The Road to Success: How Traditional and Non-Traditional Small Business Lenders can Travel it Together Federal Reserve Bank of Boston November 13, 2014
MCBC Meeting Eastern Bank Accion A Case Study November 13, 2014 BANKING. INVESTMENTS. INSURANCE. 2
Key Players Ana Hammock VP of Lending, Accion East Bob Rivers President and COO, Eastern Bank Corporation Paul Quintero- CEO, Accion East Pedro Arce Business Development Officer, Eastern Bank Charles Smith SBA Program Coordinator, Eastern Bank BANKING. INVESTMENTS. INSURANCE. 3
Key Talking Points Eastern Bank Accion Partnership Why it exists Eastern Bank Small Loan Process Understanding the market for small loans Eastern Bank/Accion Solution What it takes to maintain a true partnership Client stories Q&A BANKING. INVESTMENTS. INSURANCE. 4
Eastern Bank Accion Partnership In 2012, Eastern Bank and Accion announced a formal partnership to join together to help address small business lending needs Each partner sought out to address the same issue access to capital for businesses with smaller loan needs BANKING. INVESTMENTS. INSURANCE. 5
Why is there a Market Need for loans below $50,000? For most banks, conventional wisdom is as follows Small $ loans require the same, if not more time than larger loans Borrowers who need small loans add portfolio risk Less time in industry Lower credit scores Industries are riskier As a result, these loans are less profitable than larger loans BANKING. INVESTMENTS. INSURANCE. 6
Eastern Bank Small Business Loan Product Eastern Bank has a loan product for needs between $10,000 and $100,000 We use the SBA guaranty to reduce risk Takes extensive training of the sales force to make the program effective Using this approach has consistently grown outstandings Small loan portfolio thus far has similar losses to large loan portfolio - diversification BANKING. INVESTMENTS. INSURANCE. 7
Problem Product did not cover entire segment Lots of viable small businesses have needs less than 10K that are not being served Credit Scores are lower for these businesses Often have less time in business Home-based businesses often intertwine personal and business finances Two Sources were primarily funding these businesses Credit Cards High Interest, High Fees Microlenders Area dependent accessibility BANKING. INVESTMENTS. INSURANCE. 8
How the Eastern Bank/ Accion Partnership began? Eastern Bank was looking for an effective way to service clientele below our loan threshold Accion, a new SBA microlender, was looking for ways to increase visibility and better serve future clients Common point of interest was the SBA and its Lawrence expansion BANKING. INVESTMENTS. INSURANCE. 9
How the Eastern Bank/ Accion Partnership began? (cont.) Pedro Arce, a Business Banker with Eastern Bank, had previous experience with Accion through his mother s small business Pedro championed the idea of creating a partnership to Eastern Bank s Senior Leadership, using the Lawrence community as a model of how the program could work After a few meetings between Eastern and Accion, a partnership was developed BANKING. INVESTMENTS. INSURANCE. 10
How the Partnership Works Each Eastern Bank branch employee refers business owners to Accion They have been trained on Accion s requirements Brochures are in each branch Accion partners are sometimes co-located within Eastern branches If our program parameters can t be met, a warm referral is given to Accion BANKING. INVESTMENTS. INSURANCE. 11
How the Partnership Works (cont.) If they meet Accion s requirements, Accion will lend to the borrower and Eastern Bank continues to have a deposit relationship As the relationship grows, there is an easier path to becoming a bankable prospect Accion/Eastern will partner to provide T/A They learn how to manage debt using Accion Customers expectations of good service are met by the partnership BANKING. INVESTMENTS. INSURANCE. 12
Rocio Evolushoen Lawrence, MA After opening a shoe store, Rocio needed money to stock up on inventory and hire an additional employee. Through Eastern Bank and Accion s partnership, she received a $10,000. BANKING. INVESTMENTS. INSURANCE. 13
Ways to Improve the Partnership Program is young, needs more time to take hold Promote the partnership more BANKING. INVESTMENTS. INSURANCE. 14
Accion East 2014 YTD New England Lending Overview 138 loans disbursed in New England worth $974,393 123 loans disbursed in Massachusetts 40 financial education events including workshops, seminars, webinars and coaching clinics BANKING. INVESTMENTS. INSURANCE. 15
Accion East 2014 YTD New England Client Demographics 44% female, 30% of whom are single mothers* Over 70% are low- to moderate-income according to HUD 80% AMI guidelines 70% are ethnic minorities, with the largest shares being Hispanic/ Latino and African/African America 60% are foreign-born immigrants Over 60% are first-time borrowers 20% have owned their business for one year or less and a third have owned it for two years or less *A very new indicator; based on only 3 months of data BANKING. INVESTMENTS. INSURANCE. 16
THE CAPITAL CHALLENGE A Case Study MA COMMUNITY & BANKING COUNCIL ECONOMIC DEVELOPMENT COMMITTEE Federal Reserve Bank, Boston 11/13/14 Margaret Somer, Regl. Director, MSBDC Salem State Scott Fallavollita, Pres., United Tool & Machine, Wilmington Kevin Noyes Vice President, Peoples United Bank 2/12/14
Participants q Margaret Somer Regional Director, MSBDC Northeast Region at Salem State University q Scott Fallavollita President, United Tool and Machine q Kevin Noyes VP, Community Development and CRA Officer, Peoples United Bank
Please Note: Please Note: This Case Study, prepared by Margaret Somer, Scott Fallavollita and Kevin Noyes, analyzes an actual acquisition financing situation by a Massachusetts company. The study changes the names of the company and the lenders, as well as all financial figures, in order to protect privacy.
AGENDA q THE BUSINESS q INITIAL BANK RELATIONSHIPS q ACQUISITION TERMS q GOAL: FINANCING STRUCTURE q SEPT 2012-Emerald Bank and Blue Bank q SEPT - DEC 2012- Silver Bank q DECEMBER 2012 MassEcon q JANUARY 2013 WORKFORCE TRAINING FUND q JANUARY TO MAY 2013 q GROUP DISCUSSION q 5/31/13 CLOSING FINANCING & ACQUISITION
THE BUSINESS q Sutmark Industries, a growing manufacturer, seeks financing to acquire their third company. q In the process, he works with 6 banks, with obstacles along the way. q Banks play a key role in helping companies, and employment, grow. q Here is the story of Sutmark Industries. q How can banks help companies avoid pitfalls and raise capital?
THE BUSINESS q Dan, owner of Sutmark Industries, MBA, 25 years manuf. experience. q Acquired a co., 2007, with 2.5 staff with seller financing and LOC. q Acquired 2 nd co., Sutmark Industries, 2009, with 6 staff and bought building (SBA 504 Turquoise Bank). q By June, 2012, Sutmark Industries had 15 staff, $1.8mm sales, $350K profit.
INITIAL BANK RELATIONS q Turquoise Bank financed building but lender non-responsive and inexperienced; also asked that Dan/Sutmark Industries return when P&S signed. q Purple Bank financed a previous $300K LOC, has the biz accounts, but lack of online banking. Loan officer had to manually participate in every step of financing.
ACQUISITION TERMS q May, 2012: Dan/Sutmark Industries agrees to buy a Massachusetts CNC machine shop. q $635K Agreed sale price q $350K seller s outstanding bank debt q $290K seller financing over 5 yrs q Dan/Sutmark Industries invests or raises $280K-Acquis. q Sept., 2012: Dan/Sutmark Industries and Seller sign P&S. q All agree to close by 12/12.
GOAL: FINANCING STRUCTURE q $527K Bank Term Loan q $280K - Acquisition q $105K Electrical service upgrade q $142K Equipment lease refinance q $350K-Bank LOC (Rollover of $300K from Purple Bank plus $50K W.C.) q $ 70K Dan/Sutmark Industries - Equity q $290K Seller financing q $1,237,000 - Total package
SEPT 2012-Emerald Bank & Blue Bank q Emerald Bank and Blue Bank reject financing as they wanted the real estate as collateral. q Turquoise Bank had prepayment penalty of $46K to release the real estate. q Emerald Bank concerned that Dan/Sutmark Industries does defense work sequester possible defense cuts. q Emerald Bank noted different appraisal $$ from buyer and seller.
SEPT - DEC 2012- Silver Bank q Dan/Sutmark Industries requested replacement for inexperienced lender, but bank said team reviews loans. q Silver Bank rejected financing as: q Lender gave partial & incorrect info to Loan Com. & incorrectly said Dan/Sutmark Industries not putting in equity (actually he did 20%); also said Dan/Sutmark Industries didn t want SBA loan (incorrect). q Bank financed machine shops doing poorly; didn t see need for new equipment; didn t seek to term out old debt.
DECEMBER 2012 - MGCC q MassEcon offers $250K at 10% for down payment on acquisition. q Seller pushing 12/12 closing, will accept $70K plus promissory note if final OK from MassEcon for $250K to pay off seller s debts at its local bank. q Dan/Sutmark Industries determines the MassEcon proposal is not a fit.
JANUARY 2013 q Dan/Sutmark Industries gets $48K Workforce Training Fund grant for ISO 9001. q 15 employees to be trained q 5 jobs to be created q ISO 9001 to be completed approx. 1/2016.
JANUARY TO MAY 2013 q Turquoise Bank continues work on financing. q May 2013 Bank notes SBA restriction of 1 year limit on seller working in biz. q May 2013 Day before closing SBA notes Dan/Sutmark Industries 2009 environmental impact report re: wells not capped. q Dan/Sutmark notes MA would notify his co. prior to audit; lines up 5 contractors.
5/31/13 CLOSING -FINANCING & ACQUISITION q Turquoise Bank did $527K acquisition loan, and a $350K LOC (take out Purple Bank) as an SBA loan, 10 yrs, 4.25%. q Dan/Sutmark Industries invested $70K equity. q $290K seller financing. q $1,237K - Total package
DISCUSSION $$$ SHOW ME THE MONEY $$$
JANUARY TO MAY 2013 q Dan/Sutmark Industries gets $48K Workforce Training Fund grant for ISO 9001. q 15 employees to be trained q 5 jobs to be created q ISO 9001 to be completed approx. 1/2016
5/31/13 CLOSING -FINANCING & ACQUISITION q Turquoise Bank did $527K acquisition loan, and a $350K LOC (take out Purple Bank) as an SBA loan, 10 yrs, 4.25%. q Dan/Sutmark Industries invested $70K equity. q $290K seller financing. q $1,237K - Total package
The Road to Success: How Traditional and Non-Traditional Small Business Lenders can Travel it Together Federal Reserve Bank of Boston November 13, 2014