REQUEST FOR INVESTMENT PROPOSALS WORKING CAPITAL FOR GROWING BUSINESS

Transcription

1 REQUEST FOR INVESTMENT PROPOSALS WORKING CAPITAL FOR GROWING BUSINESS CFED, with support from the Northwest Area Foundation, Wachovia, Cascadia Revolving Fund, and the National Community Capital Association, is pleased to announce product development funding through the Local Capital Market Investment Fund (LCMIF) initiative: Working Capital for Growing Business. Growing businesses expand economic opportunity by creating and preserving jobs and benefits and building local economic vitality. Working capital provides entrepreneurs with the flexible money needed to grow their business. Revolving loans, or lines of credit (LOCs), are one of the best-known forms of working capital, but increasingly one of the most difficult for businesses to secure. There is strong demand for LOC products from entrepreneurs and many community development financial institutions (CDFIs) would like to offer them. However, very few CDFIs currently provide LOCs. CFED's research has revealed specific barriers to product scale, delivery, and efficiency, which we believe can be addressed through a disciplined product development process conducted by experienced CDFIs that currently offer working capital. WORKING CAPITAL FOR GROWING BUSINESS INITIATIVE GOALS 1. To work with a select group of CDFIs to improve the design, delivery, and pricing of LOCs, while sharing innovations and attracting new capital to promote the expansion of working capital lending by CDFIs. 2. To increase access to LOC financing by businesses that create jobs, benefits, and economic growth in low-income communities. APPLICATION PROCESS Only organizations with a track record of working capital lending can apply for funding. A successful proposal must include an outline of existing LOC offerings/lending volume and a plan for specific deliverables. The products and information developed through this process will be jointly owned and may be used freely by all partners in the Working Capital for Growing Business initiative. CFED plans to share the tools developed with the CDFI field to increase its LOC capacity. MARCH 15, 2005 Organizations submit concept papers MARCH 30, 2005 Full proposals invited from selected applicants APRIL 30, 2005 Full proposals due MAY 2005 Investment awards announced Proposals should be directed to Michael Torrens at CFED, 777 N Capitol St, N.E., Suite 800, Washington, DC ph: fx: michael@cfed.org website: N Capitol St NE Suite 800 Washington DC Ph: Fx:

2 PRODUCT DEVELOPMENT AREAS CFED seeks proposals from CDFIs that offer working capital LOCs to businesses. Investments will focus on the following priority areas to build the capacity of CDFIs to engage in working capital lending: Standardized Lending and Portfolio Management Tools Robust Documentation of LOC Program Costs Efficient Risk-Management Systems and Software INVESTMENT PARAMETERS AND PROCESS Through LCMIF, CFED invests in organizations on a contractual basis with both parties agreeing on the outcomes to be achieved and the methods for reporting results. Each investment is structured to provide high-quality information on the performance and impact of each partner's activities. CFED seeks proposals from CDFIs with existing LOC experience and a strong desire to work collaboratively with experienced practitioners to improve their business lending program and strengthen the broader field. Cascadia Revolving Fund (Cascadia) will be the product development manager for the Working Capital for Growing Business initiative. Cascadia is an experienced CDFI that provides loans and technical assistance to small businesses and nonprofit organizations in Washington state and Oregon. CFED and Cascadia completed six months of research on LOC programs in CFED and Cascadia will work with a small group of CDFIs selected through this RFIP process to develop and refine tools, training, and product strategies that facilitate growth to scale in working capital finance. CFED seeks to identify, test, and share products that increase the effectiveness and sustainability of LOC programs. The initiative will select partners for investment to complete work in the following categories: STANDARDIZED LENDING AND PORTFOLIO MANAGEMENT TOOLS. CDFIs must increase the efficiency of delivery of LOC products to achieve sustainability. The initiative seeks to identify the best models and materials for loan application and structuring, underwriting, monitoring, collateral valuation, back office operations, and technical assistance. The partners in this initiative are expected to identify and document LOC operations that provide maximum efficiency and impact (defined as an appropriate ratio of cost to risk to financial and social return). The partners must be willing to share the best tools and learning and generate critical data on the performance of current materials, systems, and operations. Of particular interest are collection techniques for non-performing loans, efficient fraud detection methods, and scalable models for all aspects of lending. ROBUST DOCUMENTATION OF LOC PROGRAM COSTS. To expand access to LOCs, they must be priced to cover costs. Few tools are currently available to help CDFIs analyze program efficiency or set optimum pricing. As part of the product development process, CFED will work with the product development manager and partners to generate data on the cost of LOC program elements. Applicants must budget for the staff time required to contribute to this effort. Working Capital for Growing Business Request for Investment Proposals Page 2

3 EFFICIENT RISK-MANAGEMENT SYSTEMS AND SOFTWARE. An applicant may propose funding for a specific system or software that would benefit the field as a whole. Of special interest are software and/or systems that reduce the cost of processing, lower the risk of loss, or detect fraud for LOC collateral. Partners must document a system in either the CDFI or for-profit sector that supports the delivery and servicing of LOC products and provide data on the volume of lending needed for cost efficiency. CFED staff monitors LCMIF investments on an on-going basis through site visits, technical assistance, and data analysis. CFED leads the initiative and will work with Cascadia, the CDFIs selected through this RFIP, and the National Community Capital Association (NCCA), to provide the following support: Hosting a product development retreat for all of the partners to strengthen their work. Organizing the partners and providing technical support for the on-going work of the partners (including web-based tools for feedback and collaboration, periodic conference calls, etc.). Coordinating development of new tools and information and dissemination to the broader field. Reviewing, approving, and managing relationships, convening partners, and monitoring performance. APPLICATION PROCESS CFED uses a two-step application process when making LCMIF investments in product development and replication. The first step is to solicit two- to three-page concept papers that are reviewed by CFED staff. Staff recommends the concept papers that should advance to the second step, which is a full investment proposal for review by the LCMIF Investment Committee. The committee includes development finance practitioners, senior state development officials, foundation representatives, and private sector investment professionals. Final investments decisions are made by the Investment Committee. STEP ONE: THE CONCEPT PAPER DUE: MARCH 15, 2005 The two- to three-page concept paper should include: A review of your background offering LOC products and your experience to date. Your plan to work with the other partners to increase LOC capacity. An outline of your proposed product development and testing strategy. A description of the market to be served and documentation of market demand. An overview of your organizational capacity to develop, market, and deliver LOC products. Qualifications of your organization s key person to manage the product development process. Total project costs including CFED funds and any available match internal and/or external. Concept papers will be reviewed upon receipt and selected applicants will be invited to submit investment proposals within two weeks. CFED may work with applicants to strengthen a submission that is determined to be inadequate but proposes a concept worthy of further consideration. ELIGIBILITY: ONLY CDFIS OR REVOLVING LOAN FUNDS THAT PROVIDE WORKING CAPITAL LOCS TO SMALL BUSINESSES ARE ELIGIBLE FOR FUNDING. CDFIS THAT LEND WORKING CAPITAL EXCLUSIVELY TO NONPROFITS OR FOR AFFORDABLE HOUSING WILL NOT BE CONSIDERED. Working Capital for Growing Business Request for Investment Proposals Page 3

4 STEP TWO: THE INVESTMENT PROPOSAL DUE: APRIL 30, 2005 Upon invitation, the eight- to 10-page (excluding attachments) investment proposal should include: A summary of the total investment request with sources and amount of matching funds identified. A description of the specific deliverables you will develop and information you will share. An explanation of how your work will add value and strengthen LOC offerings by the CDFI field. Details of your organizational capacity, with resumes, to conduct product development activities. An implementation plan with timeline, performance benchmarks, and outcomes to be achieved. A detailed line item budget for uses of all funds LCMIF investment and matching funds. Proposals are reviewed by CFED staff and presented to the LCMIF Investment Committee for final investment decisions. Decisions will be announced in May Following the announcement, CFED will host a product development retreat to collaboratively develop the product development plans and timeline. THE BUDGET CFED will invest up to $40,000 to support the product development and replication activities of partners selected to participate in the Working Capital for Growing Business initiative. Funded organizations must match CFED s investment through internal sources or external funders. Co-investment ratios are determined on a case-by-case basis with consideration given to the organization's financial and programmatic capacity, as well as the overall benefit of anticipated outcomes. PARTNERS IN THE WORKING CAPITAL FOR GROWING BUSINESS INITIATIVE CFED is a nonprofit organization that expands economic opportunity. Through LCMIF, CFED serves the development finance industry by providing research and development funding to develop, test, and evaluate products and services that expand the financial resources, strengthen the portfolio performance, and enhance the impact of development finance institutions. Established in 1979, CFED works nationally and internationally through offices in Washington, DC; Durham, NC; and San Francisco, CA. Wachovia pursues community development performance excellence by fairly, equitably, and profitably meeting the financial needs of individuals, small businesses and communities in all segments of our markets, particularly low-and moderate-income communities and community development enterprises. Our mission for community development is to be a recognized leader and innovator in providing economically sustainable financial services for our communities ensuring responsiveness to community opportunity through specialized businesses, products and local market strategies. As the nation's 4th largest financial services provider, Wachovia offers full financial services through offices along the East Coast in 15 states and the District of Columbia. The Northwest Area Foundation is committed to helping communities reduce poverty. Through three programs Ventures, Connections, and Horizons NWAF works with communities in Minnesota, Iowa, North Dakota, South Dakota, Montana, Idaho, Washington, and Oregon, providing knowledge, financial resources, products, and services. Cascadia Revolving Fund envisions a future where Pacific Northwest individuals and their communities have the means to reach their full potential and achieve economic, social, and environmental health. Cascadia provides financing and business assistance to underserved entrepreneurs, small businesses, and community-building organizations. Cascadia offers working capital lines of credit to businesses. National Community Capital Association is the leading network of private-sector CDFIs.The National Community Capital network invests in small businesses, quality affordable housing, and vital community services that benefit economically disadvantaged people and communities. NCCA's mission is to lead the community development finance industry to scale. Working Capital for Growing Business Request for Investment Proposals Page 4

5 BACKGROUND: PRODUCT DEVELOPMENT RESEARCH To research the most promising LOC product development strategies, CFED conducted an initial research and development effort, advised by seven CDFIs that currently offer growth capital, defined as near equity or working capital lines of credit. Cascadia Revolving Fund (Cascadia) prepared a draft paper that assessed the development of their near equity and working capital line of credit products. Cascadia also interviewed CDFIs and Factors (private financiers who purchase accounts receivable from cash-strapped companies) to discern their business models and markets. CFED conducted additional interviews with a variety of practitioners that offer lines of credit and near equity products. LOC PRODUCT DEVELOPMENT FINDINGS Lines of credit are powerful tools to finance business growth, but CDFIs that offer these products face a number of challenges. Significant lending volume is needed to finance optimal staff and systems and to provide adequate portfolio diversity to effectively manage risk, but scale is elusive. Whether they have offered LOCs for five or 20 years, CDFIs struggle with similar issues in product design and delivery. LOCs are frequently labor intensive to deliver, monitor, and finance. Standardization of products has been difficult. Many CDFIs believe that LOC financing requires a tailored structure for each borrower. The following challenges were characteristic of all of the CDFI LOC products surveyed: It appears many LOCs are priced below cost. CDFIs believe that they do an imperfect job of pricing LOCs. They have difficulty pricing their products to include their full costs: from delivery, risk management and servicing, to cost of capital and [for some programs] technical assistance. Many CDFIs believe that if they streamlined their product design and collateral monitoring or outsourced the administrative functions to increase efficiencies, losses would be unacceptable. Establishing appropriate liquidity reserves for commitments is difficult; lack of scale (insufficient data) hinders calculation of appropriate reserve ratios. As a result, excessive liquidity reserves constrain CDFI's balance sheets, particularly in light of the longer term of most capital sources. The practitioners interviewed reported that banks are not serving their clients. Market opportunities exist for CDFIs to provide LOCs if cost-effective products and strategies can be developed. A common alternative to CDFI-financed LOCs is for firms to turn to credit cards (whose terms rarely match uses of capital) or Factors (frequently at predatory rates). A reliance on high-cost financing is seen as accelerating the financial deterioration of many businesses. Several CDFIs expressed a desire to utilize techniques pioneered by Factors such as the use of information technology, sophisticated software, and efficiencies in back room administration. Most CDFIs resisted the concept of breaking up vertically integrated models to permit outside contracting of back room or other functions, but research suggests this option should be explored. 777 N Capitol St NE Suite 800 Washington DC Ph: Fx:

6 The market research identified the following barriers to scale and sustainability of working capital LOC product portfolios: The lack of information on product delivery and management costs at varying levels of volume precludes optimal pricing. Most programs do not measure the relationship between loan risk and performance and the intensity of costly inputs (delivery, technical assistance, servicing, collateral valuation), so there is no basis for monitoring changes in costs or increasing efficiencies. The lack of product standardization increases costs and inhibits scale; this prevents portfolios from reaching the levels needed to provide portfolio diversification and risk mitigation. The capital sources and risk structures of most CDFIs do not match the required capital structures, risk structures, or terms for needed growth to scale of LOC products. The complexity of financing LOC products and the barriers presented in aggregating impact statistics must be surmounted for additional low-cost and flexible financing to come into the field. CFED is a nonprofit organization that expands economic opportunity. Through LCMIF, CFED serves the development finance industry by providing research and development funding to develop, test, and evaluate products and services that expand the financial resources, strengthen the portfolio performance, and enhance the im-pact of development finance institutions. Established in 1979, CFED works nationally and internationally through offices in Washington, DC; Durham, NC; and San Francisco, CA.