Financing Your Business with Jud McGehee

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My name is Jud McGehee. I live in Austin, but I cover San Antonio through Dallas for LiftFund. LiftFund was formerly known as Accion Texas.

We changed our name about a year ago. The reason why, a couple reasons actually. We broke away from the Accion network. So, there's a network called Accion USA, which we were under. The way I explain it is more than a franchise deal. So, we broke away from that because we wanted to grow. And they wanted to hold us into Texas and Louisiana and Alabama. And we wanted to expand out. The other kind of funny thing was that Accion actually came out of South America. The name means "action" in Spanish.

And people in Louisiana and Alabama and even parts of Texas could not pronounce the name. They could not say Accion. So, we're like, all right, we've got to get rid of that. So, we went with LiftFund. The idea is that we kind of lift people up and give them the money. Our logo shows [unclear] lifting something up, which our CEO thought was really cute. So, that's what we are. Nothing else changed as far as what we do.

Other people are the same. The mission was the same. And the mission is that we provide financing for small businesses that cannot get conventional bank financing. There is nothing wrong with the banking system. The banks have regulations. They have certain things that they can only lend to. And so, they kind of have what I call kind of a box that you have to fit in. And we don't really have a box. Now, we have criteria, but we don't have a box. So, we can be a lot more lenient on things.

We are a huge partner of banks. Banks have something called CRA requirements, the Community Reinvestment Act (CRA). And so, we are actually a source for them to meet those requirements. So, banks will actually give us money to lend out to low-income areas. They also give us a lot of referrals. The majority of our referrals actually come from banks. So, really, if we were talking about, if we were riding up the elevator and you were really awkward and you can't stand in a comfortable silence and you said, what do you do?

The best thing I can say is, we do the loans, the banks don't want to do. That's the basics of what we do. So, I'll tell you what. Can we go to the next slide, please? So, it's kind of an overview that we're going to talk about. So, we're going to do a little bit about our products and services. I'm going to spend a little bit of time on the SBA stuff. There's always a little misconception on SBA lending. I'll talk to you about the C's of accessing capital.

If you've never borrowed money before, I can give you some ideas to think about, kind of what to expect going in. That kind of rolls into tips for preparing for financing. And then what are expectations? I don't think my presentation is really going to take that long. I like to leave a lot of time open for questions. But I also know that most people, at the end of the day, and you probably want to get out of here, too. So, I won't hold you too long.

If we can go to the next slide, please. So, that's our mission. The mission of LiftFund, formerly known as Accion Texas, is to provide credit and services to small businesses and entrepreneurs who do not have access to loans from commercial sources and to provide leadership and innovation to the small business community. Next slide, please. So, those are our products and services. As you can see, we do business loans ranging from $500 to $500,000. Now, let me explain that for a second. We actually can go up to $1 million.

When we go over $500,000, we have a partner based out of Oklahoma called MetaFund. And what they do is they actually position the business so that we take an equity position in it. So, that's just actually something that just kind of changed. We don't have that on a lot of our documentation. But up to $500,000, we don't take any kind of equity position. Most of our loans, over $250,000, we prefer real estate, commercial real estate as collateral. But we can be pretty lenient with that as well.

So, our interest rates. So, that always kind of freaks people out. I call it the sticker shock thing. So, yes, it is high. It's not auto loans. So, it's not the credit union 1.9%. But it's what we figured out as our price point to where we can still break even on the loans that we do because we're taking on a big risk. Our average credit score for our borrowers is about a 550. So, we're taking really high-risk loans. So, in order to make up that gap, we have to raise our interest rates up.

We are a preferred SBA 7(a) Community Advantage lender. And CA stands for Community Advantage. I'll get into that a little bit more in a minute. And usually, those rates are a little bit better. They usually get down to around the 7.5% range. And we do pretty much any loan over $50,000. We try to qualify as a 7(a) loan. So, the loans that we do, the average loan size that we have right now is about $15,000. We're actually trying to increase that. We want to get that up over $20,000 because we figured out that once we start doing loans over $20,000, we actually start making a little bit off those loans.

So, we are a 501(c)(3) nonprofit. But, we try to run our nonprofit as a business. So, increase revenue, reduce expenses. We will do a loan for $1,000. We'll do a loan for, as I said before, $500,000. What we're looking at right now that we're seeing are a lot of requests around the $30,000 to $50,000. We are a CDC 504 lender, which means that we partner with banks to use these 504 loans for commercial real estate purchases or asset purchases. Usually, those are in the range of $1,000,000 to $5,000,000.

So, we'll partner with the bank. The good thing for the borrower on those things is the borrower only has to come in with 10% equity. Any other time, if you go conventional lending, you have to come in with 20% equity if you're buying a building. Under the CDC 504, if you qualify, you only have to put 10% in. And then, that's just kind of the kind of loans we do. We do a lot of equipment. We do working capital. We do building purchases and improvements, inventory, marketing.

We can pretty much do anything. The only thing that we don't really do is we don't really get into any kind of investment property. We don't do anything speculative. So, if we're going to do real estate, we want it to be at least 51% owner-occupied. We also offer business education. And so, what that means is that we really kind of work with our borrowers to explain the process that they're about to go into. We help them understand, okay, why do you need a profit and loss statement?

Why do you need a balance sheet? We get a lot of borrowers that have never done this kind of stuff before. We explain why they need to separate their business account from their personal account. But we really, a lot of our education just really comes to walking them through the process. Now, we have partners like SCORE, the Small Business Development Center (SBDC), that will help the business owners with their business plans and going in-depth and getting their projections ready, things like that. So, we don't really have the staff to spend that much time on.

We don't hold a lot of classes. We partner with a lot of people in the Dallas area to do workshops and things. So, for example, we set up a workshop the other day with the YWCA, which I think they're called Wings now. And we did a budgeting workshop. So, we have some borrowers that were late on making their loan payments. And they were consistently late, consistently late. And I said, you know what? Maybe there's a problem there with them understanding how their cash flow works. So, I tell you what.

So, let's create this budgeting class. We invited them to the budgeting class. We kind of taught them how to manage their cash a little bit better. And so, now we're starting to see them make their loan payments on time. So, we kind of try to trigger our workshops around that. What's the need of the borrower? A lot of times our borrower will come up and ask us, say, hey, I need to know this or I want to learn this. And so, if we can't do it, we'll find somebody in the community.

We have a ton of community partners that we work with in the Dallas area. Next slide, please. So, what is a CDFI? A CDFI is a Community Development Financial Institution. It's basically helping those considered disadvantaged. And, like I said before, like LMI, low-to-moderate-income areas. It's an alternative to traditional financing and works with banks and the SBA to increase lending options for small businesses. A big misconception about the SBA is the SBA does not actually lend money. What they do is they back financial institutions to lend that money.

So, for our situation, when we do an SBA loan, basically the federal government is going to say, we're going to back that loan at 75% or 85% depending on the loan amount. But what that does is that mitigates our risk a little bit. So, we might have been a little bit iffy on the loan. Maybe the collateral wasn't quite there. Maybe the cash flow really wasn't where we needed to be. They're like, hey, we'll use the SBA because if this thing goes bad, we've got the United States government behind us.

So, they use us. And you have to get to a certain point to become a preferred lender. So, you have to do a certain amount of loans. And those loans have to be considered good loans. So, we are a preferred lender. So, we don't have to get our approvals through the SBA. We just have to tell them, hey, we just approved this loan for $50,000. We want to use the SBA guarantee. They set aside that money and we've got an SBA-backed loan. Next one, please. So, talking about the SBA 7(a) Community Advantage.

So, there's two types of 7(a) programs. There's a normal 7(a) and then there's a Community Advantage program. The Community Advantage program was started in 2011. It's really going after underserved markets. And those underserved markets are usually the low-to-moderate-income (LMI) areas. Next slide, please. These are the eligibility requirements. So, you really just have to hit one of these. So, it's located in an LMI area. It's located in empowerment zones, hub zones. Veteran-owned businesses must be at least 51% owned and controlled by a veteran. Businesses where more than 50% of their full-time workforce are considered low-income or reside in an LMI census tract.

So, we've got a little program that we punch in the numbers like the zip code, things like that, and we can tell you the qualifiers in that area. Next, please. Loan amounts go up to about $250,000. The interest rate is we can't go over prime plus 6%. I think prime is 3.5% right now, so we can't exceed 9.5%. The term — usually our terms on SBA — we can go seven to ten years. We try to keep them at seven. The objective for us is to get the loan paid off sooner rather than later.

We don't do any kind of revolving lines of credit under the SBA program, and we always require collateral. We really don't do any kind of unsecured lending. So, those are the eligible businesses. We don't do nonprofits under the SBA 7(a). Now, LiftFund can work with a nonprofit, not through the SBA, but just through the conventional lending on our side. It must be a legal business. Startup businesses — at least two years of operations may be considered; applicants with fewer years may be considered if the applicant possesses [unclear]. So, really what they're looking for in the SBA right now is a lot of experience.

So, we will help a lot of startup businesses, but we want to see some experience there. For example, if you've been in, like, telecom sales and you decide you want to start working on cars but you know nothing about working on cars, there's probably not a good chance we're going to give you the loan if you have no experience. But if you hire people that know how to fix cars, then that could count as the experience. So, that's been a big push by the SBA, because a lot of people would just hire people and they were just starting businesses, but they had no experience in those fields, and so the businesses were failing.

And so, the SBA has been really pushing us to get resumes, to really dig into our borrowers about what kind of experience you have, what are you bringing to the table, what are you going to do to make this business successful. The business may be located in an underserved market, as I said earlier. And then I addressed speculative businesses: we don't do any kind of investment property. So, if someone wanted to buy an apartment complex or something like that, we wouldn't be able to do that.

If they wanted to buy an office condo but they wouldn't be occupying it, we wouldn't be able to do that. Next slide. So, the five C's of credit — if you've never heard of these things, that's okay. A lot of people don't, unless you work in lending. But these are the things when a bank makes a decision, or a financial institution makes a decision on your loan — these are the things that they're going to look at. They're going to go through these five things: your credit history.

We're looking for your credit. Now, a bank probably will not lend to anybody that has a credit score under 640. As I said before, our average credit score is about a 550 or 560. We've even done deals for people with 400 credit scores. Now, we have to mitigate those risk factors quite a bit. But what we look for at LiftFund is not so much the mistakes you've made in the past. We understand everybody's made mistakes, and a lot of times startup businesses make a lot of mistakes.

We get that. It's what are you doing now? And the best way I can explain that is, if someone comes to me and they want to borrow money and I look at their credit report and I see that they don't pay their cell phone bill, they don't pay their cable bill, they don't pay their mortgage, they don't pay their auto loan, what makes me think they're going to pay us? So, that's what I'm looking at. Now, if somebody made a mistake two or three years ago and it's just something on their credit report, then we can get past something like that.

Because it's what are you doing lately? So, that's kind of what we look for with the credit report. What automatically disqualifies you from borrowing from us, and probably even from other lending institutions, is if you're behind on any kind of student loans, any government loans, or if you're behind on any kind of child support. We, unlike banks, can actually work with people who have come out of bankruptcy. So now we're limited on what we can lend, but we've been able to work with people who have just recently come out of bankruptcy.

Capacity. So, one of the first things I talk to people about when they say, "Okay, I want to borrow $50,000 from you," the first thing I ask them is, how do you expect to pay it back? One of the things we get is people say, "Well, I'm going to pay you back from the business I'm about to start up." Because we don't know if that business will succeed or not. So, most banks, as well as LiftFund, want to see some sort of secondary income coming in, and this is for startups.

Now, if you're an existing business, you've been in business longer than a year or two, okay, we can take that kind of financial information. But if you're just starting this thing up, you know, there has to be something, somebody in the household, a spouse, a significant other, whatever, something that says, if this business fails, then I can still make this loan payment. That's the number one thing that we look for. Collateral. Unsecured lending is few and far between these days. It's not really around anymore. Some people do do it.

It's usually done more on lines of credit. We don't really do any kind of unsecured lending. We think our loans are risky enough as it is for the kind of credit scores that we're taking on. So, we want to have some sort of collateral. Now, with LiftFund, we can do things a little bit different. We can be a little bit more lenient with that collateral. So, like, if you want to borrow $15,000 or $20,000 but you're an IT company, you don't really have anything to put up as collateral, you know, we could take, like, your personal car if it's free and clear.

We can use the value of that car to secure that debt. The two things that we don't get involved in are anybody's home and their retirement income. So, those are the two things that we get out of. But, you know, usually it's the business assets that you might be purchasing or the stuff that you have. If someone owns, like, a piece of real estate, like a lot or something like that, they can put that up as collateral.

But you need to go in expecting to have to put collateral up if you're going to borrow money. In a lot of tech industries, they don't have a lot of equipment. A lot of them use their accounts receivable as collateral. We can do that. We like to see some other things on top of that, not just the accounts receivable. But banks will do that. They'll put you on, like, a borrowing base or something like that. So, you can borrow 80% of whatever your current receivables are that are actually under 90 days.

So, those are just some options. But I would always have that in the back of your mind. Okay, I want to borrow $50,000. What am I going to put up as collateral? What's going to be my skin in this? The character. Character kind of goes into the credit a little bit. You know, you can tell a lot about a person's character from their credit score. But we want to know what the background is. You know, what's your experience? You know, do you, you know, have you done this kind of thing before?

Have you talked to people that have done it? Have you done your due diligence? You know, when I get people that walk in the door and they just kind of expect to get the money just because they're a person, you know, it kind of bothers me a little bit. It's like, what are you going to do to prove to me that you deserve this money? So, you really look at the character. It's a big thing. And the conditions. You know, what's going on in the economy right now?

What's going on with the competition? So, if you want to open up a sandwich shop and you've got a Subway, and I don't know what else is here. One of my favorites, actually, is Great Outdoors still in the Dallas area. Sandwich shop, whatever. Or Quiznos or whatever. If they're on either end of you, you might not want to put a sandwich shop right in the middle. Understanding what your competition's like in the area. You know, understanding what's going on in the economy. Those kind of things.

So, being aware of, am I starting this business at the right time? Next slide, please. Okay. So, tips for finance. So, these are the things that you need to be thinking about when you go in to get financing, whether it's through us or a bank. We keep it pretty similar to what the bank does. Most financial institutions ask for the same amount of stuff. So, whether or not you're borrowing with us or you're borrowing with the bank, you're probably going to have to follow these tips right here.

So, you should have a business plan. So, I want to talk a little bit about the business plan. Business plans are impressive when they have content that's relevant to what they're doing. We get a lot of business plans that are, like, that thick, and it's, like, the history of Dallas, the demographics and stuff like that. If it's not relevant to your business, I wouldn't put it in there because it takes forever to go through those things. What we want to know in the business plan is what do you do, what do you want to do, what's your experience in doing it, what makes this business viable,

what research have you done on this business, including your competition, and how are you going to make this business successful? Those are the things that we're looking for. The things that actually are relevant to the actual business that you're wanting to start. There are a lot of nonprofits around Dallas, like SCORE, the SBDC, some that I mentioned earlier. They are out there to help you. A lot of times, they do their service for free. They will help you put together a business plan. You can go online.

There are documents online that will help you do that. But a good, thorough business plan is great for us because it gives us an idea of what you're trying to do. So in written form, you have projections in there, things like that. Even if you're an existing business, I would say any business probably under, let's say, three years, should maybe have a business plan. There's a lot of changes that goes on from a startup business to a business that's been in business for two years up to five years.

So a lot of things change. My advice to business owners when I talk to them is when you have that business plan, hang on to that business plan and review that business plan every year. Go back through it. What did I miss here? What did I not understand here? Kind of keep updating that business plan. And, you know, if I were really giving good advice, I would tell a business owner, you know, you should redo your business plan probably every year.

Just go back through it and look at it. Say, okay, what do I want to change? Maybe when I started this business, I thought we were going in this direction. Well, now I think I want to go in this direction. So I think it's wise to always update your business plan and keep that and make sure that it's very concise and it's not hard to read. I've had some before where I'm like 50 pages in before I even really know what they want to do. So that's kind of annoying.

So knowing what your credit report is and what your credit score is is a big thing. You know, you want to be proactive with that. You don't want to be surprised by something. There's so many options out there for pulling your credit report for free. So I would say pull your credit report, find out what's on there. There's a lot of individuals that think that we're not going to see something. We're going to see it. Trust me. We're going to find it. We're going to find the red flag.

So you can go on there and get a lot of those things figured out ahead of time. There's going to be a lot of things on there you didn't know were on there. But if you can get those things worked out, like, man, I canceled a cell phone plan a while back, and I thought they weren't charging me for it. They charged me 50 bucks. It's still on there. I had no idea. Pay that thing off. Show us proof that it's paid off. That's only going to help me.

But it's always good. It's just good as a consumer to know what your credit score is. And I would say probably check that thing at least once a year. Have an understanding of the financial health of your business. If you are an existing business and you have been losing money for three to four years in a row, and you come to us asking for money, why should we give you money, right? If you can't pay it back, why should we lend you money? I say that because we do sometimes lend to people that are negative, but there's a reason behind that.

So just be able to explain that, hey, look, for two years we were doing great, and then this happened and we dropped off this year. It's not the trend. It's more of an anomaly. Okay, but there's a story behind that. Let us know what that story is. But really have a good idea: if I want to borrow $100,000, $200,000, can I even afford to borrow this money? The one thing that we don't want to do as a lending institution is we don't want to do what we call lending you into a problem.

We don't want to dig a hole any deeper than you might already be in. So we're going to look at this, and sometimes when we tell someone no, it's not just because we want to be mean. It's because it's not a good time for you to be borrowing money. Or maybe you're asking for $200,000, but you can only afford $40,000. Can I work with $40,000? That's what you have to understand. So understanding the health of your business and where your business is headed is very key when you walk in.

It builds a lot of credibility with the bank or with LiftFund. You're already aware of that. Providing bank statements is kind of a big thing right now, and a lot of what that tells us is kind of how you manage your cash. So basically, if we see a bank statement and there's a ton of NSFs on there, that's probably not someone who manages things very well. One thing that we really don't like to see, I mentioned it earlier, but it's really hard for us when people try to run their business out of their personal checking account.

It just convolutes things. We like to see those things kind of separated out because what we're trying to do is we're trying to follow the money. Are there more debits going out than credits or deposits? Is more money going out than deposits coming in? We're trying to get a feel for where you are. But we have declined good loans because of all the NSFs they had in their bank account. It just doesn't show; and I mean good loans—probably ones with good credit scores—but because they had so many NSFs, it just made us feel really uncomfortable.

So most institutions want to see about three to six months. I'd say probably three is about the average. And we want to see all the accounts. One of the funniest things I've ever seen is people who don't give us all the bank statements, and they're like, "Well, here's my bank statements." And we ask for all of them, and they give some. It's like, you know, we're just not seeing the cash. "Oh, I've got this other account that's got $200,000 in it." It's like, oh, that would help.

So that's cranking this deal up. So we really want people to be very open about what they have. I've had people tell me before, it's like, "Well, I've been told that the less information you have, the better the situation." And I think that's all — I don't know who started that. But give us as much information as you possibly can because I will tell you that we will find it. If there's a red flag in this deal, we'll find it. Your tax returns, you know, you usually want to provide at least the last two years.

But I would say even go one step farther, try to provide three. If you're a startup business, your personal tax returns will be fine. If you haven't filed tax returns in years, you probably ought to go ahead and do that and make that process real. And we do get a lot of people that don't file in tax returns and come in asking for money. Tax returns are kind of a funny thing. So no one wants to show profit on their tax return because they don't want to pay taxes on that profit.

Forget that. What we don't like to see is when they turn in like a profit and loss statement and there's this huge gap between what they're reporting to the government. I saw one time where they lost $80,000 on their tax return, but then their P&L showed a profit of $120,000. It's a huge gap. There's something going on there. So we like to see the tax return kind of line up a little bit with the profit and loss statement. But a lot of our underwriting is done off the tax returns.

Whatever you're reporting to the government is what we're going to underwrite on. Now, we will take into consideration profit and loss statements and bank statements, things like that. But we're really — you're going to see more institutions kind of getting into underwriting off those taxes. I personally prefer the profit and loss statement. I feel like that's a better snapshot of what the business is doing because I understand as business owners, you want to show as little profit as possible to avoid paying taxes. Going into P&Ls and balance sheets, having very concise, detailed P&L and balance sheets is key.

If you're an existing business, if you're a startup, this might be kind of foreign to you. But having a good CPA will always help that. You know, I get a little bit nervous when I see people that just have a handwritten on a, you know, yellow notepad. Do something in QuickBooks. Have something, you know, when you come in wanting to borrow money, look as professional as you possibly can. Kind of last, right there, you know, providing letters of recommendation, resumes, contracts. So a good example of this is like you're at a, let's say you're one year in business and you want to borrow, you've got this big contract with the city of Dallas.

And you need about $100,000 to get you through until they pay you on that contract. And you come to us and say, okay, I want to borrow $100,000 worth of payroll and the supplies that you need. Okay, that's great. Here's my contract that I have with the city. We can take that into consideration. That will mitigate our concern of giving you that money with those contracts. A lot of times we can actually take an assignment on that contract. If you're applying on that, you can assign that contract to us so that if you don't pay, we can go to the people that assign that contract to you and we can request the funds from them.

So it's not something we really like to do, but we have done it in certain situations. But, you know, adding resumes, hey, look, I'm starting this business up. I've got 10 years of experience doing this. I decided to go out on my own. I know this. I'm bringing all these customers with me. I've got recommendation letters. You know, you want to strengthen up this loan request as much as possible. Next slide, please. So our process, we've gone really technical here. So we have a website, liftfund.com, and you actually can apply online, and I always suggest that people apply online because that's faster.

If you come in and fill out a paper application, then somebody has to take it and type all that stuff in and put it in the system, whereas the online application automatically populates everything in. So we can start the process a lot faster. Any loan application that we have over $50,000, we automatically consider the 7(a) Community Advantage Program. So you apply, you submit the required documents, you close repayment. So I'm going to stick on this for a second, this little process. Borrowing money now is a very tedious, long process.

We're away from the days of the old handshake deal, stated income, you know, stuff like that. You've got to prove it. If you're saying, hey, I make this much money, you've got to prove it. So we ask for a lot of information. A lot of it is what I mentioned earlier in the few slides before, the tax returns, the bank statements. Sometimes, depending on the loan request or the type of business, they may go one step further and ask for a few other things. If you've got a co-borrower, anybody that maybe owns 20% or more of the business, we're going to need financial information from them as well.

So we get very detailed on our loan requests. And mainly because, as a nonprofit, we have to be very sure about the loans that we do. So we're going to ask for a lot of information. It's going to look like a lot of work. But what I always say is it's probably stuff you should already have anyway. You should already have access to. So we've tried to condense it down quite a bit. We are doing a system now. We're putting software in place so we'll be able to send a link to our borrowers.

And then they'll be able to actually upload their own financial data into our system and automatically populate it. What that's going to do is that's going to cut down on our processing time. Right now, our processing time is about 30 days from application to close. But I will tell you that the majority of that process that takes the longest is getting the information back from the borrowers. Once we have a completed loan package to submit to underwriting, underwriting has two days to get us an answer on approval or denial.

A lot of times it's like, well, it's a denial unless you can prove this. There's a little bit of work that goes on there. But about three years ago it took us about 60 days to get a loan from start to finish on average. And we've cut that down to 30. We're trying to get it to about 20. And what we figured out is that by the time people get to us, they've been turned down by three or four different banks. They are desperate.

They are pissed off. They don't want to go through this process anymore. So the last thing we want to do is hold them out any longer. We want to try to get them a decision as quickly as possible so they can either get the loan or they can go someplace else. So our big goal right now, as we're putting software into place, is to process these things in about 20 days. Next slide, please. Here are the expectations. From us: [unclear], products that reflect the business owner's need,

and internal partner resources for business owners, efficiency and professionalism. But we ask of you, as a commitment, share your information. Don't hide anything from us. Be honest. Again, be very upfront about what's going on. Flexibility. Sometimes it's not going to work out exactly as you want. It's happened so many times where someone comes to us and goes, well, I need $100,000. And I'm like, okay. And so we start looking at it, and what we figure out is they only really need about $30,000. So why not try with $30,000 and then work with that, and then if you need more, you can come back later.

We don't always approve the amount that's asked of us, and obviously the interest rate probably isn't what they want. So we ask you to be a little bit flexible, but also patience should probably be up there, too. I need to add that. Be patient. It's a hard process. We also get a lot of applications. Dallas leads our entire organization as far as applications that come in. We've cut that down a little bit because we're starting to screen a little bit better, but there for a while we were doing 25 new applications per week in the Dallas area.

That is a lot of applications to go through, and we had to work on every single one of those applications. And what I figured out was my staff in Dallas were running around like crazy. They were getting mad at each other, and so I was like, hey, look, let's do a better job because what happened is we had a lot of people applying, and they weren't ready to apply. But you know what we do when they apply is we pull their credit, so then they've got a ding on their credit.

So what we tried to do is we're trying to screen them a little bit better in the beginning, make sure they're ready, make sure they have the stuff that we're going to be asking for, make sure they've got their business plan, and then we'll ask them to apply. But if someone just wakes up one morning and hates their job and walks in to us and says, I want to start a business, but hasn't done any background on it, I don't think they're ready to apply.

So we're going to tell them, hey, here are the things that you need to think about. We want you to go back home, think about this, put all this stuff together, and then come back and apply to us. So we've actually cut that down, but what that's done also is it's allowed us to process the other loans that are ready a lot faster as well. Next slide, please. So we're going to finish the presentation. We have two offices in the DFW area, so we're right over here at 35 and Regal Row for our Dallas office, and then we just actually opened our Fort Worth office.

Don't fall in love with that suite number. We're going to be moving across the hall here in about 15 days. We got in there the first time, and there was mold everywhere, so they moved out. It's a whole process I'm dealing with right now. So we have two staff members in the Fort Worth office, and then we've got a large loan lender, two loan officers, and two lending assistants in the Dallas office. So we have one of the biggest staffs in our company in the Dallas office because Dallas is a big area, obviously.

We pretty much serve the entire DFW Metroplex, pretty much all the way to, I guess, Waco is considered Austin, so, yeah, I'd say anything north of Waco, and then all the way up to Plano. It's kind of funny with East Texas, like Tyler, which I would think would be under Dallas but for some reason is under Houston, so it's weird how they drew the maps that way. But anyway, if you're in the Dallas area, we can get something done. So I spoke kind of fast because I usually only have about 15 minutes for these things, so you are getting it in a hurry.

But I wanted to see if there were any questions, and I'll do my best to answer anything. Sure. Just to be clear, should the loan process typically be between 20 and 30 days? Try to, yes. And I know the acronym, but can you explain a little bit about the SCORE program? SCORE? SCORE. Oh, the nonprofit SCORE? Right. Yeah, okay, so SCORE is usually made up of retired, like CPAs and attorneys, and they're just there trying to help their community. And so they are good advisors. They're the people that I probably refer to more than anybody.

They're seasoned. They've seen a lot of things. There's probably not a question you can ask them that they don't know. I'm not even sure exactly what the acronym stands for because I've just been saying SCORE for so long. But SCORE is pretty much everywhere in Texas. I think they've got, do they have two offices in Dallas or just one? One in Addison. Yeah. And the other one's in Fort Worth. Fort Worth. Okay.

So they're kind of like an office there and an office there. And they would always be the number one place I would send you to if you're doing a business plan or if you had questions about starting a business. I would go to SCORE. Yes, sir. Do you service us a lot? I'm assuming you can sell it off to anybody else. We portfolio all of our loans except the SBA loans. We sell the SBA loans on the secondary market. But everything else we portfolio. Now, there are situations, when I talked earlier about the CRA credits for the banks, the Community Reinvestment Act (CRA), certain banks get in trouble with the federal government because they don't have enough CRA credits.

So what they will do is they will come in and offer to buy a portion of our portfolio to take it over. They get to go in and kind of cherry-pick the good stuff out of us, but that's fine. They're giving us a lot of money for it. And so those are the only times we're really in that scenario. We don't really like doing that anymore because we don't make as much money off of it, obviously. It's usually kind of a cash injection that we might need.

But, you know, those are the kind of situations. But I'd say probably 75% of our business, we portfolio them ourselves. We manage it. And I'll say this about our—when I talked about average credit score in the 500s, 550, whatever—our delinquency rate is less than 5%. So people are paying our loans back. We discipline them to pay our loans back. The idea is that we want to graduate a business owner from us to a bank. I don't want a business owner doing four, five, six loans with us.

Something's not working. We want them to do one, two, maybe three, and then we want to get them over to a bank. Improve their credit score, improve their financials once they get past that two-year thing. If you're a business under two years, it's extremely hard to get a bank loan. They want you to be in business at least two years. So we work very closely with our borrowers on that. And that's why we tend to portfolio them quite a bit; we feel like we can work with them a lot more when we portfolio.

But even going back to when the banks come in and purchase our loans from us, we still service those as well. We do all the collections and everything like that. So we do have PeopleFund here. They're actually based in Austin. Their headquarters is in Austin. They don't have a huge presence here.

They've got a couple of lenders. They've got one in Fort Worth, one in Dallas. The joke that I kind of make about PeopleFund and LiftFund is the two people that are leading that actually worked for us. So they came through Accion. In fact, their director of lending used to be my loan officer. So wish her well. When you compare PeopleFund and LiftFund, it's like Bank of America and Chase, right? It's pretty much the same thing. There's plenty of business out there for all of us.

There's BCL of Texas. What does BCL stand for? I think it's Business Community Lenders, BCL of Texas. They're another one, but they won't lend anything over $50,000. They're a part of our competition. You know, predatory lenders are a big competition for us. Predatory lending, even though the interest rates are so high—I mean, it's like 100%, 200%, whatever—people like those things because they're quick turnarounds. They can get their money within 24 to 48 hours.

We're getting a lot of requests now of people that can't get out from underneath that, and they're wanting us to refinance that. We try to help as many as we can, but we are not a debt consolidation business. That's not really what we do. Our main goal is to do loans for people that want to grow something, want to add jobs, and want to build something. That's what we're focusing on. So we don't want to get into a lot of deals with people that made these huge mistakes of accumulating all this debt.

Now they're looking for a lifeline. If they come to us and they want to refinance some of this debt to improve their cash flow but also to grow their business, then we can start talking about that. But those are really our main competitors. Great question. How about community banks? Are these your partners or are they competitors? They're partners. They're partners mainly. We don't really compete with the banks because we're doing the deals that the banks don't want to do. And I've had people tell me all the time, like, we decline them, and they go, I'm just going to go to my bank and get money.

I'm like, absolutely. Go ahead. I hope you do that. I don't know why you're here to begin with. You know, grab a deal. So, no, we want them to go to community banks. Community banks, you know, I used to be a commercial lender, and, you know, we really didn't like to do anything under $250,000. We usually like to work on the bigger deals. So, we get a lot of those $50,000. It's a lot of time and effort to do a $50,000 loan, and most bankers don't want to mess with that.

But they are a huge partner. An audience member asked about operating agreements and other loan documentation. I wanted to give a general summary of what you have to provide, but we do ask for operating agreements and entity documentation. We ask what kind of entity you have. We get you to sign a borrowing resolution confirming that the person who wants to borrow the money has authorization to do so.

We get a copy of your driver's license, and we ask for a lot of information. Do you have professional assistance—professional CPAs, tax return preparers, attorneys providing information into the operating agreement or other things? You know, here's what I would say about that, and this is something I learned in commercial lending. I think it's key when you have a business to have a team around you and have a very good team around you. You know, you can sit here and try to do it on your own, and it's very difficult.

You know, we see so many businesses fail, even though they know what they're doing for a business, but they don't understand the business side of their business. I don't know if that makes sense or not. Like, I use, like, the restaurant as a good example. So somebody that cooks really good food, they're like, I can make this restaurant work. But running a restaurant is so difficult from the business side of it. So we always ask for people to get a good CPA, get a good business attorney, have some mentors around you.

Mentors are a great thing. Mentors have done wonders for my career, and I'll bet you a lot of people in here have somebody that they consider a mentor. But just to have somebody to ask questions to, what if I run into this scenario, what do I do? So, I believe having a professional CPA is always the way to go. When I see people fail, when they try to do everything on their own, they make so many mistakes, especially with the entity documents. We've had people that come in, and they've got an LLC, an S‑Corp, or a sole proprietorship.

They don't even know what they are as far as an entity anymore. They've got all these things out there open because someone just said, oh, you need this, you need this, you need this, and you need this. And they didn't have anybody really good giving them some great counseling. So, yeah, great question, though. Thank you. I'm going to give them one last mistake. One lady incorporated three years ago and was told she needed to update her franchise tax. Well, that was only $50 per year.

But that wasn't the hiccup. The hiccup is that even though she filed her Schedule C for her corporation, [unclear]. By the time she gave us the copies, she had a stamp, and they were taxing her $200 every single month. At the very end, she had to negotiate a tax bill.

So, that's one of the most honest things I've seen. I would say, too, on the CPA point, we get a lot of business owners that have bad CPAs; there are bad CPAs out there, I can tell you that. There are people that don't know what they're doing. So, the advice that I always give business owners, especially startup businesses, is ask your friends, find someone that's running a business, start asking around who they use. Just Googling one is probably not the best way to go. You want to go on a referral basis.

I've seen a lot of things come in, and I'm like, why in the world did y'all do this? I'm like, well, my CPA told me to do it. It's like, I'm not sure this, I'm not a CPA, but I don't think this is the right thing, so I'll send it to one of my CPA partners, and they're like, send them over, I've got to fix this stuff. So, I would say that's a really important part of the business, having a good CPA, but usually those come from referrals, asking people that you trust, who you use, and hopefully someone they've used for years and years and years, not just somebody new to change this story.

Yes? So, what we're looking at is what we call a full-recourse loan. Even if you have an LLC, you're still running the company, you are responsible for that company, and you have to sign that loan. Even though we are making a loan to your business entity, we are also making that loan to you as a person. We have everybody sign their name on the dotted line: I promise that even if the business fails, I am still going to pay back this loan.

But, yeah, great question. I do not know enough to tell someone what entity they should be in; I leave that for the professionals and usually send them to a business attorney. The only time we get into a loan where we do not have someone sign personally is usually with a nonprofit, where we are dealing with a board and can structure it differently. But if we have a for-profit business, then it is almost considered a personal loan in a way.

And I will tell you this, and it actually leads me into a really good question. We don't do consumer lending. So we do not do, like, personal loans. You have to have a business entity in order for us to lend to you. But what's really funny is we actually kind of underwrite under a consumer lending process. So, like, debt-to-income ratio is a big thing in consumer lending. We actually use a lot of debt-to-income ratio. We want their debt-to-income ratio to be below 30%. So it's kind of funny how we do the underwriting.

We've been doing this for about 20 years. We've got a good system now. But it was really hard for me as a commercial lender to come in and start kind of looking at the consumer side of underwriting. But, you know, at the end of the day, our delinquencies are low. We're growing. We did, last year in Dallas, about $3.8 million total for the year. So when you think about your average loan size, actually, in Dallas, our average loan size is $12,000. We did a lot of loans last year.

In fact, I had one loan officer who did 25 loans in one month, which is a lot of loans. She was really busy. Most of those loans were under $5,000. We stopped doing so many of those because we lose money on them. Our company-wide conversion ratio was about 48%, and I tried to keep my team at least at 50%.

We get a lot of bad loan requests. A lot of people that have no business asking for a loan. Their credit's a mess. They're not making any money. We still count those because they still apply. I mean, I've had people before, I go, you're not ready to apply. Well, I want to apply. You're not ready. I'm going to do it anyway because they think they're going to convince me otherwise. And so they apply. So we count those against our numbers. But, yeah, I'd say we, you know, we approve every one out of two loans.

So, and we're doing a better job of that. Those conversion ratios, when I started four years ago, we were at 20%. Because every single person that came in the door, whether they were ready or not, we made them apply. We weren't going to talk to you until you applied for a loan. Myself and my boss actually thought that was completely unfair because we were hurting their credit, and so we got them to overturn that. Because the reason why they did that, and we were a very mission-driven organization a long time ago,

and those numbers look good when they're going out and asking for money from people. Hey, look how many people are applying for us. Give us some more money. And we decided that was not the way we need to go. So we changed that model. We do not do leases. We don't do lines of credit. We have a line of credit product. I don't like it, so I don't sell it, because if you want to borrow money on your line of credit, it takes five business days for us to give you that money, which you basically already have.

We do not do any kind of leasing; we make strictly term loans. Our average term-loan length is about three years. An audience member asked whether the payments are interest-only. No—they are principal and interest. We want these loans paid off quickly. On the flip side, we do not charge prepayment penalties or fees for refinancing the debt.

How do you determine how much value or how much of a loan you'll lend out based on the collateral? We usually do a collateral assessment. If it is a vehicle, we will use Kelley Blue Book. If people put up restaurant equipment, we have been in the industry long enough to have a general idea. Restaurant equipment, the day you take it out of the store after buying it, is discounted by 50%.

It is not valuable anymore because there's so much of it out there. I'd say our average collateral is probably discounted by 80%. So whatever you think the value is, you know, 80% of that is probably what we're doing. Now, the great thing about our deal is that we get very lenient with that. So when I was at the bank, to give you an idea, if you wanted a $50,000 loan, we wanted about $75,000. At LiftFund, if you want that same $50,000 loan, if you can get up to about $40,000 in value collateral, we can give you that $50,000.

So we get real lenient with collateral. Do you have a follow-up question? Yeah, absolutely. So we do that. That's a great question. Because sometimes people come in and they want to borrow $30,000. But we can only prove that they can afford $15,000. So what we'll do is we'll say, okay, for right now we've got $15,000.

Here's what we're looking at. This is why we can't give you the full $30,000. See what you can do to increase revenue and whatever. Clean something up. Come back and talk to us in six months or a year, whenever you're ready. Let's look at the situation again. We'll take that debt that you currently have, whatever your balance is. We'll refinance that, add new money to it. We do that kind of stuff all the time. And mainly because we have a lot of people that have never borrowed money before.

And so we want to make sure that they can borrow money. We do not want to just give somebody $100,000 and say, okay, you are out the door. Sometimes we give them a little bit and say, okay, let's see what you can do with this. It is almost like you earned it: reward, pat you on the head, here is a little bit more. That is what we do. We want to give you what you qualify for.

Because we feel that if we give you more than you qualify for, it is going to make it harder for you to pay it back. Our commitment fee is a percentage of the loan. I have a whole tiered schedule, but it is going to be anywhere from 4% to 8% of the loan. If you roll those fees into the loan, they are not out of pocket. I can tell you this: our interest rates are high.

Our commitment fees are high. But we're doing riskier deals. From the commercial lending stuff, it's hard for me to stomach those kind of interest rates. But like I said before, we lose money on any deal under $20,000, even at 18%. It's expensive to do the loan. There's so many people from a loan officer to a loan processor to an underwriter to a closing officer to an accounting person. There's so many people that touch these loans in the amount of time that it stays in the system.

They're just extremely expensive. And then all the education stuff that we do when we do workshops and things like that, all that stuff's free. So we have a lot of people that are on our payroll that we consider non-revenue driven people that are out there just doing promotion and education. And they're not asking for anything in return. So a lot of what we make off our loans goes to pay those salaries to educate the community. How many early repayments? Advantage if you reapply and you say, hey, I paid it off early.

I like to see that. So, yeah, that's an advantage. No, that's an advantage. Absolutely. That's something that you say, okay, I'm going to pay this thing off early. Now I'm going to borrow more money. I definitely would say, yeah, absolutely. You did a great job. That's going to mitigate our concern that you can borrow that money. So that's a great question. On the flip side is we don't penalize you for paying off early. Or if you, if you come to us, we've had it happen a lot of times where people borrow money from us.

And they say, hey, guess what? I got a bank loan, so I am going to refinance that debt. Congratulations. We are happy for you. Go on; we are moving on to the next deal. An audience member asked how subscription revenue would be considered. I think that is a consideration. What I want to see is the longevity of those subscriptions: how long have they been a subscriber? I would consider subscriptions that have been in place for a meaningful amount of time, but every business is different, so I do not want to give you one number.

I look at that like someone who owns an office complex that they operate from, so it is 51% owner-occupied. If they say, you know what, we are usually 90% occupied and we have been that way for the last five years, that is great. But if they walk in and say they are only 10% occupied, where is our money going to come from? You have to prove it.

If you can prove where your revenue is coming from and show a consistent history—for example, that the property has been 90% occupied for five years—then we can consider it. If it is only 10% occupied, where is our repayment going to come from? The key is to prove the source and consistency of the revenue.

it's something that's consistent, then we can definitely take that into consideration. It is harder because those subscriptions can go. What I would say, too, is always understand what is my worst-case scenario. What happens if everything falls apart? How am I going to pay back this loan? That's what we're going to ask you. And I'll tell you kind of a funny thing. I had a young lady in Austin, and I know we might have run out of time here, but she wanted to start up a restaurant in downtown Austin.

There are a lot of restaurants in downtown Austin. She was a paralegal who was going to quit her job and open a sushi restaurant. I said, okay, that is great. You have a big business plan. I like it. Let us talk about what happens if this thing fails. She said, "Well, no disrespect, but I don't see how it can." I told her [unclear]. It is a restaurant; failure has to be considered.

So I did not do the loan for her because she would not budge from that position. She insisted there was no way the restaurant was going to fail, and I was not confident in that. Always have an idea of what happens if the business falls apart. What is my fallback plan? The other thing we want a business owner to understand is that, yes, our loan is important, but your livelihood is important too. I have had people who think we want to hear, I am going to start this

business, so I'm going to quit my job and throw everything I've got in this business. That really concerns us because what happens is most businesses don't start to turn a profit until after their first year, right, or sometimes after their second year, if they ever do. But, you know, how are you going to put food on the table? How are you going to keep a roof over your head? Those are the kind of things you want to make sure that happens. We don't want you to lend yourself into a problem, as I said earlier, before you lose anything.

And so we're very careful about that. Let's turn it back. Did we lose money? No. It's a tricky question because we're a nonprofit, right? Our goal is to have $1 at the end of the year, to make $1. And we usually get there. We do, from the lending side, so let me answer this question this way. So my team, the lending teams, make money based on the expenses that we have. It's all the back-office people, and it's all the people that are doing the education services.

We support that. But we also get a lot of grant money from banks and donations from individuals and foundations, and that keeps us up. So we are 50% self-sufficient. I hate that; I want to be 100% self-sufficient. We have to raise about half of our operating budget every year, which is about $6 million to $7 million. Our operating budget is about $12 million to $15 million. We are out there looking for grants and donations to keep these programs running.

But I will tell you this, that since I've been here with this organization and myself and my superiors, it's been a big push for us to figure out a way how to become more self-sufficient so that we don't have to ask for that grant money. I hate it. I had to do a deal at United Way yesterday asking for money. And I flat out said, I don't want to be here anymore. I want to stop asking for this money. I want to figure out a way.

But if you give us this money, we are going to put that in the program to become more self-sufficient. We are going more technology-based. We're trying to do these loans faster. We're going to try to get to a point where if you want $20,000, you don't have to talk to anybody. You just apply. We've got all the systems in place. And we spit that thing out a yes or a no. Those will be cheaper for us to do. And then we can move. We can start making not a profit, less of a loss.

Somebody busted me on that. They said, "You can't say you are going to make a profit; it is not a profit." We say it is less of a loss. We are trying to reduce that loss. About 50% of applications are declined. Unfortunately, we tend to be the last resort for people, and I hate that. I wish there were another option.

I will not refer people to payday lenders. An audience member asked how many loans go bad. Not as many as you might think; it depends on the market. In Dallas, our delinquencies got high because we did loans called Promise Loans.

They were $5,000 unsecured loans. All you had to do was pass a test, and you got $5,000. I was against that because I thought that was going to cause a problem. It did. A lot of those went delinquent. We're currently cleaning those up. A lot of those have charged off, so our percentage increased. So I'd say probably about—probably, I think it's 11% of our loan portfolio in Dallas are considered bad loans. We've fixed the problem. We're not doing those, but we're scrutinizing those deals more.

And we're taking some sort of collateral. So we're trying to get that back down. But I will tell you what I've noticed: the trend on this is that it's getting really easy for people to declare bankruptcy, and people are okay with that. That's weird for me. I remember as a kid, if someone declared bankruptcy, they couldn't even walk down the street; they held their head in shame. And I've sat in these hearings.

People just do not care because they have attorneys saying, "Don't worry about it. Just declare it. Worry about it another day. It is not a big deal." That is starting to worry me. It is getting too easy to do that, and I am concerned about people doing it. Any other questions? Awesome. Well, thank you very much. I appreciate it.