Micro Lending: Loan Application Scoring

1
Micro Lending Loan Application Scoring
Valley Economic Development Center (VEDC)

• Roberto Barragan, President
• Angela Stanislawski, Director of Lending
• rbarragan_at_vedc.org

2
Micro-lending in Los Angeles

• 8 million residents, 45 Latino
• 250,000 small businesses
• 95 of all job creation is from small business
• Banks Credit scoring for all loans below 50,000

3
Hybrid program of lending

• Achieve volume of microlending impact 450
  loans in 10 years 5.5 million
• Made 75 loans per year, avg. size 13K
• Credit, collateral, cashflow plus character
• 92 payback
• Operates alongside SBA 7(a) lending 300 loans
  funded annually under 50k thru Bank of America
  and Community Express ( Innovative, Superior)

4
Limited Application

• Signed and completed SBA Microloan Application
• Business tax returns for last three (3) years
• Signed credit authorization
• Personal Financial Statement
• Personal monthly budget

5
Screening

• Credit check w/authorization and intake form
• No Bks w/in 3 years
• No more than 3 unpaid derogatories
• Denials are referred to Consumer Credit Counseling

6
Loan Officer Scoring

• Complete application will be scored in four
  categories
• One to five points are granted in each category
  poor to strong
• Minimum of 15 points are required for
  presentation to loan committee
• Loan amounts above 7,500 require hard
  collateral

7
Cashflow

• 5 Historical profit Min.Debt Service Coverage
  of 2.01
• 4 HP Min Debt Service Coverage of 1.51
• 3 HP Min Debt Service Coverage of 1.21
• 2 HP Min.Debt Service Coverage of 1.01
• 1 HP DSC of less than1.01
• 0 No historical repayment ability

8
Credit

• 5 Excellent, no derogatories
• 4 Good, some past dues
• 3 Fair, pd collections,chgoffs, BK over 7 yrs
  old.
• 2 Poor/Bk 5yrs Tax liens
• 1 Poor/Bk 3yrs
• 0 Unpd Charge-offs/Collections liens/Outstanding
  Child Support

9
Collateral

• 5 Trust deed (any position)
• 4 Vehicles, purchase money UCC-1 filing
• 3 UCC-1 on existing business assets, LLTV 21
• 2 UCC-1 on business assets, LLTV 11
• 1 Business LLTV lt11
• 0 Negative net worth

10
Character

• In the Character category, the borrower will
  receive one additional point for each of the
  following categories, up to 5 points
• 1. Public records search no outstanding legal
  issues
• 2. Landlord/Trade references clean references,
  no derogatories
• 3. Site Visit Clean, well organized, busy
  location

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Character (continued)

• 4. Previous addresses Located at current address
  over five years, preferably over 10 years
• 5. Police record search no outstanding issues
• 6. Experience/Exposure more than 3 years with
  this business
• 7. Graduation from City of Los Angeles
  Entrepreneurial Training program
• 8. 10 Equity Contribution

12
Impact Loans

• Loan Officers can recommend applications with
  scores between 13-14 points that
• 1. 100 matching equity
• 2. Are located in a low/moderate income census
  tract
• 3. Is a minority and/or woman owned business
• No startups

13
Startups

• Business plans required
• A revised criteria exists for startups
• Cashflow existing other household wages/income
  is required
• Collateral TD or vehicle req.
• Character additional investment,
• Min. Application score of 15

14
Chief Credit Officer Signoff

• Can reduce loan amount based on collateral,
  cashflow
• Establish secondary repayment source
• Review and reject for negative net worth

15
Loan Committee Approval

• Internal approval below 5k
• Fax vote below 15k
• Loan Committee meeting and approval above 15k

16
Strong Documentation

• Loan Agreement
• Security Agreement
• Promissory Note
• Guaranty
• Perfected Security
• Business sale amendment

17
Servicing

• Entrepreneurial Training Program required prior
  to funding 6 weeks or one Saturday
• Annual submission of tax returns
• Annual site visits
• Annual review of credit reports, UCCs

18
Collection

• TA at 30 days and recommendation for action
• Acceleration at 75 days
• Liquidation of collateral at 90 days
• Repossession
• Foreclosure
• Legal action

19
Performance

• 8 chargeoff over 10 years
• 14 delinquency versus 30 national average
• Avg DSC 2.28
• Avg Score 14.4
• 50 startup
• Business failure 10 in 3 years

20
Portfolio

• 40 startups
• 55 minority
• 50 women
• 33 retail
• 25 service