Crisis and Great Recession further tightened credit.Major U.S. financial institutions wrote down more than $510 billion

in bad investments in 2008 and $550 billion more in 2009. Theyexpect to write off another $500 billion in losses this year.

Lending across all banking sectors was down 9 percent last year. In 2009 small business ownersunsuccessfully sought $160 billion to finance their ventures. Small business loans were down 4percent at the largest banks. Bank of America cut back 21 percent. Established institutions likeCIT with multi-billion portfolios in small business holdings declared bankruptcy.

The government closed 140 banks in 2009 and 78 since January and the pace is accelerating.

Saying NO is often the safe response due the number of foreclosures pending. In many casesbanks are preserving capital to protect their investment in local businesses like your own.

Source: Business Week, Associate Press and Fortune

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Due to the crisis, lenders began exploring alternativemethods of securing private financing, returning to atwo thousand year old system where small investors

were the engines of commerce.

The emergence of Social Lending websites permits family and

friends to join wealthy benefactors and small private investors asready sources of capital. Instead of approaching banks and creditunions or appealing to an angel investor or assigning equity tosilent partners or venture capitalists a business owner could

conveniently tap the resources of 10 investors at $2,500 each or 100 investors at $250each or 1,000 investors at $25 or any combination of the above to fund expansion plans,capital improvements, purchase new equipment and expand inventory.

What gives these emerging financing tools real momentum (and fueled $1 billion in loans)are favorable interest rates for borrowers and transparency and a low incidence of default.

"As major financial institutions stumble or fail completely, online lending sitesare on the rise. CBS News

"...the increased efficiency of cutting out the banks The New York Times

Raise a hand toSource: CBS News, New York Times, Lending Club

THE GREAT RECESSION

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Technology Advances Make it Easier to Access Risk


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Peer-to-Peer Lending

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Access to a Large Pool of Lenders

Convenient Application Process Competitive Rates (8-12%) Sophisticated Risk Assessment Quick Funding Decisions Low Default Rates Transparency

THE GREAT RECESSION

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Raise a hand toSource: www.virginmoneyus.com

THE GREAT RECESSION

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A Short History & Some Supporting Research


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THE GREAT RECESSION

Samovar Tea LoungeSan Francisco

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This independent small chains grossearnings were $3 million in 2009 on salesof beverages, food, loose tea and fine teaware at three locations.The first shop opened in 2001 and earns$1.2 million. A second opened near the

citys convention center in 2006. Cash was tight as Samovar opened itsthird shop in Feb. 2009. That summer asthe 2009 holiday shopping and gift givingseason approached owner Jesse Jacobsbegan lining up funds to stock inventoryfor his online operation and shops. Failure to place timely orders for$100,000 in gift items posed a seriousthreat as 4th Quarter revenue is critical tothe chains overall profitability.

Source: Interview, 5/27/10 Jesse Jacobs, owner 6


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Finance Options

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Prior to seeking financing Jacobs reduced labor

expense, eliminated the least profitable menuitems and bartered for staff morale-boosters inlieu of bonuses. He created customer couponincentives, introduced a value tea and brunchand marketed aggressively online. He alsoshortened the inventory cycle to just-in-timereducing cash on the shelf by $40,000.

Starting in 2008 he asked key vendors toextend payment terms and consider convertingreceivables to debt. Several converted about halftheir receivables at 7% for six months.

He next sought $10,000 from private investorsand paid 8% on $50,000 in short-term loans.

Jacobs, who qualifies for AMEX Plum, also tookadvantage of their offer to extend payments for90 days to a maximum of $30,000.

It was only after all these options had beenvisited that Jacobs turned to Prosper with arequest to borrow $20,000.

Source: interview 5/27/2010, Samovar owner Jesse Jacobs .

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Raise a hand toSource: interview 5/27/2010, Samovar owner Jesse Jacobs .

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Stellar local business focused on creatinghuman connection through the ancient ritual oftea is looking to expand our online business.After eight outstanding years in business we areready to venture online and brave the holiday

season with a new offering of retail tea and teaware. We are looking for a bit of capital to helpfund inventory for our retail operations andwould appreciate the support of passionate

Samovar lovers who "get" our business andwant to help us grow.

Samovars Description for Loan on Prosper


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Raise a hand toSource: MSN Money, Informa Research Services, Inc

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Interest Rates

National average for a 36-month unsecured $5,000 loan was 12.32% on May 28.

Jacobs, with good credit, borrowed$20,000 from Prosper at 9% and paid itback in 6 months.

Coffee shops historically faced difficultyobtaining loans from traditional banks. Mosthave no significant assets or receivables and

little collateral to secure business loans.

An On Deck $30,000 loan used to buyinventory at 19% when paid in six monthscosts $277 per day. Interest expense is$5,700.

At Prosper borrowers with good creditscores pay as little as 9 percent but the costrises to 33 percent for those with blemishedcredit records.

Investors earn 8.2 percent to 32 percent.
http://www.informars.com/http://www.informars.com/http://www.informars.com/


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Raise a hand toSource: Prosper website

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Several hundred lenders maypurchase a note. The notefinances the borrowersproposed use. Borrowers paydown the note in equalmonthly payments with aportion to Prosper to service

the loan and the remainderas interest to lenders.

How it Works: Business Loans in Small Increments


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Proprietary ratings based on credit scores and internal benchmarks help lenders predict losses.

How it Works: Risk Assessment


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Lenders select projects to fund. An online auction determines interest rate.

How it Works: Auction


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How it Works: Family & Friends

The identity of lenders is carefully guarded.

Borrowers disclose as much information asneeded to present their case. Lenders can askquestions via email.

Since its founding Prosper has attracted960,000 members and loaned $197 million

and paid lenders several million in interest.


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Prosper: A Closer Look

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Outstanding Loans: $197 millionFounded: 2006Typical Loan: $4,369 (available from $1,000 to $25,000)Loans Funded: 32,000 funded loansSecurity: Personal guaranteeInterest (borrowers): 10 to 33% Members: 980,000Fee: 1 percent Approval: Depends on successful bidsDefault rate: 6.8 percent Minimum Credit Score: 640Profile of Successful Applicant: Sixty percent are individuals seeking debt relief. Small businessloans make up 12% of successful applicants with 4% seeking education assistance.

Paperwork: Online application, credit review by ExperianPayments: Monthly paymentsFunded: Venture Capital Funds*, Private Family FundsAs new peer-to-peer sites emerge they are becoming more specialized as borrowers define theirneeds. Prosper, for example has seen big growth in debt consolidation in the past year.

Source: Accel Partners, Benchmark Capital, DAG Ventures, Fidelity Ventures, Meritech Capital Partners, and Omidyar Net

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Debt Consolidation

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Currently the majority of Prosper

(60%) and Lending Club (61%)borrowers are seeking financial reliefthrough debt consolidation. Smallbusinesses comprise the next highestloan category at 12 percent.

Source: On Deck Capital, Prosper

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Established BusinessOn Deck Capital offers borrowerslarger sums. However they musthave operated at least one year at anon-residential business office, whichdiscourages debt consolidators.


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Raise a hand toSource: www.ondeckcapital.com

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Small Business SpecialistsRetail and small manufacturers with good cash flow are the sweet spot for this lender.


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Prosper promotes On Deck to borrowers who meet requirements.

On Deck Capitalcompetes with both

Merchant CashAdvance programs andtraditional lenders.


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How it Works: Smooth Sailing

Prosper and On Deck Capital are not FDIC insuredand borrowers do default at rates approaching 20percent for those with weak credit.

Returns are only as reliable as individual borrowers.Each Prosper Note corresponds to a listing which setsforth the relevant details about the loan, including loanamount, price, yield percentage, and borrower details.Any payment from a Prosper Note is dependent onpayments Prosper receives on the corresponding loan.

Prosper recommends lenders diversify across a widerange of choices investing small amounts to reduce theimpact of a possible default.

Shop owners finding it difficult to navigate the narrowchannels of traditional lenders should considerestablishing a history with a reputable peer-to-peerlender for equipment and seasonal inventory buys asan alternative to merchant and vendor advances,credit card and bank lines of credit.

Dan Bolton, Editor-in-Chief

Specialty Coffee Retailer

[email protected]

(415) 839-5063

Documents

Alternate Financing Public